Policy Brief: Co-operatives, Mutuals and Friendly Societies Bill

Co-operatives, Mutuals and Friendly Societies Bill

1. Introduction

1.1 Co-operatives UK fully supports the Co-operatives, Mutuals and Friendly Societies Bill - introduced by Sir Mark Hendrick MP on 15 June 2022.  

1.2 The proposed legislative measures for share capital and non-distributable capital surplus would enable significant new investment, innovation and development in a wide range of co-operatives, for greater economic, environmental and social impact. From previous consultation with our members, we know these measures would enjoy widespread support within the co-operative sector.  

2. Non-distributable capital surplus 

2.1 The Bill would give co-operative societies the option of adopting a statutory provision guaranteeing that their residual capital surpluses are ‘non-distributable’ among members. The term capital surpluses means residual equity minus members’ shareholdings and share interest. The provisions would not interfere with co-operative societies' ability to profits to members or to pay interest on share capital.

2.2 The accumulation and re-investment of such ‘common capital’ is a feature of co-operative model, as recognised internationally and in UK policy. For this reason, most co-operative societies include non-distributable capital surplus provisions in their rules. But rules-based provisions fall short of the permanent legal guarantee sought by many co-operative entrepreneurs, investors and policymakers.

2.3 The economic benefits of this legislative change would be: 

• Creating more optimal conditions for investment and asset growth in co-operative societies, by setting the right boundaries and engaging with the appropriate motivations of entrepreneurs, members and investors, and by preventing perverse incentives to destroy co-operative value (such as unnecessary demutualisation)  

• Boosting business investment, by committing more capital surplus to re-investment in economically, environmentally and socially productive enterprise  

• Providing co-operative entrepreneurs with more optimal choices of legal form and enabling innovation and impact in the social economy  

3. Repayable shares  

3.1 Our understanding is that the Bill would enable societies to issue equity shares that are repayable at the option of the society, rather than being withdrawable at the option of shareholders.   

3.2 While withdrawable shares are a vital and irreplaceable tool for societies, and underpin the £200 million community shares market, these shares have limitations for some large and/or capital-intensive societies seeking to raise large amounts of equity investment. These societies need the ability to fully control repayment and to raise amounts in excess of the £100,000 holding limit for withdrawable shares, especially when engaging wholesale capital markets. 

3.3 At present, societies looking to raise equity are hampered by legal uncertainty as to whether they can ‘repay’ non-withdrawable shares at their option. Only primary legislation can provide the legal certainty that these businesses and investors require.  

3.4 The economic benefits of this legislative change would be: 

• Reducing financing costs in the sector by more than £1m a year (very conservative estimate) 

• Larger and/or more capital-intensive societies raising millions of pounds more each year in equity than they do now, to invest in decarbonisation, technology and other critical missions relating to energy, housing and food production  

• Enhancing the GVA of new capital-intensive societies, perhaps adding more than a £1 million in productivity to these start-ups over 10 years 

• Aiding the long-term resilience of societies