On Saturday 17th May 2014, Delegates at the Co-op Group General meeting consider a resolution on the reform of the Group’s governance. That is part of the process of considering Paul Myners’ recommendations on governance and the Kelly Report on the great Co-op Bank disaster and demutualisation of 2013.

Saturday’s decision will determine whether the Co-operative Group has a chance of survival. Getting it wrong may well bring insolvency proceedings closer. The implications of that for the UK and world wide co-operative movements would be grave indeed.

This is not a time for small minded political bickering or dogmatism. Those voting must rise to the challenge of giving UK Co-operation a future by allowing space for the revival of the Co-op Group as an effective co-operative business.

The resolution accepts four key principles about the direction of reform.

  • A Board elected by members that is individually and collectively qualified to lead an organisation of the size and complexity of the Group

  • A structure that gives the Co-operative Group’s members appropriate powers to hold the Board properly to account for business performance and adherence to co-operative values and principles

  • ‘One member one vote’ with appropriate representation for independent Co-operative societies

  • Necessary provisions in the Rules to protect against de-mutualisation.

Ursula Lidbetter as Chair of the Group has said that Myners’ recommendations are not “stapled to the back” of the resolution. She is working to achieve reforms acceptable to the Group’s members and their elected representatives which also address the serious governance problems that the Myners and Kelly Reports identified.

Ursula has made clear her willingness to talk to people with concerns. She has set up a board committee to work on reforms. She has said:

“I would be concerned if we don’t pass the motion. I think it would send a message to the world that we don’t actually understand the problems that we have. I can’t envisage that would happen.”

Co-op Group employees, through their trade union support reform. Many wise and experienced co-operators support the process: Sir Graham Melmoth expects sanity to prevail, Vivian Woodell has presented the case for a yes vote with his usual clear and principled approach, Cliff Mills, despite his reservations about Myners’ recommendations, has accepted (at http://www.mutuo.co.uk/news/the-myners-report-a-response/) that as long as it is clear that a process of debate and reform follows Saturday’s meeting people should accept the Principles.

How much clearer could the next stage of the process could be? A vote in favour of the resolution leaves the detail to be filled in by the members’ meeting. Only rule changes needing a two thirds majority at one or more further general meetings can actually change the system. That leaves scope for debate about the detail of the structure once the principles are agreed – although changes need to be in place by the end of 2014.

The background to Saturday’s meeting is last year’s disastrous £2,500,000,000 loss. The bank consortium, whose covenants have already been renegotiated once and without whose support the game is up, have already sent in a “troubleshooter” to look at selling off businesses.

If the resolution is lost it is not hard to imagine the banks’ reaction. If it is passed, the next stage allows co-operators to work alongside the executives, the employees, the creditors and the board to put reforms in place. The prize is more power for ordinary members than they have at present and a board with the skills necessary to run a business of the size of even the smaller Group that will survive, held to account by a body elected by members. Sales of parts of the Group are, sadly, necessary to reduce the debt burden left by the grandiose failures documented by Kelly and Myners.

The lessons from this debacle have been expensive. It is important that the whole co-operative movement takes them on board. There is no room for complacency about governance by other big societies.

To me, the choice about how delegates should vote on Saturday is a no brainer. The resolution should pass with an overwhelming majority. Then the real work can begin.

© Ian Snaith 2014 Creative Commons LicenseThis work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | 4 Comments

I posted this on the Co-operative Members Group FB page on 09.05.14:

On two tier boards, this is a complex issue and there are no simple or easy answers.

Subject to detailed legislative requirements that certain particular matters have to be dealt with by the committee/board or by the members’ meeting, societies, like companies, have a lot of freedom about structure. In that sense, I agree with Dave Boyle’s scepticism about there being a strictly legal rule against a two tier board.

However, what is crucial is that there is absolute clarity about the roles of all the organs in the business and that there is one organ (usually the board) which has extensive decision-making powers and carries the legal can for cock ups. I think that is what City people mean when they say there must be one unitary board.

See also the Co-ops UK Corporate Governance Code at  page 9:
“Every co-operative should be headed by an effective board which is accountable to its membership and is collectively responsible for the long-term success of the business in accordance with the International Co-operative Alliance Values and Principles.”

That provision is similar to the equivalent for PLC’s. Responsibility for success also gives responsibility for failure so the focus is clear.

However in both co-ops and companies there is another group that plays a role: the executive team. They will in fact meet weekly. That looks rather like a management board but legally it is a group of people with powers given in the constitution or delegated by the board. In the Group the rules deal with that.

The Co-ops UK document about Reserved Powers for the Board limits Executives’ power by listing decisions that need prior approval by the full board. In a PLC those executives (or some of them) would also be on the Board – usually in a minority. The rest of the board would consist of IPNED’s.

Rules 2.10 to 2.15 of the Co-op Group Rules confer certain roles and powers on the board and the executive. Rule 2.12 gives the list of things reserved for the Board.

Kelly and Myners are effectively both pointing to the catastrophic failure of the Group Board to deal effectively with its non-delegable roles of:

“2.10.1 deciding the vision and strategy of the Society and its businesses in
consultation with the Subsidiary Boards, and having regard to the nature
and extent of its interest in all of its businesses……
2.10.3 monitoring the Society’s businesses; and
2.10.4 overseeing the Group Chief Executive and the other members of the
Executive as they carry out their roles.”

That is where lack of business experience is a problem and that problem needs to be dealt with while members retain control.

Hope this helps.

© Ian Snaith 2014 Creative Commons LicenseThis work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

It was interesting to see Sarah Butler in the Guardian comparing the fortunes of the Co-op Group and The John Lewis Partnership last weekend. Clearly, the decisions of the last Group management to try to buy market share for the Group via Somerfield and for the Bank via Britannia and the Lloyds Branches were important. However, as Paul Myners has pointed out, that arose, in part, from the failure of the Group Board to have any effective oversight of the managers or enough board members with the expertise to achieve that. Maybe having elected directors who were concerned about Co-op Values and Ethics but incapable of effectively challenging business decisions suited the executives while also suiting the politicos from the area committees and regional boards who got those jobs.

The FT claimed last Thursday, in a story (perhaps coming directly or indirectly from those favouring the Myners reforms?) that at the April 2014 Group Board meeting that pattern continued. The story alleges that some Group elected directors can pull in £100,000 and yet, at least at the beginning of the meeting, failed to deal with the central and potentially fatal business problems that the Group faces. It is claimed that they expressed concerns about the availability of fair trade bananas rather than the £2.5bn loss and consequent renegotiation of bank covenants to avoid breaking them. It seems that those particular problems would be less likely to arise on the John Lewis Board because of structures combining business expertise, legally mandated commitment to co-ownership and ethical structures and a culture of involvement and transparency by the employees.

So maybe it would be helpful to look a little more closely at how The John Lewis Partnership works. The information here is mainly sourced from their web site but I have also consulted the John Lewis M & A and the Partnership Constitution.

The John Lewis Partnership uses of a combination of a trust mechanism and corporate structures to establish a subtle and finely balanced governance system to combine business efficiency in the market place with democratic involvement and financial benefit for the employee-owners. The business is not a partnership in the technical legal sense of the word but rather a collaborative relationship among the employee co-owners in their joint interests in the legal form of companies controlled by trustees bound by Trust obligations. The Partners, as they are known, enjoy bonuses of a proportion of salary depending on the performance of the business.

The structure was established when the owner of the business decided to hand it over to the employees in the 1920’s and created a trust to do so. Currently, the John Lewis Partnership Trust Ltd, a private company formed in 1950, whose objects are to uphold the Partnership Constitution and the employee benefit objectives of the trust, controls the PLC which carries on the business. The voting rights attached to the only two classes of voting shares in the Trust company, ensure that a majority of votes on crucial decisions are held by trustees who are bound to exercise their votes in pursuit of the trust objectives and the maintenance the Partnership Constitution. Crucial decisions include changing the voting rights or winding the company up, and all decisions made by the company general meeting during an interregnum after the removal of a Chairman by the Partnership Council – a key mechanism backing up the Chairman’s accountability to the employee Partners.

The governance practice of the Partnership, within this legal framework follows the Listing and Disclosure and Transparency Rules and the UK Corporate Governance Code applicable to listed companies, despite the fact that the Partnership’s companies are not listed or bound to follow those rules. The Partnership Constitution consists of principles and rules which respectively set out its purpose and policies. The duty to uphold the Constitution is a key element in the objects of the Trust Company.

The key top level governing bodies are The Partnership Council, the Partnership Board and the Chairman. The Council is 80% elected by secret ballot every three years by the employee Partners, all of whom can vote in the elections or stand for election. The elections are based on one or two representatives from each local constituency, the detail being decided by the trustees elected by the Partership Council and serving as directors of the John Lewis Trust Ltd. Remaining Council members are appointed by the Chairman, often from people holding posts such as Director of Communications, Director of Legal Services, or Company Secretary. The intention is that those people can provide the Council with specialist knowledge but it also means that, together with the Board members who are automatically Council members, there is full participation by senior management. The Council meets at least four times a year and the Chairman attends and reports to it twice a year, facing questions on the performance of the business. It is the Council which has the power to remove the Chairman. There are also divisional, regional and local democratic bodies composed of Partners. Together, these bodies are intended to hold management to account.

The Partnership Board manages commercial activities. Its members include the Chairman, five directors appointed by him or her, five elected by the Partnership Council and three non-executive directors. It is thus linked to the Partnership Council, partly by a Partners’ Counsellor whose remit is to uphold the values, ethics and integrity of the business as set out in the Constitution. The Counsellor sits on the partnership board and convenes meetings of the elected directors (as appropriate but at least once a year) from which executive directors are excluded.

The Chairman’s Committee consists of the Chairman and the Board members appointed by him or her plus the Partners’ Counsellor and meets frequently and informally to develop strategy, business plans, budgets and to review operational and management issues including results, forecasts and proposals. This is presumably the equivalent of executive meetings in PLC’s or the Co-op Group.

Separate Divisions such as John Lewis and Waitrose are managed day to day by divisional Management Boards which are accountable to the Chairman for performance but are also held to account by their own Divisional Partners’ Councils.
This structure illustrates the use of the trust mechanism and also represents an intricate set of organs which have separate roles of democratic representation and business management but which link together both at the apex (in the Partnership Board and Chairman role) and at Divisional level with the Divisional Councils.

