What is a community benefit society & how does it work?
In my last blog we looked at the reasons for setting up a community benefit society rather than a co-operative society, or any other legal form. And we took a closer look at the key points that influenced our community group, Oxford North Community Renewables (ONCORE) in its choice of legal entity. This month I will look in more detail at community benefit societies and how they work.
a community benefit society
Just to recap, a community benefit society is a form of industrial and provident society – a legal form with limited liability for shareholders, operating on the principle of “one shareholder, one vote” and with an individual shareholder limit of £20,000.
Community benefit societies differ from other legal forms in a number of ways. They are particularly focused on the wider community interest. The objects (or goals) set out in their governing documents must be for the benefit of the community, any growth in assets should benefit the community rather than shareholders, and interest payments to shareholders are restricted. And, if you want to raise money from your local community through a share offer, a community benefit society offering withdrawable shares will be exempt from onerous Financial Services Authority (FSA) regulation. From talking to other community energy projects, a community benefit society seems to be a typical legal form for those that want to recycle income into the wider community.
transferable vs withdrawable shares
If you have shares in normal limited companies, the idea that you might not be able to sell your shares in a community benefit society might go against the grain. Community benefit societies can issue normal transferable shares, but these do not benefit from the same FSA exemptions as withdrawable shares. Alternatively societies can issue “withdrawable” shares that are exempt from FSA regulation, but normally these shares can only be withdrawn at the discretion of directors and if there is enough cash in the society. Withdrawable shares can’t be sold on, but shareholders can apply to withdraw their shares and have their money back, and usually the directors have discretion to grant such applications.
At ONCORE we had a long discussion about whether to issue transferable shares instead of, or alongside, withdrawable shares. Some of us thought that transferable shares (or share that are both withdrawable and transferable) may be more attractive to potential shareholders.
Guidance on community shares (such as the Practitioner’s Guide to Governance and Offer Documents suggests that transferable shares may not mean much for shareholders in community benefit societies, as there is no established market for community benefit or co-operative society shares. In other words, even if in theory you could sell your shares, in practice it might be difficult to find a buyer. The concept of withdrawable shares is, therefore, seen by some as a way of providing “liquidity”, or a possible exit mechanism for shareholders.
In the end, the exemption from FSA regulation was the deciding factor and persuaded us to go with withdrawable shares at ONCORE.
The issue of shareholder returns is a tricky one. Under FSA regulation and industrial and provident societies legislation, community benefit societies cannot pay dividends like normal companies do (note, co-operative societies can pay a type of dividend to their customers). Community benefit societies can, however, pay “interest” on shares, limited to “what is necessary to obtain and retain enough capital to run the business”. When developing our ONCORE share offer, we were frequently told by those advising us that community benefit societies are NOT about distributing profits to shareholders. Nevertheless, we were keen to offer a reasonably competitive return to be able to raise the amount of money we needed – £150,000. In the end we went for 3–4% average annual return. We felt we needed to offer this level to attract “enough capital”. Feedback from our community seemed to suggest we were right. Many did not invest for financial reasons, but others were influenced by what they concluded looked like a relatively safe and attractive financial proposition. Other community energy share offers I’ve seen seem to forecast similar levels of interest, normally in the range of 2–5%.
children & grandchildren
As we’ve seen, another tricky issue about community benefit societies is that they don’t usually issue normal shares that you can sell on, to avoid costly FSA regulations. For a 25- year solar PV project, this means you may be in it for a long time and may not live to see the return of your capital. This point was made to us numerous times, privately and at public meetings. A reasonably competitive interest rate is all very well, but what’s the use if you won’t see your capital again? But many people seemed to have a ready answer to this: like action against climate change more generally, many of us are doing this for our children and grandchildren. To address this issue, we tried to make it easy for shareholders to buy shares for their children, and to nominate someone to receive shares in the event of death. Our constitution, or “Rules” (developed by Wessex Community Assets) allows shares to be held on behalf of children under 16, which can then pass on to those children on their 16th birthday. The “Rules” also allow shareholders to nominate someone to receive their shares on death, without having to go through probate (there is a legal limit on this, as far as we know the latest limit is £5000). Our share application form was drafted to allow for this – see ONCORE’s Community Share Offer Brochure. I should add that we are not experts in probate law or otherwise, so if you want to be absolutely sure, you should get legal advice.
We’ve looked at some of the features that make a community benefit society fundamentally different to a normal company. What about the day-to-day – how does a community benefit society work?
In practice, they don’t seem that different to small companies. Regulatory requirements are fairly light touch, requiring an annual return to the FSA. The starting point for the day-to-day running is the constitution, called the “Rules”. This sets out a society’s objectives, any membership requirements, how the society should be run, how to elect directors etc. The model rules from both Wessex Community Assets and Co-operatives UK contain detailed rules on organising meetings, including quora, voting procedures and notice requirements. It is worth studying the rules in some detail to get a good sense of how you should be running your society’s affairs. One of the things to watch out for is that the Wessex Community Assets Rules (which ONCORE adopted) require a society to hold a Special General Meeting six months after registration. This came round surprisingly quickly! As with all these things, there are good reasons, and we found holding a meeting so soon was a great way to involve our shareholders in what was going on and help create the feeling that this was a real community project.
Community benefit societies – what they are and how they work – are described in detail in The Practitioner’s Guide to Community Shares and Practitioner’s Guide to Governance and Offer Documents.
We’ve covered a few challenging – some would say emotive – issues this month. It would be great to hear how you’ve dealt with these in your community.
Next month we’re going to get into the nitty-gritty of setting up a community benefit society – log on again at the end of February!