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.
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.