05 October 2018

The feeling is mutual: another win for customer-owned sector

This article was written by Jo Dodd, Ian Paterson and Rhys Casey.

The difficulties the mutual sector currently faces in raising capital will be substantially reduced if the amendments to the Corporations Act proposed yesterday by the government are implemented.

Our Alert in November 2017 highlighted the challenges faced by mutual entities in raising capital without losing their mutual status, due to uncertainty around application of the demutualisation provisions in the Corporations Act.

The Hammond Report which was released in July 2017 recommended (among other things) that the government consider the effectiveness of the demutualisation provisions in Part 5 of Schedule 4 of the Corporations Act and include in the Corporations Act a definition of a mutual entity.  The proposed amendments respond to those recommendations and are intended to enable the mutual sector to raise capital without the risk of triggering a demutualisation.

The amendments proposed are straightforward, with two simple changes to the Corporations Act envisaged:

  • A new definition of “mutual entity” is to be inserted in Division 6 of Part 1.2 of the Corporations Act.  A “mutual entity” would be a company registered under the Corporations Act that provides each member with no more than one vote.
  • The demutualisation provisions in Part 5 of Schedule 4 of the Corporations Act would be triggered only on constitutional changes that would result in a mutual entity no longer being a mutual entity (as per the new definition).

Implications for mutuals and cooperatives

Provided that a mutual entity’s constitution gives each of its members no more than one vote, it will satisfy the proposed definition. 

Many mutual constitutions have their own demutualisation approval provisions, so these would still need to be taken into account in determining whether a demutualisation would be triggered by a capital issuance or other corporate action (unless they are removed with member approval).  Nevertheless, if enacted, the amendments will remove the uncertainty in the Corporations Act. 

The amendments contemplate that ASIC will no longer have the power to exempt entities from Part 5 of Schedule 4 in light of the simplified definition.  This will presumably also mean that ASIC’s Regulatory Guide 147 will no longer be relevant (although we note that proposed section 51M of the Corporations Act is consistent with the governance relationship test in paragraph 40 of RG 147).  Given mutual entities come in all shapes and sizes across almost every sector of the Australian economy, including banking and finance, health, aged care, housing, insurance and agriculture, there may be utility in retaining an exemption power to cater for the “known unknowns” as mutuals seek to innovate, invest and compete.

While the proposed amendments should remove the uncertainty around the triggering of a demutualisation under the Corporations Act, any membership interest will still need to be made commercially attractive (and have voting rights limited in accordance with the Corporations Act definition).  Further, regulated financial institutions will still be subject to APRA’s prudential requirements (e.g. the requirements which apply to mutual ADIs in relation to Mutual Equity Interests).

In this regard, Recommendation 5 of the Hammond Review suggested that the government consider the effectiveness of the demutualisation guidelines in the Banking Act. Under section 63(8) of the Banking Act, the Treasurer has a similar authority to that of ASIC under the Corporations Act to propose guidelines in respect of a potential demutualisation of an ADI.  The Treasurer has currently delegated this authority to ASIC. If ASIC’s exemption power under the Corporations Act is removed, it will be necessary to consider how the Treasurer will exercise powers to approve any demutualisation of an ADI.

Next steps

These amendments take significant strides towards addressing what the Hammond Report described as a “lack of recognition and understanding” leading to a “significant barrier to growth and accessing capital” in the mutual sector.

We welcome these amendments to the Corporations Act which should make accessing the capital markets easier for mutual entities.

Submissions on the proposed amendments are due by 1 November 2018. Should you wish to discuss these amendments, or the potential impact it may have on your business, please contact us.



Key contacts

Regulator

Australia's financial institutions are experiencing more regulatory pressure than ever before. Remain at the forefront of key regulatory issues as we guide and shape the future of financial services.

regulator
Share on LinkedIn Share on Facebook Share on Twitter Share on Google+
    You might also be interested in

    On 9 October 2019, the Australian Securities Exchange (“ASX”) released the final version of its listing rules reforms. Nearly all of these changes are expected to come into effect on 1 December 2019...

    14 October 2019

    On 18 September the Federal Government reintroduced Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 into Parliament.

    20 September 2019

    Committed settlement, a patent-pending methodology introduced by Digital Asset , could present a way to make financial transactions immutable

    18 September 2019

    Then this week came ASIC’s surprise. With no fanfare, ASIC has doubled the SPP participation limit from $15,000 to $30,000 per securityholder. Could this be the end of the entitlement offer era?

    30 August 2019

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.