The values and purposes enshrined in the Constitution and the Trust objectives are fully legally secured and worked out institutionally. In addition, the Partnership Councils provide fora for questions and concerns from the employee owners. The whole organisation is served by the Gazette, an internal newspaper where articles on retail are published and issues can be raised and ideas suggested. The organisation currently enjoys significant commercial success while maintaining its identity as a values based employee owned business.

So, any lessons for the Group here?

Differences:

The John Lewis Partnership is not, strictly, a co-op but it is very close. On the removal of the Chairman his or her nominee or a Deputy takes over or the Board appoints someone. The Chairman is not elected by the Partners or their Council.

John Lewis is employee and not consumer owned. That makes it easier to persuade members (“Partners”) to engage as employment is important in their lives and bonuses can be substantial. Consumers can just choose to shop somewhere else so getting them engaged will always be harder. Members’ dividends on purchases are modest at best.

The John Lewis Partnership has an element of paternalism in the role of the Chairman – John Spedan Lewis was the first one and no Chairman has ever been removed by the Council.

The Trust structure makes the business very secure against demutualisation or takeover but does not represent member control in the mainstream co-operative tradition.

The business of John Lewis and particularly Waitrose serves upmarket customers and that makes sense for the benefit of employees. A consumer co-op aims to serve its consumer members rather than simply make a profit from them.

Lessons:

Clarity of function  exists strongly in John Lewis but commercial success for the employee owners and upholding the organisation’s values combine when necessary – especially at the top. In the Co-op Group, if one assumes the Board and Regional Boards were made up of people concerned with co-op values, who was holding executives to account for business decisions?

In John Lewis executives are accountable for their business performance and decisions which are directly in the financial interests of the Partner owners who get a bonus depending on success. However, executives are also accountable for their adherence to the values and ethics of the organisation. Was that effectively true in the Co-op Group or was rhetoric and judicious spending of profits enough there? Who was concerned about how the profits were made and, more importantly whether any were?

In John Lewis one board has full power and can make fast business decisions when needed. Its internal members are 50:50 between elected Partners and executives but the Chairman’s role covers both Values and Ethics and commercial success.

The appointed outside non-execs bring independent expertise. The Co-operative Group never appointed any of those to its board even after rule amendments were passed to permit that. The Co-op Bank had some but their wise advice was ignored there.

The John Lewis Partners’ Counsellor is there to ensure that the elected directors are empowered and served. That is a board level job by someone paid to do it who can actually organise the elected directors and act as the lead independent non-executive.

The organisation voluntarily observes all the disclosure and transparency and governance obligations of a listed PLC. They are all aimed to make sure executives are accountable. However, in John Lewis they are applied to the benefit of the Partners who own it and not investors.

Perhaps just as important the national regional and divisional Partners’ meetings take questions and comments from Partners and the Gazette gives a forum for debate and complaint. Thus the culture is open and encourages a healthy and informed involvement outside the formal mechanisms of decision making

This all gives food for thought. Could Lord Myners’ proposals be tweaked to take advantage of some of these apparent lessons? Could the NMC have a role similar to the Partners’ Council? Could it elect or nominate some directors or have some reserved Board seats? Is there room for a Members’ Counsellor role? Could the Group increase transparency by adhering to appropriate Listing Rule and other requirements, suitably adapted for its member controlled co-operative status?

© Ian Snaith 2014 Creative Commons LicenseThis work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

The FCA are looking for one senior associate and two associates for this work. No existing knowledge of Co-op or Bencom Law required and salary near the bottom end of the scales mentioned (so I’m told). Still £30k plus for associates and £46K plus for Senior Associate maybe isn’t too bad even in London…..?

This could be an opening for someone in or around the sector and a great opportunity to see how it all works on the ground…..

Associate job details here Senior Associate job details here.

by isn | Leave a comment

On a lighter note than usual here recently, here is a PhotoSGECOL Valencia 2014

of the Study Group on European Co-operative Law Group (SGECOL) members currently working on the Principles of European Co-operative Law (PECOL) Project. We are pictured with Jose Luiz Monson Campos President of CIRIEC. For more information on the project visit my page about it.

by isn | Leave a comment

Yesterday, the Progress-Update-of-the-Independent-Governance-Review from the Myners Review was published. It answers many of the issues I raised yesterday about what was reported to have been agreed in principle by the Group Board earlier this week.

The Myners Interim Report is a carefully thought out but blunt piece of work that faces up to a lot of realities to improve the existing system. As Ed Mayo tweeted, no punches were pulled.

Let’s look at its recommendations one by one:

“The creation of a new Group Board made up of an independent chair with no previous association or involvement with the Group, six to seven independent non-executive directors, and two executive directors. The non-executive directors would have the skills and experience of NEDs sitting on the boards of The Co-operative Group’s primary competitors. This new, far smaller Board would replace the existing 20-strong elected Board; it would be responsible for all commercial and financial matters and would have full power and responsibility for the operation and management of the Society.”

This would ensure director competence and the accountability of executives to people with commercial experience but what about member control, including election by members, and other mechanisms for members to influence their society? The answers are found (to some extent) in later recommendations. To understand those we need to see the next recommendation – a National Members’ Council (NMC).

“The establishment of a National Membership Council (NMC) of around 100 individuals, including provision for representation of around 20 employees. This new Council would have powers to ensure that the Group adheres to co-operative values and principles, and that these are reflected in its corporate vision, strategy and operating practices. The NMC would elect from its membership an Executive Committee of 12 which would also include corporate representation from independent societies.”

This representative body is not the same as, for example, the old CRS Council which had no powers. It can propose people to the Nominations Committee for Board approved nomination in the Board Elections (below). It protects the Group from demutualisation by being able to veto certain rule changes, and it oversees the social programme, holds the board to account on ethics, stewardship, strategic leadership and operational performance. Much will turn on the precise roles and responsibilities of the NMC, and the powers underpinning those roles and responsibilities; but clearly a radical new constitutional settlement between commercial competence and democratic representativeness is needed, and this proposal has real credibility.  There is an important and necessary tension between those two elements of member-based governance, and any new settlement must capture that tension.  Importantly, it is proposed that the NMC has a secretariat of its own, and this needs careful thought.

“Group Board directors would be subject to annual election/re-election by all members. Vacancies would be openly advertised and candidates would be appointed on merit against clear criteria of skills and experience. A Nominations Committee of the Group Board would be established on which two members of the NMC would serve. The Nominations Committee would also be responsible for commissioning an annual review of board effectiveness and reporting to the Annual General Meeting in light of this review.

The NMC would be encouraged to propose Co-operative Group members possessing the requisite competence to the Nominations Committee for consideration as Group Board candidates.”

This would combine an electoral process with a system designed to vet competence. It is similar to the one used in building societies but there are member reps on the Nominations Committee. If people pass the nomination process they are Board recommended candidates in annual elections in which all members participate. I assume that there would also be a rule allowing other nominations from the membership but only those vetted would be “Board Candidates”. They would probably stand a better chance of winning as in the building society model but there would also be member input to the Board nomination process. There will be much debate about whether this approach preserves ultimate member control, but assuming that nomination to the board by members as well as by the board would be possible then in electoral terms it is clearly arguable.

The Nomination Committee’s annual review of board effectiveness gives genuine feedback to all members through the annual general meeting on how the board is doing. The NMC could presumably comment on that report and it could be debated both there and at the AGM.

One Member One Vote – both to the Board and the NMC – is fully preserved and indeed extended fully within the Co-op Group for the first time – currently it is mediated through the sales proportions of regions and the area committee and regional board system.

Elections to the Group Board and the NMC would be conducted on the principle of “one member, one vote”. NMC members would be elected by all members for a term of three years. Detailed voting arrangements, including the structure of regional/national constituencies and the method of voting would be the subject of analysis and consultation in Phase 2. Once the proposed arrangements were approved, the present membership architecture would be disbanded and transitional arrangements put in place. A revised remit and role would be developed for Area Committees.”

The detail on the fuller role of the NMC then follows. I have referred to parts of it above.

The NMC would have two primary roles: first, as guardian of the values and principles of the Group’s constitution. The NMC would protect the Group‟s position as a member owned organisation. In this capacity it would hold certain powers to veto further changes in the revised constitution; nothing would be done to increase the vulnerability of the Group to takeover or demutualisation. The NMC would also hold the Group Board to account on ethical matters and oversee the Group‟s social goals programme.

That answers the classic building society problem of demutualisation by bribing members with shares in the PLC it will become as the elected NMC stands in the way of that. It therefore helps to secure the co-operative structure while giving all members a voice through OMOV.

The second primary role of the NMC would be to hold the Group Board to account for its stewardship and strategic leadership of the organisation and for the operational performance of the Group. In this capacity, the NMC or its Executive Committee would have the right to be consulted on key strategic and operational initiatives along with any aspects of the management of the Group. A “significant transaction rule” would be introduced, giving the entire membership a vote on large deals which can currently be approved by the Group Board alone.”

If the point about a “significant transaction rule” finds its way into the new constitution, it will give co-op members, for the first time, the same legal rights  as PLC shareholders to decide on major transactions instead of a more watered  down “consultation meeting” as the Co-operative Code  for consumer societies currently recommends (see paragraphs 22 to 24 on page 8) but most society rules do not require. That boosts democratic control.  However, here again the details of the roles and responsibilities of the NMC will be important.  The “right to be consulted” may need to be developed further if member control is to be firmly established.  Holding the Board to account for its strategic leadership will be of limited value if the Board has unfettered powers to determine strategy.

“To facilitate its work, the NMC and its Executive Committee would be supported by a secretariat. Arrangements would be put in place to safeguard confidentiality of information shared by the Group Board and Executive with NMC members.”

This provides the back up needed to do the NMC’s job effectively across the whole business. The regional structure has always had the problem that, while it made sense in a delegate based democratic structure, it bore no relation to the way the nationally controlled businesses were managed.

“Independent societies would cease to sit on the Group Board and a new enhanced structure would be established to promote trade and protect interests in common between the Group and these independent societies. The independent societies have a high and necessary dependence on a viable, efficient and competitive Co-operative Group.

The Group’s structures need to support the current business and business relationships, including with corporate members.  This proposal completes the process of removing independent societies from positions of major influence, in a society which was founded and for more than a century controlled by independent societies.  Whilst this is logical in the context of the proposals as a whole, its acceptance by independent societies will depend upon the “new enhanced structure” referred to, and upon any changes to the current capital owning arrangements.

