Legislating for co-operative identity: The new co-operatives national law in Australia Ann Apps*

Co-operatives and mutuals are the main types of member-owned in Australia. Co-operatives are usually registered as co-operative societies under State-based legislation. Co-operatives may also register as under the Act 2001 (Cth) but are distinguished from companies and mutuals by their commitment to co-operative principles. On 2 March 2015, the Senate referred an inquiry into the role of co-operatives and mutuals in the Australian economy to the Economics Reference Committee. The terms of reference include “barriers to innovation and growth” and the “impact of current regulations”. This article examines the Co-operatives National Law (CNL) which has recently been introduced in some Australian States. The article will analyse the key aspects of the new law that will have the maximum impact on co-operative identity – control, governance and finance. The CNL will be compared with the to evaluate its effectiveness in articulating the co-operative’s distinct identity and promoting co-operative growth.

INTRODUCTION The co-operative model continues to play an important role in shaping Australia’s commercial landscape. Co-operatives have both a historical and a contemporary presence in the banking, insurance, agri-business, retail and service sectors.1 Yet, until recently there has been a surprising lack of acknowledgement of the existence and importance of the business model in business, education, law and policy circles. This is best illustrated by its absence from curricula in tertiary business and law degree programs in most Australian universities.2 A review of recent Australian academic literature reveals that research on co-operative enterprise has mainly taken place in the fields of social policy studies, human geography and environmental governance.3 There is a small but growing interest in the potential of the co-operative as an alternative business model in the disciplines of economics and management. Much of this current research focuses on the history of consumer co-operatives in Australia and the performance of larger Australian co-operatives in the agriculture, retail and financial sectors.4 Western Australian academics, Timothy Mazzarol and Elena Limnios, have published extensively in the area of co-operative enterprise business models from a management, marketing and business strategy perspective. Their recent publications deal with

* B Commerce/LLB (UNSW), Lecturer, University of Newcastle Law School, PhD Candidate TC Beirne School of Law, University of Queensland. The author would like to thank Ross Grantham, Robyn Donnelly, Simon Lane, Gary Lewis and the anonymous reviewer from this journal for their helpful and constructive feedback on earlier versions of this article. 1 R Denniss and D Baker, “Who knew Australians were so Co-operative?” (The Australia Institute, 2012) 17, 24, 28, 31, 34. 2 D Lee, K Marshall, R Shankar and M Wang, “A Comprehensive National Education and Training Strategy for the Co-operatives and Mutuals Sector” (Business Council of Co-operatives and Mutuals, 2014) 6, http://bccm.coop/wp/wp-content/uploads/2014/06/BCCM_ETStrategyReport.pdf. 3 See, eg, JK Gibson-Graham, J Cameron and S Healy, Take Back the Economy: An Ethical Guide for Transforming Our Communities (University of Minnesota Press, 2013) 264; JA Cameron, “Experimenting with Economic Possibilities: Ethical Economic Decision-making in Two Australian Community Enterprises” in A Amin (ed), The Social Economy: International Perspectives on Economic Solidarity (Zed Books, 2009) 92-115; L Phelan, J McGee and R Gordon, “ Governance: One Pathway to a Stable-state Economy” (2012) 21(3) Environmental Politics 412. 4 See, eg, N Balnave and G Patmore, “The Outsider Consumer Co-operative: Lessons from the Community Co-operative Store (Nuriootpa), 1944–2010” (2015) 57(8) Business History 1133. See also J Brewin, M Bielek and B Oleson, “The Evolution of Grain Trading Organisations in Australia: Applying the Co-operative Life Cycle” (2008) 9 Journal Of the Canadian Agricultrual Economics Society 9.

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Please note that this article is being provided For information concerning permission to for research purposes and is not to be republish material from this journal, either in reproduced in any way. If you refer to the part or in its entirety, in any medium, please article, please ensure you acknowledge both refer to http://sites.thomsonreuters.com.au/ © 2016 Thomson Reuters (Professional) Australia Limited the publication and publisher appropriately. journals/permissions. for further information visit www.thomsonreuters.com.au The citation for the journal is available in For general permission queries, contact or send an email to [email protected] the footline of each page. [email protected]. Legislating for co-operative identity: The new co-operatives national law in Australia co-operative governance, member engagement, financing models and resilience.5 Yet despite the recent introduction of a national model law (Co-operative National Law, “CNL”) in New South Wales, the Northern Territory, South Australia, Tasmania and Victoria,6 there has been little interest or response from law academics to these reforms and their implications for Australian co-operative law and business law generally.7 This article seeks to generate a space for academic scholarship and debate on co-operative law and particularly on the merits of the CNL. The co-operative business model has produced some of Australia’s most resilient commercial and agricultural enterprises. One of the first Australian co-operatives was the Australian Mutual Provident (AMP) Society of New South Wales formed in 1849.8 More than 160 years later AMP continues to operate as one of Australia and New Zealand’s leading wealth management specialists.9 The formation of co-operative creameries in New South Wales and Victoria underpinned the development of the modern Australian dairy industry, including two of its leading dairy exporters, Murray Goulburn and Bega Cheese.10 The co-operative business model is still utilised by major players in the dairy industry, including Norco and Dairy Farmers.11 Co-operatives continue to have a strong presence in many agricultural sectors including fishing, grain, crops and livestock.12 The business model supports rural communities by allowing small farm units, particularly family-owned farms to pool resources to market and distribute produce. One of Australia’s largest co-operatives, Co-operative Bulk Handling Group, was formed in 1933 and today provides services to more than 4,200 grain producers in Western Australia. It has an annual turnover of more than $2.8 billion and exports around 90 per cent of the Western Australian grain harvest.13 Westfund Health insurance is an example from the insurance sector. It had its origins as a co-operative in the mining town of Lithgow in 1896 providing support for injured miners. Today it continues as a member owned health insurance fund with around 44,000 members.14

5 T Mazzarol and E Mamouni Limnios, Co-operatives in the Fourth Sector: The Role of Member-Owned Businesses in the Global Economy (Tilde University Press, 2013); T Mazzarol, S Reboud, Mamouni Limnios E and D Clark, Research Handbook on Sustainable Co-operative Enterprise: Case Studies of Organisational Resilience in the Co-operative Business Model (Edward Elgar Publishing Ltd, 2014); see also T Mazzarol, E Mamouni Limnios and S Raboud, Co-operative Enterprise: A Unique Business Model?, Paper presented at the Future of Work and Organisations, 25th Annual ANZAM Conference (Wellington, 2011). 6 Co-operatives (Adoption of National Law) Act 2012 (NSW) and Co-operatives National Law Application Act 2013 (Vic) both commenced on 3 March 2014. The Co-operatives National Law (South Australia) Act 2013 (SA) commenced on 22 May 2015. The Co-operatives (National Uniform Legislation) Act 2015 (NT) commenced on 1 July 2015 and the Co-operatives National Law (Tasmania) Act 2015 (Tas) commenced on 1 September 2015. 7 Macquarie University academic, Troy Sarina has contributed a chapter on Australian co-operative law in D Cracogna, A Fici and H Henry (eds), International Handbook of Co-operative Law (Springer, 2013). The contribution of Sydney solicitor, Jenni Mattila must also be acknowledged. Jenni is one of Australia’s leading co-operative lawyers, and she was actively engaged with the co-operative law reform process and the promotion of improved understanding of the legal aspects of co-operatives generally, see “100224 Mattila Lawyers Submission Co-operatives National Law”, http://www.fairtrading.nsw.gov.au/biz_res/ ftweb/pdfs/Cooperatives_and_associations//Coop_submission_J_ Mattila.pdf. 8 R Rhodes, Empire and Co-operation: How the British Empire used Co-operatives in its Development Strategies 1900-1970 (Birlinn Ltd, 2012) 148. 9 Rhodes, n 8, 148; see also AMP, “About”, https://www.amp.com.au/amp/about-amp. 10 For an extensive history of co-operatives in the Australian dairy industry, see G Lewis, The Democracy Principle (Co-operative Federation of NSW Ltd, 2006). Bega Cheese began its history as the Bega Co-operative Creamery in 1899 and the co-operative business model was retained until 2008: Bega Cheese, Student Resources – A Brief History, http://www.begacheese.com.au/student-resources/brief-history. Murray Goulburn was first registered as a co-operative in 1950, it is currently registered as an unlisted but it retained its co-operative status through the adoption of the co-operative principles in its internal governance rules: Goulburn M, “Our Story, Our Heritage”, http://www.mgc.com.au/our-story/our-heritage. 11 Denniss and Baker, n 1, 34. 12 Denniss and Baker, n 1, 34. 13 Business Council of Co-operatives and Mutuals, National Mutual Economy Report 2014 (BCCM, 2014) 24, http://bccm.coop/publications/national-mutual-economy-report-2014. 14 Denniss and Baker, n 1, 28.

(2016) 34 C&SLJ 6 7 Apps The contribution of the co-operative business model to the success of these businesses is often ignored. Yet conversely, demutualisation is more likely to be seen as a failure of the model rather than the business. This is so even where the pressure for demutualisation is a direct consequence of the success of the business model in building substantial equity in the business over time. This article interrogates this anomaly, using the CNL as the basis for a comparative analysis between co-operative law and company law in Australia. This comparison will focus on the treatment in each legal framework of the issues of ownership, finance and governance. The co-operative is a distinctive type of corporate business model that offers an alternative to the profit-driven company. Rather than seeking to maximise profit, the co-operative seeks to maximise the value of membership by advancing the interests of its owner-members. The members of a co-operative are also stakeholders who transact with the business. In a producer or workers’ co-operative, the members are the suppliers of one or more of its non-capital inputs, for example labour or raw materials. In a consumer co-operative, the members are also the consumers of its goods or services. The achievement of a co-operative’s business objectives requires balancing financial returns with non-financial or social returns that are also valued by its members, for example the provision of additional member services.15 The liberty to pursue non-financial goals has contributed not only to the resilience and longevity of the model, but also to its ability to innovate and adapt to its changing member needs.16 The co-operative can be described as a business model which refuses to “divorce economic activity from its societal consequences.”17 It can be distinguished from all other enterprise types, including other member-based organisations (collectively referred to as “mutuals”), by the adoption of a set of internationally recognised co-operative values and principles.18 The co-operative’s legal identity is inextricably linked with these values and principles. The co-operative values are self-help, self-responsibility, democracy, equality, equity and solidarity. These values are translated into practice by the seven co-operative principles: (1) voluntary and open membership; (2) democratic member control; (3) member economic participation; (4) autonomy and independence; (5) education, training and information; (6) co-operation among co-operatives; and (7) concern for the community.19 The adherence to the co-operative principles is simultaneously a strength and weakness of the business model. The principle of autonomy and independence ensures that the model’s resilience and sustainability but also limits the model’s access to external capital and may create “horizon” problems for existing members (who are unwilling to invest further capital if the benefits are unlikely to be realised during their membership).20 The principles of democratic member control and member economic participation strengthen co-operative governance by aligning the interests of members with

15 An example is the establishment of dental care units by Westfund Health Insurance in Lithgow, New South Wales and Mackay, Queensland; see also Denniss and Baker, n 1, 29. 16 This is well illustrated by the history of the United Kingdom’s The Co-operative Group, a contemporary co-operative retail giant which began over 150 years ago in 1864 as the North England Co-operative Wholesale Industrial and Provident Society and was later known as the Co-operative Wholesale Society. The enterprise has adapted and innovated its path through retailing history including some of the earliest uses of national distribution networks, “own brand” retail products and the introduction of self-service shopping and in-store banking. A detailed history of The Co-operative Group and the evolution of its multi-sector business model is provided in JF Wilson, A Webster and R Vorberg-Rugh, Building Co-operation: A Business History of the Co-operative Group, 1863-2013 (Oxford University Press, 2013). 17 Wilson, Webster and Vorberg-Rugh, n 16, 3. 18 These principles and values are described in the International Co-operative Alliance, “Statement on the Co-operative Identity”, adopted at its Centennial Congress in Manchester (UK) on 23 September 1995. 19 International Co-operative Alliance, n 18. 20 Mazzarol, Mamouni Limnios and Raboud, n 5, 5.

