Bill C-5: Canada Cooperatives Act (LS-296E)

HOUSE OF COMMONS		SENATE
Bill Stage	Date	Bill Stage	Date
First Reading:	25 September 1997	First Reading:	9 December 1997
Second Reading:	22 October 1997	Second Reading:	16 December 1997
Committee Report:	24 November 1997	Committee Report:	24 February 1998
Report Stage:	28 November 1997	Report Stage:
Third Reading:	9 December 1997	Third Reading:	25 February 1998

Bill C-5, An Act Respecting Cooperatives, was introduced and read the first time in the House of Commons on 25 September 1997 by the Minister of Industry. This bill had been introduced on 21 March 1997 in the 35th Parliament as Bill C-91 but died on the Order Paper with the dissolution of Parliament.

Bill C-5 is the product of a process initiated by two cooperative associations, the Canadian Co-operative Association and le Conseil canadien de la coopération. The federally incorporated non-financial cooperatives had felt they were operating under a competitive disadvantage because of an outdated corporate governance structure. The associations developed draft legislation after spending a number of years discussing and debating the issues involved. In July 1996, the government announced it would be introducing legislation after public consultation. A discussion document based on the draft legislation was circulated in September of that year.

Cooperatives have played an important role in many parts of this country ever since 1861, when a cooperative store, based on the Rochdale consumer cooperative in England, opened in Stellarton, Nova Scotia. Retail cooperatives were set up in a number of rural communities. Farmers, however, felt that their problems stemmed from a lack of control of the marketing of their products, rather than powerlessness as consumers. They set up marketing cooperatives which have become of major importance in the agricultural economy of Canada. The financial needs of Rochdale-type retail cooperatives are quite different from those of agricultural marketing coops. In a retail operation, sales revenues are generated in proportion as shelf stocks are run down and new supplies need to be purchased, enabling self-reliance through self-financing. The patronage dividend is paid to members only after all the costs are covered, reducing the risk of default on loans. Farmers, on the other hand, need to buy inputs during the planting and growing seasons, but they are paid only when the crop reaches market. Agricultural coops need more capital than retail cooperatives, and this capital may be more than their members or the banks can provide. Allowing the possibility of outside shareholders requires the laws governing cooperatives to ensure that they retain their unique nature while providing protection for the shareholders.

The 1970 Canada Cooperative Associations Act (CCAA) was based on the then current Canada Corporations Act. Federal business corporate law has been substantially revised since 1970, but the Canada Cooperative Associations Act has not. Cooperatives incorporated under provincial law, on the other hand, have the advantage of more up-to-date legislation.

Bill C-5 would repeal the CCAA and bring legislation covering federal non-financial cooperatives into line with that of federal business corporations and financial institutions. As a result, cooperatives would be able to achieve a governance structure with easier incorporation and more clearly defined rights and responsibilities for the members, shareholders and directors.

Members of a cooperative would be firmly in control of the cooperative’s business decisions. A cooperative could issue investment shares but shareholders would have no rights to elect the directors of the cooperative unless the members put such a privilege into the cooperative’s articles of incorporation.

Bill C-5 is composed of 24 parts. A brief overview of each part is provided below. Where a part incorporates similar provisions of the Canada Business Corporations Act (CBCA), this is noted.

Part 1 lays out to whom the Act applies. A "cooperative" must be organized and operated on a cooperative basis. Bill C-5 would update and broaden the definition of "cooperative basis" to reflect prevailing principles in Canada and to be consistent with the Statement of Co-operative Principles adopted by the International Co-operative Alliance in 1995.

A cooperative would be organized on a cooperative basis if it had the following features:

Bill C-5 would be restricted to non-financial federally incorporated cooperatives (clause 3(5)). To be federally incorporated, a cooperative would have to operate in more than one province (clause 3(2)).

Exceptions to the principle of one member - one vote are set out in clause 7(3) Multiple voting would be permitted for second and third tier cooperatives. This exception would apply to federations of cooperatives whose members were other cooperatives rather than individuals. Cooperatives incorporated under the CCAA that now have a multiple voting structure would be permitted to continue using this structure. Finally, a cooperative entity (cooperatives other than a cooperative incorporated under the new Act) that was a member of a cooperative incorporated under the Act, would be able to maintain multiple voting rights at the primary level. This, for example, would allow financial cooperatives who were members of other cooperatives and who provided substantial amounts of capital to have multiple voting rights.

The following table shows cooperative size and incorporation basis by sector in 1995.

Volume of Business ($M) of Canadian Non-Financial Cooperatives
of Canadian Non-Financial Cooperatives
	Federally Incorporated Coops (1)	All Coops in Canada (2)	%
Consumer	2,682.3	6,382.3	42
Supply	439.1	4,002.2	11
Marketing	2,922.0	11,817.6	25
Fishing		164.6	0
Production		778.1	0
Service	133.8	1,700.9	8
Total	6,177.2	24,845.7	25

Incorporation as a cooperative would become a right for those groups who satisfied the conditions of Bill C-5. Under the current law, the Minister has some discretion in this matter.