 “All rule changes would contain a so-called “sunset clause”, under which the constitution of The Co-operative Group would return to the current status quo after a period of four to five years without a member vote to retain the new structure”

This gives members a chance to revert to the present system if they don’t vote to support the new one after five years. So even voting through these changes in May is intended not to be irrevocable.

So this is the outline of a new governance structure to address the problems of the old one.  The outline of the overall architecture is becoming clear, though the shape and functions of the annual members meeting will be an important part of this.

Many will find this Interim Report painful reading.  Whilst much detail needs to be worked out – some of which will be in stage 2 –these proposals have the makings of a practical and democratic structure for a large 21st century co-operative.  The absolute priority for all of us is to secure a basis for the survival of the Co-operative Group as a co-operative.  This means engaging with the process and supporting the development of detailed arrangements which will be fit for purpose; fit for purpose for a business of this scale, but also fit for purpose to provide an even stronger basis from which to challenge conventional investor-owned businesses.

That is the prize. For the sake of the future of UK Co-operation, we must all do what we can to help the Group to win it.

© Ian Snaith 2014 Creative Commons LicenseThis work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | 5 Comments

The Quick Questions

I’ve been very busy lately and wasn’t able to submit anything to Myners by his deadline. Below are my questions on what seem to be the broad lines allegedly agreed by the current board in their panic meeting earlier this week.

After the questions you’ll find some fuller thoughts. I have not addressed the role of members and wider democracy as that is Stage 2 of the Review. Maybe the apparatus of local committees and other structures fit in there.

First, remember two general points:

1. Governance and the text of laws and rules only set a framework. The success or, as we have seen recently, failure of the business commercially and in co-operative terms depends on the quality of the people involved and the culture. If those things are wrong the rules won’t mend them.

2. Read the Wikipedia on Berle and Means (or even the book). That is, as the wikipedia author says, the “foundational text in corporate governance”.  The key role of corporate governance in any big businesses with widely dispersed ownership (8 million members counts as that, I think?) is to hold managers to account in the interests of the owners of the business. For PLC’s that is the shareholders and the Corporate Governance Code tries to do that. For co-ops it’s the members and the Co-operatives UK Code tries to do the same but with less emphasis on non-executive directors. Without clear and effective monitoring and challenge to the internal executives, the system won’t work. For the reasons Berle and Means give, the challenge has to operate above and beyond general meeting (in the Group delegate meetings). The lack of that challenge sank CRS in the late nineties and others before it – London, Greater Nottingham etc.etc.etc. It has come close to sinking the co-op group. It’s time to get that right.

These are the questions that I squeezed into the available box at the Myners website :

“1. (a) Doesn’t the elected board need some significant basic powers to approve business strategy, investment and disposals and annual financial statements, and to appoint and remove the CEO to be able satisfy the FCA that the group meets the ICA requirement of member control – a condition of continued registration as a co-operative?

(b) Doesn’t that mean it needs independent non-execs or others with business expertise there to hold executives to account & discuss business strategy? If not it’ll repeat the mess that just happened.

2. Why reject a majority directly elected single board with non-execs & CEO as members and board recommendation of candidates to members at election, e.g. Nationwide?”

Why these questions?

The starting point is that to retain registration as a co-operative the Group needs to show the FCA  that the members have control of the society and elect officers i.e. directors:

“Control – Control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society.  In general, the principle of ‘one member, one vote’ should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office.”

the FCA Notes on applying to register (see page 8 of the PDF)

See also ICA Statement 2nd Principle:

“Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives members have equal voting rights (one member, one vote) and cooperatives at other levels are organized in a democratic manner.”

If there is to be a two tier board of some kind, everything depends on the detailed remit of each of the two boards. I am puzzled by the current press reports which put the outside non-execs in the “management board” as systems with two tier boards call it e.g. European Co-operative Society or the German system for companies which gives significant powers on commercial matters to the “supervisory board”.

The Co-op Group Rules currently list matters which have to be dealt with by the full board rather than being left to the executives who, in practice, meet weekly almost as if they were a lower tier board – just as PLC executives do.

It’s a long and rather messy list and you can find the full detail  in Rules 2.10 – 2.17.

Core functions of the board include the following that it cannot delegate. Maybe those would be placed with the elected supervisory board in a system like the one mooted in the press?

They are:

“2.10 The Board has the following roles and responsibilities (which it cannot delegate):

2.10.1 deciding the vision and strategy of the Society and its businesses in consultation with the Subsidiary Boards, and having regard to the nature and extent of its interest in all of its businesses;

2.10.2 ensuring, whether directly or through other people, that the Society’s businesses and affairs are conducted and managed in accordance with its Purpose and Objects, and in accordance with the best interests of the Society and its Individual Members and Independent Society Members;

2.10.3 monitoring the Society’s businesses; and
2.10.4 overseeing the Group Chief Executive and the other members of the
Executive as they carry out their roles.”

It seems to me that if you cut out 2.10.3 and 2.10.4 and give them to the unelected board of executives and independent non-execs it is hard to say that the members control their society, even in the sense of “ultimate” control. The people they elect are unable to control or monitor management.

If you leave them in and place the non-execs with the execs you need another way of ensuring that the elected board has the skills and experience to do that vital work. Maybe that would be the “guided democracy” that works with building societies where all members vote for directors but the board recommends people that it feels will fill its skill gaps.

If you are going to do that, why not have one board along those lines with execs and independent non execs and an elected majority? The members could elect everyone except the executives, including the outside non-executives.

Maybe a two tier board is needed because a single board decides on a strategy and finds it hard at a certain point to admit it got it wrong? At what point could the Group Board have decided to abort the massive IT spending or challenge the amount of borrowing. Presumably each decision about it was agreed by all (or most) of them. Maybe the separation into two tiers avoids that and would allow the supervisory elected board to demand a review. However, to do that, it needs expertise and the confidence to face down a CEO who refuses to revise his or her policy. There are no perfect answers but a combination of co-operative legitimacy (through election) and expertise seems vital.

Marginalising the elected people and denying them control of the business does not achieve that. However, serious failure to challenge management on business matters led to the present near catastrophe. It follows that people with expertise and people with legitimacy both need to be involved in business decisions. The underlying question is how to achieve that.

by isn | 2 Comments

These emails, supplied to the Parliamentary Select Committee looking at the issues around the Co-op Bank’s attempt to buy the Lloyds Branches give interesting food for thought. They give a perspective on the deficiencies of the Boards of both the Bank and the Co-op Group when decisions were being made and the problems the writer saw with the quality of the then executive.

The perspective is that of Rodney Baker-Bates. They give his reservations and issues with Project Mars and some insights into the decision making process as he saw it. He suggested that some on the board had personal reservations but allowed themselves not to make those “public” (I assume that means they didn’t raise them in the board meetings) and were part of “group think”. His account suggests that the exec looked with “disdain” on lay directors who had no business experience and that some lay directors  saw themselves as being “hoodwinked”. His account also implies that the executive persuaded the chairs of both Bank and Group Boards to support their plans and then relied on them to persuade the other directors.

Anyone who wants to understand what went wrong with the Bank and the Group should invest time in reading the material here and watching some of the hearings here. Unfortunately I can’t find that time at present but it is a treasure chest of inside information for those who can.

A big thank you to the person who specifically drew these gems to my attention.

by isn | Leave a comment

I just had this correspondence with Robin Brownsell of Bank to the Future – a crowd funding site.

I found information about Robin and his site in the excellent book “The Heretic’s Guide to Global Finance” by Brett Scott @suitpossum . I highly recommend Brett’s book alongside “Anarchists in the Boardroom” by Liam Barrington Bush @morelikepeople, an anarchist activist, for a refreshingly radical view on these matters. Both books combine high ideals with practical on the ground suggestions for beginning a process of change. They also need to be complemented with political and legal action to get anywhere but the law should facilitate that.

Robin tells me that Res Rublica is launching a Report next week in Portcullis House which is relevant to this question. The correspondence gives links to the New Economics Foundation and Mutuo materials on this as well as some of the legal sources and issues.

“From: Ian Snaith
Date: 2 February 2014 10:23
Subject: Re: Starting Banks
To: Robin Brownsell

……………….My key, if rather geekish point is that it is currently impossible to use an industrial and provident society ( to be renamed co-operative and community benefit society from 1st August 2014) which has withdrawable share capital for a banking business unless it is a credit union – see s 7 IPSA 1965

That does not change in the Consolidation Bill currently before parliament – see clauses 67 to 70.

However, Lord Naseby’s Bill would greatly ease this situation if passed as it would allow societies use of redeemable shares without that restriction. I understand it will have quite a high priority in the Commons but I believe HMT have not yet decided whether or not to support it and, as a private member’s Bill, it is doomed without Government support.

Of course we already have building societies and credit unions using member share capital and any organisation meeting the FSMA et al definitions of deposit taking would be subject to PRA regulation. One possible route would be to build on the basis of existing credit unions or even building societies and the inability to use the co-operative or community benefit society structure is something of an obstacle to that. Clearly avoiding or living with PRA Rules is likely to be an even bigger obstacle.

As you are no doubt aware, the New Economics Foundation are also looking at these issues and I have spoken to one of their researchers who suggested that there is some political good will towards removing the ban on banking for registered co-ops. Mutuo promoted the Naseby Bill and published a pamphlet in support of it.

Hope this is of interest and some use.

Best Wishes

Ian”

by isn | Leave a comment

This is the presentation I prepared for the Group on Members’ Capital at the CBC Conference on the Co-op Bank Crisis on 17th January . It seemed a bit long and technical on the day so I didn’t use it but here it is. Enjoy.

by isn | Leave a comment

With Dave Hollings permission, I reproduce this exchange I had with him about minority member protection in industrial and provident societies:

On 13 January 2014 14:31, Dave Hollings wrote:

I have a client which is registered as a co-op with multiple shares.

For a variety of reasons (business and financial), they want to convert to a bencom and to convert the shares to a nominal amount of £1 (with the value of shareholdings being converted either to loans or donations, depending on each member’s wishes). They have sounded out their members and most have no problem with this.

However, what if a small number of members do have a problem? They lose the vote at the General Meeting, so the change goes through. But, if this were a company, there would be protections for minority shareholders’ rights which would have to be taken into account and dealt with. Do such protections exist for minority shareholders in Societies (I have found no reference to such rights).

