By Shaun McGushin, Director Ash St. with research contributions from Daniel Gallagher, Paralegal Ash St.
The Federal Government has now followed up on its commitments to make it easier for Mutuals and co-operatives to invest, innovate, grow and compete. We previously commented on an exposure draft of the Bill which was to start this process.
The Treasury Laws Amendment (Mutual Reforms) Bill 2019 (Bill) was introduced into the Senate on 13 February 2019. This Bill gives effect to recommendations 5, 8 and 9 of the Hammond Report on Reforms for Cooperatives, Mutuals and Member-owned firms released on 31 July 2017 (Report). In particular, the Bill seeks to:
• introduce a definition of a mutual entity into the Corporations Act;
• remove the uncertainty for transferring financial institutions and friendly societies in respect of the demutualisation provisions in Part 5 of Schedule 4 of the Corporations Act 2001; and
• expressly permit mutual entities registered under the Corporations Act to issue equity capital without risking their mutual structure or status.
This follows the Federal Government’s acceptance of all the Recommendations made by the Hammond Report.
- Definition of ‘mutual entity’: A ‘mutual entity’ will be defined as a registered company which has a constitution stating that “each member has no more than one vote at a general meeting.” For clarity, a person who is a member in more than one capacity, or joint members, must have no more than one vote for each capacity in which the person is a member. This definition only applies to companies registered under the Corporations Act 2001 and does not impact on other entities with similar governing arrangements.
- Demutualisation disclosure: Demutualisation is a process that changes a Mutual or cooperating association into a public company by converting the interests of the members into shareholdings. The demutualisation disclosure provisions in Part 5 of Schedule 4 of the Corporations Act 2001 will only be triggered where the changes to the constitution are such that it would no longer meet the definition of ‘mutual entity’. Under the current law, even where the changes do not necessarily have the effect of demutualisation, the disclosure obligations are generally triggered if the mutual entity proposes to modify its constitution to vary or cancel the rights of its members. Where the changes do not have the effect of demutualisation, ASIC may then exercise its discretionary power to exempt entities from these provisions. This amendment will provide for a simpler and clearer determination of when an entity is demutualised.
- Mutual Capital Instruments: Mutual entities will now be able to raise capital by issuing Mutual Capital Instruments (MCIs). A Mutual (MCI entity) may issue this new bespoke form of share if it meets the following requirements and has issued one or more MCIs:
- it must be a public company;
- it must not have voting shares (other than MCIs) quoted on a prescribed financial market;
- it must not be a registered entity within the meaning of the ACNC Act; and
- it must have a constitution that states that the entity is intended to be a MCI entity for the purposes of the Corporations Act.
A share must meet two requirements to be issued as, and continue to be, an MCI, namely that there is a restriction on the mutual entity’s ability to vary or cancel class rights (requiring either a special resolution of all members holding the same class of MCI, or obtaining written consent of 75 per cent of the holders of the class of MCI), and the Mutual’s constitution stipulates further rights and conditions that attach to the share.
The conditions that must be included are that the share may only be issued as a fully paid share; that dividends in respect of the share are non-cumulative; the constitution must also include the rights attached to the share with respect to participation in surplus assets and profits is set out. This includes any rights of an MCI holder to repayment of the face value of the share ahead of other claims to surplus assets in a winding up. An MCI entity may also specify further terms, conditions or rights in their constitutions attached to MCIs beyond those specified in the Bill. Importantly, a MCI mutual entity is not required to treat the holder of MCIs in the same way as other members.
If passed, this Bill should provide Mutuals with the ability to effectively raise capital without tapping into its existing members in order to remain a Mutual. We would expect a member of Mutuals to take advantage of this when the proposed changes become law which should achieve the aims for growth and more competition in the Australian Banking sector.
To ensure that Mutuals are prepared for these changes they should:
• examine their Constitution and amend them if necessary to ensure that they would meet the legislative requirements for the ability to issue MCIs;
• consider the rights that are attached to the MCIs in addition to those that are mandatory; and,
• give some consideration to their likely investor base who will take up MCIs.
This communication is intended to provide commentary and general information only. It is not intended to be a comprehensive review of all aspects of the matter referred to. It should not be relied upon as legal advice as to specific issues or transactions.
About the author
Shaun McGushin leads the Ash St. Projects & Finance team. He is one of Australia’s most experienced advisers on infrastructure and finance, including buying and selling infrastructure assets, public private partnerships, project finance, corporate finance, acquisition finance, capital markets and workouts.
Formerly a partner of both Corrs and Freehills, Shaun has over thirty years’ experience advising local and international corporates on a wide range of transactions with particular focus on the infrastructure, power, energy and resources industries. He has a reputation for successfully completing major transactions, no matter how complex, and is sought for his strategic and negotiating skills.