1.1 Share capital
All enterprises need capital to start, to grow, and to be sustainable. This is as true for community business, as it is for any other type of business. In an era when government funding for communities is diminishing, it has fallen on communities themselves to find ways of financing community business. Community fundraising has traditionally relied on grants, gifts and donations, but there is a limit to how much people can afford to give. Even quite small community businesses, such as a local shop or pub, may need hundreds of thousands pounds of start-up capital. Banks and social investment institutions are reluctant to bear all the risk, and want hard proof of community support before investing.
Community shares are a type of share capital, unique to co-operative and community benefit societies, that are ideally suited to the needs of community businesses. Community shares in societies are wholly different to share capital in companies, represented by two entirely separate and distinct bodies of corporate legislation; society law and company law.
To understand the significance of these differences it helps to understand how share capital works in private companies. Under company law shares determine how the enterprise is owned and controlled, based on the principle of one-share-one-vote. So, a majority shareholder also has a majority of the votes and can therefore exercise control over the enterprise. Share capital is fully-at-risk, meaning that shareholders are the last in the line of creditors should an enterprise get into financial difficulties. It is “permanent capital” because the company is under no obligation to refund share capital. This provides reassurance to other creditors, such as lenders, suppliers, customers and employees, who know that what is owed to them must be paid in full before the shareholders are paid anything. As long as the share capital in an enterprise exceeds its accumulated losses then other creditors have their liabilities covered by the share capital in the business. It is the shareholder who will suffer the losses in these circumstances.
In return for this risk, company shareholders have the rights of ownership. Company shares are normally transferable, meaning the shareholder can transfer, or sell, their shares to another person. The value of shares is whatever another person is willing to pay for them, regardless of the price paid to the company for those shares. This valuation might be based on the net asset value of the business, its current or future profitability, or the worth to the buyer of owning and controlling that company.
Companies can distribute some or all of the profits to shareholders through the payment of dividends, although a majority shareholder might prefer to reinvest profits back in the business to boost profitability, increase its net asset value, and the perceived value of their shares.
Company law favours majority shareholders, and generally does not encourage minority shareholders and distributed ownership unless it is a large public company with shares sold through a stock exchange. A majority shareholder can decide to sell their shares, and with it their controlling interest in the business, to whoever they choose. Known as trade sale, this is the most common way for shareholders in small companies to realise the value of their investment. Larger companies rely on acquisitions and mergers with smaller companies to achieve rapid growth, often financed by private equity funds, who might have bought a controlling stake in the parent business.
Public limited companies are heavily regulated, especially when making a public share offer, in order to protect the public from being misled, and to provide investors with sufficient independently verified information on which to base their investment decisions. The cost of meeting these regulatory requirements are significant and only affordable to large enterprises, way beyond the scale of most community businesses.
In short, company law is designed for businesses in pursuit of profit and capital growth. These goals are incompatible with the aims of a community business with primarily public, social or community objectives. But community businesses still need risk capital to get established and to succeed. This is where community shares and society law have an important part to play.
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]