Thanks

Dave Hollings

From: Ian Snaith

Sent: 14 January 2014 12:35
To: Dave Hollings
Subject: Re: Minority Shareholders Rights in a Society

Dear Dave

The short answer is that sections 994-999 of the Companies Act 2006 do not apply to societies so there is no remedy for “unfair prejudice” of members. The “just and equitable” winding up remedy under section 122(1)(g) of the Insolvency Act 1986 does apply to allow a member of a solvent society to petition for it to be wound up. However, the courts will be reluctant to agree to that and the process will be very expensive and troublesome for the minority member(s).

There is a duty for members voting to amend rules to convert to a bencom and change the structure of the share capital to do so bearing in mind the interests of the whole society but in the light of the above it is difficult to enforce.

It would be wise for this to be completed and the rule changes registered before 1st August this year when the new consolidating legislation comes into force.

I’ll put this on my blog  without identifying you as the person with the query if you are OK with that.

Best Wishes

Ian

From: Dave Hollings

Date: 14 January 2014 12:36

Subject: RE: Minority Shareholders Rights in a Society

To: Ian Snaith

Thanks.

No problem with you putting this on your blog – or even identifying me, as the client is not identified.

Thanks

Dave

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

Don’t miss this important event at  Central Hall, Oldham Street, Manchester M1 1JQ. A wide range of co-operative activists and commentators will be discussing the lessons of the roller coaster highs and lows of 2013.

It’s open, free of PR and is serious and democratic in format – a real treat with a choice of stimulating and informative workshops and plenary sessions open to all for just £24 delegate fee.

Just a few days left to register by 09.01.14. Thanks to the folks at Co-operative Business Consultants for organising it.

It’s just what we all need in the New Year. I’m looking forward to it.

See you there.

by isn | Leave a comment

On Friday, phase 1 of the deal to rescue and demutualise the Co-op Bank was finalised. It was supported at all necessary meetings of classes of creditor and shareholder and approved by the Court. Effective majority control of the Bank has now passed to investors with the issue of new ordinary shares and the cancellation of the Group’s existing shares.

However, the question of the Bank’s continued use of the word “Co-operative” in its name remains open. Back in early November when the basic effects of the deal were announced, I expressed my views and outlined the relevant legal provisions about its continued use of the word “Co-operative” in its name.

That led to Letters in the print edition of the Co-op News of 19.11.13 to 03.12.13 from my old mate, Iain Williamson, fellow Co-op news scribbler and secretary of the Co-operative Press, and Brian Taylor, long time co-op activist and employee, arguing that it’s OK for the name to be used by a PLC 70% owned by investors.

Some readers of this blog may not subscribe to the paper edition of the Co-op News. So here’s my reply to Iain and Brian, published in the print edition of 03.12.13 to 17.12.13:

“23rd November 2013

Dear Sir,

Co-op Bank, Co-op Group, The Name and the Brand

Please allow me to respond to the letters that appeared in the print version of the Co-op News of 19th November to 3rd December from Iain Williamson and Brian Taylor.

First, I heartily agree with Iain Williamson’s comments on the Bank rescue and the current Group CEO. The leadership  shown by Mr Sutherland and the job that he and his colleagues have done in seeking to rescue what they can from the Bank disaster is excellent. They had a very poor hand in the negotiations and played it very well. We must all hope and pray that the recapitalisation plan is supported by the necessary majorities of each class of creditor and by the preference shareholders on 11th December when they meet.

I also agree with Brian Taylor’s comments on the importance of the “Co-operative” brand and its value as an intangible asset, although I think he may have overstated the effect on the share price of a suitable name change for the Bank within a year or two of the recapitalisation.

However, the argument of Messrs Williamson and Jones that the Bank never was a co-operative is disingenuous. While the legal entity of the Bank has long been a PLC, the Co-op Group has always argued that the whole “family of businesses” is one Co-operative family. That was based on the Group’s status as a bona fide co-operative owned and controlled by its corporate and individual co-operative members and, crucially, its 100% ownership of the Bank PLC and the Co-operative Insurance Society.

That is a wholly different situation from  the retention of the name “Co-operative” by a Bank 70% owned by stock market investors. This new situation is a long way down a slippery slope. The recapitalisation deal actually permits the continued use of the name if the Group’s stake reduces to 20% and the stake of the investors rises to 80%. The Group is already legally committed not to use the word “co-operative” or any similar word in conjunction with the word “bank” for many years.  That disposal of an aspect of the brand was presumably a necessary price for retaining a 30% stake in the Bank and getting the constitutional entrenchment of ethical values. That is certainly in the interests of all the stakeholders in both the Bank and the Group.

However, the Group is neither the whole UK Co-operative Movement nor the whole global Co-operative Movement. That wider interest requires that only organisations which conform with the ICA definition should be regarded as co-operatives. In many countries that is legally achieved by preventing the use of the name by any entity not registered under a specific Co-operative Law. In the UK we have the flexible and liberal approach of allowing co-operatives to use any business structure that they wish. However, the restriction on the use of the name “co-operative” by business structures other than I & P societies is the legal price paid for that. As I have noted elsewhere, the restriction only applies to new company registrations but there is power to prohibit the use of a misleading name at any time in a company’s life. That explains Paul Gosling’s observation on page 4 of the same issue of the News that a change of name ordered under those provisions is listed in the Prospectus as a risk factor for investors. That shows that the point is not merely “academic”. It is with a heavy heart that I re-emphasise this issue because it is obviously one that is irritating and worrying for the Bank and Group Executives and Boards.

However, the wider interests of cooperatives cannot be ignored and BIS is the ultimate guardian of those interests in this situation as it is te only agency that can force a change. Surely consideration of a transition to another “ethical” name for the Bank within the next couple of years would be helpful to all the bank’s stakeholders – especially the investors who may well have rescued it from oblivion. Such an approach might also help to deal with any process by BIS that results from complaints about the use of the name and could help to  avoid an abrupt forced name change. I appreciate that any change will have be made some time after the recapitalisation plan has been carried out, as the unfettered use of the name by the Bank is the basis on which next month’s votes take place.

I hope that I am acting as a critical friend on this. As Daren Hale implies in his letter on the same page of the News as Brian Taylor’s, an absence of critical debate may have contributed to the development of these problems. We should all try to prevent any repetition of that by encouraging more robust, better informed and sympathetic debate as well as more thorough scrutiny by members and the press of management and boards.

Yours faithfully,

Ian Snaith”

Vince Cable has indicated that, if complaints are received, he will consider requiring that the name no longer be used. That possibility was highlighted in the Bank prospectus as a risk for investors. Surely it is time for the Bank to look at phasing out the use of the word “Co-operative” in the name to deal with that risk?

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

On Friday, the first stage of the recapitalisation plan for the Co-op Bank got massive support from the retail investors most at risk of not meeting the special majorities needed to get the  plan approved.

“The Co-operative Group and The Co-operative Bank are delighted at the overwhelming levels of support for the Liability Management Exercise at this critical juncture, and we would like to thank all our bondholders and Preference Share holders for backing the Recapitalisation Plan. Based on the votes received so far, we expect the proposals to be approved at the meetings of the holders of the Preference Shares, 13% Bonds and 5.5555% Bonds on 11 December 2013. Successful completion of the Liability Management Exercise is also dependent on the success of the Scheme – holders of the Dated Notes are currently due to vote on the Scheme on 11 December 2013. We are now highly confident that our £1.5 billion Recapitalisation Plan for The Co-operative Bank can be achieved.” – Statement of 29.11.13

This means that the next stages of the Liability Management Exercise part of recapitalisation and demutualisation of the Bank should go ahead without problems.

The demutualisation of the Bank is sad but this outcome should prevent the  Bank from entering “resolution” bank insolvency proceedings. That  lifts the threat to the Group of liability on cross-defaults triggered by a bank insolvency.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License

by isn | Leave a comment

Hedge Fund Cock Up?

More news on the Co-op bank Recapitalisation Scheme today.

This morning’s Times carried this enigmatic piece on page 56:

Co-operative Bank: Hedge funds planning to take control of the lender have been left with a potentially expensive loophole. At issue is £125 million of new capital that lower tier bondholders, led by the funds Aurelius Capital and Silver Point plan to inject.”

This afternoon the FT explains what has happened thus:

“A group representing the hedge funds and other lower tier two investors on Thursday pledged its support for the restructuring, after asking the Co-op to make a last-minute amendment to the terms.

The change is intended to close a loophole that was providing an opportunity for brokers and traders to undermine the new equity issuance by submitting claims for larger numbers of shares than they were entitled to. This could have meant that the LT2 group ended up with a smaller equity stake than they expected.

“The LT2 Group confirms its support for the recapitalisation of the Co-op Bank and . . . is fully supportive of the new management team for the bank,” it said”

The detail of the new announcement on the Co-op Group website reveals that the Bank may apply to court to modify the Scheme of Arrangement. Some of the holders of LT2 bonds have requested that and the Bank is considering whether or not to make the application. The statement says that  no slippage in the timing of the deal beyond 31.12.13. would be permitted. That is a PRA deadline on the capital. The legal obligation of some of the holders of these securities to support the Scheme (the “lock in agreement”) would stay in place whether the Scheme is modified or not.

Here’s the change the announcement outlines. Under the existing Scheme as proposed these holders get:

“a combination of:

  • £100 million of 11 per cent. Subordinated Notes due 2023 to be issued by the Bank (“Bank T2 Notes”); and

  • 112,500,000 new ordinary shares in the Bank (“New Ordinary Shares”) representing 45 per cent. of the total issued share capital of the Bank following completion of the LME.

The holders of the Dated Notes will also be entitled to subscribe for 62,500,000 additional new ordinary shares in the Bank (the “Additional New Ordinary Shares”) at a price of £2.00 per new ordinary share representing 25 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration equal to £125 million, pursuant to, and on the terms of, the Scheme with such subscription being underwritten by certain persons who were holders of Dated Notes as at 4 November 2013. The Scheme provides that any holder of Dated Notes is entitled to elect to subscribe for between a minimum election of 50,000 (for an aggregate subscription price of £100,000) and a maximum election of 62,500,000 Additional New Ordinary Shares.”