8 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia management. But adherence to these principles may also encourage “free riding” where less active members still benefit from the increased economic participation of other members.21 The quest to improve the “efficiency” of the business model in deregulated markets has tended to shift the focus of law reform towards making the co-operative function more like a company, through for example introducing tradeable securities and variable control rights. The risk with this approach is that by compromising co-operative principles, the business model loses its distinct legal identity and diversity in business models is reduced. This article considers that there is an inherent tension in the CNL as it attempts to straddle two competing objectives: the adherence to the co-operative principles which promote the unique legal identity of the co-operative model on the one-hand and the “companisation” of the model to enable it to compete with and access the capital efficiencies of the company on the other hand. The article concludes that this conflict will detract from the CNL’s impact on the “formation, growth and stability” of co-operatives. A more effective solution may be found in the referral of State law-making powers on co-operatives to the Commonwealth. National legislation for co-operative societies together with a separate recognition of a hybrid co-operative company within the existing corporations’ law framework offers the possibility of a “fresh start” for Australian co-operative law. This bold step may be required if the co-operative is to realise its objective to become the preferred enterprise alternative to the company model in Australia.

THE NEED FOR DIVERSITY OF BUSINESS MODELS The social and environmental impacts of a business model that prioritises profit over people and concentrates wealth in the hands of a few are well-known and increasingly acknowledged.22 The task of mitigating the potential excesses of the profit-driven company has caused enormous growth in the volume and complexity of business regulation, including competition and consumer protection, employment, environment, insolvency and taxation laws. The main focus of law and policy reform in this area has been on striking a balance between controlling the deleterious impacts of corporate greed on society and improving regulatory efficiency, so as not to deter investment and stifle economic growth.23 Ironically, one of the consequences of this quest for regulatory efficiency has been an international trend towards the standardisation of enterprise types on the features of the investor owned company.24 The former chief economist at the World Bank, Joseph Stiglitz, acknowledged the issue of homogenisation of business models:25 We [USA and Western governments] have focused too long on one particular model, the profit maximizing firm, and in particular a variant of that model, the unfettered market. We have seen that that model does not work, and it is clear that we need alternative models. We also need to do more to identify the contribution that these alternative forms of organization are making to our society … the contribution is not just a contribution to GDP, but a contribution to satisfaction. Stiglitz’s warning came at a time when the impacts of the global financial crisis (GFC) were being felt in average households around the world. In the post-GFC period a new and largely unregulated market, known as the “sharing economy”, has emerged to challenge the regulatory landscape and the

21 Mazzarol, Mamouni Limnios and Raboud, n 5, 5. 22 See, eg, A Sen, Development as Freedom (Oxford University Press, 2001). In popular press, see N Klein, This Changes Everything: Capitalism vs the Climate (Penguin UK, 2015). 23 A recent example is the political pressure that has been applied by “big business” on the Commonwealth government to dilute the reforms suggested by the Harper Competition Policy Review to give the Australian Competition and Consumer Commission greater power to intervene when retail giants such as Woolworths and Coles use their economic power to reduce competition, see J Fernyhough, “Government caves to big business”, The New Daily (4 September 2015), http://thenewdaily.com.au/money/2015/09/04/government-caves-big-business-threatens-war. 24 H Henry, Guidelines for Cooperative Legislation (International Labour Office, 2012) p 14. An example in Australia is the introduction of the sole director/shareholder which has largely replaced small and sole traders. 25 DJ Stiglitz, “Moving Beyond Market Fundamentalism to a More Balanced Economy” (2009) 80(3) Annals of Public and Cooperative Economics 345, 359.

(2016) 34 C&SLJ 6 9 Apps standardised business model. The “sharing economy” includes the creative and collaborative use of digital platforms to reuse, recycle and share excess capacity in goods, services and property.26 While some of these entrepreneurial activities are largely profit-driven or “extractive”, the sharing economy also extends to altruistic models of community enterprise and sharing initiatives to allow equitable access to food, housing, energy and transport.27 In the quest to understand and capture the potential benefits generated by the sharing economy, there is growing interest in new legal models for .28 This article suggests that before legislators and policy makers seek to “reinvent the wheel”, they should reconsider the potential of the original social enterprise model, the co-operative. Globally, the co-operative has “the longest and most successful history in mutuality and [is] the most clear–cut form of business organisation with social objectives”.29 A CO-OPERATIVE REVIVAL? The number of co-operatives in Australia has been steadily declining since their peak in the late 1950s and has almost halved in the past decade.30 The reasons for the decline are not entirely clear, but it is at least partially attributable to changes in government policies around market competition in the 1980s, resulting in the deregulation of agricultural industries and the concentration of retail markets around national enterprises such as supermarkets.31 The shift in policies allowed the concentration of market power in the hands of large investor-owned companies and contributed to the public view that the co-operative was an outdated business model that would eventually disappear. The development of a national framework for Australian company law in the 1990s and introduction of a single national law, the Corporations Act 2001 (Cth), is also likely to have contributed to the perception that the co-operative business model was passé. Co-operatives have been left behind in a mire of inconsistent State-based legislation that has made it difficult for the business model to modernise and compete with companies as an alternative organisational form. An alternative view is that the co-operative business model is not at all passé, but is instead a business model which occurs naturally in times of transition. The popularity of the co-operative throughout history has tended to ebb and flow depending upon the need for enterprising solutions to collective problems. A significant problem that requires enterprising solutions is the decline in employment opportunities in regional Australia. While Australia may have fared reasonably well during the GFC, the shift of major car manufacturing industries to countries with cheaper production costs is a recent example of the impact of post-GFC globalisation on the Australian economy.32 Arguments in favour of the “companisation” of business law have focussed on the reduction of transaction costs and improvements in market efficiencies. However, it is becoming increasingly evident that the benefits of

26 Despite its popular currency, there is as yet no widely accepted definition of the “sharing economy”: see B Morgan and D Kuch, “The Sharing Economy: More than the Sum of its Parts? Implications for Legal Services: Orsi Workshop Report” (2014); R Botsman, “The Sharing Economy Lacks a Shared Definition” (2013), http://www.fastcoexist.com/3022028/the-sharing-economy-lacks-a-shared-definition. 27 Morgan and Kuch, n 26, 9. 28 In Australia, the Legal Models Working Group is a subgroup of the Social Innovation, Enterprise and Entrepreneurship Alliance and has produced a report on alternative legal models for social enterprise: B Morgan, D Kuch, S Bennett, R Donnelly, A Greig, J McNeil, F Martin, M Rodgers and A Perry, Legal Models Working Group Report: Social Innovation, Enterprise and Entrepreneurship Alliance (2014), http://www.employeeownership.com.au/social-enterprise-legal-models. 29 Rhodes, n 8, xi. 30 Australian Bureau of Statistics and NSW Fair Trading, International Year of Co-operatives 2012: Regulation of Co-operatives in Australia (2012), http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~ Main%20Features~Regulation%20of%20co-operatives%20in%20Australia~287. 31 Ministerial Council of Consumer Affairs, “Co-operatives: A National Approach, National Co-operatives Law – Consultation Regulatory Impact Statement” (2009) 3, http://www.fairtrading.nsw.gov.au/biz_res/ftweb/pdfs/About_us/Have_your_say/ National_coops_law_regulatory_impact_ statement.pdf. 32 Ford will cease manufacturing cars in Australia by 2016. General Motors Holden and Toyota will withdraw from car manufacturing in Australia by the end of 2017. See M Hawthorne, “Toyota to exit Australia, 30,000 jobs could go”, The Sydney

10 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia these reforms do not necessarily flow into the coffers of the economies that bestow them. The homogenisation of business models and business laws has facilitated the globalisation of production itself and allowed companies to move beyond the reach of national laws to set their own “global standards”.33 Globalised production clearly favours the company model whose capital is highly mobile. However, there are new opportunities for co-operative businesses in regional Australia to demonstrate how the model can address collective problems, including unemployment and inadequate public infrastructure, left in the wake of vacating manufacturing companies.34 Because co-operatives are member owned and operated, they are inextricably linked to the communities in which they operate. They generate employment opportunities directly as employers and also indirectly as contributors to local economies. Although many agricultural co-operatives demutualised in the 1980s and 1990s, there has been a resurgence of interest in the potential of co-operatives in the agricultural sector. The federal government’s “Green Paper on Agricultural Competitiveness” suggests that more farmer-owned co-operatives are needed to help farmers improve the balance of power in negotiating prices with the major supermarkets.35 Co-operatives are also needed to helping small-scale farm businesses to achieve greater economies of scale and improve profitability without the need to sacrifice individual control of their business.36 The co-operative model is also proving to be a suitably adaptable vehicle for the provision of solutions in the public and community sectors including infrastructure such as energy and services such as housing, child care and health.37 The consumer-owned health practice, National Health Co-operative, which has grown since 2010 to service 7 per cent of Canberra’s primary health care sector, is an example of the potential of the co-operative model for this type of service delivery. Membership of this co-operative continues to grow at a rate of more than 10 per cent per quarter.38 In Victoria, Common Equity Housing Ltd provides expertise in helping member co-operatives to provide alternative housing solutions to more than 2,200 Victorian households.39 Staff based co-operatives have provided effective solutions in the provision of aged care and disability services. Examples include Nundah Community Enterprises Co-operative in the Northern Territory which provides long term and sustainable employment for people with disabilities;40 and Waverton Hub in Victoria which is a mutual organisation for aged-care, where members provide mutual support to help each other stay in their own homes for longer and also to create a market for local service provision.41 The idea that public servants should form their own co-operatives and bid for the right to provide health, education, welfare and emergency services was proposed in a Public Service Mutuals White Paper published by the Business Council of Co-operative and Mutuals in August 2014.42 The White Paper may generate interest among displaced public servants who need to rethink their employment options in a sector that has growing needs but a shrinking public purse to fund continuing services.

