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Legislation
Main features of french co-operatives, as defined by the act of 10 september 1947 regarding the status of co-operative organisations
As well as cooperative experiences abroad, history, the places where the first experiments occurred, and of course the first cooperators all played a part in shaping the rules of the French cooperative movement. Each category of cooperatives is defined by a specific type of membership and business activity (Claude Vienney, L’économie sociale, La Découverte, in the Repères series, 1994). We present the cooperative diversity in France through this lens.
In July 2001, the “collective-interest cooperative company” (société coopérative d’intérêt collectif, SCIC) was created (see www.scic.coop). This new type of cooperative is based upon the association of various
stakeholder groups—employees, volunteers, users, local government, private business, nonprofit organizations, individuals, etc. (the principle of multistakeholder organizations). A cooperative has to comply with the regulations of the French civil code that form the general legal framework for all companies regardless of their specific legal status. Whether a company is registered as a public limited company (société anonyme, SA) or as a private limited company (société à responsabilité limitée, SARL), a cooperative still has to comply with corporate law.
Article 1 of the law of September 10, 1947 on cooperatives (excerpts)
Cooperatives are companies with the following main objectives:
1. To reduce, for the benefit of the members and through their
common effort, the cost and, where applicable, the sale price of
goods and services by performing the function of entrepreneurs
or middlemen, whose remuneration would otherwise increase
costs.
2. To improve the quality of products supplied to members or
produced by members and supplied to consumers.
3. More broadly, to help meet the needs of their members, promote
their social and economic activities, and offer possibilities
for training and further education.
Cooperatives operate in every branch of human activity.
Summary
I - Co-operative law : law governing a community of men and women
A - A co-operative is a company …
B - … which renders services or uses the work of its members ...
C - … and whose management is democratic.
II - Co-operative law : a law governing businesses
A - A co-operative is an undertaking …
B - ... whose surpluses are allocated in an orginal manner ...
C - ... and rules governing the valuation of members contributions have become more attractive.
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Co-operatives are active in nearly all sectors of the French economy (agriculture, crafts, credit, retail, housing, fisheries, transportation, etc.). They are governed by a specific legislation, i.e. the Act of 10 September 1947 which sets out the status of co-operative organisations and defines their general operating and administrative rules as compared to other legal corporate forms. This Act also allows the formation of specific legal entities which are governed only by the provisions of the Act : Co-operatives which are called “1947 Act Co-operatives”, unions of co-operatives and social economy unions -U.E.S- (U.E.S are governed by specific rules, and their members have the distinctive feature of being comprised of a majority of “social economy” institutions). Specific enactments (about twenty in total) contain amendments, exemptions or additions to the general provisions of the 1947 Act in order to take into account the specific features of each type of co-operative organisation. This body of legislation constitutes a true “co-operative law”.
What are the main and fundamental features of the legal system created by the Act of 10 September 1947 (general features which do not take into account the specific rules applicable to each category of co-operatives) ?
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I – Co-operative law : law governing a community of men and women
A - A co-operative is a company …
A co-operative must comply with the rules of the Civil Code which set forth the general legal framework applicable to companies, regardless of their legal form. When a co-operative chooses to be organised in the legal form of a société anonyme (S.A.)1 or société à responsabilité limitée (S.A.R.L.)2 , it must furthermore comply with the legal provisions applicable to business corporations. Finally, regardless of its legal form, a co-operative may elect to adopt the status of a variable capital company (société à capital variable). In this case, and without any formal requirement, the capital may be increased by successive contributions in cash made by the members, or by the entry of new members, and may be decreased through repayment in whole or in part of the contributions which have been made. The provisions governing companies with a variable capital and the Act on Business Corporations are only applicable to the extent that they do not run counter to an imperative rule set forth by the Act of 10 September 1947. Indeed, one of the principles of French law is that the purpose of special laws is to set forth exceptions to general laws. Also, on the basis of this principle, the 1947 Act only applies if no specific rules have been promulgated for each category of co-operative.
Co-operatives may be engaged in any type of human activity, and Article 1 of the Act of 10 September 1947 sets forth that co-operatives may serve three purposes:
- reducing the cost or sale price of certain products or services
- enhancing the merchantability of the products supplied to its members or of the products which its members make and supply to consumers
- finally responding to the needs of its members and promoting their economic and social activities as well as organising their training.
As is the case for all companies, the co-operative must bring a material or pecuniary advantage to its members or enable them to achieve savings.
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B - …which renders services or uses the work of its members...
According to the “double capacity” principle, the member of a co-operative, whether a legal or natural person, is also the beneficiary of the co-operative’s services. The member not only contributes to the equity of the co-operative, but also agrees to participate in its operations, and therefore becomes its client, supplier or employee.
