Collaboration between businesses can have many advantages. And of course one of the co-operative principles is co-operation between co-ops.
The benefits of collaboration
The pooling of resources, expertise and ideas that results from businesses collaborating can:
- Help businesses gain entry into markets previously closed to them
- Allow expansion through the costs savings resulting from economies of scale
- Give co‑ops the ability to offer enhancements to the products and services they offer as a result of combining intellectual property, systems and processes.
Given the current economic challenges faced by all businesses further collaboration may be a way forward and an opportunity that should be grasped.
This article takes a high‑level look at some of the options available and the legal questions that might arise where co-ops wish to collaborate.
Many options are available if two or more co‑operatives wish to collaborate, ranging from the very informal to the permanence of a merger. The decision to collaborate further can be taken as a result of the opportunities it brings, as noted above, or it can be the result of the business needing support in order to continue trading profitably so it can support its members. Whatever the reason the members of the Co-operative will need to support the decision.
In this article, we will look at a range of options for co‑operatives to come together, being:
- Contractual collaboration
- Joint Ventures
Contractual collaboration ranges from, informal agreements (such as memorandums of understanding) to work together for a short period of time, with loosely defined roles to detailed contractual arrangements where there is a very specific aim and complex documentation.
Examples include informal consortium arrangements, team/consortia bidding agreements for submission of tenders and sub-contracting arrangements (i.e. manufacturing or outsourcing contracts) where one party is better placed to deliver part of a project or a product.
Putting a contract in place helps cement a relationship and helps make sure parties are clear about what they’ve promised to do for each other and what the consequences are if they don’t meet their obligations. The advantage of contracts are they can be activated quickly, are sometimes standard form and are easier to understand for businesses. The disadvantages are that it can be difficult to cover all eventualities without creating very long and complicated contracts.
Joint venture arrangements
Joint ventures are a step up from purely contractual arrangements. They are more formal and usually mean committing resource and assets to a project in a more permanent way.
Such arrangements can be contractual or involve the creation of new trading vehicles to which both parties contribute funding, resource employees and expertise. The choice of such vehicle will depend on the situation. The choice can be dictated by tax planning, risk mitigation or statutory requirements. The choice of vehicle is therefore something that must be decided at the time of entry into the joint venture and might include a registered society, share company or a partnership.
Parties may choose the contractual route if they wish to have greater control over their own assets, employees and business. Alternatively, a new joint venture vehicle can have advantages, such as certainty for third party trading partners as they have one specific trading party. It can also reduce risk for the joint venture parties as it allows them to ringfence liabilities within a corporate shell that is separate to their existing business. This is often of paramount importance where the venture is new and involves uncertainty as to the outcome.
Exiting a corporate joint venture is also planned in advance along with the valuation mechanism. The parties will measure what they’ve contributed to the joint venture when the corporate vehicle receives the assets. There will also be ongoing separate accounts to measure the increase in value and an agreed way of valuing the portion of the business i.e. in a share company there will be a mechanism for stating what each parties shares are worth. The mechanisms can lead to greater certainty for the parties and often better outcomes because sensible decisions are made on the way in rather than hasty decisions on the way out when parties may have already fallen out..
Federal Retail Trading Services Limited (Company No. 09166412) (FTS) is a strong example of consumer co‑operative societies developing a collectively owned entity to seek to enhance selling margins, allow competitive pricing for consumers, and run the co‑operative brand – while maintaining co-operative distinctiveness. It aims to reduce costs through collaboration and efficiency, using a combination of contractual arrangements and a of federal structure. FRTS developed from the former Co‑operative Retail Trading Group (CRTG).
A merger is formal and permanent and so the parties need to conduct a thorough examination of the reasons and benefits of a merger before proceeding.
The most common method for the merger of two Registered Societies is by way of ‘Transfer of Engagements’. Two Co‑ops can also ‘Amalgamate’ into one new entity but this is much less common.
If the co‑operative is not a Registered Society and is structured as a Company, whether a company limited by guarantee or limited by shares the merger mechanism will involve either the transfer of assets or shares or, in the case of a guarantee company, the transfer or change of membership. The process can be more complicated than a ‘Transfer of Engagements’ because there is not the automatic statutory transfer of all assets and liabilities that a Transfer of Engagements offers. Instead, there needs to be thorough investigation as to the transferability of assets and shares.
Unlike the transfer of assets or shares in a company limited by shares or guarantee that is not a Registered Society, a Transfers of engagement does not involve a traditional payment of a purchase price. Instead, each member of the ‘transferring society’ receives a share or shares in the ‘receiving society’ and then become members of the receiving society on the same terms as any other member of that society (subject to its rules). Part of the process may involve the ‘receiving society’ changing its rules to provide for membership rights of incoming members if that was part of the deal.
Members will need to vote in favour of a merger at two formal members meetings. There are also statutory processes that need to be adhered to. Section 111 of the Co‑operative and Community Benefit Societies Act 2014 requires the resolution to be passed by a two‑thirds majority of eligible members who vote at the first members meeting, with a simple majority required for the confirmatory vote not less than 14 days or more than a month later.
All of the options examined above allow for co‑ops to do what comes naturally and work together. The transfer of engagements mechanism is a unique feature of societies and unknown in company law. It enables societies to merge formally with a minimum of formality, and in a way that preserves the underlying nature of co-operatives and co-operative capital.
In all scenarios advice should be taken to make sure the technicalities are covered. Most scenarios have a common structure.