As a co-operative or mutual enterprise (CME), you are unquestionably operating to achieve a common objective that benefits each member. So what happens when a claim is made against your CME that alleges the board of directors or other leadership have not acted in good faith or in the best interests of members?
Securities claims can be incredibly complex, extremely costly (both in time and money) and have the potential to upheave the good work your mutual or co-operative is doing to benefit the entire enterprise. We step through the importance of preparing your CME for a securities claim, and how Barrack Broking can assist.
Why do mutuals and co-ops need to be aware of securities claims?
For many, the idea of a mutual or co-operative needing to be concerned about securities claims may be unexpected, given that CMEs are member-owned and inherently designed to drive value for members. However, like other corporate entities, CMEs raise capital in various ways, and have associated reporting and disclosure obligations to potential members and investors.
CMEs raise funds through pre-registration contract, issuing of shares, and through capital instruments, such as Co-operative Capital Units (CCUs) and the recent equivalent for mutuals, Mutual Capital Instruments (MCI).
CCUs and MCIs are a new share type that can be issued to members and non-members. They are designed to ensure that member-owned businesses can compete on an even playing field with other types of entities in raising capital for their endeavours. The legislation that made this possible, enables mutuals and co-operatives to innovate and expand in a diverse range of sectors including, agriculture, motoring and banking.
With the introduction of CCUs and MCIs also came the introduction of further risk to CMEs by way of a claim made against them, regarding their newly issued securities. Raising capital in this way comes with obligations to ensure potential investors are fully informed of the opportunity and associated risks.
Murray Goulburn Co-operative Co. Limited & Anor v AIG Australia Limited
In 2015, Murray Goulburn Co-Operative Co Limited (MGCL), a dairy-processing company that has grown to become one of Australia’s largest milk product processors, went through a capital restructure. The restructure involved the creation of the Murray Goulburn Unit Trust (MGUT) and a wholly-owned subsidiary, MG Responsible Entity Limited (MGRE), to act as a trustee of MGUT.
As part of this capital restructure, units in MGUT were first made available for acquisition in May 2015, off-market, to a select number of group members. Subsequently, in July 2015, units in MGUT were made available to the general public by being listed for quotation on the ASX.
The Webster and Endeavour class actions were then commenced against MGCL and MGRE (Class Actions) for misrepresenting and failing to disclose the material facts surrounding milk prices and anticipated profits in its Produce Disclosure Statements (PDS) and subsequent ASX announcements in 2015 and 2017. In June 2019, the Endeavour River class action settled for $42 million. The Webster class action settled for $37.5 million in November 2019.
MGRE made a claim under various insurance held, such as Directors and Officers insurance policy with Side C cover for MGCL, Investment Managers Insurance and a Public Offering of Securities, Directors, Officers and Company Liability insurance policy. The insurer, AIG, declined indemnity for the Class Actions on the basis that units in the MGUT were not ‘securities’ as defined in the policy.
The Court ruled in favour of Murray Golbourn, and found the D&O Policy responded to the claim. It was held that:
- The units in MGUT were “equity interests” and, therefore , “securities” within the meaning of the policy. It stressed that on the “ordinary meaning of the words” it fell within the definition. It followed that the Class Actions were ‘securities claims’ within the meaning of the policy.
- Although units in a unit trust were not the ‘traditional’ form of security, they met the definition, and the purchase of securities insurance (Side C) demonstrated a common intention.
How to protect your CME from a securities claim
Your co-operative or mutual enterprise may be exposed to a securities claim if you have disclosure obligations or are raising capital. To protect your mutual from potentially catastrophic securities claims, it is prudent to have an appropriate insurance program in place.
Whether you need Directors & Officers Insurance which includes Side C cover for entity securities liability, Management Liability Insurance or even a strategy around transferring your risk, Barrack Broking are backed by the experience you need to confidently set an insurance framework in place.
At Barrack Broking, we not only seek to understand your unique objectives and environment to implement appropriate cover, we monitor your needs and adapt our advice as your co-operative or mutual enterprise evolves.
Reach out to us today to take the next step forward to securities claim cover for your CME.
