In large co-operative structures, the risk of those in positions of authority seeking to bolster their own position and reduce the influence of members has become a real concern, putting the legal framework for co-operatives in need of urgent review.
A fundamental principle of co-operatives is that they are democratic bodies, answerable to (and owned by) their members. In an economy that is struggling to adapt to the demands of the climate crisis, along with the ongoing impact and cultural changes resulting from the pandemic, an ownership model that brings the benefits of ownership to all those involved is increasingly vital as an alternative. But what happens if that democratic ownership breaks down?
In a large co-op with many members, there is always a risk that those in positions of authority – generally, the Board or senior management – seek to shore up their own position and reduce or “manage” the role or influence of members. A recent example involving the black cab drivers of London shows that the legal framework for co-ops needs urgent review.
The Licensed Taxi Drivers Association (LTDA) is a trade body whose membership comprises some ten thousand London taxi drivers. It was established as a co-operative in the 1970s to provide legal support for drivers in their day-to-day business, and strategic representation and advocacy in dealing with key bodies including Transport for London. Members pay substantial monthly subs to the LTDA for these services.
In recent years, some members became frustrated with the lack of opportunity to engage with their association, influence its management, and obtain answers to questions about its affairs. In 2018, rather than deal with the serious questions raised, the LTDA commenced proceedings to expel a number of those members.
The last resort for the members of any organisation, in such a situation, would normally be to call a special members’ meeting. The constitution typically requires 10% or 100 members to sign a requisition for a meeting, whichever is lower. This right is protected in law for limited companies under the Companies Act 2006. However, the LTDA, as a co-operative society registered with the Financial Conduct Authority (the FCA) is not subject to company law – and the relevant legislation is silent on the rights of members to call a meeting. The only protection that members have, in a registered society, is the constitution itself.
In the case of the LTDA, its rules required 51% of the members to sign a requisition. In an organisation with 10,000 members, such a high threshold makes it practically impossible for members to call a meeting.
The 51% rule had been introduced as a rule amendment in 2010. Rule amendments for a coop have to be approved at a members meeting after which the secretary submits the amendment to the FCA, confirming on oath that the amendment has been approved under its rules; it is then registered by the FCA and takes effect. Prior to this change, the rule required 1/10th of the members to sign.
None of the concerned members could recall any such members meeting or rule amendment approval. It is difficult to see what justification might have been put forward for such a change; it is inconceivable that members themselves would have pressed to make it more difficult to call a members meeting. Nor was there history of LTDA members using the provision frivolously such that management might want to curb their rights.
Part of the FCA’s role is to ensure that a co-op’s rules preserve democratic member control. The ability to call a special meeting is the members’ final remedy under the rules. Without such a power, there is nothing to stop a board from taking control of a society. The FCA might have challenged a rule amendment which made that practically impossible, but it did not.
Special meeting
Being unable to call a meeting, the concerned members decided to use the only other remedy available to them under the Cooperative and Community Benefit Societies Act 2014: namely to apply to the FCA under section 106 of the Act for the FCA itself to call a special meeting.
Such an application requires the signature of 10% or 100 members, whichever is lower. An application, duly signed by 120 members, was filed with the FCA on 9 May 2019 asking them to call a special meeting.
The first test for such an application is for the FCA to determine that there are good reasons for requiring the meeting – in this case management capture and the loss of democratic member control – and that the applicants do not have malicious motives. The FCA confirmed in August 2019 that the application passed this legal test.
Organising a special meeting proved much more challenging. The full history is outlined by the drivers concerned in their podcast, but it became apparent over the ensuing three years (the special meeting did not take place until March 2022) that the FCA did not regularly have to deal with s.106 applications, particularly of such a potentially high profile, that there was no established procedure to follow, and that their statutory powers were so vague and restricted that organising an effective meeting was a challenge.
In the event, the special meeting was chaired by a barrister agreed by the applicants and the current Board. Each side was invited to put forward their own proposals for changes to the rules, to restore democratic member ownership, setting out the specific changes proposed and separately a two-page explanation. A meeting was held online and there was a vote by secret ballot. The outcome of the process was a 57%/43% vote in favour of the rule amendments proposed by the current board.
Despite the fact that the FCA had reviewed those proposals, and had previously accepted the loss of democratic member control as good reasons for calling the meeting, the rule amendments put forward by the Board and approved by the special meeting arguably make the position even worse than before. Such a meeting now requires:
- the signatures of 500 members
- in relation to each of whom a £50 deposit is paid to the LTDA (a total, therefore, of £25,000)
- the prior written approval of any proposed resolution by the current Board.
In other words, from the point of view of democratic member control, the hold of the current Board over the society has been strengthened.
The outcome – and the extraordinary length – of this process should be of concern to all those concerned with protecting member control of any business. The process failed to address the serious concerns of the members about management capture, and though the FCA accepted that the rules needed to be repaired to restore democratic member control, the outcome did not achieve this.
Having funded the process for almost three years from their own pockets, the members concerned felt there was no more they could do. The only remedy would have been the high-cost, high-risk option of judicially reviewing the FCA’s decision to accept the Board’s proposals as sufficient to protect member control. The FCA did decide that the LTDA should pay for the vast majority of the drivers’ costs, but this was cold comfort.
Democratically controlled organisations are an important component of a fair society. Cooperatives and other mutual organisations help to reinforce equality and equity and provide an alternative to investor ownership. They cannot do this unless democratic member control is clearly established and firmly protected. The Law Commission is considering a review of this area of law, and we would urge that this issue should be included in its deliberations. The law governing co-operative and community benefit societies needs to be strengthened.
David Alcock and Cliff Mills, Anthony Collins Solicitors
