Setting up a Co-operative or Ben Com: Legal Considerations

Transcription

1 Setting up a Co-operative or Ben Com: Legal Considerations The purpose of this note is to provide some broad preliminary guidance on some of the legal aspects of setting up a bona fide co-operative or a society for the benefit of the community. The guidance is not all-encompassing. The intention is for this note to be used as a starting point to assist decision-making by organisations considering establishing themselves as co-operatives or societies for the benefit of the community. The particular focus of this note is on organisations considering setting up community-owned renewable energy projects. 1. Statutory Base & Principles 1.1. Section 1(1) of the Industrial and Provident Societies Act 1965 ( the 1965 Act ) as amended by the Co-operative and Community Benefit Societies and Credit Unions Act 2010 ( the 2010 Act ) provides that: A society for carrying on any industry, business or trade (including dealings of any kind with land) may be registered under this Act as (a) a co-operative society (a Co-operative ) (b) a community benefit society (a Ben Com ) 1.2. Both Ben Coms and Co-operatives are regarded as co-operative organisations as they conform to the International Co-operative Alliance values and principles Those values are: self-help, self-responsibility, democracy, equality, equity and solidarity The principles are: voluntary and open membership, democratic member control, member economic participation, autonomy and independence, education, training and information, co-operation among co-operatives, concern for community Regardless of which legal form the organisation chooses, these values and principles must be respected in the rules and operations of the organisation. 2. Ben Coms and Co-operatives 2.1. A Co-operative is set up to benefit its members which can be defined to include customers, employees, supporters or investors Therefore a Co-operative is not automatically restricted from distributing profits in the form of dividends to members or distributing assets to members in prescribed circumstances.

2 2.3. Nevertheless, under the definition provided in the 2010 Act, a co-operative society does not include a society that carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person. Members can benefit financially, but this should not be the main purpose there must be other benefits Therefore despite not having an asset lock, a Co-operative cannot be established with the main object of making money for its members. Such a society would struggle to conform to the co-operative values and principles in any event A Ben Com is set up to benefit a community Therefore the members are not permitted to receive a dividend, only interest on share capital. Reserves and capital assets of a Ben Com can only be distributed to other organisations which benefit the community. This mechanism is known as the asset lock and is an essential feature of a Ben Com, whereas an asset lock is an option for Co-operatives The asset lock must be incorporated within the Ben Com s rules. It can be drafted in simple language, or statutory wording from Community Benefit Societies (Restriction on Use of Assets) Regulations 2006 can be used. 3. Co-operatives, Ben Coms and Community Renewable Energy 3.1. The decision to structure a community renewables project through a Cooperative, or a Ben Com can be finely balanced. Both have been used successfully by different groups in different parts of the country: 3.2. Co-operatives: The Energy4All group (including eg. Baywind Energy Co-operative) Brixton Energy Solar 1 & 2 Leominster Community Solar Ben Coms: Bath & West Community Energy Ltd, West Oxford Community Renewables, Brighton Energy Limited and Community Energy Warwickshire Limited From a cursory look at these organisations websites, it appears that there is a trend to opt for a Co-operative where there is only one project (which could be a number of sites) in the pipeline for an organisation. The Ben Com structure appears to be favoured by the groups with broader ambitions or who

3 are looking to raise capital for a number of projects within a specific community Other factors may also influence the decision on structure. Co-operatives have the scope to pay members a dividend which can stimulate member loyalty and strengthen the business model. Ben Coms with a statutory asset lock may provide greater reassurance to public funders and grant-giving bodies that none of their money can end up in private hands As a result of the asset lock, a Ben Com can be considered for charity status from HMRC with various tax benefits (though note that the rules on this are rather complex since the charity commission is in the process of taking over the regulation of Ben Coms with a turnover of over 100,000 that have been given charity status by HMRC) Notwithstanding this option, West Oxford Community Renewables has chosen to set up a separate company limited by guarantee to manage their charity fund, and Bath and West Community Energy appear to run a community fund without registering as a charity Overall, the decision between incorporating as a Ben Com or Co-operative may come from the business plan, may come down to local, group or individual factors or may be the choice of the consultant organisation that is engaged by the community group to take the organisation through the registration process (eg Energy4all). 4. Registration with the FSA 4.1. In order for the society to be properly established, The Rules must be registered with the Financial Services Authority (the FSA ). Once the IPS Rules have been registered, the society appears on a public register of mutual ( Both Ben Coms and Co-operatives are also registered on the Government s Community Shares website ( In relation to Ben Coms, the 2010 Act provides as follows: A society may be registered as a community benefit society only if it is shown to the satisfaction of the Authority that..there are special reasons why the society should be registered under this Act rather than as a company under the Companies Acts Historically that special reason could have been simply the desire to enshrine the commitment to benefit the community within the rules of the society, or the commitment to serve the community benefit through the democratic principle of one member, one vote which is essential for all co-operatives Due to the increasing numbers of Ben Coms being registered, there have been rumours of the FSA looking for more identifiable special reasons before permitting registration. The law firm Cobbetts advised the FSA on this point