If the Co-op Bank made an application to court and the court agreed the modification they would get:

“a combination of:

  • £100 million of Bank T2 Notes; and

  • 141,666,666 new ordinary shares in the Bank representing 56.67 per cent. of the total issued share capital of the Bank following completion of the LME.

The holders of the Dated Notes would also be entitled to subscribe for 33,333,334 additional new ordinary shares in the Bank at a price of £3.75 per new ordinary share representing 13.33 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration of £125 million3(iii), pursuant to, and on the terms of, the Modified Scheme. This subscription would be fully underwritten by, amongst others, the Ad Hoc Group.  The Modified Scheme would provide that any holder of Dated Notes would be entitled to elect to subscribe for between a minimum election of 26,667 (for an aggregate subscription price of £100,001.25) and a maximum election of 33,333,334 additional new ordinary shares. The allocation mechanism for the allocation of additional new ordinary shares described in the explanatory statement dated 18 November 2013 relating to the Scheme would otherwise remain unchanged.”Note 3(iii) reads: ‘33,333,334 (representing the balance of 13.33 per cent. of the total) will be available for subscription by holders of Dated Notes pursuant to, and on the terms of, the Modified Scheme for an aggregate consideration equal to £125,000,002.50 (representing an effective subscription price of £3.75 per share)’.”

This appears to mean that they would get more shares up front and subscribe for fewer further down the line. However,:

“The total number of new ordinary shares in the Bank issued to holders of Dated Notes as a class under the Modified Scheme would be the same as the number to be issued under the Scheme.”

I fear I am at the limits of my ability to interpret this information here but maybe a failure to get the Scheme modified could cost them £125m without changing the overall percentage holding they would have?

Maybe this was an error in transcribing what was agreed to the detail of the official Scheme documents or maybe it was only realised later that there was an issue about the timing and minimum and maximum permitted subscriptions by this Group and its effect on their stake?

The position of the classes of creditors and preference shareholders deciding by tomorrow whether to take extra money for early agreement will be unaffected by the proposed change so maybe a court would grant a modification if it was asked to?

 Aurelius Sale?

The FT reported at 4.47pm today that Aurelius has “walked away” by selling most of its stake to another Hedge Fund.

“Aurelius piled into Co-op Bank’s lower tier two bonds as a severe capital shortage emerged at the lender in the summer. Along with several other hedge funds, including Silverpoint Capital and Beach Point Capital, it built up a blocking stake in the bonds, which it used to secure a far better deal for creditors than had originally been offered by the bank.People familiar with Aurelius’s decision to sell said it was based purely on economic value, as its bonds performed strongly after the restructuring deal was announced.”

However, because key parts of the deal have already been contractually agreed, the obligation to vote for the Scheme and the commitment to the ethical aspects of the Bank’s constitution will still bind the new owner of the Aurelius stake.

Flowers and the Chancellor

The announcement on the Co-op Group website also warns investors:

“On 22 November 2013 the Chancellor of the Exchequer ordered an independent investigation into events at the Bank and the circumstances surrounding them to take place under section 77 of the Financial Services Act 2012. Separately, the Financial Conduct Authority and the Prudential Regulation Authority each announced on 22 November 2013 that they are considering whether they should also launch their own formal enforcement investigations. The precise scope and timing of these investigations is yet to be determined.

The regulatory and other investigations that have been recently announced are likely to subject the Bank to greater scrutiny from regulators, will take management time and result in the Bank incurring costs not currently included in its business plan which cannot be quantified at this time. Recent events may have caused some brand and reputational damage, but it is too early to form a definitive view as to the extent of such damage.  These recent events, together with the competitive landscape in which the Bank operates, the introduction of seven day account switching and the associated increased competitor marketing activity at a time when the Bank has been constrained in its ability to undertake its own marketing activity, may be a contributing factor to an increase the Bank has seen in the switching out of current accounts.  However, the Bank’s retail deposit base remains broadly stable and it is too early to identify any significant trends at this point.  Further, the Bank’s liquidity position remains stable.  Overall, the Bank’s performance has been consistent with or, in the case of costs, slightly better than, management’s expectations.”

Interesting times indeed……….but lets hope the Scheme gets approval.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

Friday this week 29th November 2013 is the first key date in the long and complex process of saving the Bank from insolvency proceedings by recapitalising and demutualising it. The others are 11th December 2013 , the day of the Class Meetings to approve it and 16th December 2013, the date of the court hearing to finally approve it.

This post looks at that process, the legal mechanisms used to implement it and the timetable.

The Story So Far

  • In May this blog examined the Co-op Bank’s credit rating downgrade. That was the first public sign of the trouble to come.

  • In June, I looked at Plan A for a rescue of the Bank in the light of the £1.5bn shortfall identified by the PRA.

  • In September, hints of the likely demutualisation and indications of the Hedge funds’ demand for 100% ownership were addressed.

  • On 23rd October the scale of investor control was announced and later that month I shared my thoughts on the issue of the use of the name “co-operative” in that bank after it becomes 70% owned by stock market investors with follow up on Co-operatives UK’s response.

The Plan in Summary: A Reminder

The Co-operative Group will give 70% of the equity shares in the Bank to the senior bondholder (i.e. those with the highest priority claim – upper tier 2) in exchange for about £940m of the debt they hold plus a £125m cash injection into the bank. The Group will continue to hold the remaining 30% in return for providing £462m in a new Group bond and cash.

The lower ranked bondholders who are mainly retail investors on a smaller scale but who would have lost their whole investment if existing priorities of debt had been followed, will be offered new bonds with a choice between continuing their existing annual payments for 12 years with no capital sum or a lower annual payment plus a future capital sum. (See the FT Outline and Q & A)

The Legal Mechanisms Involved

Since this is a Law Blog, it might be useful to look at the legal basis and process for this crucial first stage of the recapitalisation plan for the Co-operative Bank PLC.

The detailed plans for the scheme can be found in a combination of the outline press release announcement and the detailed “nitty gritty” of the legal mechanism.

Why the Money is Needed:

Readers will remember that £1.5bn extra “common tier 1 Equity” is required by the bank as a result of the wide range of problems it has faced and the increased requirements imposed by the PRA and Bank of England for bank capital. The problems included the bad debt that Britannia brought, the bank’s excessive cost to income ratio, the money written off on IT schemes, and the compensation it is having to pay as a result of mis-selling PPI to its customers.

As the Summary section of the Bank Prospectus succinctly puts it:

Para B.4b The capital shortfall is a result of continuing losses incurred by the Bank predominantly driven by impairment charges to the carrying value of the Bank’s loans, in particular corporate loans acquired as part of the merger with Britannia Building Society (Britannia) in 2009. Impairment charges for the six months ended 30 June 2013 were £496.0 million.

The Bank also has a high cost base relative to its revenue when compared with its peers. The Bank has an ageing IT platform that has suffered from under-investment in recent years and has failed to integrate Britannia into the Bank’s operations, resulting in significant cost duplications in front, middle and back office functions and a significant overlap in the branch network. In addition, the Bank’s revenues are impacted by it not having achieved sufficient penetration of its current account customer base and historically pricing certain of its products on terms more generous to customers than the market.”

– Page 8.

The recapitalisation plan will raise the £1.5bn in two ways:

  • A Liability Management Exercise in 2013 will contribute £1062m and

  • Another £333m – £170m by 30.06.2014 and another £163m by 31.12.2014 – will come from the Banking Group, the subsidiary of the Co-operative Group through which the Bank is held.

They are linked and conditional on each other but let’s look at the Liability Management Exercise today. The rest of the money only comes if that goes ahead and that question depends on a legal process. Let’s look at that.

The Liability Management Exercise: The Current Process

As the FT Outline and Q & A reported, the two main groups of securities (bonds or shares in the Bank) affected are:

  • 5.555% perpetual subordinated bondholders – lower tier 2 (LT2) investors – hand over their £937m of debt plus £125m of new cash plus £38m of interest (£1100m in total) for 70% of the Bank’s ordinary shares. This Group includes the Hedge Funds and holders of 48% of these securities have signed up to a legal commitment to vote in favour of the Scheme in their meeting. So those votes are in the bag.

  • 9.25% Preference Shares and 13% perpetual subordinated bonds – both mainly held by retail investors and lower in priority for payment than the other bonds. They would have been completely wiped out in the normal course of events but are offered £38m for their £60m. They can swap for either “Instalment Repayment Notes” which get 12 years of income with no capital at the end or “Final Repayment Notes” which give capital at the end of the 12 years but less income from interest in the meantime. If 75% of each of the two groups agree to swap by 29.11.13, they all get more than if that doesn’t happen. Their agreement to swap is taken as a vote for the Scheme. However, the whole scheme has to be agreed before anyone gets anything. If the financial incentive works, it will be known on 29.11.13 whether one or both of these groups have effectively voted in favour of the whole plan.

Legal Process and the Key Dates

This process involves a combination of legal agreement based on the common law of contract and procedures under the Companies Act 2006 to allow the imposition of what is agreed by a big enough majority on the minority.

Under the Law of Contract, agreement must be made with anyone who is to be legally bound by their promise. If people already have rights attached to their bonds or shares, Contract Law would require the agreement of each one of them before those rights were changed. Here the plan is to substantially change the rights of the holders of these securities. If each and every one of them had to agree, a tiny group could hold the rest to ransom and it would be impossibly complex to organise the arrangement.

To allow deals agreed through “creditor democracy”, Part 26 of the Companies Act 2006 provides a mechanism, now being used for the Bank Liability Management Exercise, to allow majorities to impose new terms on minorities. This requires court approval as well as special majorities in separate meetings of each sclass of creditors or members. Section 895 of the Act sets out the possible uses of the procedure for “a compromise or arrangement” between a company and its creditors or members or any class of them. In the case of the Co-op Bank, the Bondholders are creditors and the preference shareholders are members.

The first step is an application to the court to order class meetings of different groups of creditors and members. That was done for this Scheme on 18th November 2013 as planned and the Court ordered that the meetings be called on 11th December 2013 as had been intended all along. That meets the requirement of section 896 of the Companies Act 2006.

Under section 897 of the Companies Act 2006, a statement explaining the effect of the compromise or arrangement must be made available and with the creditors being involved about where it can be found. That has been done by the availability of the statement on the Co-op Group website which is referred to in the Court Order.