Morning Herald (10 February 2014), http://www.smh.com.au/business/toyota- to-exit-australia-30000-jobs-could-go-20140210-32cl3.html. 33 Henry, n 24, 14. 34 A Apps and J McGee, “Regional communities will take back control”, Sydney Morning Herald (10 March 2014), http://www.smh.com.au/comment/regional-communities-will-take-back-control-20140309-34f9u.html. 35 L Hems, M Leth, E Olesson and L Turner, “Public Service Mutuals: A Third Way for Delivering Public Services in Australia – White Paper” (BCCM, 2014) 13, http://bccm.coop/wp/wp-content/uploads/2014/09/WhitePaper_PSM_LR1.pdf. 36 Hems, Leth, Olesson and Turner, n 35, 13. 37 Denniss and Baker, n 1, 24. 38 Hems, Leth, Olesson and Turner, n 35, 15. 39 Hems, Leth, Olesson and Turner, n 35, 12. 40 Hems, Leth, Olesson and Turner, n 35, 14. 41 Hems, Leth, Olesson and Turner, n 35, 14. 42 Hems, Leth, Olesson and Turner, n 35, 14.

(2016) 34 C&SLJ 6 11 Apps The McClure Report on Welfare Reform has recommended that the federal government needs to do more to encourage the growth of co-operatives and mutual enterprises to fill the gaps in the provision of public sector services.43 There are good academic and policy reasons for a renewed interest in the co-operative model. However, the business model will not necessarily attract the member participants needed to generate significant co-operative growth in Australia. The reality is that those involved in new business start-ups are more likely to be concerned with the ease and speed of set-up and the costs associated with registration and maintenance of the business model. These are issues for the CNL that will be considered later in this article. It is also likely that they will take advice from their lawyers, accountants and business advisors who are unlikely to have learnt much about the co-operative business model in their undergraduate university degree programs.44 BETTER LAWS FOR CO-OPERATIVES The International Co-operative Alliance (ICA) estimates that co-operatives secure the livelihoods of nearly a quarter of the world’s population and generate more than 250 million jobs.45 To raise global awareness of the significance of the co-operative and its potential to contribute to socio-economic development and the achievement of the Millennium Development Goals, the United Nations declared 2012 as the International Year of Cooperatives.46 One of the objectives of the year was to encourage governments and regulatory bodies to establish policies, laws and regulations conducive to co-operative formation and growth.47 At its general assembly in Manchester in October 2012, the ICA approved a plan for a world-wide campaign to continue to promote the co-operative enterprise model.48 The plan titled “Blueprint for a Co-operative Decade” outlines an ambitious plan for co-operative growth, with a vision for 2020 that the co-operative becomes the “fastest growing form” of business and the “acknowledged leader in economic, social and environmental sustainability”.49 One of the five interlinked themes for the Blueprint strategy is to “ensure supportive legal frameworks for co-operative growth”.50 The ICA is of the view that very few countries have adequate legislation for co-operatives. In most countries, a lack of understanding of the distinctive features of the co-operative compared to other types of business organisations, particularly its dual social and economic outputs, is at the core of regulatory problems for co-operatives. There is also evidence that policy and lawmakers have contributed to a gradual erosion of the distinct identity of the co-operative by prioritising the harmonisation of business laws that are favourable to companies and encourage the isomorphism of other enterprise types towards the company form.51 In Australia, the promotion and growth of co-operatives has arguably been hindered by constitutional restrictions on the business law making powers of the national parliament. The power to make laws with respect to co-operatives resides with each of the six States and two Territories and this has resulted in a plethora of inconsistent laws, regulations and administrative regimes for co-operatives in Australia. In 2011, Australian States and Territories entered into the Australian Uniform Co-operatives Laws Agreement (AUCLA) to implement a scheme to promote uniform or

43 P McClure, W Aird and S Sinclair, “A New System for Better Employment and Social Outcomes – Report of the Reference Group on Welfare Reform to the Minister for Social Services” (Department of Social Services, 2015) 182. 44 Lee, Marshall, Shankar and Wang, n 2, 6. 45 B Roulants, E Hyungsik and E Terrasi, Cooperatives and Employment – A Global Report (CICOPA, 2014) 28. 46 United Nations, “International Year of Co-operatives 2012: About the International Year of Co-operatives”, http://social.un.org/coopsyear/about-iyc.html. 47 United Nations, “International Year of Co-operatives 2012: What are the Objectives of the Year?”, http://social.un.org/coopsyear/objectives-of-the-year.html. 48 C Mills and W Davies, “Blueprint for a Co-operative Decade” (International Co-operative Alliance, 2013), http://ica.coop/sites/default/files/media_items/ICA%20Blueprint%20-%20Final%20version%20issued%207%20Feb%2013.pdf. 49 Mills and Davies, n 48, 3. 50 Mills and Davies, n 48, 6. 51 Henry, n 24, 15.

12 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia consistent legislation and systems of administration for co-operatives. The AUCLA commenced in February 2012. The scheme includes a model template known as the CNL. The agreement provides that each State or Territory will adopt the CNL or an alternative consistent law as a law of its own jurisdiction. Administration of the uniform laws will continue to be the responsibility of each State and Territory but with a commitment to achieve uniform administrative processes and policies.52 The introduction of an updated legal framework for co-operatives in Australia is timely in the context of the ICA’s blueprint goals and the publication by the ILO of a revised edition of guidelines for co-operative legislation.53 This article uses the CNL as the basis for a comparative analysis between co-operative law and company law in Australia. A quick scan of the CNL may lead corporate lawyers to conclude that there is a great deal of similarity between the two laws. The CNL mirrors many of the key provisions of the Corporations Act 2001 and directly applies other provisions. The consistency between some aspects of the two laws is not surprising as both models share a number of legal characteristics including separate legal personality, the privilege of for shareholders, and the right to raise capital from the public in some circumstances. However, the objective of this article is to analyse the divergences between the two enabling legal frameworks and examine the potential impact of the CNL on the articulation of the legal identity of the co-operative. The comparison draws from some aspects of the comparative functional approach used to analyse the impact of legal frameworks on the company form in the seminal work The Anatomy of .54 However, any conclusions drawn are normative and are not based on any empirical studies of the behaviour of co-operatives induced as a response to the legal framework.55 This comparison focuses on the treatment in each framework of the issues of ownership, finance and governance. However, before proceeding with this analysis, the inherent assumption that a separate legal framework is required for the co-operative business model is acknowledged and addressed. Many successful co-operatives, including all financial co-operatives in Australia, are registered as companies under the Corporations Act 2001. If they continue to adhere to co-operative principles and values by adopting these as part of their internal governance rules, they are legally recognised as co-operatives although registered as companies. This begs the question: do we need separate laws for co-operatives in Australia? The answer is hopefully revealed in the analysis in this article of the differences in the treatment of ownership, finance and governance in each legal framework. The models have different objectives and a business that is registered as a company yet seeks to adhere to co-operative principles must experience tension, as satisfying the objectives of one framework will inevitably involve making some sacrifices in meeting the objectives of the other. The collapsing of distinct business models into one overarching framework, without specific recognition of variation in type, may have three consequences for the co-operative sector. First, it may further diminish the visibility of the business model as its co-operative nature is internalised. Secondly, it may provide an environment which is conducive to isomorphism of co-operatives into companies. Finally it may limit the potential for the operation of the sixth co-operative principle – co-operation amongst co-operatives, as the company model assumes vertical rather than horizontal integration.56

52 The Australian Uniform Co-operatives Legislation Agreement (AUCLA) was an agreement between the Ministers responsible for consumer protection and co-operatives in each State and Territory (originally the Ministers for Consumer and Co-operative Affairs or MCCA and now the Consumer Affairs Forum or CAF) and commenced in February 2012. 53 Henry, n 24, 1. 54 R Kraakman, J Armour, P Davies, L Enriques, HB Hansmann, G Hertig, KJ Hopt, H Kanda and EB Rock, The Anatomy of Corporate Law – A Comparative and Functional Approach (2nd ed, Oxford University Press, 2009). 55 Henry, n 24, 22. 56 The company model expands vertically by creating subsidiaries which are at least partly owned or controlled by parent companies. The co-operative model expands horizontally using networks and federations to increase market penetration, but each co-operative remains autonomous and independent.