4 in March 2012 ( and they came up with the following questions that the FSA should consider in this regard: That the business of the society is to be conducted for the benefit of the community; That there are arrangements in place (within the rules) to ensure that the business will be conducted for the benefit of the community; That any financial surplus will benefit the community, and not particular interests; That any retained reserves (capital surplus) will remain committed to the benefit of the community (the asset lock); That the business of the society is not being conducted for the benefit of providers of share or loan capital To be registered with the FSA every society must meet the requirement of having certain governance provisions within their rules. These are considered further below The FSA states that it takes 15 working days to examine each application for registration. The cost of registration ranges from 40 if a set of model rules are used (see notes on form of model rules below) or to up to 950 if the applicant is not using or amending model rules. 5. The Rules 5.1. The Rules document of a Co-operative or a Ben Com is the constitution of the society. Within the Rules will be all of the provisions that describe how the society will be run, including (for example) the number and powers of directors and the process by which the society will hold its AGM and amend its Rules To be registered with the FSA, the Rules must contain certain information which is contained within the most common model rules. The following table sets out the main essential headings of a Co-operative or Ben Com Rules, with a brief note on how that issue is dealt with by the most common forms of model rules: Eg. Objects Energy4all Co-op Baywind/Dru mlin/westmil l Renewable Energy Co-ops UK Community Coop Somerset Co-op Multi-stakeholder Co-ops UK Ben Com Bath and West Broad/General Open Open Open Wessex Ben Com Members Electricity Anyone living Determine more Supports Objects Purchase of

5 Members Meetings Consumer or subscriber to Co-op 51% majority of members to change rules. Board additional appointees Energy4all to be one appointee is contracted manager Can co-opt up to 1/3 Rotation at AGMs Shareholdings Board decision Withdraw/Tran sfer of capital Terminating membership Hierarchy of Profits Distribution Transfer/Wit hdraw at Board discretion Transfer on death/bankru ptcy Offset against debt possible General reserves; Dividend/inte rest to shareholders; Social/charita ble objects working or active in a community ¾ majority to change rules 3-15 Can co-opt up to 1/3 rd 1-max by law Withdrawal only 13 weeks notice 10% per year Transfer on death/bankruptc y Offset against debt possible General reserves; Interest up to 10%; Social/Charitabl e objects. ¾ members must sign order Residual assets than one category of shares/member Commonwealth Council to oversee Board. Different Weighting in relation to decision making for different shares % must be user-members Min-Max by law or 50k No member may hold 25% of capital. Transferable shares possible for non-user members Board can expel members, cancel membership if member not met criteria or fails to respond for 2 years. 20% to general reserves; Up to 20% in interest to user members; Up to 80% in interest to nonuser members and paid fee 2/3 majority of members to amend rules 3-12 Can co-opt 1/3 rd 2 professional nonmembers Rotation at AGMs Bath & West = 5 Elected 3 Exec Board decision Withdrawal only 3 months notice 10% per year Termination if member fails to pay subs Transfer on death/bankruptcy Offset against debt possible General reserves; Reasonable interest on shares; ¾ members must sign order Residual assets to charity (community fund) one share ¾ majority of members to amend rules. 2- no max Co-opt nonvoting Rotation at AGM Society decision Shares can be bought in installments. Withdrawal only 180 days notice Allows withdrawal. Pursuit of society s objects; Interest on shares set by directors; Put to charity Any use of reserve fund

6 Other to charity Right to develop secondary rules Rules on engaging Commonwealth Council on key decisions. Rules to ensure other co-ops are engaged on tenders. Rule to produce social accounts. Right to develop secondary rules must be approved by a majority of members. 6. Regulatory Risk, Tax and FSMA 6.1. The legal framework for Ben Coms and Co-operatives is limited to the 2010 Act, guidance from bodies like Co-ops UK, the Community Share Unit and the model rules. Ben Coms and Co-operatives have not been subject to a great deal of case law to clarify principles and establish precedents Therefore there is very limited black-letter law telling you what you can or cannot do with a Ben Com. Essentially whether a Co-operative or a Ben Com can or can t do an activity is usually left to the FSA to decide For a steady community enterprise (like energy generation) that works just fine the precedents that this would be permitted are very clear. However a more innovative and commercially ambitious enterprise may raise more difficult questions. In particular joint ventures, different share classes and non-vanilla finance instruments could be examples of grey areas in FSA rules The lack of clarity opens up a risk for the directors of a Co-operative or a Ben Com since there is a danger of the directors taking the society beyond its powers or acting beyond their authority. This would have consequences for the directors, in particular it could trigger an action by the members. There is more information on the legal issues for directors in the Cobbetts advice note to the FSA: This advice also deals comprehensively with how a Co-operative or Ben Com can benefit from the exemption from financial promotion rules by virtue of Article 4 of the FSMA Exemption Order The exemption means that as long as a Co-operative or Ben Com prospectus offers the opportunity to invest in the Co-operative or Ben Com takes deposits in return for withdrawable share capital, it can avoid the regulatory due diligence

7 requirements (and huge related cost) normally associated with a prospectus. Nevertheless, any prospectus must be true, fair and not misleading and it must outline the risks to investors Tax will always be an important consideration in relation to the choice of legal structure. An investment in a community renewable energy project should benefit from relief as an Enterprise Investment Scheme but this should be checked before any decisions on structure are finalised. Alex Meredith 22 January 2013