1.7.3 Equity

In comparison to loans, institutional investment in the form of equity, is usually a better option for societies, especially if institutional investors accept the same terms and conditions on their share capital as individual members. Sections 3.2.7 and 4.5.6 recommend that the maximum amount of share capital held by individual members should be voluntarily limited to no more than 10% of the total share capital required, if this amount is less than £1m, to avoid the society becoming overly dependent on the capital provided by a small number of members.

The same voluntary limits need not apply to institutional investors that are not vulnerable to changes in personal circumstances that may mean an individual member wants to withdraw all their share capital. Even so, a society should be cautious about allowing a single institutional investor holding more than 50% of the total share capital.

The legal maximum limit for individual holdings of withdrawable share capital in a society is £100,000. This limit does not apply to societies investing in the share capital of other societies. So, if an institutional investor wanted to invest more than £100,000 in the share capital of another society, it would need to be structured as a society, with the requisite powers to invest in other societies. 

Where it proposed to allow an institution to invest more share capital than the voluntary maximum limit, the society should adopt the following procedure. If the institutional investor is seeking preferential terms of withdrawal or share interest, these terms must be clearly stated in the offer document. If this offer is being made by an established society, with existing member shareholders, then the society should seek their members’ approval before agreeing to these preferential terms.

If the institutional investor is prepared to accept equal terms to other members, then it is sufficient for the society to simply state this in its offer document, noting what proportion or amount the institutional investor may invest. As a matter of good practice, societies should give preference to ordinary members over institutional members if the offer is over-subscribed. This needs to be agreed in advance with the institutional investor.

Unlike in companies, where an institutional investor with a significant shareholding might expect a seat on the board, it would be unreasonable for an institutional investor in a society to expect the same. However, there is no reason why an institutional shareholder should not seek representation on the board if that is within the scope of the society’s rules. The rules of a society must state how directors are appointed and removed. Most societies elect directors from their membership. Some model rules provide for different membership categories with a set number of directors on the board for each category. Other model rules allow the board to co-opt directors. So, if a society decided it was in its best interests, it could invite a representative of an institutional investor to be co-opted onto the board.

Institutional investors agreeing to equal terms of withdrawal should limit their requests to an amount no more than the maximum any other member may request or may be granted. So, if a society has a voluntary maximum shareholding limit this would also be the maximum amount that an institutional investor could apply to withdraw. If the amount of share capital available for withdrawal is restricted, then institutional investor should only be allowed to withdraw capital on the same restricted terms as other members.   

For example, if a society is seeking to raise a maximum of £250,000 in community shares, it should adopt a voluntary maximum shareholding limit of £25,000 for individual members. An institutional investor may be allowed to invest up to the legal maximum of £100,000 or more if it is also a society with the powers to make this sort of investment. However, unless the institutional shareholder has agreed preferential terms with the society, it should agree to limit withdrawals to £25,000 in any one period, if it has invested more than this. If the society has received requests for withdrawals exceeding the amount it has available for withdrawal in that period, then it should devise a fair way of rationing withdrawals that should be applied equally to all withdrawal requests.

Where a society is using an open offer to generate liquidity to fund share withdrawals, any preferential terms held by institutional investor members should be made clear to applicants in the offer document. 

If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at [email protected]