(2016) 34 C&SLJ 6 13 Apps

A BACKGROUND AND CONTEXT FOR AUSTRALIAN CO-OPERATIVE AND COMPANY LAW Australia is a federation comprising separate legal systems in six Australian States, two Territories and at the national or Commonwealth level. The allocation of specific law making powers to the Commonwealth is expressly set out in the Australian Constitution.57 The power to make laws with respect to the formation of companies and co-operatives and the power to regulate financial mutuals (as opposed to banks) remained with the States. The constitutional restriction on business law making powers at national level in Australia has long been recognised by State and Commonwealth governments as problematic. Inconsistent laws and the duplication of business regulatory regimes in each State and Territory have created barriers to the efficient operation of the commercial sector and have significantly increased transaction costs.58 While the localised nature of most co-operative businesses should mean that State-based regulation is most appropriate for this business model, the Australian States have always struggled to achieve efficiencies in the business regulatory sector.59 The long standing aim of the Australian States to maintain homogenous business models across State boundaries is a legacy of the reception of the English model of company law and later the British colonial model of co-operative law.60 In contrast to the United States (US), where competitive federalism has encouraged the US to differentiate their corporate legal structures to compete for tax revenues from corporate charters,61 the Australian States have tried co-operative federalism to maintain consistent business models in both the company and co-operative sectors. In practice, co-operative federalism has resulted in State laws that are “almost” but never exactly the same. As political priorities shift and change, the seemingly minor technical and administrative differences between the differing State regulatory systems becomes a significant cost burden not only for businesses who wish to operate in more than one Australian State, but also for the community which must bear the cost of duplication of administration in each State.62 The absence of competition between the States (in terms of innovating new legal models for co-operatives) together with the lack of any combined political will to move co-operative law to the Commonwealth jurisdiction has contributed to the entrenchment of bureaucracy and paternalism in State co-operative registries.63 In contrast, the political will to establish a national regime for company law emerged in the 1970s under the Whitlam Government and largely as a response to the unscrupulous fund raising practices for speculative mining ventures that emerged in the 1960s mining boom.64 In 1999, as part of the financial sector reform process, legislation was passed to convert financial mutuals to companies

57 Commonwealth of Australia Constitution Act 1900 63 & 64 Vict c 12 (IMP), s 51. 58 This has been recognised by the Council of Australian Governments (COAG). In 2008, COAG entered into the “National Agreement to Deliver a Seamless National Economy” to deliver reforms aimed at reducing the regulatory burden imposed on firms that operate in multiple State jurisdictions: see Productivity Commission, “Impact of COAG Reforms: Business Regulation and VET” (Australian Government, 2012) 8-9, http://www.pc.gov.au/inquiries/completed/coag-reporting-busines-vet/report/coag-reform-overview.pdf. 59 Australian States have attempted on numerous occasions to achieve uniformity in both company and co-operative law regimes through interstate agreements; however the implementation of these agreements has usually proved to be ineffective due to State political divergences. Similar harmonisation problems have occurred in other areas of State business regulation including workplace health and safety and consumer protection. 60 In relation to the State’s desire to maintain uniform company law, see RI Barrett, “Towards Harmonised Company Legislation – Are We There Yet?” (2012) 40 Federal Law Review 141, 146. 61 L Bebchuk, “Federalism and the : The Desirable Limits on State Competition in Corporate Law” (1992) 105 Harvard Law Review 1435. 62 Ministerial Council of Consumer Affairs, n 31, 8. 63 Lewis, n 10, 136. 64 P Von Nessen, “The Americanization of ” (1999) 26 Syracuse Journal of International Law and Commerce 239, 240.

14 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia governed by State company law.65 In 2001, all Australian States referred their powers to make laws to regulate all aspects of the formation and activities of companies to the Commonwealth, resulting in the Corporations Act 2001.66 Financial co-operatives such as mutuals, building societies and credit unions are now required by law to be registered as corporations under the Corporations Act 2001; although most continue to adhere to co-operative principles and values and align with the co-operative sector.67 Non-financial co-operatives remain within the legislative authority of the States and Territories. In 1996, the States agreed to adopt consistent co-operatives legislation based on a set of Core Consistent Provisions (CCP) developed by a standing committee of State Attorney’s General.68 Although this strategy led to similarity between the legislative frameworks adopted in each State, it was generally unsuccessful because different priorities in maintaining and reviewing the legislation allowed inconsistencies between States to develop and contributed to an overall neglect of the co-operative business model by legislators.69 The Australian States and Territories entered into the AUCLA in February 2012.70 The AUCLA provided for the development and implementation of a revised national framework for co-operatives legislation based on a model template known as the CNL. New South Wales, the Northern Territory, South Australia, Tasmania and Victoria have since passed legislation adopting the CNL.71 Arguably, the agreement to implement a national scheme was compromised from the beginning by the inclusion of a provision in the AUCLA to allow any State or Territory the option of adopting legislation that was consistent with the CNL as an alternative to the model template.72 Western Australia made it clear from the outset that it was not interested in replacing the Co-operatives Act 2009 (WA) with the CNL. The Co-operatives Act 2009 was based on the exposure draft of the CNL and Western Australia has committed to ensuring that its laws remain consistent with the CNL.73 Queensland has recently provided the Consumer Affairs Forum with notice of its withdrawal from the AUCLA, effective from 30 January 2015.74 Queensland has also indicated that it is committed to ensuring substantially consistent legislation for co-operatives. This raises a concern that this latest attempt to achieve uniform or harmonised States legislation may be destined to a similar fate to the CCP due to variations in State political priorities and a lack of commitment by some States to AUCLA.

65 As part of this process each State passed legislation transferring the registration of non-bank financial institutions and mutuals from other regulatory vehicles to registration as companies under the Corporations Law in that State. 66 The various State governments entered into the Corporations Agreement 2002 (Cth), with the Commonwealth government and agreed to refer their powers to make laws with respect to the formation of companies for a period of five years unless extended. In November 2004 the referral was extended to July 2011 and most recently until July 2016. 67 L Cutcher, “Credit Unions – An overview” in Australian Bureau of Statistics, 1301.0 – Year Book Australia, International Year of Co-operatives 2012 (ABS, 2012) 56, http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/ LookupAttach/1301.0Publication24.05.121/$file/13010_2012.pdf. 68 The Core Consistent Provisions were the of a body as a co-operative; legal capacity of a natural person; member control through the one member-one vote principle; governance standards on activities and directors to be similar to general standards that apply to companies; recognition of separate registration and operation of interstate co-operatives and the strengthening of investigation and enforcement powers, extracted from Western Australia: Western Australia Legislative Assembly, Co-operatives Law: Standing Committee on Uniform Legislation and Intergovernmental Agreements, Report 22 (1998) 9. 69 Ministerial Council of Consumer Affairs, n 31, 12. 70 AUCLA, n 52. 71 New South Wales was the lead jurisdiction and the Co-operatives (Adoption of National Law) Act 2012 (NSW) commenced on 3 March 2014. CNL legislation also commenced operation in Victoria on the same day. Note that New South Wales and Victoria represent over 80 per cent of the co-operative sector in Australia. South Australian legislation adopting the CNL commenced on 22 May 2015: NSW Fair Trading, “Co-operatives National Law Update March 2015 – Proposed Start of SA CNL on 22 May 2015”, http://services.enews.fairtrading.nsw.gov.au/online/18254826-71.html. 72 AUCLA, n 52, cl 9(3)(ii). 73 Bureau of Statistics and NSW Fair Trading, n 30. 74 NSW Fair Trading, National Co-operatives Law Update, Issue 11 (September 2014), http://services.enews.fairtrading.nsw.gov.au/online/18248380-63.html.

(2016) 34 C&SLJ 6 15 Apps The CNL continues the main provisions of previous legislation based on the CCP. There are three significant reforms introduced under the CNL. First, under the CCP regime co-operatives were prohibited from conducting business across State borders unless they were also registered in those other States as a “foreign co-operative”. This process of registration was time consuming, costly and involved annual obligations to each regulatory body.75 However, the vast majority of registered co-operatives in Australia operate in just one jurisdiction.76 It is too soon to tell if this reform will have any significant impact on co-operative growth, although it seems unlikely unless all States and Territories participate. Secondly, the CNL articulates the relationship between co-operative law and company law by expressly setting out the provisions of the Corporations Act 2001 which are to be adopted for use by co-operatives.77 The CNL reforms seek to standardise the language used in co-operative governance provisions relating to director’s duties and qualifications, but importantly it links those duties to the co-operative principles. Thirdly, a reform that should have an impact on the ease of use of the co-operative vehicle and its attractiveness for start-up businesses is the distinction made in the CNL between a small co-operative and a large co-operative for the purpose of financial reporting obligations. This distinction is similar to the distinction between small and large proprietary companies in the Corporations Act 2001.78 The CNL also seeks to address the issue of capital-raising by enabling co-operatives to issue Co-operative Capital Units (CCUs). CCUs are a hybrid security that can be issued to non-members and quoted on a stock exchange. The likely impact of this reform on co-operative growth will be considered in more detail in the third section of this article. The objects of the CNL include the promotion of co-operative philosophy, principles, practice and objectives. The seven co-operative principles as adopted by the ICA are set out in s 10 of the CNL.79 Section 11 expressly provides that an interpretation of the CNL should prefer a construction that promotes these principles. The Corporations Act 2001 does not embed any similar corporate values into the legal framework of companies and this is an important difference between the two models. On the one hand, a lack of embedded principles arguably removes a constraint on the ability of the corporate model to adapt to resolve a broader range of enterprise issues. The presence of legislated core values may be seen as imposing an idealised constraint on efficient decision-making.80 On the other hand, the legislative recognition of the requirement that co-operative management must make

75 Ministerial Council of Consumer Affairs, n 31, 13. 76 It is difficult to obtain accurate statistics on the number of co-operatives that trade interstate. The number of “foreign” registrations in each State was about 1 per cent of the co-operatives in each jurisdiction in 2009: Ministerial Council of Consumer Affairs, n 31, 6. This figure is unlikely to provide an accurate reflection of co-operatives engaging in interstate trade as some co-operatives believed that they were required to register under Pt 5B.2 of the Corporations Act 2001 (Cth) if they wished to trade across State boundaries resulting in an anomaly where some businesses were registered as a co-operative in their own State, and also a company under Corporations Act 2001. 77 The former co-operative laws were difficult to read because they used the cumbersome drafting technique of adoption. Section 5 of the Corporations Act 2001 (Cth) excluded co-operatives from the operation of the law unless the State law declared the law to be adopted. This resulted in a complex series of declarations with modifications in the State’s co-operative laws or regulations that made compliance provisions particularly difficult to understand and locate. In some cases, such as financial reporting, a co-operative had to consult up to four separate legislative instruments to determine their obligations. This kind of drafting added significantly to regulatory compliance costs and was a deterrent to using the model. 78 A small proprietary corporation is defined in Corporations Act 2001 (Cth), s 45A as a proprietary company which satisfies at least two of three requirements in a financial year of consolidated revenue less than $25 million, gross assets less than $12.5 million and less than 50 employees. A small co-operative is defined in Co-operatives National Regulations 2013 (NSW), reg 1.4 as a co-operative that satisfies two of three requirements in a financial year of consolidated revenue less than $8 million, gross assets less than $4 million and less than 30 employees. A small co-operative that issues shares to members of more than $2 million or has securities on issue to non-members may also not be entitled to exemption from reporting requirements of large co-operatives. 79 International Co-operative Alliance, n 18. 80 S Novkovic, “The Balancing Act: Reconciling the Economic and Social Goals of Co-operatives” (Conference Paper presented at the Amazing Power of Cooperatives, Quebec, 2012) 292, http://base.socioeco.org/docs/pouvoir_des_coop_final_web2.pdf.