The number of persons required to submit an application for incorporation would be reduced from seven to three. Where a cooperative would have federations as its members, one or more federation could apply as an incorporator (clause 8).

Bill C-5 would make the contents of a cooperative’s articles and by-laws more explicit. The articles of incorporation would contain fundamental matters such as restrictions on the business to be carried on by the cooperative; the number of directors; details about investment shares, if any; details pertaining to membership share capital, if any; the distribution of property on dissolution; a statement that the cooperative would be organized and operated on a cooperative basis; and provisions by which members could restrict the powers of the directors (clause 11).

Among other things, the by-laws would deal with items such as membership (classes, qualifications, rights, withdrawal and expulsion); any delegate system; the selection, qualification, term of office and removal of directors; and the rules for distributing a surplus (clause 15).

Part 3 of Bill C-5 would give a cooperative the capacity, rights, powers and privileges of a natural person. In addition, the cooperative would be able to carry on business throughout Canada (clause 26). Members and shareholders would enjoy limited liability (clause 29).

The provisions pertaining to the registered office of a cooperative and to record keeping would follow those found in the Canada Business Corporations Act.

Part 5 sets out how members would join a cooperative, how they would withdraw as members and how membership would be terminated. Under Bill C-5, corporations could join a cooperative. Subject to certain exceptions outlined above, the one-member–one vote rule would apply and proxy voting would be disallowed for members (clause 37).

When a member withdrew his or her membership from a cooperative, the directors of the cooperative would have to redeem all of the member’s shares, and repay loans (except loans with a fixed date of maturity) as well as any other amounts advanced by the member. Subject to a solvency test, any payout would have to be completed within one year, unless the payout would affect the financial health of the cooperative (clause 39). Where the directors or the members terminated a person’s membership in a cooperative, and subject to a solvency test, the payout to the member would have to take place within one year after termination and could not be extended (clause 40).

Persons whose membership had been terminated could be re-admitted to a cooperative by special resolution of the members (clause 45).

Part 6 sets out the rules governing annual and special meetings of cooperatives, notice of such meetings, quorum and procedures for voting. A meeting could also be requisitioned by at least two persons holding five percent of the voting rights (clause 69), and in certain circumstances, a court could order that a meeting be held (clause 71).

Under Bill C-5, members would have the right to attend annual meetings of the cooperative. Shareholders would attend special meetings, but would attend and vote at annual meetings of shareholders only where they had the right to vote for directors (clause 133). In situations where shareholders had the right to elect directors, they would be limited to electing no more than 20 percent of the board (clause 124). Shareholders would have the right to vote on fundamental changes to the articles of incorporation if the changes affected them, regardless of whether the shares carried any other voting rights (clause 134).

The bill provides that a cooperative would have to have at least three directors, of whom, generally, at least two-thirds would have to be members of the cooperative. Subject to an exception for worker cooperatives, the majority of directors could not be full-time officers or employees of the cooperative. In addition, a majority of the directors would have to be resident in Canada (clauses 76-78). All directors would be elected by the members of the cooperative unless the articles specifically allowed shareholders to elect a portion (not more than 20 percent) of the directors.

Provisions relating to the functions and duties of directors would be modernized. Subject to the bill, the articles and any unanimous agreement, the directors would be responsible for managing the business and affairs of the cooperative (clause 79). Thus members, through their ability to vote on the contents of the articles, and members and shareholders, through a unanimous agreement, would be able to restrict the powers of the board of directors.

The duties of directors would reflect those set out in the CBCA. Directors would have to "act honestly and in good faith with a view to the best interests of the cooperative" and "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances" (clause 80).

Bill C-5 would implement provisions similar to those set out in the CBCA in respect of meetings of directors. To constitute a quorum, a majority of directors at the meeting would have to be resident in Canada and be members of the cooperative or representatives of members (clause 97).

The provisions relating to directors’ liability would be harmonized with those of the CBCA. Directors would be jointly and severally liable for the outstanding value of shares issued at less than the fair equivalent value and for amounts paid and not recovered in respect of certain enumerated payments and loans made in breach of the solvency tests set out in the bill (clause 101).

Similar to the current provisions of the CCAA and the CBCA, directors would be liable for up to six months’ wages of a cooperative’s employees. They would not be liable, however, for amounts relating to statutory or contractual termination of employment, for severance pay or for punitive damages related to termination of employment (clause 102).

Directors’ liability would also be limited by a general due diligence defence (clause 111). This would be broader than the current defence found in the CBCA and would reflect the recommendations of the 1996 report Corporate Governance issued by the Standing Senate Committee on Banking, Trade and Commerce.

