Credit unions and caisses populaires have for many years sought a way to carry on business in multiple jurisdictions in Canada. In addition, they have sought means by which to obtain long-term strategic investment to help fund their growth. Under newly introduced federal legislation, credit unions and caisses populaires will have new opportunities to achieve these objectives.
On March 29, 2010, the Government introduced Bill C-9 being An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures. Delivering on the Government’s commitment in the 2010 federal budget, Bill C-9, if enacted, will introduce a framework enabling provincial credit unions and caisses populaires to incorporate, or continue as, federal credit unions, which will be banks under the Bank Act.
Credit unions and caisses populaires will want to consider the following in deciding whether to incorporate, or continue as, a federal credit union:
- the ability to carry on business across Canada under the supervision of a single regulator, the Office of the Superintendent of Financial Institutions (Canada) (OSFI);
- the ability to amalgamate with other credit unions in different jurisdictions (assuming they have continued as federal credit unions);
- the flexibility to issue non-membership shares, providing opportunities for strategic investments, which may include the right to elect a limited number of directors;
- federal credit unions would be subject to the same rules as other banks in relation to permitted investments, related party transactions, business and powers (including commercial lending powers) and corporate governance;
- federal credit unions would be subject to the same restrictions as other banks with respect to insurance distribution and automobile leasing; and
- federal credit unions would be subject to the same deposit insurance regime that applies to other banks.
Incorporating or Continuing as a Federal Credit Union
A federal credit union will be a bank under the Bank Act that is organized and carries on business on a cooperative basis. A federal credit union will be organized and carry on business on a cooperative basis if:
- a majority of its members are individuals;
- it provides financial services primarily to its members (which may include corporations or other entities);
- subject to any legally permissible restrictions in the by-laws on the classes of persons to whom membership is available, membership in the federal credit union is wholly or primarily open, in a non-discriminatory manner, to persons who can use the services of the federal credit union and who are willing and able to accept the responsibilities of membership. We note that a federal credit union would have a narrower market base than a “retail association” under the federal Cooperative Credit Associations Act, which can provide services to members and the public;
- each member has only one vote;
- a delegate has only one vote even though the delegate is a member or represents more than one member;
- dividends on any membership share are limited to the maximum percentage fixed in the federal credit union’s letters patent or by-laws; and
- surplus funds arising from the federal credit union’s operations are used:
- to provide for the financial stability of the federal credit union,
- to develop its business,
- to provide or improve common services to members,
- to provide for reserves or dividends on membership shares and shares,
- for community welfare or the propagation of cooperative enterprises, or
- as a distribution to its members as a patronage allocation.
On the application of five or more persons, a majority of whom are individuals, the Minister of Finance (Canada) may issue letters patent incorporating a federal credit union if he or she is satisfied that various statutory criteria applicable to bank applicants are met, but also including the requirements that, if the applicant is a federal credit union, it will carry on business in accordance with the cooperative principles set out above and that the incorporation is in the best interests of the cooperative financial system in Canada.
As with other banks, a federal credit union must be organized with a minimum of $5 million in capital or any greater amount specified by the Minister. Once incorporated, an order approving the commencement and carrying on of business by a federal credit union will be deemed to contain a condition that the federal credit union must, on an ongoing basis, be organized and carry on business on a cooperative basis.
If it is authorized by the laws of the jurisdictions in which it is incorporated and it is authorized by special resolution of its members, a provincial credit union or caisse populaire may apply to the Minister for letters patent continuing it as a federal credit union.
While the provincial laws vary in permitting credit unions incorporated under their respective legislation to continue to other jurisdictions, we note that the legislation in some provinces such as British Columbia, Alberta, Saskatchewan and Ontario does allow for continuance to other jurisdictions. Quebec’s legislation is silent on caisses populaires being able to continue out of the jurisdiction and, accordingly, legislation would be required.
Some provincial credit unions and caisses populaires may engage in activities that banks are not permitted to engage in, such as automobile leasing and the distribution of insurance through branches. In these cases, a credit union or caisse populaire that continues as a federal credit union would be required to provide an undertaking to cease engaging in those prohibited activities within a specified timeframe, but presumably would be permitted to wind-down existing business in an orderly manner.
Whereas some provincial legislation offers unlimited deposit insurance for deposits held in a credit union or caisse populaire, federal credit unions would be subject to the same deposit insurance regime as other banks, which would generally limit the coverage to $100,000. Under Bill C-9, the Canada Deposit Insurance Corporation Act is also amended to, among other things, address certain transitional matters relating to deposit insurance coverage.
Membership, Shares and Debt
Membership in a federal credit union is governed by the Bank Act and the federal credit union’s by-laws. To be a member of a federal credit union, a person must acquire and hold the minimum number of membership shares required under the by-laws. A member has one vote on all matters to be decided by members notwithstanding the number of membership shares the member holds because the right of a member to vote at members’ meetings attaches to membership, not to the holding of membership shares.
There can only be one class of membership shares in which the rights of the holders are equal in all respects, including the right to receive dividends on membership shares and the remaining property of the federal credit union on dissolution.
Subject to solvency and liquidity requirements, a federal credit union may pay a dividend or patronage allocation declared by the Board in money or by issuing fully paid shares or membership shares or options or rights to acquire such shares.
Non-Membership Shares and Debt Financing
A federal credit union will be able to fund itself by issuing both non-membership shares to members or non-members, as the by-laws may provide, and debt obligations. A federal credit union may use its ownership structure to further strategic alliances with other parties providing financial support.
Certain ownership prohibitions in the Bank Act will not apply to federal credit unions. As a result, a person may be a major shareholder of a federal credit union. Accordingly, a person could own 100% of a class of shares or a series in a class of shares (other than membership shares) of a federal credit union regardless of the size of the federal credit union so long as the person would not thereby control it in law or in fact. Shares may confer the right of holders to elect no more than 20% of the directors. Those shares, however, must not confer a right to receive the remaining property of the federal credit union on dissolution or a right to vote at meetings of the federal credit union, unless specifically provided for in the Bank Act (e.g., a right to vote at an election of directors on the happening of an event or confirming an amendment to a by-law revising the rights, privileges, restrictions or conditions attached to those shares).
The proposed amendments to the Bank Act provide a federal credit union with the same ability as a bank to issue debentures or other debt obligations.
At least two-thirds of the directors of a federal credit union (or such greater proportion as may be stipulated in the by-laws) must be members of the federal credit union or representatives of members of the federal credit union. Residency requirements, affiliation rules and other limits on directors that apply to other banks will also apply to federal credit unions. Where a federal credit union has issued shares that provide for the election of directors (discussed above), a majority of the directors present at a meeting must be members.
Two or more federal credit unions may amalgamate as one federal credit union. This would enable a provincial credit union or caisse populaire to continue as a federal credit union and amalgamate with a provincial credit union or caisse populaire in a different jurisdiction (assuming it has itself continued as a federal credit union) and carry on business in multiple jurisdictions.
Continuing as a federal credit union and then amalgamating with another federal credit union is a two-step process, and each step must be authorized by members. Ideally, members could authorize both continuance and amalgamation at one meeting as this would be more efficient than having a meeting to authorize the continuance and then a separate meeting following continuance to authorize the amalgamation. This issue will require further consideration and discussion with OSFI.
The matters to be taken into account by the Minister before issuing letters patent of amalgamation include the best interests of the cooperative financial system in Canada. An amalgamation, therefore, will require member (and, if applicable, shareholder) approval as well as the approval of the Minister.