16 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia choices which balance the self-interest of individual members with social gain to all members and the broader community is at the core of the unique identity of the co-operative model.81 The alignment of co-operatives with the “fair trade” movement is one example.82 More recently, co-operatives have embraced the emerging “fair tax” movement.83 In contrast, the consequences of allowing the corporate sector to pursue self-interest without constraint have been too apparent in the global exploitation of the vulnerable by the multinational corporate sector.84 CO-OPERATIVES AND COMPANIES IN THE AUSTRALIAN MARKET SECTOR In Australia, companies must choose whether to be registered under the Corporations Act 2001 as a public or proprietary company. Proprietary companies are restricted to less than 50 non-employee shareholders and are not allowed to engage in certain fund raising activities that require the issue of a prospectus.85 Most companies (public and private) issue shares and the individual member’s liability is limited to their purchased share capital. Although there are approximately 2 million registered companies in Australia, approximately 92 per cent of these are proprietary companies and only 4 per cent are public companies limited by shares.86 Less than 2,300 Australian companies are listed on the ASX.87 Australian co-operatives are often classified according to their industry sector, for example agricultural co-operatives and financial co-operatives, or a description of the members they serve, for example producer co-operatives and consumer co-operatives. However, the CNL only distinguishes between two types of co-operative: a distributing co-operative and a non-distributing co-operative. A distributing co-operative must have share capital and is allowed to give a return or distribution to members on their shares.88 The non-distributing co-operative may or may not have share capital, and is prohibited from giving returns to members on their capital, other than the nominal value of their shares on a winding up.89 Both types of co-operative usually require a minimum of five active members to register and remain registered. The number of registered co-operatives has declined from around 2,350 in 2000 to approximately 1,700 in 2012.90 In September 2009, there were approximately 452 registered distributing co-operatives in Australia.91 When comparing how each model’s legal framework deals with issues of ownership, governance and finance, the comparison will generally assume a comparison between a public company and a large distributing co-operative. Although the majority of co-operatives in Australia are small or micro enterprises (as are the vast majority of companies), the justification for using public companies for this

81 Novkovic, n 80, 292. 82 Around 75 per cent of Fairtrade producers are small farmer co-operatives, and co-operative importers, traders, financial institutions are an essential part of the Fairtrade network. Secondary cooperatives are promotors of Fairtrade through campaigns, advocacy and offer technical assistance. Financial cooperatives are investors and creditors to small producers, http://www.fairtrade.net/single-view+M55f3d434b65.html. 83 The “fair tax” movement has grown out of an international campaign for corporate tax fairness. Co-operatives UK is promoting the “fair tax mark” as a way for co-operatives to represent a positive attitude towards taxation based on paying a fair share of tax that highlights the co-operative approach to business, see Co-operatives UK and Fair Tax Mark, “Fair Tax Mark – Guidance Notes for Co-operatives UK Members”, http://www.uk.coop/sites/default/files/uploads/attachments/fair_tax_mark_guidelines_2015_0_0.pdf. 84 JG Hill, “Regulating Executive Remuneration: International Developments in the Post Scandal Era” (2006) 3 European Company Law 64. 85 Corporations Act 2001 (Cth), s 113. A prospectus is required for most offers of shares and other securities to members of the public: ss 706, 708, 708AA. 86 P Hanrahan, I Ramsay and G Stapledon, Commercial Applications of Company Law (15th ed, CCH Australia Ltd, 2014) 85. 87 As at October 2015 there were 2,216 entities listed on ASX, http://www.asx.com.au/about/historical-market- statistics.htm#No.%20of%20Companies%20and%20securities% 20listed%20on%20ASX. 88 Co-operatives (Adoption of National Law) Act 2012 (NSW), Appendix – Co-operatives National Law (“CNL”), s 18. 89 CNL, s 19. 90 Australian Bureau of Statistics and NSW Fair Trading, n 30. 91 Ministerial Council of Consumer Affairs, n 31.

(2016) 34 C&SLJ 6 17 Apps comparison is that both the Corporations Act 2001 and the CNL are based on a “one size fits all” approach to regulation. The key restrictions on a proprietary company (limited to 50 members and no ability to engage in fundraising from the public) do not apply to a distributing co-operative, which will typically seek to fund an expansion by increasing its membership base. So although a small co-operative will in practice have more in common with a small private company, the legal model for a co-operative fits somewhere between a small proprietary and a large listed company on the spectrum of corporate ownership structures. Ownership The first divergent characteristic of the co-operative is that it is owned by the members that it serves.92 Member owners have a trading relationship with a co-operative, either as customers or as suppliers of a product or service (including labour in the case of a worker co-operative). This means that they are active participants in the business of the co-operative.93 In contrast, the public company is owned by investor-members whose relationship with the company is mainly defined by the returns or dividends they receive on the investment. It is of course possible to describe a listed public company as a type of producer co-operative (ie a capital co-operative). Using this analogy, the shareholders have one relationship with the company as owners and another as suppliers of its capital.94 However, the distinction between the co-operative and the company in this part of analysis rests on the “active” participation of member patrons of a co-operative in its business activities, whereas once the investor owner has supplied capital by purchasing shares, they usually assume a passive role in the company’s business activities. The distance between the investor-owner and public company in this purely economic relationship is a reason for both its dominance and success in the market and its potentially destructive and sociopathic nature.95 In a co-operative the members’ active involvement in the business is rewarded by returns that are linked to patronage and loyalty. The complexity of the relationship between the participant owner and the co-operative business is one reason for the under-utilisation of co-operatives in the market but this close relationship also underpins its potential to support resilient and sustainable enterprise.96 This essential difference in the nature the relationship between the owner and the business in co-operatives and companies is reinforced by the way each legal framework treats the division of control between owner and manager. The relationship between the investor-owner (shareholder) and the public listed company in Australia is regulated by combination of the Corporations Act 2001, the company’s internal governance rules (constitution or replaceable rules) and the listing rules of the stock exchange where the company’s securities are quoted for sale.97 The division of control between the and the shareholders in general meetings will be set out in the company’s constitution. In most public companies, the board of directors will have a general power of management to conduct the day to day affairs of the company.98 The ability of shareholders to

92 “Owned” here means ownership in its customary sense referring to those that have the residual claim on the profit and assets of the business after its prior contractual claims have been satisfied, rather than the legal sense in which the corporate entity is interposed between the “owner” and the business. See H Hansmann, The Ownership of Enterprise (The Belknap Press of Harvard University Press, 1996) ix, 11; see also M Blair and LA Stout, “A Team Production Theory of Corporate Law” (1999) 85(2) Virginia Law Review 247, 269. 93 CNL, s 125. 94 Hansmann, n 92, 13. 95 G Olson, “Corporations: Empathy–Devoid Psychopaths” (2013) 10 Springer Briefs in Political Science 53. 96 S Novkovic, “Defining the Co-operative Difference” (2008) 37 Journal of Socio Economics 2168, 2169. 97 The ASX Listing Rules are not only binding contractually on listed companies but are also enforceable against them under Corporations Act 2001 (Cth), ss 793C, 1101B. 98 Most companies will adopt the replaceable rule in Corporations Act 2001 (Cth), s 198A or its equivalent providing that “[t]he business of a company is to be managed by or under the direction of the directors”.

18 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia influence the management of the company is usually restricted to a right to vote on resolutions in a general meeting to remove or appoint directors or to amend the constitution to limit their decision making powers.99 In contrast, the members are directly involved in the business of the co-operative and their influence on co-operative decision making is ensured by the active membership provisions in the CNL.100 The business of the distributing co-operative will focus on one or more “primary activities” and member’s participation in those “activities” will be a requirement for membership of the co-operative.101 For example, an active membership requirement for a producer’s dairy co-operative would be the supply of milk to the co-operative. The primary activities of the co-operative will be to collect, process, brand, market and distribute the milk products. Any change to the primary activities of the enterprise that will impact on the active membership requirements will require member approval by special resolution.102 Although the board of directors of a co-operative has a similar general power of management to the board of a company, the CNL requires that the majority of the directors must also be “active” members of the co-operative.103 The quorum requirements provide that at any directors meeting the number of member directors must always outnumber non-member directors, increasing the likelihood that decisions of the board will align with members’ interests.104 The CNL allows the members a much greater say in enterprise decisions of the co-operative than members of a public company including matters such as the acquisition, sale or lease of assets of the business that may impact on its primary activities.105 The co-operative principle of democratic member control is embedded in the legal framework of co-operatives by an express provision in the CNL linking voting rights to members and not shares.106 The general rule is that each member only has one vote.107 The CNL also limits member shareholding to a value that is less than 20 per cent of the value of the nominal capital of the co-operative.108 The separation of ownership and control in a public company is facilitated by the free tradability of shares. The listing rules of the Australian Stock Exchange (ASX) allow efficient capital-raising by ensuring that tradable shares have consistent control rights of one vote per share.109 The consequence of freely tradable shares is that management is able to conduct its business with little interruption from its constantly changing ownership. From the investors’ perspective, it allows a liquid and diversified share portfolio, without requiring any active participation or engagement in the affairs of the

99 Proprietary companies may adopt the replaceable rule in Corporations Act 2001 (Cth), s 203C which allows the members by ordinary resolution to remove and appoint directors. For public companies, s 203D overrides any constitutional or contractual provision to provide that members will always have the right to remove a director by ordinary resolution is a member’s general meeting. Section 136 of the Act provides that the company may modify its constitution by a special resolution of the members. 100 Active membership provisions first appeared in New South Wales co-operative law in 1992. These provisions were a response to the proliferation of “free riding” or dry members. This concept was developed by dairy co-operatives primarily to enable retiring farmers to retain a stake in a co-operative so that they could be rewarded for their contribution of “equity” if the co-operative subsequently demutualised. The regulatory response to this problem was a complex set legislative rights for former members that had a life of five years. These former member entitlements continue under the present regime, although their operation has been reduced to two years: CNL, s 168(1)(a). 101 CNL, ss 147, 150. 102 CNL, s 146(2). 103 CNL, s 174. 104 CNL, s 175(5). 105 CNL, s 249. 106 CNL, s 228. 107 CNL, s 228(2). However s 228(3) provides that the rules may provide for a member to have up to five votes in a general meeting. Section 228(4) allows the rules to provide that the chairperson has a second vote at board or general meetings. 108 CNL, s 363. 109 ASX Listing Rules 6.2 and 6.9 limit the voting rights of shareholders in a public listed company to one vote per share for all ordinary shares and limiting the classes of shares to ordinary shares and preference shares. Typically preference shares have limited or no voting rights.

