How Do Mutual Capital Instruments (MCIs) Work?

Mutual capital instruments, or MCIs, are a form of a share in a mutual entity. Mutual entities are public companies. The customers (‘members’) own the mutual entity instead of shareholders. Australian examples of mutual entities include: health care service and insurance provider like Australian Unity, superannuation funds like Australian Super and Sunsuper Super Fund, and financial banking service providers like Credit Union Australia and Teachers’ Mutual Fund. MCIs are now regulated by Part 2B of the Corporations Act 2001 (Cth). This is a result of amendments that occurred in 2019.

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Raising Capital through MCIs

Mutual entities are limited by shares, limited by guarantees or limited by shares and guarantees. For more information about companies limited by shares or guarantees, visit our guide here.

Historically, mutual entities have had challenges in raising capital for their members. Traditional methods involved increasing membership fees, relying on a slow accumulation of profits, or to increase debt by borrowing money at high costs. However, mutual entities also require a long term and secure form of capital. Increasing debt is not a long term source of capital. It is also a very inflexible source of capital. Long term and secure capital is especially necessary for mutual entities that are delivering long term services. Assistance for the disabled and the elderly provided by Australian Unity would be an example of this. As a result, there is a need for a means of acquiring greater capital.

MCIs represent an alternative means of acquiring capital for mutual entity members. By issuing MCIs as a type of share, mutual entities can generate capital to grow their funds and offer better services to their members. The MCI may be issued to members only but the mutual entity can allow outside investors to purchase MCIs as well. Mutual entities can raise capital more flexibly through MCIs. From the perspective of an investor, MCIs are a stable asset because they offer the ability to earn a stable income through dividends. But, MCIs represent a long term investment. This is because they have low liquidity and are not for sale on the sharemarket.

Capital raising is a complicated area with considerable regulation. For assistance in capital raising, you can contact a Lawpath capital raising specialist here.

MCI Mutual Entity

Only a ‘MCI mutual entity’ can issue MCIs under the Corporations Act. A ‘MCI mutual entity’ is: (a) a public company; (b) it does not have voting shares other than MCIs; (c) is not a charity or a not-for profit; and (d) the constitution of the entity states that it is intended to be a ‘MCI mutual entity’.   

Amending Constitution to issue MCIs    

A constitution of the entity must intend the entity to be a ‘MCI mutual entity’ in order to issue MCIs. For existing mutual entities, this requires amending their constitution through a resolution. The resolution can simply state that the entity is a ‘MCI mutual entity’. The resolution may or may not describe in detail the rights and obligations attached to MCI’s.  

MCI Rights and Requirements

MCIs do not grant the owner the same rights as a member of a mutual entity, and a mutual entity may determine the right granted by an MCI in relation to surplus assets and profits. The rights can only be varied by a special resolution of the company (section 167AE of the Corporations Act).  MCIs allow the owner to receive dividends but the right is non-cumulative (section 167AF(b) of the Corporations Act). Further, MCIs are securities. Thus, they are subject to the same requirements of disclosure and information as ordinary shares.

An MCI must be issued as a fully paid share (section 167AF of the Corporations Act). But, comparatively, it is a lower preference share of a company. First, it does not guarantee a dividend. Second, the mutual entity determines the rights to the funds. Likely, the rights will be inferior to those of its members. This can be an issue where a mutual entity is in liquidation and an MCI owner is unable to sell his MCI. Notably, MCI investors only have one vote regardless of the amount of MCI they own. 

Demutualisation

Prior to the amendments to the Corporations Act, a mutual entity that issued equity instruments similar to MCIs could cause a ‘demutualisation’. The mutual entity would then cease to be a mutual entity which would create new structural implication. It would also affect the income tax breaks granted to mutual entity members. The Corporations Act now specifically recognises that issuing MCIs does not trigger a ‘demutualisation’ (section 167AG). 

Conclusion  

An MCI is a type of share that a ‘MCI mutual entity’ can issue. Through MCIs, mutual entities can generate capital in order to grow and offer better services to their members. Notably, MCIs do not trigger demutualisation. For a mutual entity to offer MCIs it must be a ‘MCI mutual entity’ as defined in the Corporations Act. This might require a mutual entity to amend its constitution. The MCI itself must meet the requirements under the Corporations Act.

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