The provisions of the bill dealing with officers and committees are similar to the provisions of the CBCA. Subject to the articles, by-laws and any unanimous agreement, the directors could designate offices, specify the powers and duties of each office, and appoint officers (clause 108).

Cooperatives can be structures with or without share capital. Part 8 deals with matters such as membership capital, the distribution of property to members, investment shares and corporate finance.

Under the bill, the term "co-op shares" would be replaced by "membership shares." There would be one class of membership shares, issued only to members of the cooperative. Membership shares would not confer voting rights (which would go with membership, not shares) but they would confer equal rights to receive declared dividends and the remaining property of the cooperative upon dissolution, unless the articles or the Act provided otherwise (clause 118).

One of the most significant changes to be effected by Bill C-5 would permit cooperatives to issue investment shares (clause 124). This would allow a cooperative to raise capital and investors to realize a gain on their investment through dividends and capital gains. Investment shares could not be issued until the members of a cooperative had authorized the principle of doing so (clause 126(2)).

Investment shares would have attributes similar to shares issued by business corporations under the CBCA. They would have to be in registered form and without par value (clause 125).

Holders of investment shares would be entitled to vote for the election of directors, if the articles granted them that right. In any event, investment shareholders could elect no more than 20 percent of the board. Where a class of investment shareholders was entitled to elect directors, a cooperative would have to call a special meeting of shareholders within six months and annual meetings of shareholders thereafter (clause 133).

The need to provide a sound framework giving cooperatives access to additional sources of capital is a major driving force behind these provisions of the bill. This issue is troubling to some in the cooperative movement because it would threaten the continued existence of the Rochdale model of a self-sustaining democratic entity. Outside capital might allow some control and direction of the cooperative to be taken away from the members and given to the shareholders. However, the decision to seek non-member investment would be democratically made by the members of the cooperative; and, as noted before, the degree of shareholders’ power would be decided upon by the members, subject to strict upper limits imposed by the bill. Investment shares in a cooperative would probably more closely resemble non-voting stock than voting stock in a business corporation.

Proxy voting by members would not be allowed, but shareholders would have proxy voting rights and privileges similar to those of shareholders of corporations incorporated under the Canada Business Corporations Act.

The insider trading provisions, for the most part, would follow similar provisions of the Canada Business Corporations Act.

Take-over bids for investment shares would be dealt with in the same manner as they are under the Canada Business Corporations Act. These provisions would not apply to membership shares.

The CCAA does not establish rules for dealing with the transfer of ownership of securities. Part 12 would enact provisions comparable to those of the CBCA with respect to security certificates, registers and transfers. These have been made necessary by the introduction of the concept of investment shares. The rules governing investment shares in a cooperative would mirror those established for shares of business corporations. Membership shares would not be subject to these provisions.

This part would harmonize the financial disclosure rules applicable to cooperatives with those of the Canada Business Corporations Act. Annual financial statements would be placed before members at the annual meeting of members. Shareholders, on the other hand, would be entitled to have annual financial statements placed before them at such an annual meeting only if they could elect directors.

In addition to approving the financial statements, directors would now be required to inform the auditor and the audit committee of any error or misstatement in those statements of which they were aware. They would also be required to revise the statements and inform the members and the investment shareholders (clause 264).

Cooperatives with outstanding securities that were part of a public distribution would be required to appoint an auditor. A distributing cooperative would be required to have an audit committee composed of at least three directors. Other cooperatives would be able to establish audit committees if they wished to do so (clause 263).

Part 14 is based upon comparable provisions of the Canada Business Corporations Act. It would apply to trust indentures entered into by a cooperative in relation to debt obligations issued as part of a distribution to the public.

Part 15 is based upon similar provisions of the Canada Business Corporations Act. Among other things, it covers the functions of a receiver and a receiver-manager, the termination of powers of directors, the duties and standards of care of the receiver or receiver-manager and the actions required of a receiver or receiver-manager.

Part 16 would allow any "body corporate" to apply for a continuance⁽¹⁾ under the Canada Cooperatives Act provided it satisfied the requirements for incorporation, carried on business on a "cooperative basis," had a capital and corporate structure that complied with the Act, and had been authorized by its governing legislation to apply for the continuance. Corporate bodies would be allowed to continue under Act if they were intending to amalgamate into a body that would meet the requirements of the Act (clause 285). In addition, the bill would permit a federally incorporated cooperative (other than a worker or non-profit housing cooperative) to continue under other federal statutes (clause 286). This would allow cooperatives to become regular business corporations. The bill would also permit federally incorporated cooperatives to move to provincial jurisdiction, or technically "export," provided the procedures set out in the bill were followed (clause 287).

