Challenging the role of the Corporation: A comparative analysis of the

development of Cooperative law in Australia and Italy

Presented by Troy SarinaMacquarie University

Troy.Sarina@mq.edu.au A joint project by Antonio Fici and Troy Sarina

Australian-Italian Cooperative SymposiumUniversity of Sydney25th-26th July 2013

Why are cooperatives important in Australia? What has been the role of regulation in

promoting Cooperatives in Italy and Australia?

What are the major differences in regulatory responses?

Where to here from here?

Todays presentation

Australia A legitimate alternative organisational form

since 1859 A key contributor to the Australian economy

- Sectoral (Primary produce, consumer cooperatives and financial services)- $14.77 billion annual turnover (2011)- 13,085,000 members & 26,000 employees

The contribution of cooperatives in Australia and Italy

Italy Recognition in various commercial codes

since 1882 Composition of cooperatives in Italy (2006)

- 71,464 cooperatives- 11,490,000 members- 1, 249,000 employees- 119 billion euro annual contribution to

economic activity

Convergence or Divergence? The role of regulation in promoting

cooperatives in Australia and Italy

Embedded in the social structure of Italy Constitution of 1948

“The republic recognizes the social function of the cooperative” (Article 45)

Why? An attempt to promote fair and social partnerships and democratize the economy

Italy

Legacy of Australian economy was to promote capitalistic enterprise rather than cooperative effort

Why?- Overarching public policy agenda- Promotion of ‘for-profit’ forms of organisations

rather than democratizing the economy- Focus has been on Individual and consumerism

NOT cooperative ideals (Wickremarachchi 2012)

Australia

Notions of Federalism – protecting State autonomy while also facilitating the functioning of a national economy

Role of Constitution, section 51 (xx) “Corporations power”- Allows Federal government to legislate for entities

that have the primary purpose of engaging in trading and financial activities across state boundaries

Result?- A fractured and constrained growth of cooperatives across Australia regulated by inconsistent laws

Constitutional constraints on the development of cooperatives in Australia

Italy- Reference to cooperatives in Constitution of

1948- Recognition of cooperatives in company law

(see Legislative decree n.6 17 Jan 2003- General rules applicable to cooperatives are

contained in Civil Code (CC) (ss. 2511-2545)- Article 2520 deals with special rules and the

connection with the CC. CC applies to the extent of any inconsistency with special rules

Legal frameworks: Italy vs. Australia

Australia- Main source of cooperative law is STATE based (purpose, rules

of the cooperative etc.)- Other sources of laws?

- Income Tax Assessment Act (ITA), ss. 117-120- Trade Practices Amendment Act 2010 – aimed at ensuring that

there are no artificial barriers to trade- Result Cooperative Law and TPA are “natural enemies” (Edgehill

2008)- Solution? Application for exemption for particular commercial

dealings- Corporations Act 2001 (Cth) outlining Directors Duties and tax

status

Objectives- Similar ideals in Italian and Australian law- Focus on “mutual aims” of organisation

- See Article 2512, par.2 of CC- Co-operatives (Adoption of National Law) Act

2012 (NSW), section 3- Focus of laws seems to be on clarifying objectives

rather than outlining specific purpose?- Why? A cooperative by very nature is a “vague

concept” (Balnave and Patmore 2009)

Objectives of Co-ops in Italy and Australia

Italy- Prevalently mutual cooperative (PMC) vs. non-prevalently

mutual (NPM) or other cooperative (OC) (See art. 2512 of cc)- Difference?

- PMCs are those that have transactions with members as “users” of the cooperative

- E.g. sales costs of labour costs must be at least 50% of total sales or labour costs

- NPM may be established via special law where services produced are NOT for a mutual aim

- NPM or OC not required to engage exclusively with members nor report on activities

Types of cooperatives: Italy

Similar distinction drawn to Italy- Distributing vs. Non-Distributing co-operatives

(ss. 18-19 of the NSW Act)- Distributive

- Undertake commercial activities- Benefits can be distributed to members and

investors- Non- Distributive

- Often classified as “not-for- profit” organisations- Distribution of surpluses on winding up of entity

Types of cooperatives: Australia

Italy- Cooperatives can perform any economic activity- Very few specific restrictions with activities- Criteria of “mutual aims” does need to be met for PMCs

Australia- Requirement for Cooperatives to list one “primary activity” that is sufficiently connected to the ideals of the International Cooperative Alliance enshrined within the Act

Establishing a primary activity

Italy- “Cooperative incorporation”- Via a document drafted by a notary outlining

rules, aims, membership rules and information about distribution of profits (art. 2521, par 3 CC).