(2016) 34 C&SLJ 6 19 Apps company.110 It means that in widely held public companies, very few investor-owners will have the capacity to monitor and influence management and the notion of control is illusory for most shareholders.111 It also means that it is relatively easy for shareholder control to be concentrated in the hands of those few owners that have enough capital to acquire more than an insignificant shareholding. The corollary of the requirement for active membership of co-operatives is that shares are not freely tradable and are only transferable in limited circumstances.112 When the participant member exits the co-operative their shares are usually repurchased by the co-operative at face value.113 The long term investor member of a company looks for an increase in wealth based on the increase in the market value of the shares reflecting the value of any increase in the company’s net assets. The long term participant member may be disappointed by what might seem to be an unfair anomaly in their treatment by the co-operative at exit. However, it is this feature that underpins the intergenerational nature of co-operative enterprise. In Australia we have seen a number of successful producer co-operative enterprises that have achieved substantial equity growth over a long period, succumb to the pressure to demutualise and allow its members to access their equity at market value.114 For a range of reasons demutualisation may be inevitable and justified. However, the short term gain for retiring members will usually come at the cost of longer term benefits, such as control over prices or reduced operating costs which allow small suppliers to survive and support their local communities.115 An alternative option that is likely to be attractive to larger agricultural co-operatives is to provide legal recognition and incentive to a hybrid co-operative company.116 Although the hybrid model already exists in the market (eg Devondale Murray Goulburn), it is not recognised by the Corporations Act 2001 as a distinct company type. Without express legal recognition, the hybrid vehicle relies on its internal constitution to reveal its co-operative character. The hybrid model relies heavily on the commitment of both members and managers to adhere to co-operative principles and to withstand market pressure from external investors.117 The current hybrid model is extremely complex as it seeks to meet the differing objectives of the two regimes. It is also largely invisible, as its contribution to the survival of local businesses and regional economies is unnoticed by policy makers as being a direct consequence of its co-operative nature. The legal recognition of a distinct hybrid co-operative company would raise the profile of the co-operative in the federal corporate jurisdiction. It would allow federal policy makers to use taxation incentives to reward businesses for reinvesting profit or surplus locally and supporting regional development. Similarly, taxation disincentives should apply to discourage shareholders from changing company types to cash in on any improvements to their equity flowing from their preferred treatment as hybrid companies. A hybrid co-operative company would allow these larger co-operatives to take advantage of some of the efficiencies of the corporate sector, especially access to external capital without the need to resort to complex unit trust

110 Kraakman, Armour, Davies, Enriques, Hansmann, Hertig, Hopt, Kanda and Rock, n 54, 11. 111 Hanrahan, Ramsay and Stapleton, n 86, 139. 112 CNL, s 99. 113 CNL, s 107. 114 LK Savery, “Club versus Shareholder Dichotomy of Co-operatives” in T Mazzarol and E Mamouni Limnios (eds), Co-operatives in the Fourth Sector (Tilde University Press, 2013) 23. 115 T Mazzarol, “Co-operation versus Investor Returns – The Future of Dairy Farming in Australia”, The Conversation (24 November 2013), http://theconversation.com/cooperation-versus-investor-returns-the-future-of-dairy-farming-in-australia-20679. 116 The Co-operative company model is recognised in New Zealand under the Co-operative Companies Act 1996 (NZ). The Act requires that not less than 60 per cent of the voting rights in a co-operative company must be held by transacting shareholders: see https://www.business.govt.nz/companies/learn-about/other-registers/co-operative-organisations/co-operative-organisations. 117 This is well illustrated by Murray Goulburn’s recent proposal to approve the use of a listed equity trust to raise $500 million external capital while allowing suppliers to retain control of the company: A Marshall, “Dairy giant seeks to open gates”, The Land (16 April 2015), http://www.theland.com.au/story/3379044/dairy-giant-seeks-to-open-gates.

20 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia schemes. This proposed hybrid model is not intended to be a true “co-operative” in the legal sense. It should be considered as a regulatory response to the negative effects of demutualisation, rather than as a substitute for the co-operative business model. Finance The second divergent characteristic of the co-operative is that a share represents membership and not equity. One of the strongest arguments in favour of the companisation of the co-operative has concerned the restrictions on its ability to access investment capital. There is no doubt that any revision of the legal framework that seeks to modernise the co-operative will need to take this issue into account. However, preservation of the distinct legal identity of the co-operative will also depend on understanding the essential differences in the treatment of share capital in the two models. For a shareholder member of a public company a share represents the value of their equity in the company. It is a type of intangible personal property which entitles the shareholder to distribution rights (the right to receive dividends and the right to a repayment of the principal and a share in any surplus assets if the company is wound up) and control rights (the right to vote on any decisions affecting the company which are taken at a general meeting of shareholders).118 Both sets of rights will influence the value of the share on the secondary market. Because the shareholder has no rights to the capital and assets of the company until it is wound up, share capital is treated as equity on the company balance sheet. The distinctive treatment of share capital in a co-operative is inherent in the active membership requirements in the CNL and also prevents co-operative shares being traded on a secondary market. The share price is fixed in the rules of co-operative and represents the price of membership. Because shares are linked to membership, the price is refundable if the member withdraws or ceases to be a member.119 The legislative requirement in the CNL that the par value of shares be refunded to members on exit means that accounting standards currently require the share capital to be treated as debt on the co-operative balance sheet. This view places co-operatives at a disadvantage when it comes to seeking external finance. There are arguments against the treatment of co-operative share capital as debt. Given the conservative nature of the co-operative model, it has adequate safety nets in place to ensure financial stability when members exit. Under the CNL the co-operative also has the power to substitute CCUs for share capital.120 Compared to the flexibility given to companies under the Corporations Act 2001 to buy back shares or reduce capital,121 the application of the accounting standards in this context is discriminatory and not well justified. The two types of enterprise also have distinctly different approaches to profit. The primary objective of the company is to make a profit to maximise the return to shareholders on their investment. If shareholders receive good returns in the form of dividends on their shares, there is an incentive to invest more capital. The company prioritises the return on capital over other resources such as labour. By comparison, the co-operative exists to provide a vehicle for members to pool their resources (which include capital, but also other inputs such as labour, product and patronage). Because the co-operative exists as a vehicle for trade with its members, its members are also its customers or workers. A co-operative cannot prioritise the return on capital because to do so would mean extracting profit from its own members. If the co-operative accumulates a surplus (because prices are higher than needed to break-even – if it is a consumer co-operative, or lower than needed to break even – if it is a producer co-operative) the co-operative will usually retain a proportion of its surplus in a reserve fund to reinvest in the business or the community and distribute the balance to its members in the form

118 Shareholders are only entitled to receive dividends if company is permitted under Corporations Act 2001 (Cth), s 254T and the directors declare a dividend. Generally ordinary shareholders have one vote for each share on a poll: see ss 135, 250E and the ASX Listing Rule 6.9; CNL, s 175(5). 119 CNL, s 163. 120 CNL, s 163(2)(b). 121 Corporations Act 2001 (Cth), ss 254K, 256B, 257B.

(2016) 34 C&SLJ 6 21 Apps of a patronage refund. Instead of maximising profit, an “efficient” co-operative looks to balancing the return to its members by maximising the value of their ongoing membership and loyalty to the enterprise. The combination of these two identity features – the lack of focus on profit and growth and the treatment of share capital as debt – may deter external lenders and investors, particularly those who do not understand the nature of the co-operative model.122 This means that member financing through share acquisition is the primary source of co-operative capital for a distributing co-operative and is essential to maintaining the co-operative principle of autonomy and independence. The CNL allows the co-operative to access additional capital from its members, including the ability to issue shares at a premium to new members, or to require existing members to take up additional shares or to lend money to the co-operative.123 For co-operative members who do not understand the distinction between equity shares and member shares, there may be a reluctance to contribute additional capital beyond the initial subscription. The one-member-one-vote principle means that any additional capital investment in member shares does not attract increased control rights.124 The lack of transferability of shares and inability of members to redeem more than the fixed or par value of their shares is a disincentive for those seeking financial returns.125 This is particularly likely to be the case for members who may be approaching retirement age where the capital investment is only likely to yield longer term benefits to the enterprise beyond their “horizon”.126 It is possible that frustration regarding the allocation of capital is partly caused by a lack of understanding by members of the true nature of their financial and participatory relationship with the co-operative. The CNL takes some steps towards redressing this by ensuring that co-operatives provide disclosure statements to new members in distributing co-operatives.127 This is a new addition to the framework and is consistent with similar provisions in the Corporations Act 2001, including a right to recover damages where the disclosure is misleading or deceptive.128 However, given the fundamental differences in the two types of member relationships, the CNL disclosure provisions may not go far enough to ensure that members fully understand that the nature of their returns on capital include social as well as economic benefits and a commitment to a dual output is essential if the model is to succeed and thrive.129 The objective of the formation disclosure document is to ensure prospective members are adequately informed of the nature and extent of their financial involvement or liability as a member of the co-operative.130 There is a danger that aligning the purpose of the disclosure statement with the investor perspective may serve to generate or reinforce investor expectations in members. Given the co-operative principle of education, training and information, the requirement for formation disclosure statement may be a missed opportunity to legislate for an improved understanding of the distinction between the investor role and the participant role of

122 E Mamouni Limnios, J Watson, T Mazzarol and G Soutar, “Co-operative Capital Units, Attractive equity instruments?” in T Mazzarol and E Mamouni Limnios, (eds), Co-operativies in the Fourth Sector (Tilde University Press, 2013) 49. 123 CNL, ss 80, 82, 343. 124 Mamouni Limnios, Watson, Mazzarol and Soutar, n 122, 49. 125 Whilst not a common event, members can transfer their shares to another person (existing or new member) with the approval of the Board. The par value is the value of the shares if the co-operative repays the capital, but it does not control any private sale price. A number of barrister’s chambers utilise the co-operative model. Buying shares in chambers will usually be at a price substantially above par value depending on the prestige of the chambers. Similar types of co-operative share sale transactions occur in skiing clubs that hold valuable leases in snowfields controlled by national parks. 126 Savery, n 114, 28. 127 Disclosure statements must be prepared and approved by the registrar at formation and also when shares are issued to any new members: CNL, ss 25, 68, 70. 128 CNL, ss 72, 73; cf Corporations Act 2001 (Cth), ss 728, 729. 129 Debenture holders are secured creditors and will take priority over unsecured creditors in a winding up subject to claims by employees for unpaid wages and superannuation: Corporations Act 2001 (Cth), s 561. 130 CNL, s 25.