The Scheme meeting will be held at 10.am on 11th December 2013 at the Bloomsbury Holiday Inn. Although it is referred to as one meeting, there are separate class meetings and the necessary majority has to vote in favour of the Scheme at each of those meetings. If any meeting does not get the necessary majority the whole Scheme collapses. According to the document on the Co-op Group website, the votes by Preference Shareholders will be at 1.00pm, those of 13% Bondholders will be at 2.00pm and those for the 5.555% Bonds at 3.00pm.

In each case the vote will be on an Extraordinary Resolution. A majority in number representing 75% in value of each class of creditors or and class of members voting either in person or by proxy at the meeting called under section 896 must agree the Scheme – s 899(1). That means that there must be a simple majority of votes by people present at the meeting and voting (in person or by proxy) and that simple majority of voters must also hold between them 75% in value of the holdings of all those present and voting (again in person or by proxy).

In addition each of the three classes must vote in favour of the Scheme by that dual majority and if they don’t the court has no power to sanction the Scheme and it cannot go ahead – 899 (1) and Re Hellenic & General Trust Ltd [1976] 1 WLR 123.

If the meetings do pass the necessary resolutions by the necessary majority, the court may approve the Scheme so that it becomes binding on all those it affects whether or not they voted in favour of it s 899(1). As that wording suggests, the court has a discretion about whether or not to approve the Scheme. Even after approval by the correct majorities, it can refuse approval. However, the court will be unwilling to upset the Scheme on its own commercial assessment, especially if there is a large majority in favour of it in each class. That is because the test applied by the court is whether no honest and intelligent person among those affected by it could reasonably approve it and the more votes there are in favour the less likely that is – Re Equitable Life Assurance Society (No.2) [2002] EWHC 140 (Ch). It is also the case that the existence of an adverse situation facing the company if the Scheme fails is a factor in favour of approving the Scheme at least of all the procedural rules have been followed – Scottish Lion Insurance Co Ltd [2010] CSIH 6 at para 44 [LINK]. Given that the Scheme document indicates (at para 5) [link] that:

“If the Liability Management Exercise is not successfully implemented on or before 31 December 2013, the Bank therefore considers that the PRA would have a basis for determining that the Bank is failing, or is likely to fail, to satisfy its threshold conditions; that the power of the Resolution Authorities to exercise stabilisation powers under the Banking Act had arisen; and the Bank believes it is likely that the Bank would be subject to a resolution procedure under the Banking Act. The Bank therefore believes that there are only two realistic outcomes for the Bank, which are either its recapitalisation following successful implementation of the Liability Management Exercise or a failure of the Liability Management Exercise resulting in the Bank becoming subject to a resolution procedure under the Banking Act.”

The result of the votes at the class meetings will be announced on 12th December 2013.

The Court hearing to sanction the Scheme will be on 16th December 2013 and the result of the hearing will be announced “as soon as reasonably practicable” after the hearing.

Likely Outcome?

I don’t have a crystal ball. However, key factors making it likely that the necessary majorities will be found and that the court will approve the Scheme are:

The retail investors – Preference Shares and 13% Notes

They get quite a good deal they can get more if they agree the swap by 29.11.13 instead of waiting till 6th December and to get the extra they have commit to vote for the Scheme. They are treated generously. They can still get 12 years of income or less income plus some capital instead of losing the whole investment. Arguably, anyone investing in a security labeled as bearing a 13% return should have understood how risky it was and preference shares are shares and not debt. However, the potential PR disaster of a lot of elderly individuals with faith in the Co-op Bank ( or previously Britannia) having their savings wiped out, the great work of Mark Taber and others on their behalf, and the relatively small value of their total investments in the scheme of things has saved their bacon – as long as the Scheme goes through. They should be very grateful.

The LT2 Bond Holders – 5.555% Notes

This group get 70% of the Bank in return for all their bonds plus some cash. Whether that is a good deal depends on how the bank fares in the future. Negatives for the value of the Bank’s shares include the recent blizzard of bad publicity and political mud slinging around Paul Flowers and the plethora of enquiries into the Bank, the Group and the regulators. That all means that the controversy will run and run. However, if the business plan works and the Bank’s performance improves with its new capital structure, the new shareholders and the Co-op Group could do quite well. More immediately, holders of 48% of this class of securities are locked into voting in favour of the deal.

Both groups have been party to the detailed negotiations to agree the Scheme and seem to welcome it. If the Scheme fails and the Bank goes into “Resolution” (i.e. special regime for banks with financial difficulties) all parties will be worse off than they would be under the Scheme. The creditors and preference shareholders will either be wiped out or suffer significant loss.

For the Co-op Group, the “cross default” that Len Wardle was reported as mentioning at the Co-op Group Half Yearly meeting might also arise. So there can be no doubt that agreement on this plan is also in the interests of the Co-operative Group and the whole co-operative movement.

We must hope that the Scheme is approved despite the demutualisation of the Bank that it will involve.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

All our heads are spinning. Never before has the UK Co-op been the lead story in so many news bulletins for so long. It has not been a good experience.

New investigations and inquiries seem to be proliferating. Here, I’ll have a look at the latest two (or three if PRA & FCA do one each?) and at their legal framework, with a reminder of the others.

1. The Independent Investigation

George Osborne announced today that there is to be an investigation into the problems at the Bank and the way the regulators handled them. The Treasury Statement says:

“It will cover the actions of relevant authorities (regulators and government) and the institution itself, including prudential issues, governance (including the appointment of senior staff) and acquisitions. The period that the investigation will review will start from at least 2008 and run to at least the present time.”

According to the Statement it will be conducted by an independent person. The investigation is under Part 5 of the Financial Services Act 2012. It is specifically under section 77 and is based on the fact that the Treasury considers that it is in the public interest that the FCA or the PRA should investigate events which they are not already investigating.

The events need to concern a person carrying on an authorised activity – in this case the Co-op Bank – and the Treasury will give a formal direction requiring an investigation and report back once that is agreed with the PRA, the FCA and the independent person. The process for conducting the investigation is determined in that formal Direction and the Report is presented to the Treasury and then published – ss 78 & 81. The report will set out the results of the investigation and the lessons for regulators with recommendations to them for changes – s 79.

The formal process of starting it will be delayed until the enforcement investigations being considered by the PRA and the FCA have reached a stage at which they will not be prejudiced by this one and at which issues arising from them can be included for investigation by the independent person – see the text of the Treasury Statement.

That will be some months or years hence.

2. PRA and FCA Enforcement Investigations

The FCA and the PRA have both welcomed the Independent Investigation and confirmed that they will fully support it. In addition they have each said that they are:

“undertaking work to establish whether [they] should commence a formal enforcement investigation and expect[s] to reach a conclusion shortly.”

Investigations by them will be under the powers they have under the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012. To see the breadth of those powers see Part XI of FSMA 2000 . If any question of market abuse arises see Part VIII for procedures and penalties and for penalties for disciplinary matters see Part XIV, Part XXVI on formal notices and Part IX on appeals.

The areas that might well be subject to investigation could include:

  • Possible breaches of Listing Rules which include rules about non-disclosure of information. LR 17.3.9,  for example, applies to organisations like the Co-op Bank and Co-op Group with debt securities listed under the rules. That applies to them legal rules aimed at “prompt and fair disclosure of relevant information to the market” – see DTR 2. Both the Co-op Group and the Bank had such securities listed.

  • Whether a false market was created in any of those securities so as to amount to Market Abuse under Part VIII of FSMA 2000 as elaborated by the regulators. That idea includes behaviour likely to mislead market participants about the value of securities – see s118(8) of FSMA 2000 as explained and elaborated in MAR 1.9.

  • The way the Bank was run. As an authorised person under FSMA 2000 a wide range of regulatory provisions apply to it. They include the Eleven (legally binding) “Principles for Businesses” which include Number 2: “A firm must conduct its business with due care skill and diligence”; Number 5 “A firm must observe proper standards of market conduct”; and Number 11 “A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.” The Prudential Rules about capital and liquidity levels, and the like, have triggered the current recapitalisation plan but earlier breaches of them could be investigated as could issues about senior management and control standards and the fit and proper person regime.

All these rules can be found in the Financial Services Handbook which includes legally binding rules, guidance and explanation from the FCA and the PRA. I’m not suggesting they will all be investigated but this gives a flavour of the main areas likely to be considered by PRA and FCA. On the enforcement side see DEPP especially the penalties available.

Some of those who have appeared before the Treasury Select Committee recently, and some others who have not, may be in the frame for these enforcement investigations and, if the investigation reveals wrongdoing, sanctions under this legislation. One thinks of senior people in the Bank. I imagine many will be dusting off their legal insurance policies and checking out whether they are covered for high costs over a long time if they use lawyers with expertise in these areas.

After all that has settled, the Independent Investigation will get under way.

These two formal legal investigations add to :

3. Kelly Review

The Kelly Review set up by the Co-op in July and now open for business.

4. Group Governance Review

The internal Group Governance review announced by Moira Lees at the Half Yearly Meeting of Co-op Group this month and to report to the AGM in May 2014.

5. The Rest

I leave aside as irrelevant, if colourful, Mr Flowers’ ongoing legal difficulties and miscellaneous associated examinations of emails, expenses claims, and fees paid since his resignation.

Bad News and Opportunities

None of this is good news for the Bank or the Group and it has been used with glee by the right – see Melanie Phillips in this week’s Spectator. Last week’s Mail on Sunday broke the drugs story in a piece of good, if embarrassing, journalism which fitted nicely with the axes they like to grind.

However, these problems may present a great opportunity to start with a clean sheet and revive the Group as an important part of the Co-operative Movement on a new basis.

I was encouraged on that front by reports of Euan Sutherland’s address to the half yearly meeting and the appointment of the excellent Ms Lidbetter as Chair.

Particularly:

“This does not mean we have to weaken our co-operative democracy. But it does mean we must take a cold hard look at the way we are operating and ask ourselves if we really are serving the needs of our seven million members and giving them a true voice in our movement.”

A cold hard look without rose tinted glasses is clearly needed. It could be a form of glasnost and re-engagement which is actually very exciting. But, for the Group, all of this depends on the Bank recapitalisation plan being agreed over the next month or so. We must hope for the Group’s sake that it is.

These problems also illustrate the benefits of having strong, if smaller, independent co-ops like SumaMidlandsLincolnshire and Midcounties. Initiatives like the Phone Co-op and Co-op Energy also show the way forward in penetrating new areas and serving members directly on a smaller scale.

