1.2 Community shares

There are two main bodies of corporate law in the UK; company law and society law. Both give the corporate form its own legal identity and limit the liability of shareholders to the amount they invest in the enterprise, reflected in the requirements to use the term “limited” in the registered name of the enterprise. But apart from these two big similarities, a society is very different from a company, especially when it comes to share capital and the rights of membership.

Society law has its origins in the mid-nineteenth century and was aimed at the emergent co-operative movement. It was known as the Industrial and Provident Societies Acts until 2014 when the Co-operative and Community Benefit Societies Act (2014) consolidated and modernised previous legislation under a single Act, focusing on the two principal forms, co-operatives and community benefit societies.

Societies can issue a form of shares known as withdrawable share capital, which is unique to society law. Withdrawable share capital can be withdrawn from the society, subject to the society’s rules and any conditions set out in a share offer document. Most societies have rules that give the board discretionary powers to refuse or suspend withdrawals if it is financially prudent to do so. This means withdrawable share capital is fully at risk. Members could lose some, or all, of the money they invest. But they also have the scope to withdraw some, or all, of their capital when they need it, subject to consent. Unlike with transferable shares, members don’t have to find a willing buyer, or negotiate a price for their shares.

Withdrawable share capital places a responsibility on a society to manage its capital prudently. It needs to establish reserves to provide for withdrawals, or to attract new share capital from new or existing members to replace capital that is being withdrawn. Most new societies suspend withdrawals for an initial period, typically three or more years, so that they can build up reserves to finance withdrawals.

Voting rights in a society are normally attached to membership rather than share capital, with most societies adopting the co-operative principle of one-member-one-vote. Investment in share capital can be encouraged by offering a financial return on shares expressed as an interest rate, but the interest rate offered must be the minimum necessary to attract and retain the capital. Profits cannot be distributed in the form of a dividend on share capital. 

Most societies choose to have an asset lock, similar to those found in charities and Community Interest Companies, which prevents any residual assets being distributed to members or subscribers in the event of the enterprise being wound-up. This means that members cannot benefit from the sale of the society or its assets.

Society law restricts a member’s withdrawable shareholding in a society to £100,000, although this limit does not apply to societies investing in other societies, or to transferable share capital issued by a society. The purpose of this limit is to prevent a society being financially dependent upon members who can afford to invest larger amounts. It is good practice for smaller societies to limit shareholdings even further, to no more than 10% of the total share capital in the society.

Society law is suited to distributed ownership by hundreds, or even thousands, of members. Each member contributes a relatively modest amount of share capital and there is an established mechanism for withdrawing this share capital without the need for a stock market or the sale of the enterprise. Members have a democratic say, but their financial interests are restricted to a modest interest rate on capital and without the scope for capital gain.

The purpose of a society is wholly different to that of a company. Company law grants full rights over the enterprise to shareholders, underlining its central purpose, which is to make profits and generate wealth for the owners. Societies are different. Community benefit societies are obliged by law to conduct business for the benefit of the community, and all profits must be used for this purpose. Co-operative societies are allowed to distribute some of their profits to members, but they must not conduct their 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.”

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