22 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia members in the enterprise and the non-financial aspect of member value. There is also a concern that the disclosure statement requirements are potentially an intimidating administrative barrier to set up for businesses who are interested in the co-operative model. The relevant provision requires new co-operatives to provide comprehensive information including income and expenditure projections and forecasts about future , as well as “any information that the Registrar directs to be included”.131 For many businesses these requirements are likely to impose an unrealistic resource burden and send them scurrying to an alternative business model that can be acquired quickly and cheaply online. The CNL continues provisions in previous legislation allowing co-operatives to raise funds by issuing debentures to non-members as well as employees and members of the co-operative. The CNL expressly applies the relevant provisions of the Corporations Act 2001 governing the issue of debentures to the public including the requirements for a prospectus, security and the appointment of a trustee for debenture holders.132 Special provision is made for debentures that are issued to co-operative members or its employees.133 However, increasing debt capital creates particular accounting challenges for the co-operative, due to treatment of member shares as debt and the taxation and financing implications of high debt to equity ratios.134 A regulatory response to this particular problem for co-operatives in Australia was the introduction of CCUs. CCUs were first introduced in 1996 under previous New South Wales legislation as a unique type of hybrid security instrument designed to provide an alternative mechanism for capital-raising by co-operatives. The CCU was also adopted by Victoria in 2008 and Western Australia in 2009. The CNL extends the ability to issue CCUs to all jurisdictions adopting the model law. A CCU is defined as “an interest issued by a co-operative, conferring an interest in the capital (but not the share capital) of the co-operative.” This means that a CCU holder has none of the rights or entitlements of a member of the co-operative. Although a CCU can be structured as equity or debt, its flexibility means that it may be issued on terms that allow it to be treated as equity capital with similar characteristics to preference shares.135 The co-operative must have rules that govern the issue of the CCUs including the minimum requirements set out in the CNL.136 The rules must nominate the voting rights of the CCU holder in relation to the terms of issue of that class of CCU (either one vote per share or one vote per holder), the requirements for varying rights attached to the CCUs (including a special resolution of CCU holders) and the right to receive notices of meetings and other relevant information. The CCU holder does not have voting rights in the co-operative. Although CCUs are instruments that are capable of being quoted for trade on the ASX, they have yet to gain a profile in the quoted securities market.137 The challenge for co-operatives seeking to access this type of investment capital will involve balancing the terms of any issue so that it is attractive enough to lure potential investors without compromising member control. The co-operative

131 CNL, s 25(2)(g). 132 CNL, s 337. 133 CNL, ss 338–340 apply restrictions to advertising and publicity to these debentures and require subscription money to be held on trust. 134 Ministerial Council of Consumer Affairs, n 31, 33. 135 The flexibility of the CCUs to be treated as equity capital may be constrained by the application of the international accounting standards. 136 CNL, s 349. 137 The only CCUs that appear to be currently listed on ASX are those issued by Namoi Cotton Co-operative: see http://namoicotton.com.au/about/our-business.aspx and http://www.asx.com.au/asx/research/company.do#!/NAM. Note that once listed CCUs must fit with ASX classes and in the case of Namoi Cotton are listed as shares with no voting rights. In 2001 ASX issued guidance notes on listing rules for co-operatives which considered the circumstances in which CCUs would be classified as debt or equity securities: ASX Listing Rules, Guidance Note 3, “Co-operative and Mutual Business Entities” (ASX, 2001) [15]–[17]. Guidance Note 3 was updated in April 2015 and no longer makes reference to CCUs, but it deals with dual classes of security and refers to the requirement for equity securities with limited or no voting rights to have a special five character trading code with the letters “LV” or “NV” at the end: ASX Listing Rules, Guidance Note 3 “Co-operatives and Mutuals Listing on ASX” (ASX, 2015) [7.4], http://www.asx.com.au/documents/rules/gn03_cooperatives.pdf.

(2016) 34 C&SLJ 6 23 Apps principle of autonomy and independence also requires co-operatives to be wary of placing too much reliance on external funding sources as it may jeopardise active members’ democratic control of the enterprise. There is some evidence in Australia that a co-operative’s utilisation of the hybrid funding model (a mix of participatory and investor owners) is a stepping stone to demutualisation.138 The challenge for any co-operative seeking to utilise CCUs will be in its ability to lure external investors without compromising autonomy and independence. Success seems likely to hinge on the member’s confidence in management and the commitment of both to co-operative principles. The proposed hybrid co-operative company model outlined above is an alternative solution to the financing problem for the larger producer co-operatives. This model would allow the co-operative company to issue recognised securities to raise capital, while at the same time placing legislative restrictions on control rights for non-transacting shareholders. Governance The final divergent characteristic relates to the underpinning rationale for ensuring the distinct legal identity of the co-operative. It exists to promote member value, not capital growth. This divergent characteristic has sparked renewed interest in the co-operative in the post-GFC global economy. The legal model has inherent governance mechanisms clearly absent from the listed public company. The focus on surplus rather than profit and member value in lieu of financial returns reduces the risk not only of member exploitation but also rent seeking from other stakeholders. The governance challenge for any corporate enterprise is to motivate the manager(s) to act in a manner that promotes the best interests of the members. However, the notion of what might be in the best interests of co-operative members is significantly more complex than “best interests” of company members. For a public company, it is widely accepted that the best interests of members is the maximisation of financial return on investment capital. As this is a quantifiable and auditable measure of success, management must focus its attention on capital returns and growth. In a co-operative, the member’s best interests are measured by the generation of member “value”.139 The notion of member value includes less auditable characteristics such as the ability of the organisation to service the economic, social and cultural needs of its members, including future members.140 There is no question that the co-operative manager must focus on servicing the members’ needs. However, the unique challenge for co-operative management is to convince members that management is succeeding in achieving satisfactory member value in return for participation in the enterprise. The role of the external audit in ensuring that co-operative managers promote member value requires an investigation into more than the financial aspects of management of the business. This requires an audit that goes beyond accounting documents to look to other measurements of management performance, such as board minutes and the opinion of members.141 The inclusion of a societal (or management) audit is an essential feature of co-operative laws in many jurisdictions.142 It is not a legal requirement in the CNL and although it does enable a modification or substitution of corporate auditing standards in the Co-operative National Regulations, the current regulations do not address this particular issue.143

138 I MacAulay, “Restructure will give rise to two groups with conflicting aims”, The Weekly Times (21 May 2014), http://www.weeklytimesnow.com.au/news/opinion/restructure-will-give-rise-to-two-groups-with-conflicting-aims/story- fnkerdb0-1226924439178. 139 Mazzarol, Mamouni Limnios and Raboud, n 5, 22. 140 Henry, n 24, 38. 141 Henry, n 24, 96. 142 The societal or management audit is, for example, a feature of German co-operative law which utilises a specialised Co-operative Auditing Federation to conduct audits in a manner that is consistent with the dual social and economic role of co-operatives: HH Munkner, “Germany” in Cracogna, Fici and Henry, n 7, 423. 143 CNL, s 314.

24 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia Both Australian public companies and co-operatives must have a minimum of three directors, and at least two of those directors must ordinarily reside in Australia.144 To qualify as a director of a public company the only legislative restrictions are that the appointee must be a natural person who is at least 18 years of age and not be disqualified from being a director.145 However for listed public companies, the ASX Council recommends that the majority of the board should consist of independent directors.146 Factors relevant to assessing independence include whether the director has a material contractual relationship with the entity, other than as a director.147 This is not a mandated requirement, however, and a listed public company is only required to provide an explanation to shareholders in their annual report if they choose not to follow the guidelines.148 In contrast, the CNL prescribes that although the rules of a co-operative may provide for the appointment of non-member directors (directors who are not active members of the co-operative), the majority of board members must be active members.149 In distributing co-operatives the active member requirements will usually require that a member is a supplier or customer of the co-operative and must have a significant contractual relationship with the enterprise other than in their capacity as a director. In a profit-driven enterprise, the agency problem is that executive management will behave opportunistically and divert profits away from members and into their own pockets. The role of the board is to act as a watchdog over executive management and the appointment of independent directors is a “trusteeship” strategy to remove conflicts of interests and ensure that the board members make decisions based on the interest of members as a whole even if contrary to the wishes of management or controlling shareholders.150 It also has the added advantage of promoting board diversity, by encouraging the company to recruit new talent from a broader pool.151 The need for external trusteeship is a response to spectacular examples of management self-interest and greed that led to the destruction of several large public companies in Australia and overseas in the late 1980s and 1990s.152 While the opportunistic behaviour of executive management will still be a risk for co-operatives, the renewed interest in co-operatives is strongly enhanced by its inherent governance mechanisms. The focus of the enterprise on surplus rather than profit and the distribution of member value rather than financial returns reduce the risk of member exploitation by management. The member-patron composition of the co-operative board is an essential feature of the co-operative structure and ensures that the board is not only concerned with the management of assets but also serving its members’ needs.153 While member directors have experience of their own businesses and are well placed to ensure that decision making supports the primary activities of its members, it may also mean their management skills have a narrow focus and they lack broader strategic skills that are needed to ensure the enterprise remains viable. If, as a consequence they bring in independent expertise at the executive level, the board may lack the skills to effectively monitor management. A board that becomes too

144 Corporations Act 2001 (Cth), s 201A; CNL, s 172(2). 145 Corporations Act 2001 (Cth), s 201B. 146 ASX Corporate Governance Council, “Corporate Governance Principles and Recommendations” (2014) Recommendation 2.4 p 17, http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf. Note the Prin- ciples will also apply to any distributing co-operative which is a listed entity on ASX. 147 ASX Corporate Governance Council, n 146, Box 2.3, 16. 148 The “if not, why not” approach is described by the Council as the “fundamental to the operation of the Principles and Recommendations”: ASX Corporate Governance Council, n 146, 3. 149 CNL, s 174. 150 J Armour, H Hansmann and R Kraakman, “Agency Problems and Legal Strategies” in R Kraakman, J Armour, P Davies, L Enriques, H Hansmann, G Hertig, K Hopt, H Kanda and E Rock, The Anatomy of Corporate Law – A Comparative and Functional Approach (2nd ed, Oxford University Press, 2009) 43; see also Hanrahan, Ramsay and Stapledon, n 86, 206. 151 ASX Corporate Governance Council, n 146. The 3rd edition includes a recommendation that listed companies set measurable targets for achieving gender diversity on boards: Recommendation 1.5, 11. 152 Hill, n 84, 66. 153 Henry, n 24, 87.

