3.2.9 Terms and conditions for share capital
Societies can issue shares that are transferable and/or withdrawable, or non-withdrawable and non-transferable (this type of share capital is cancelled on termination of membership, and the money is transferred to the general reserves of the society). The rules must state what type of share capital the society intends to issue, and the terms and conditions applying to these shares.
Very few societies choose to issue transferable shares, for the reasons explained in Section 2.2.3. Withdrawable, non-transferable share capital is the norm for societies, although there are major differences in the terms and conditions adopted by societies for this type of capital, which in turn affect the liquidity of the shares and the capital flows of the society. These terms and conditions also have a bearing on how withdrawable share capital is treated in the accounts of the society.
Most societies adopt rules that give the board the discretion to suspend the right of withdrawal. This rule is necessary for withdrawable share capital to be treated as equity, not debt, on the balance sheet of the society. Shareholders must be told if the board has the right to suspend withdrawals.
The main reason for suspending withdrawals is the time it takes for a new investment to generate sufficient surpluses to finance withdrawals. Societies need to plan for the liquidity of their share capital, and reflect these plans in the terms and conditions of their share offer. Societies planning to apply for Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR) also need to make it clear that withdrawals are at the discretion of the management committee. Beneficiaries of these tax relief schemes must maintain their shareholding for at least the first three years of trading after investment (see Sections 8.4 to 8.6).
However, the main reason why a society may suspend withdrawals is to protect the interests of creditors other than its members. This duty is underlined by Section 124 of the Co-operatives and Community Benefit Societies Act 2014, which states that former members remain liable for any debts incurred by the society before they withdrew their share capital for up to one year after withdrawal, if the society is wound up during this period. It is the duty of the management committee to ensure that such a situation does not arise, by suspending the withdrawal of share capital during any period of anticipated insolvency. This matter is dealt with in greater depth in Section 2.3.
The rules should also state what period of notice a member must give when they ask to withdraw some or all of their share capital. This is usually stated as a minimum period of notice, typically ranging from one week to one year. Some societies also adopt rules that limit the proportion of share capital that can be withdrawn in a year, or that limit withdrawals in some other way, such as linking them to retained profit, or the issue of new share capital.
Another condition sometimes applied to withdrawable share capital is the right of the board to reduce the value of shares. This right is usually linked to an assessment that the net asset value of the enterprise can no longer support the full value of the share capital, justifying a temporary or permanent reduction in share value. Some societies have a rule which allows them to deduct an administrative charge for withdrawals.
The terms and conditions applied to withdrawable share capital have a big impact on the liquidity of share capital and therefore its attractiveness to potential investors. It is very important to ensure that the rules address all the terms and conditions a society may want to place on its share offers.
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