The amending process for articles of incorporation of a cooperative would be brought into line with the process outlined in the Canada Business Corporations Act. Amendments to articles would be approved by special resolution of the members and the shareholders, if any. Each investment share affected by a proposed amendment would have a vote (clause 290).

The provisions governing amalgamations between federally incorporated cooperatives and other cooperatives would harmonized with those of the Canada Business Corporations Act.

Under the bill, provisions pertaining to extraordinary dispositions (the sale or transfer of most of a cooperative’s assets) would be brought into line with similar provisions of the Canada Business Corporations Act.

Under the CCAA, members of a cooperative have a dissent right and a right to withdraw if an amalgamation agreement is approved. Provided the cooperative is solvent, it must repurchase the member’s shares and pay out all amounts owing to the member. Clause 302 of Bill C-5 would, for members and shareholders of cooperatives, enact dissent rights similar to those found in the CBCA. The right to dissent would apply to:

If the resolution to amalgamate, continue, amend the articles or to make an extraordinary disposition passed, the dissenting member or shareholder would be entitled to be paid out in full. The bill provides, however, that payments to a dissenting member or shareholder would be deferred if the cooperative was or would become insolvent (clause 302(23). Moreover, under clause 302(24), payments to a dissenting member could be spread over 10 years with interest paid at a rate established by regulation if the directors reasonably believed that payment to the member would adversely affect the financial well-being of the cooperative.

The provisions relating to court-ordered reorganizations and arrangements would follow similar provisions set out in the Canada Business Corporations Act (clauses 303-305).

This part is modelled on similar provisions of the Canada Business Corporations Act.

In line with similar provisions of the Canada Business Corporations Act, Part 18 would move the responsibility for ordering an investigation of a cooperative from the Minister to the courts.

Part 19, which is modelled on the Canada Business Corporations Act, would introduce the right to bring a derivative action and to apply to the court for an oppression remedy. In addition, the Minister of Agriculture and Agri-Food could provide assistance with alternative dispute resolution mechanisms (clause 351).

This Part would set out special provisions for non-profit housing cooperatives. Such cooperatives would be restricted to providing housing to their members and could issue only membership shares on a par-value basis. On dissolution, the remaining assets, would, after the payment of liabilities, have to be distributed to another non-profit housing cooperative or to a charitable organization. The business of a housing cooperative would have to be carried on without the purpose of gain for its members (clause 354). Any fundamental change in the structure of a non-profit housing cooperative would require the consent of at least 90 percent of the members (clause 358).

Clause 355 of the bill would require all non-profit housing cooperatives to include certain enumerated items in their by-laws. For example, the by-laws would have to detail capital payments, dispute resolution procedures, procedures to terminate membership, procedures for determining a member’s equity upon termination and for its repayment and capital reserves.

The bill also sets out the rights of members to occupy a housing unit in the cooperative and the procedures that would apply in the event of a relocation of a member to an alternative housing unit (clause 356).

Under clause 357, a non-profit housing cooperative would be restricted from distributing or paying any of its assets to a member. But a cooperative would be permitted to pay dividends on membership shares (up to 8 percent per year) and interest on membership loans (up to 10 percent per year) as well as certain other payments set out in the bill.

Part 21 would apply to worker cooperatives that operated in more than one province. The prime objectives of a worker cooperative would be to "provide employment to its members and to operate an enterprise in which control rests with the members." Only individuals who were employees of the cooperative could be members. The maximum mandatory membership investment could not exceed 50 percent of a member’s expected annual salary during the first year of membership, unless all members paid a greater amount (clause 359).

A worker cooperative would be permitted to employ non-members if, within five years after its incorporation or within five years after the acquisition of a business by the cooperative, at least 75 percent of the permanent employees were cooperative members.

Among other things, all worker cooperatives would be required to include the items enumerated in clause 360 in their by-laws and at least 80 percent of the directors of such cooperatives would have to be members that were employed by the cooperatives (clause 361).

This part deals with technical matters pertaining to certificates, statements, documents and records. The changes proposed in this part follow the Canada Business Corporations Act.

This part sets out the technical arrangements under which cooperatives incorporated under CCAA would be deemed to have been incorporated under Bill C-5. Each cooperative would have five years to amend and file its articles to comply with the new law.

Part 24 would make consequential amendments to a number of statutes and repeal the CCAA. The new Canada Cooperatives Act would come into force upon order of the Governor in Council (clause 386).

Bill C-5 is not likely to engender considerable debate within the cooperative sector. The sector’s national associations, the Canadian Co-operative Association and le Conseil canadien de la coopération, were the driving forces behind the movement to modernize the CCAA and have actively participated in the consultative process leading up to the bill.

(1) A continuance allows a corporate entity incorporated under the laws of one jurisdiction to move from that jurisdiction to another. For example, a corporation incorporated under the Canada Business Corporations Act could move its governing jurisdiction from the CBCA to the corporate statute of a particular province and vice versa.