Surely the lessons that strength lies in diversity within the Co-operative Movement and that economies of scale and grandiose plans can have downsides have now been well and truly learnt?

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

Mervyn Wilson writes:

“Next Thursday Tony Webster will be delivering our monthly evening lecture BUILDING CO-OPERATION – FROM CWS TO CO-OPERATIVE GROUP: 150 YEARS OF A CO-OPERATIVE GIANT

The lecture will start at 6.30 and this date has been chosen as it is the date of the second meeting of the CWS.

In addition to the lecture Tony will also be signing copies of his latest book and there will be an opportunity for you to view our recently opened exhibition ‘From Jumbo Farm to Jam Factory’ which focuses on the formation of the CWS in Middleton. The exhibition itself has used the museum space in  new and exciting way and we want to showcase this. There will also be a ‘Jumbo Tea Party’  – tea and cake for everyone!

It would be great if any colleagues were able to attend.

I would also be grateful if you could forward this information to your wider networks.

Full details can be found here:

http://www.rochdalepioneersmuseum.coop/event/evening-lecture-building-co-operation-from-cws-to-co-operative-group-150-years-of-a-co-operative-giant “

by isn | Leave a comment

Rumour has it that formal announcements to the markets and bondholders about the future of the bank will be made on Monday 4th November.

In the meantime Ethical Consumer has launched a campaign on the basis of “staying ethical: returning to mutual” http://saveourbank.coop/ . This seems both practical and principled. It saves the potential account moving campaign until we have more information and maintains the aspiration to return the Bank to mutual status.

On the question of the use of the name “Co-operative” addressed here last week, Ed Mayo’s comment to my blog post reserves Co-operatives UK’s position until full details of the new arrangements are known, including the amendments to the Bank’s articles of association and a separate board concerned with ethical issues. Ed says there:

“Given you mention us, I thought I would explain our role. Co-operatives UK is the guardian of co-operative identity in the UK, in line with the International Co-operative Alliance (ICA) Statement of Co-operative Identity, .and recognised as the national apex body by the ICA.

“We have made a commitment to examine the co-operative identity of the Co-operative Bank, once the formal proposals are made, which are due shortly. This is a significant matter and it [is] because of its importance, that we have said that we will not add to speculation by commenting on the media comments in advance, but assess this in a formal way when we have the formal details of structure and constitution. We do the same for any business that wants to call itself a co-operative. We are on record, though, with our approach to the matter, which is set out in our policy, the substance of which was subject to consultation with our members. This can be found on http://www.uk.coop/identity

In the Co-op News, Ed is quoted as saying:

“’Whether this is the case must depend on a reading of the full prospectus and formal constitution of the new Bank – and whether these are accepted by all the relevant parties. We have already indicated that if we believe that it is not a co-operative, then we would argue vigorously for a review of the name.’

He added: ‘There are some indications that co-operative values may be locked into the core purpose of the Bank. If so, then the Co-operative Group deserves credit for a creative model that will be new to the UK. This is what in other countries is called a Public Benefit Corporation – profit-seeking, but with a wider public purpose enshrined in its goals.'”

It will be interesting to see what emerges next week. Could there be a transition period away from the name?

Under the Listing Rules, Prospectus Regulation, Financial Services and Markets Act 2000 and similar laws, what is said next week locks people in. So it is important that the name issue is dealt with in the announcements. What is said there will also no doubt be crafted to avoid continuing uncertainty on the name issue which would affect future share price movements. The best (maybe only?) way to do that is to commit to phasing out the use of “co-operative” and similar words after a transition period. That will give time to come up with a new name to reflect the ethical intent and the actual structure and safeguards in place in the new arrangements so as to avoid haemorrhaging customers as a result of the change but also avoiding misusing the “co-operative” name.

The International Co-operative Movement and UK co-operators will be fully entitled to feel betrayed by a failure to address the issue or by the continued use of the name under 70% investor ownership other than as a limited transitional measure.

I’ll try to do an analysis of the full documentation here within a few days of its release.

by isn | Leave a comment

Now that I’m back from Brussels it’s time to have a closer look at the use of the word “Co-operative” in the name of a bank 70% owned by Stock Market investors and 30% by the Co-operative Group.

I argue here that the shocking idea that the word “Co-operative” could be used in this way is legally questionable as well as being unethical.

It is the job of the Co-op Group directors, Co-operatives UK and the authorities charged with consumer protection to stop this NOW.

Naming Co-operatives: hard and soft Law

As many readers of this blog are aware co-operatives, as a form of business structure different from investor owned companies, are defined by the International Co-operative Alliance Statement on Co-operative Identity Values and Principles.

Here’s the ICA definition:

“A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.”

The core of that definition is that a co-operative is a “jointly owned and democratically controlled enterprise”. The ethics and values dealt with in the full ICA Statement are important but the definition focuses on ownership.

That has been reinforced by a series of International legal and policy documents.

ILO Recommendation 193, “applies to all types and forms of co-operative” and adopts the ICA definition. It tells member governments that:

“Measures should be adopted to promote the potential of cooperatives in all countries, irrespective of their level of development”

and that

“Governments should provide a supportive policy and legal framework consistent with the nature and function of cooperatives and guided by the cooperative values and principles”.

In 2002, the EU Commission communicated its position on the approach of EU member states to co-operatives. It advocated:

“The promotion of the greater use of cooperatives across Europe by improving the visibility, characteristics and understanding of the sector”

The Commission also related the ICA Statement to legal matters:

“Although laws governing cooperatives are diverse in approach and based on different traditions, they generally respect the co-operative definition, values and principles set out in the “Statement on the Co-operative Identity” adopted by the International Co-operative Alliance (ICA) in 1995 and recently endorsed by a resolution of the U.N. and fully incorporated into a Recommendation of the I.L.O. Consequently national legislators should be based [sic] on the co-operative definition, values and principles when drafting new laws governing co-operatives.”

Much of the above, is what is known as “soft law”.  An NGO Statement, a Recommendation by the ILO to Governments and an EU Commission Communication may not seem very important to hard nosed City lawyers trying to solve a tricky problem.

However, EU regulations are hard law. In the preamble to Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE) the EU legislator addressed the definition of a co-operative thus:

“Cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include the principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis”

The European Court of Justice also deals in hard law and it has stated:

“55 Cooperative societies……..conform to particular operating principles which clearly distinguish them from other economic operators. Both the European Union legislature, in adopting Regulation No 1435/2003, and the Commission, in its Communication on the promotion of cooperative societies in Europe, have highlighted those particular characteristics.

56 As stated in particular at recital 8 in the preamble to Regulation No 1435/2003, those characteristics essentially find expression in the principle of the primacy of the individual, which is reflected in the specific rules on membership, resignation and expulsion. Moreover, recital 10 in the preamble to that regulation states that net assets and reserves should be distributed on winding-up to another cooperative entity pursuing similar general interest purposes.

57 Cooperative societies are not managed in the interests of outside investors. According to recitals 8 and 10 in the preamble to Regulation No 1435/2003 and section 1.1 of the Communication on the promotion of cooperative societies in Europe, control of cooperatives should be vested equally in members, as reflected in the ‘one man, one vote’ rule. Reserves and assets are therefore commonly held, non-distributable and must be dedicated to the common interests of members.”

Joined Cases C-78/08 to C-80/08 Ministero dell’Economia e delle Finanze v Paint Graphos Sarl For more see my comments after the case.

So, the ownership structure is key and a listed PLC “managed in the interests of outside investors”  with a 30% stake for the Co-operative Group will not be a co-operative, however “ethical” its behaviour may be.

Protecting the Name: Law in the UK

The next question is how this applies in the UK. Here the main legal structure used by co-ops has always been the industrial and provident  society (IPS) registered under the Industrial and Provident Societies Act 1965. The Co-operative Group is registered as an IPS. However, the bank could not use an IPS structure with withdrawable share capital. An IPS with withdrawable share capital is prohibited from operating as a bank – s 7 IPSA 1965.

However, it is helpful to look at the criteria used to define a co-operative under that legislation as that casts light on the meaning of the word “co-operative” in a business name.  Sections 1(1) & (2) of the IPSA 1965 requires a registered society to be either a bona fide co-op or a benefit of the community society society. IPSA 1965 does not fully define a co-operative but section 1(3) reads:

“In this section, the expression “co-operative society” does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person.”

The “bona fide co-operative” definition is fleshed out by the registering authority – currently the Financial Conduct Authority (FCA) as successor to the old Registrar of Friendly Societies.

The current version of the FCA Note with the registration form includes this statement:

“Control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society.  In general, the principle of ‘one member, one vote’ should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office”

That indicates the importance of ownership and control and is very important as background to this issue for the Co-operative Bank PLC.

However, the bank is not a society. The liberal business structure law of the UK allows a co-op to use company, partnership or LLP structures. That gives welcome flexibility but means that the protection of the co-operative name and brand is an issue in the name used by any of those entities. That is dealt with in the Companies Act 2006 – see my blog post on this for a fuller discussion of the legal position on name protection.

On the issue of the name of the Bank the first port of call in the CA 2006 is section 55 on sensitive names. That requires permission from BIS (in practice Companies House) for their use. Under The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2009 SI 2009/2615 the word “co-operative” is protected from unapproved use in a company name, an LLP name, or by anyone carrying on business using any unregistered structure.

However, section 55 only applies at the point of company registration and not afterwards so it does not force the Bank to get permission for the continued use of the name “Co-operative” after the new ownership structure is in place. This has been pointed out by many on twitter (@coopnewsant & @theboyler) and it’s true. They mentioned the use of the word by Co-operative Travel after the joint venture with HSBC owned Thomas Cook. So section 55 is not the way to deal with this issue.

But section 55 is not the only relevant provision. Lets look at section 76 of CA 2006. It applies at any time after registration and states:

“ Misleading indication of activities

(1) If in the opinion of the Secretary of State the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public, the Secretary of State may direct the company to change its name.”

Now you may say “so what?”. It’s activity is a bank. It does banking. What is misleading about the name so far as activity is concerned?

In the case of the Association of Certified Public Accountants of Britain v Secretary of State for Trade and Industry [1998] 1WLR 164 the court upheld an order against the Association under the previous version of section 76. That was because the court found that the name suggested that members were certified on the basis of more than the three years’ experience and professional indemnity insurance that were all they needed.