The Act has recently been amended in order to relax the “double capacity” principle, in order to provide that members may also be persons who do not intend to use the co-operative’s services, but who contribute funds in order to further the achievement of its purposes. These members are called “member-investors”.
Pursuant to the same principle, a co-operative may only work for third parties which are not members if a special legal provision enables them to do so and if the co-operative’s articles of association especially authorise this type of activity. This operating rule – which is called “exclusivism” – is mandatory for co-operatives which are governed by the exclusive status contained in the 1947 Act. However, U.E.S. may carry out transactions with non-member third parties up to 20% of their turnover, provided that their articles of association expressly approve this type of activity and that the relevant transactions are recorded in separate accounting statements.
A co-operative which has elected to be organised in the form of a variable capital company may not prevent a member from withdrawing, subject to compliance with applicable rules contained in the articles of association. Conversely, such a company may expel a member who fails to perform his obligations.
Finally, membership in a co-operative is on a voluntary basis. However, in order to become a member, the applicant must meet the requirements set forth in the articles of association and must be approved.
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C - … and whose management is democratic.
Members of a co-operative have equal rights regarding its management, and no distinction may be made among the members according to the date of their entry and number of interest shares they own. Pursuant to the said principle, each member has a vote in the general meetings. However, as an exception to this voting rule, the articles of association of each co-operative may provide that “member-investors” (or certain categories among them) may hold a number of votes which is proportionate to the share capital held (within a limit of 35 percent of the voting rights, with a right to increase this limit up to 49 percent when member-investors include co-operative companies). In the case of UES or unions of co-operatives, each member may receive a number of votes which is proportionate to the business transacted with the union or to the member’s workforce.
Co-operatives are administered by unpaid representatives who are elected by the general assembly and who may be revoked by the said assembly. The fact that their relationship with the co-operative is to be analysed as an agency agreement implies that they have been selected from among the members represented at the general assembly.
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II - Co-operative law : a law governing businesses
A - A co-operative is an undertaking…
As a company which is a legal person, the co-operative is governed by trademark law (the company may own a collective trademark provided that it acts as the agent of its members), the law of commercial leases (when the co-operative has chosen to be organised as a business company or has a commercial purpose), bankruptcy law, competition law as well as the law of contracts.
In order to organise its co-operation with other entities or to strengthen its market position, a co-operative may create subsidiaries governed by general legal provisions, provided that this measure remains within the scope of its corporate purpose. Being a co-operative company is therefore not incompatible with the status of a parent company.
However, no person may alter the legal nature of a co-operative company, which means that a co-operative company may not be absorbed or acquired by a company organised under another legal form. An exception may however be made to this rule when such a change in legal status is necessary to the company’s survival or development, provided however that such development is impossible under the co-operative status. In this last case, a co-operative may be transformed into a company governed by the general rules of company law, subject to approval by administrative authorities. Therefore, a co-operative is a company which is stable from a legal point of view. The co-operative status provides extremely effective protection against the predatory instincts of competitors or non-co-operative companies looking for short-term profitability.
This situation is further strengthened by the existence of an obligation regarding the control of transfers of interest shares, either by the general assembly, or by the directors or managers.
Finally, to the extent that there is no formal prohibition, a co-operative may receive gifts, bequests, or subsidies.
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B - ... whose surpluses are allocated in an original manner …
By its very nature, a contribution to the equity of a co-operative is made in order to provide access to the co-operative’s services and therefore does not serve a speculative purpose. Co-operation has thus been described as a form of “a-capitalism”.
This defines the three main features of the co-operative in terms of allocation and distribution of its income: strengthening of the equity base through the creation of reserves; payment of the “discount”; payment of interest on the equity at a limited interest rate. In these matters, co-operatives give preference to collective investment as compared to individual investment, to the remuneration of the business activity rather than the remuneration of capital.
For a classical company, the creation of reserves enables the company to finance its development with its own funds and to guarantee its commitments towards third parties. Creating reserves also means sacrificing the present in order to prepare the future, since the shareholder has at least a virtual ownership right as against the reserves. In the case of a co-operative, a second objective is added to this first objective, i.e. the creation of a corporate net asset in respect of which members will have no individual right. Thus, the reserves of the co-operative are collective. Contrary to what is the case for an entity governed by the general rules of company law, these reserves may not revert to individuals, even after the dissolution of the co-operative. This collective nature of the reserves has two practical consequences:
- the amount of the net income allocated to the reserves of the co-operatives is more important than that of companies governed by the general rules of company law. A minimum of fifteen percent of the surplus (5 percent for companies governed by the general rules of company law) must be allocated to such reserves, thus compensating for the small capital base which has been invested initially in the co-operative and the variable nature of the share capital as well as its consequences regarding commitments made in respect of third parties. For co-operatives which have chosen the form of a business company, the minimum share capital requirement upon their incorporation is less than half the amount required for the corresponding business company. Therefore, in a co-operative, the size of collective investments supplements the small equity base which has been contributed by the members
- the surplus from transactions with third parties may not be distributed and must necessarily be allocated to reserves.
