Mutual enterprises have, traditionally, been restricted in the ways they could raise capital to avoid triggering the demutualisation provisions. However, on 6 April 2019 the Federal government introduced the Treasury Laws Amendment (Mutual Reforms) Bill 2019 introducing a new way of capital raising for mutual entities.
A mutual capital investment or an MCI, is a “security” or a “financial product” regulated under the Corporations Act 2001 (“Corps Act”). MCIs allow mutual entities to raise money without relying solely on debt or compromising its member owned or mutual status. As such, issuing MCIs are governed by the same provisions which apply to the issue of shares. These provisions include the fundraising and disclosure requirements of the Corporations Act.
To be capable of issuing MCIs, the entity must be a ‘mutual entity’ within the definition of s.167AC of the Corps Act, and specifically it must be an ‘MCI mutual entity’. A mutual entity will be eligible if they:
- are a public company;
- do not have voting shares (other than MCIs) quoted on a prescribed financial market;
- are not a registered entity within the meaning of the Australian Charities and Not-for-profits Commission Act 2012.
For an instrument to be an MCI the security must have certain class rights attached to it and a number of constitutional amendments are required. These amendments include (but are not limited to):
- a clause which states that the entity is intended to be an MCI mutual entity for the purposes of the Corps Act;
- a clause which only allows MCIs to be issued only as a fully paid share;
- a clause which outlines that dividends in respect of MCIs are non-cumulative;
- a clause which sets out the rights attached to the MCI with respect to participation in surplus assets and profits; and
- a clause which only allows dividends to be issued in respect of the MCIs in the event the payment of the dividend is fair and reasonable to its members as a whole.
Further, for an entity which is not yet an MCI Mutual entity, there is a specific process which must be followed in order to make the necessary constitutional amendments to conform. It is important to note that there is a time limit placed on when these amendments can be made.
Once a company has passed the necessary constitutional amendments and it has registered those amendments with ASIC, it is able to issue MCIs. Depending on the nature of the offer of MCIs, a company may be required to follow certain disclosure requirements.