Mr Justice Jacob said at p 173:

“Given all these facts, does the name of the association, “The Association of Certified Public Accountants of Great Britain,” give a misleading indication of the nature of its activities? I have….. come to the conclusion that it does. I think the word “certified” indicates, or is likely to indicate, to a substantial number of persons, that there is something objectively significant about the member’s qualification, training and experience…………

Next I must consider whether the name is likely to cause harm to the public. I think it is. People go to accountants expecting not only probity but a level of expertise. I think if you went to someone calling himself a “certified public accountant” you would expect more by way of formal professional qualification than just professional indemnity insurance and some experience……”

How does that apply to the Co-operative Bank?

Many of the Bank’s customers have accounts and do business with the bank because they believe it is a co-operative. It may attract new ones for the same reason. Customers may accept  worse terms or pay more for services because of that. For the reasons given above, even if the bank carries on its current ethical policies it will not be a co-operative. Customers are misled by the name and suffer loss because of that.

On that basis the Bank should be ordered by Vince Cable to change its name. If the bank objects to such an order in court, BIS should win using the Certified Accountants’ case as a precedent.

Whose Job is it?

Having set out the argument about the law, I now turn to the responsibilities of the people and organisations involved.

Directors of the Co-operative Group

The Co-operative Group Board will have to approve the new arrangements (or will already have done so). As the guardians of the co-operative nature of the society they have a duty to prevent the misuse of the name.

Here is why. The Co-operative Group’s Rules provide:

“1.2 The Society is registered under the law as a bona fide co-operative with the registration Authority”

“Why the Society exists

1.3 The Society exists in order to serve its Members by carrying on business as a co-operative in accordance with Co-operative Values and principles. This is the Society’s Purpose……..”

“2.10 The Board has the following roles and responsibilities (which it cannot delegate):

2.10.1 deciding the vision and strategy of the Society and its businesses in consultation with the Subsidiary Boards and having regard to the nature and extent of its interest in all of its businesses;

2.10.2 ensuring, whether directly or through other people, that the Society’s businesses and affairs are conducted and managed in accordance with its Purpose and Objects, and in accordance with the best interests of the Society and its Individual members and Independent Society Members” (my underlining)

The legal duties of the directors of society are governed by the equitable and common law principles developed in case law. They were consolidated for company directors in Companies Act 2006. Those duties, as expressed there, include exercising independent judgment to :

“(a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred.”

– sections 171 and 173 Companies Act 2006.

 This shows that the Co-operative Group’s rules:

  • write in the Co-operative Values and the definition (rule 1) and

  • impose a duty on the directors to pursue that purpose (rule 2).

The directors must act in accordance with the constitution and exercise all their powers for the purpose for which they were conferred – s 171.

Does agreeing to the use of the name “Co-operative” by a PLC in which the Group has only a 30% stake comply with that? I think not.

Co-operatives UK’s remit

Anyone used to visiting the Holyoake House, Head Office of Co-operatives UK will be familiar with the magnificent display of objects on the outside wall.

This is the modern version.

“The purpose of the Society is to be a successful co-operative enterprise providing support for the creation and maintenance of businesses and enterprises which:

ƒreflect the aspirations of the founder of the Society to the creation of a Co-operative Commonwealth; and

are founded upon principles of social justice and democratic control, such as the International Alliance (“ICA”) Statement on the Co-operative Identity, the Co-operative principles published from time to time by the ICA or the principles of common ownership contained in the Industrial Common Ownership Act 1976″

– Rule 2 of Co-operative UK’s current Rules

I am sure that everyone at Co-operatives UK will be working hard to avoid the misuse of the name “Co-operative” by an investor controlled bank and we must all wish them success.

Consumer Protection Authorities

The Financial Conduct Authority – We have noted the role of the FCA as registrar of societies. However, they also have a consumer protection role for bank customers and the misleading name of a bank raises just those issues.

The Prudential Regulation Authority is the main bank regulator and have to approve the plan for the ex-Co-operative Bank and the change of control involved. They have no doubt been closely involved in discussions. It would seem strange for them to approve an arrangement which includes a misleading name for the new bank.

Companies House as an independent agency of the Department of Business Innovation and Skills can and should order the name change under section 76 of the Companies Act 2006.

It is for the FCA, the PRA and BIS to work together to prevent the use of the name co-operative to mislead the consumers and the public if the Co-operative Movement fails to do so.

Ethics and the City Ethos

The irony of this story is that the new owners of the Bank want to use the name to ensure that they maximise their profit from the ownership of the bank by keeping its ethical image. They fear that the loss of its “ethical” reputation will damage the value of their investment. I am sure their advisors have had much work to do and have been under pressure. City law firms  are used to finding “wrinkles” to get the client what they want. If they rely on some technical rule plus the inaction of Government agencies to use the name “Co-operative”, they serve their clients badly and undermine any claim to be ethical as opposed to just legal.

If the new owners try to keep a name to which they are not morally entitled by relying on the technicality that section 55 of the Companies Act 2006 does not apply, they will already have forfeited the claim to be ethical. They will be relying only on the inability of the Co-operative Group directors, FCA, the PRA and BIS to insist on a name that is not misleading. That is not ethical.

The new owners are welcome to choose a new name that expresses their ethical intentions and brand. There is no problem about making the bank sound “cuddly”. They can have an “ethical” board to try to keep the brand’s image. They can amend the Articles of Association.

They must not say that it’s a co-operative when it isn’t. That is disreputable.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | 4 Comments

It certainly was a sad day when I learned that the Co-operative Bank is to become a majority investor owned company in the hands of vulture funds when the full deal is announced on Monday 28th October.  Although that was not Plan A, it is perhaps not surprising given the hard ball played by the vulture funds.

I have been working on PECOL here in Brussels since Sunday and just learned the bank news last night. Many lessons need to be taken from this. I’ll save my detailed blogging for  next week when the technical details are out on Monday. For now, the FT and the Co-op Group announcement that it will keep only a 30% stake are both interesting .

The reason that the 30% equity stake is said to give the Co-operative Group “control” is  that it is the biggest single stake. 30% is also a “magic figure” under the Takeover Code and is defined as de facto control – “30% of the voting rights of a company is treated by the Code as the level at which effective control is obtained” says the Takeover Panel web site.  However, the vulture funds/former bondholders will have a bigger stake between them.

In addition, it is being said that, to protect the investment of all the shareholders and extract long term value from the bank, the articles of the Bank PLC will somehow require “ethical” behaviour and have a body to try to ensure that happens. We’ll have to see, but that all looks rather fragile in a PLC with all its shares listed. It won’t stop passionate co-operators from moving their accounts to genuine mutuals and it remains to be seen how it plays with the wider customer base.

One interesting immediate legal question is whether a PLC in which the co-operative movement has only a 30% stake can use the word “Co-operative” in its name  for trading purposes. That word is restricted in its use by company legislation to, as I understand it,  those who are felt by Companies House to satisfy the FCA bona fide co-operative test.  Since that focuses on member (not investor) control it is hard to see any justification for allowing the use of the word by a PLC 70% owned by investors and only 30% by the Co-operative Movement. That would drive a coach and horses through the protection of the co-operative name. But,anomalously, the word “co-op” is not protected in that way. So will we see a subtle name change……….??

I’ll do more detailed analysis when more information is available.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

Thanks to Software.coop, which I refer to as my IT department (sorry folks ; ) ), for an analysis of recent changes to the Code and comparisons with Linux. Keep up the good work on all fronts.

by isn | Leave a comment

I’ve not been keeping my eye on this ball very closely and now need to do some updating. The Co-op Group plans to redeem £200 million of its Eurobonds next month as, it seems, part of the run up to the new plan for the Bank.

The Group has also announced a new committee to look at solutions which has been seen by the markets as a way of developing a Plan B to appease the Vulture Funds that Paul Gosling discussed in his Co-op News article and the Guardian picked up. This FT story on 20.09.13 alerted me to some of it.

This website has covered the Eurobond redemption and suggests it is to do with potential “cross default”. As it says “This means that if the group puts the bank into run-off, it would cause default of the bonds from the group itself.” Hence those bonds are to be redeemed.

So Plan B is being worked out as we speak……..

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

 

by isn | Leave a comment

Next month, the Co-op Bank and Co-op Group will announce details of the rescue plan announced back in June 2013 . Essentially the idea is to increase the Bank’s capital by extra Co-op Group investment in bank shares and a “haircut” for various bond holders  who would get varying amounts of shares worth less than their bonds. Maybe the Bank would give up 25% of its ownership stake?

However,  US “vulture funds”  have bought up significant numbers of bonds and are now trying to start negotiations with the Co-op Group to increase the value they will get from any deal to raise capital.

They have done that by suggesting a “Plan B” under which the whole ownership of the Co-op Bank would be held by stock market investors. They have said, however, that what they want is negotiations. Presumably the aim is to increase the return holders of the bonds will get. Their aim will be to threaten that they can gather enough support to block the Co-op’s own plan so as to increase the value those bondholders get.

This Financial Times Blog Post indicates how high up the agenda demutualisation is. You may wish to register with the FT to be able to read it for free.

We must hope the Co-op Group and Co-op Bank Board and Executives are well advised and skilled at poker. Only if they are, is the Movement likely to keep any meaningful degree of control of the Bank on an ongoing basis after any deal is done.

Seventy five percent (75%) of the ordinary shares allows the Co-op group to amend the articles of the Co-op Bank. If investors have more than 25% they can block that. The lower the Group’s stake under 75% the more they depend on the agreement of other shareholders to get anything through. Any one minority investor with a substantial minority stake will be able to cause problems. Five percent allows you to influence meeting agendas and 10% allows you to call a Bank general meeting. The minority will have to be kept sweet. Stock market rules require shareholder votes for many decisions and a high level of public disclosure. A brave new world for the Co-op……

The bank is also more likely to be seen as “in play” for a takeover in those circumstances and, from the point of view of bank executives, once any shares are listed, issuing more to raise capital will always be tempting.

How steep is the slippery slope here?

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment

I have just sent HM Treasury this extra response to detailed questions they raised about applying the administration procedure to IPS’s.

The main issues concerned credit unions and other societies (if any) operating as deposit takers. I argue that only shareholder depositors in those societies should have the status of creditors in an administration. Other society members should not be treated as creditors but as owner-members as would be the case in a company.

© Ian Snaith 2013 This work is licensed under the Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.

by isn | Leave a comment