Indeed the payment of the “discount” is one of the specific features of co-operative organisations. While in other companies profits are shared between members on a pro rata basis of their contributions, in a co-operative this allocation is made on the basis of the transactions carried out with each member. Therefore, the relationship between the transactions and the resulting surpluses is maintained at the end of the fiscal year. It is possible to say that the payment of a “discount” – which is often assimilated with the repayment of an “excess payment “ received from the member – makes it possible to refund the profit made on operations to those who have created it and not to those who have made funds available to the co-operative. This observation is important, since this fact enables the co-operative to deduct from its income the amounts which have been paid in this respect and for which the member is subject to income tax. This is the only specific tax rule applicable to co-operatives which are for the rest subject to general tax rules.
The payment of interest on the share capital is restricted to the yield of bonds issued by private-sector companies, as published each year by the Ministry of Economic Affairs (currently 5.09 percent). This in no way represents the payment of a dividend, since the capital contributed by the members gives rise, if expressly provided in the articles of association, to the payment of an annual interest (within the limits set out above). For accounting purposes, this interest is deducted from net income for the fiscal year concerned. In the event that net income is not sufficient, interest may be applied against the reserves, up to the amount necessary to effect the payment.
After allocating the required amounts to the legal reserves and serving the interest on certain securities and refunding the “discount”, the co-operative may post among its reserves the rest of the surplus or allocate this balance to subsidies granted either to other co-operatives, or to charities, whether serving a general purpose or organised within the professional community. In the event of a dissolution, the net assets remaining after covering the liabilities and repaying the contributed capital is devolved under the same rules.
Possible operating losses are applied in priority against the capital (unless otherwise provided in the articles of association) and not against the reserves (due to the fact that they are a “collective share capital”). The member contributes to the losses of the co-operative in a manner which is proportionate to its contribution or to a multiple of the said contribution.
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C - … and rules governing the valuation of members’ contributions
have become more attractive.
In order to strengthen the equity base of the co-operatives and to make it more attractive to invest in them, various provisions have been added to the 1947 Act in 1992.
Today, co-operative companies may issue, if their articles of association allow, a broad range of securities representing their equity, to correspond with their objectives and specific requirements. In addition to ordinary interest shares, co-operative investment certificates, co-operative member certificates (only intended for co-operative or mutual credit institutions) and equity loans, they may now issue shares granting a right to certain specific benefits reserved for holders of interest shares (whether or not they are active members of the co-operative or not) and priority interest shares without a voting right reserved for holders of interest shares who are not active members of the co-operative and also reserved for third parties which are not holders of interest shares.
Interest shares to which special rights are attached may bear interest at a rate which is higher than that paid to holders of ordinary interest shares, or the liability of the holder may be restricted. As their name indicates, priority interest shares give their holder a right to an interest which is paid in priority over the interest served on ordinary interest shares. Moreover, a voting right is granted to their holder when interest has not been paid for three consecutive fiscal years.
Until recently, when the capital was repaid to holders of interest shares, this was made only up to the par value, after deducting possible losses sustained by the co-operative. This provision has now lost much of its practical impact, since it is possible to incorporate, into the capital, part of the “distributable” reserves or to create a special equity reserve for the revaluation of the equity of members who leave the co-operative or have been expelled, either one having a seniority of more than five years. These two measures have relaxed the principle according to which reserves were not to be distributed as well as the priority given to collective interests versus individual interests.
Reserves may be incorporated into the capital by allocation of free interest shares or by an increase in the par value of the interest shares. This measure may only apply to one half of the available reserves when reserves are incorporated for the first time, and to one half of the increase in the said reserves when they are incorporated into the capital at a later stage.
The revaluation of the capital for members who leave the co-operative or have been expelled corrects the decrease in value of the interest shares as a result of monetary erosion.
Even though recent changes in legal rules applicable to French co-operatives tend to limit part of the features which distinguish them from the general rules of company law, it is necessary to note as a conclusion that the legal elements which define a co-operative retain a strong identity, in line with the generic definition adopted by the International Co-operative Alliance in 1995.
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