- Once formed, this document must be registered with Register of Enterprises with the Chamber of Commerce

- Once registered it acquires “legal personality” resulting in limited liability to the level of member contribution

Modes of establishment

Australia- Registration under relevant State law- Application made to Cooperative Registrar- Application must contain similar information to

Italian counterparts- Once incorporated, cooperative secures

separate legal identity allowing it to enter into commercial transactions within its own right (see for eg section 38 of Cooperatives Act NSW

Italy - Minimum membership is 9 but in reality 3 Individuals

may in fact form a new cooperative ( art. 2522, par 2- Membership can consist of

- ‘active members’ (i.e. users, providers of work etc.) OR- Investor members

- New members- Must be in line with the rules of the co-op- Approved by a board (within 60 days)- New members must be included in annual reports- Denial of membership can be appealed at general meeting

Membership

Australia- Minimum of 5 members present at the formation

meeting (see section 21 of NSW Act)- Aim of cooperative and rules must be considered and

agreed upon by at least two thirds of parties attending this meeting (section 22)

- Disclosure statement must be issued outlining number of issues pertaining to establishment of co-operative (section 23)

- Incorporation of cooperative complete once submitted with cooperative registrar

Governed by similar rules to Italy- “One member – one vote principle”- Members are required to remain “active”.- Why? To avoid concentration of control

Penalties for inactivity- Cancellation of individual membership after 3 years

(section 156 of NSW Act)- NB Boards fines up $2000 for each offence relating to failure to cancel inactivity

A closer look at membership in Australia

Generally, Australian and Italian cooperatives adhere to the “one member- one vote” principle see ( See for example, art. 2538 par.2 CC and Chapter 5, Part 2.5 of the NSW Coop Act).

Some capacity under both jurisdictions to deviate from this rule (to a maximum of 5 votes) for some legal entities that have large capital holdings

Australia- no one member is able to obtain more than 20% of shares with the cooperative (See section 363 (1) of NSW Coop Act)

Governance (I)

Reforms have occurred to Italian Approach to governance. Now three options are available regulated by cooperative statutes:1. Traditional ‘Tripartite’ model: members, board of directors and

supervisory board ( including auditors, lawyers, academics) appointed by members

2. ‘Monisitic’ model- similar to Tripartite model but supervisors are appointed by directors = formation of “committee for the supervision of management” (NB requirement for there to be one independent auditor).

3. ‘Dualistic’ system- less power given to members. Consists of general meeting, surveillance board and management board. Surveillance power holds majority of power as it appoints management and approves national accounts

Governance (II)

Australia operates in a traditional framework- members (general meetings), board of directors and supervisory/auditing structures

- Board of Directors must consist of at least 3 members. 2 must be residents of Australia. (see ss.172-172 of NSW Act )

- Directors required to comply with Directors duties found in the Corporations Act 2001 (Cth), see section 201 ff.

- Mirrored in Division 4, Part 3.1 of the Coop Act (NSW)- Concerns remains about the separation of control- do ALL

members have the requisite knowledge to manage an organisation?

- Auditing requirements within model legislation (e.g. ss.262 ff. Coop Act (NSW)).

Governance (III)

Italy-Cooperative capital is divided into stocks and shares- Transfers need to be approved by Directors- No one member can hold more than 100,000 Euros in shares

(with some exceptions) (See art. 2525, par 2, CC).- Coops must allocated at least 30% of their profits to a reserve

fund- Dividends can only be distributed if ratio between assets and

debts is higher than 25%- Major implication for tax- funds allocated to reserves (invested

back into the coop) are exempt from corporate income tax (art.12, Law 16 December 1977 n.904) Applicable to PMCs.

Financial and Tax considerations

Australia- Similar distinction to Italy. Focus is on the transaction unit of shares

and raising of capital- Shares only issued to members - Level of surplus retained from activities determined by the rules- Cooperatives do have the capacity to retain the entire surplus

(section 355 of the NSW Coop Act 2012)- Maximum 20% of surplus can be reissued as bonus shares to members- Access to capital via Co-operative Capital Units (CCUs)- Dividends returned to reserve or members are deemed to be tax free

(section 120 of Tax Act)- Note: Section 117- requirement that 90% of activity of cooperative

needs to be amongst members to be able to obtain this benefit.

Financial and Tax considerations (II)

Divergence in the historical legacy of cooperatives between Italy and Australia

However there seems to be convergence amongst the two countries when it comes to the process of regulating aspects of this unique organisational form

In pursuing alternative and legitimate forms of productive capacity, the cooperative continues to evolve into an effective “hybrid” organisational form that meets the demands of various stakeholders while providing at alternative approach to promoting economic activity

Whether these evolutions will be enough to overcome Australia’s obsession with profit driven corporate forms is yet to be seen

Conclusions?