(2016) 34 C&SLJ 6 25 Apps reliant on the executive team is likely to lose the confidence and trust of members.154 A potential solution is the appointment of independent non-executive directors to the co-operative board. The need for independent directors on co-operative boards is not based on any trusteeship strategy but rather on a need to supplement management skill and expertise to strengthen the board’s ability to check the power of a strong CEO. In a public company the remuneration of directors is regarded as a powerful rewards tool to incentivise profit maximising performance. The inclusion of equity compensation as part of the rewards package is justified on the basis that it helps to align management’s interests with those of its shareholders. The Corporations Act 2001 only requires directors to obtain member approval for their remuneration package where the remuneration would amount to a “financial benefit” because it is not “reasonable” given the circumstances of the company and/or the director or officer’s level of responsibility.155 However, excessive director remuneration was at the centre of Australia’s two biggest corporate collapses and a continued lack of restraint shown by directors of some Australia’s largest public companies in setting their own remuneration levels has been the subject of considerable criticism and debate.156 The initial regulatory response was to require public listed companies to produce a remuneration report and to put the report to an advisory vote of shareholders at a general meeting.157 However, in 2011 the Corporations Act 2001 was amended to further strengthen shareholder participation in corporate governance by adding the “two strikes” rule by providing a mechanism for members to “spill” the board if more than 25 per cent of members oppose a remuneration report in two consecutive years. It is worth noting that post-GFC there has been a shift in the US and Europe towards the Australian regulatory model of addressing corporate governance issues by strengthening shareholder participation rights in management.158 In accordance with traditional co-operative principles the CNL mandates that directors must not receive remuneration for services as a director other than fees, concessions and benefits approved by the members in general meetings or reimbursement of expenses properly incurred when attending meetings of the co-operative.159 However, the model rules for both distributing and non-distributing co-operatives allow for the appointment of a chief executive officer or managing director who is not required to be an active member of the co-operative.160 The CNL mirrors the Corporations Act 2001 provisions imposing statutory obligations on directors and officer to act with care and diligence, in good faith and in the best interests of the co-operative and not to engage in insolvent trading. A breach of statutory obligations may result in the imposition of civil penalties and in instances where the breach involved intentional dishonesty, criminal prosecution may also occur. It is well established in Australian company law that the “best interests” of the company are generally those of its members “as a whole”.161 It is also accepted that the best interest of investor members will be decisions that maximise member investment returns. It may not be as clear to co-operative managers and members that decision making in the “best interests” of “co-operative members as a whole” may not necessarily align with member’s self-interest and must also take into account co-operative principles and values. The absence of any recent judicial interpretations of the meaning of “best interest” in the context of co-operative membership together with a lack of co-operative specific auditing tools means that in a legal sense the concept of members’ “best interest” is nebulous and vague. However, in a practical

154 Mazzarol, Mamouni Limnios and Raboud, n 5, 11. 155 Corporations Act 2001 (Cth), ss 208, 211. 156 Hill, n 84, 66. 157 Corporations Act 2001 (Cth), ss 250U, 300A. 158 JG Hill, “New Trends in the Regulation of Executive Regulation” in RP Austin and AY Bilski (eds), Directors in Troubled Times (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2009) p 100. 159 CNL, s 203. 160 Co-operatives National Regulations (NSW), Sch 5 reg 51, Sch 7 reg 51, Sch 6 reg. 43. 161 Hanrahan, Ramsay and Stapledon, n 86, 267; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 at 291; Ngurli v McCann (1952) 90 CLR 425, 438.

26 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia sense, because co-operative members are either members of the production team as suppliers or employees or they are the co-operative’s end users, the alignment of management and member interests is assured by the very nature of the business model. Although s 11 of the CNL provides that any interpretation of the provisions relating to director’s duties must prefer a construction that promotes the co-operative principles, the only explicit linking of co-operative director’s duties to co-operative principles is in the .162 The CNL follows the Corporations Act 2001 by including the business judgment rule as a defence to an allegation of negligence in the performance of director’s duties. However, s 192(2) of the CNL expressly provides that in determining whether a business decision was taken in good faith and for a proper purpose, the co-operative principles are to be taken into account where relevant. An illustration of how this might take effect is to consider the decision-making position of directors of Murray Goulburn, who may at some stage have to choose between maintaining the highest possible milk price to its farmer shareholders and satisfying its retail investors who seek a higher dividend return on units. A decision that favoured the non-farmer investors but had a disastrous impact on farmers might satisfy the business judgment rule under the Corporations Act 2001 but might not satisfy the business judgment rule under the CNL, as it would conflict with the principle of member economic participation.163 The co-operative business model has traditionally faced the criticism that it continues to resist the influence of the market and survives despite its inefficiencies. The modern response is that the co-operative’s dual output of social and economic returns is more efficient in the longer term as it encourages business activity which is both sustainable and socially constructive.

CONCLUSION The objective of this article is to increase awareness of the potential contribution of the CNL to preserving the distinctiveness of the co-operative business model and to the promotion and growth of co-operative enterprise in Australia. The introduction of the CNL was an opportunity for Australian legislators to update and modernise the co-operative model and a lengthy process of consultation attempted to ensure that the co-operative sector and industry stakeholders were given adequate opportunity to influence and shape the national legal framework.164 Unfortunately, the CNL may represent another missed opportunity to bring about uniform co-operative legislation in Australia. To date New South Wales, the Northern Territory, South Australia, Tasmania and Victoria have adopted the legislation. Queensland and Western Australia have opted not to adopt the CNL but have agreed to maintain consistent legislation. The CNL has introduced a number of key reforms that attempt to improve the competitiveness of co-operatives as an alternative to the company model. • The first of these is the removal of administrative barriers to co-operatives conducting business across state borders. The removal of this colonial anomaly is worthy of attention regardless of the number of co-operatives actually engaging in interstate trade. However, unless the CNL is adopted in all states and territories or at least mirror provisions are enacted, the anomaly will remain. • The second reform is the simplifying of reporting requirements for “small” co-operatives. This change brings co-operative law into line with the Corporations Act 2001 where a similar distinction is made between small and large proprietary companies for the purpose of reporting and disclosure obligations. The reform may have a positive impact on the ease of use of the co-operative vehicle and its attractiveness for start-up businesses in the participating jurisdictions.

162 CNL, s 192(2). 163 Arguably, the principle of member economic participation as described in CNL, s 10, would require the members to approve any redistribution of surplus to unit holders. 164 See NSW Fair Trading, “Submissions on Co-operatives – A national approach” (18 February 2014), http:// www.fairtrading.nsw.gov.au/sites/ftw/Cooperatives_and_associations/About_cooperatives/Cooperatives_national_ law.page#Submissions_on_Co-operatives_-_a_national_approach.

(2016) 34 C&SLJ 6 27 Apps • The third reform involves the introduction of CCUs as a means of improving the co-operative’s ability to raise capital from members and non-members. CCUs were already recognised under previous legislation in New South Wales, Victoria and Western Australia. The adoption of the CNL in the Northern Territory, South Australia and Tasmania will extend CCUs to those jurisdictions. Although CCUs are instruments that are capable of being quoted for trade on the ASX, they have yet to gain a profile in the quoted securities market and there are few listings that use this type of security. They may have a role to play in allowing members or former members to access some of the equity in the co-operative that has accumulated over time. However if the members are overwhelmingly concerned with accessing equity (because of declining membership numbers), the issue of CCUs is likely to be a stepping stone to demutualisation. There is a strong argument against allowing co-operative members access to co-operative equity, beyond the par value of their membership shares, as the co-operative principles rely heavily on shares representing membership and not equity. This argument is based on the idea that accumulated equity does not belong to any member but rather to future generations of members, or in the case of demutualisation, the equity should be returned (at least in part) to the community and the tax payers that have supported its existence.165 In some overseas jurisdictions, if a co-operative wishes to convert to a different type of entity it must be liquidated and any surplus will be allocated to a fund to be used for the purpose of co-operative promotion.166 The potential value of CCUs in promoting co-operative growth is difficult to assess at this stage. The CNL has now made CCUs available in three new jurisdictions. The problem of requiring access to external capital is predominantly a problem for agricultural producer co-operatives who wish to remain loyal to their local suppliers but require significant capital to compete in the international export market where there is a growing demand for Australian produce. A new hybrid co-operative company is suggested as an additional model to be included as a distinct company type under the Corporations Act 2001 and within the regulatory control of ASIC. Although the hybrid model exists in the market (eg Devondale Murray Goulburn), its contribution to regional economies is not recognised as being a function of its co-operative nature. Legal recognition will raise the profile of co-operatives in the federal corporate sector and allow federal policy to promote co-operatives as a solution to regional development. The CNL attempts to straddle the gulf between the competing objectives of preserving the unique identity of the co-operative and removing barriers to its ability to compete on a level playing field with companies. The latter objective carries some risk of isomorphism of the co-operative to company form. The justification for retaining a separate legal framework for co-operatives depends on its utility as a vehicle for collective action in the modern economy. The real impact of a modern legal framework on co-operative growth and identity will depend on its capacity to capture the attention of the new generation of entrepreneurs who are seeking suitable vehicles for sharing pooled resources including knowledge. Arguably the CNL pays too much attention to aligning co-operative and company law and not enough attention to attracting new enterprise to the co-operative sector. To encourage co-operative growth a legal framework needs to pay attention to removing administrative barriers to formation. The new disclosure statement requirements may have unnecessary resource and cost implications for new businesses and deter them from using the co-operative form. The State co-operative registries have a long history of paternalistic interference that is unlikely to attract a new generation of potential co-operators who prefer to learn by experimentation rather than consulting any “how to” or user manual. The failure of the states to achieve genuine uniformity in co-operative laws together with the hidden cost to communities of administrative duplication and bureaucracy are good reasons to

165 CNL, s 10(3) refers to the co-operative principle of member economic participation and states that “[a]t least part of the capital is usually the common property of the co-operative”, yet the CNL applies the Corporations Act 2001 (Cth) winding up provisions to co-operatives (s 444(2)), which sees the distribution of any surplus to members based upon their share capital. This is not consistent with the application of co-operative principles. 166 This is the case in most of the Latin American countries, including Argentina: see D Cracogna, “Argentina” in Cracogna, Fici and Henry, n 7, 203.

28 (2016) 34 C&SLJ 6 Legislating for co-operative identity: The new co-operatives national law in Australia contemplate a referral of co-operative law making powers to the federal jurisdiction. Apart from including a hybrid co-operative company in the existing legal framework for companies, smaller co-operatives require a streamlined legislative framework that aligns co-operative principles and values with a legal model that is flexible and user friendly. Co-operatives have the potential to become the institution of choice for those seeking people-centred solutions to new problems. But the success or failure of co-operatives in this arena will depend to some extent on the attention given to legal frameworks by policy makers to ensure that the vehicle is relevant and accessible to those who seek an alternative to the company model. This objective will be assisted if the co-operative is promoted as a viable alternative business model in educational institutions and public fora. The CNL and co-operative law deserve attention from lawyers and academics to debate its strengths and shortcomings and secure its place on the Australian business law agenda.

(2016) 34 C&SLJ 6 29