The Government has introduced the Treasury Laws Amendment (Mutual Reforms) Bill 2019 into the Senate.
UPDATE: The Bill has been passed and Royal Assent was given on 5 April 2019. The Act commenced on 6 April.
The objects of the Bill are to:
- introduce a definition of a mutual entity into the Corporations Act;
- clarify the demutualisation provisions in Part 5 of Schedule 4 of the Corporations Act for building societies, credit unions, friendly societies and other State and Territory regulated financial institutions that transferred to Commonwealth regulation in 1999; and
- expressly permit mutual entities registered under the Corporations Act to issue equity capital (“Mutual Capital Instruments”) without risking their mutual structure or status.
What is a “mutual entity”?
The Bill amends the Corporations Act to insert a new definition which provides that a mutual entity is a company registered under the Corporations Act that provides its members with no more than one vote for each capacity in which the person is a member.
To avoid doubt, the amendments make clear that a company registered under the Corporations Act is a mutual entity if its constitution provides for someone to have a separate vote in their capacity as a joint member (and those persons each have one vote at a general meeting of the company), holder of a proxy or as a representative of another person or entity.
The definition also only applies in relation to mutuals registered under the Corporations Act and does not have any effect on other entities that may have similar governance arrangements.
The definition of a mutual entity also makes it simpler to determine when an entity demutualises.
The demutualisation disclosure provisions in Part 5 of Schedule 4 of the Corporations Act will be triggered only if the effect of a change to a mutual entity’s constitution is that it no longer meets the definition of a mutual entity.
The existing ASIC exemption power will be simplified so that it only applies to allow ASIC to exempt an entity from the operation of Part 5 of Schedule 4 where ASIC is satisfied that the entity is not a mutual entity.
Mutual Capital Instruments
The new definition also determines which mutual entities are able to raise capital through the issuance of Mutual Capital Instruments (MCI’s).
MCIs can be issued by eligible mutual entities that are companies limited by shares, companies limited by guarantee and companies limited by shares and guarantee.
There are two sets of requirements for issuing an MCI that attach to the share itself. The first set involves a restriction on the mutual entity’s ability to vary or cancel class rights and the second set involves further rights and conditions on the share that must be stipulated in the entity’s constitution.
MCIs are subject to the Corporations Act regulatory regimes that would ordinarily apply to the issuance of a share issuing including fundraising and disclosure requirements.
The mutual entity’s constitution must provide, in relation to the MCI, that the share may only be issued as a fully paid share and dividends in respect of the share are non-cumulative.
The constitution must also set out the rights attached to the share with respect to participation in surplus assets and profits (which includes any rights of an MCI holder to repayment of the face value ahead of other claims to surplus assets in a winding up).
For a three year period, eligible mutual entities that propose to issue MCIs can amend their constitutions by following a standardised process to enable mutual entities to take advantage of these reforms.
Contact David Jacobson if you require advice on any aspect of the Bill or creating MCI’s.