Questions are being put to Canadian banks about ethical sales practices. Are consumers being sold things they do not need? Are banks picking people’s pockets? Such questions may also be put to Coast Capital Savings, BC’s second largest credit union, now proposing to be a bank. The members of Coast Capital Savings Credit Union are being asked to approve a Special Resolution that will, it would appear, facilitate the partial sale of the co-operative financial institution to investors. The voting closes April 12th. But how fair is the sales pitch?
I have reviewed the information online. The Special Resolution is represented as necessary to conform to requirements of The Bank Act (Canada), in anticipation of Coast Capital becoming a federal credit union (a type of bank under that statute). The fact that members are being asked to ‘concede’ ownership rights gets no real attention. And, to be clear, credit union members are implicitly being asked to put at least $1B- $3B of their ‘wealth’ into play. The complex proposal also places more powers into the hands of the directors.
The ‘voting’ campaign is structured more like a lottery than a request for member-owners to prudently consider the issues. “Vote and you could win!” Four $1000 prizes are offered. Most members will not review the proposed new Rules in detail, but one rule in particular may have broad implications. Rule 4 allows for several classes of shares, each with different potential distributions in the event of a winding up or sale of the credit union, whether “voluntary or involuntary”.
Only two classes of shares have an overall claim on the net assets of the credit union; Class A membership shares and Class D equity shares (non-voting and none yet issued). When Class D shares are issued, the relative value of Class A shares will be diluted. The Class D rules are written to permit them to be publicly traded and their value may grow to be many times that of Class A.
As of this time, members have ownership claims to all of the net equity of the credit union. Recent published statements represent the net equity at @$1B (share holdings and retained earnings), most of it owned collectively and ‘contributed’ by many generations in the communities of Surrey/Richmond/Victoria. The credit union says its membership is @532k, so based on this book value the average member’s current stake is potentially worth @$1900 (on paper).
However, the book value of the credit union is not the ‘market value’ of the credit union. The market value is what a large bank might pay to acquire the credit union’s book of business. Experience in Australia has clearly indicated that the market value would be 3 or 4 times above the book value. A market value of @$3-4B, a very large sum. So, based on market value the average member’s stake in Coast Capital is @$5000+. Under this current proposal, individual members will not be able to realize any of the current value in the business, but they (and their communities) have something at stake.
To address potential dilution of member shareholder value the proposal includes an ‘Intermediate Entitlement’ provision, but it is not explained. It seems to give Class D shareholders a portion of the ‘book value’ of the credit union. But wide discretion is given to the directors to issue an unlimited number of Class D shares, set the issue price, and to determine the portion of the relative ownership stake. As represented it is impossible to assess ‘how much’ of a transfer of ownership is being proposed without any compensation to the current owners.
Why should members relinquish their sole ownership claim on @$3B+ asset? How is this proposal in the members’ best interests? Should they be receiving some compensation? Would it not be better to sell the whole business now? Many questions do not seem to be answered.
On related subjects, the proposed rules for share capital imply that Coast Capital will become a ‘hybrid’ entity – part consumer co-op and, substantially, investor owned; with the new concerns for ‘maximizing shareholder value’ on this second front. The business will no longer be local. The implications, the potential trade-offs, and conflicting interests in this structure are not discussed. Neither are some changes that result from provisions under The Bank Act under which members may be less able to hold the directors accountable (eg. members meeting requisitions, members proposals). Business plans and capital plans are not provided.
The Credit Union Incorporation Act requires members to vote on such matters, presumably, expecting members to do more than ‘rubber stamp’ what is placed before them. To do so they would need more information. Balanced disclosure should allow for informed consent. An unbiased process would enable discussion and debate. This campaign appears to be more like high pressure sales.
The Coast Capital members may vote, and then may ask more questions at the credit union’s Annual General Meeting May 3rd. If the resolution passes, the regulator will have to determine if disclosure was ‘full and fair’ before accepting the change. Perhaps provisions of governing legislation regarding Special Resolutions should be strengthened to protect member-owners and other interested parties.
Australian credit unions have seen these transitions and Professor Kevin Davies of the Melbourne Centre for Financial Studies “…argues that credit union growth and increasing financial sophistication have led to a paradoxical situation in which a mutual governance structure creates the seeds of its own destruction. This arises from the increased importance, and incentives, of professional management, and from requirements to accumulate financial capital for risk management purposes which, in larger organizations becomes of sufficient size to make expropriation activities, via demutualization, worthwhile.” Expropriation means, in this context, the “conversion of communal wealth into private wealth”. The challenge is to ensure the process is transparent and fair to all stakeholders if it is to be pursued.
The Australian researcher suggests that a further sale is almost inevitable, but it may be years away. This is why clarifying ownership stakes is important. It is also important because members may have a far bigger stake in the enterprise than they realize. If they are being bought out, the price should be fair.