APPENDIX 7 CO-OPERATIVE STRUCTURES

NEW ENGLAND TABLELANDS COMMUNITY WIND FARM FEASIBILITY STUDY

AUGUST 2011

Our Ref: SH: 34038:13277 Your Ref:

10 May 2011

Mr Adam Blakester New England Community Wind Farm Consortium Co Starfish Enterprises 19 College St Armidale NSW 2350 By email: adam@starfishenterprises.org

Dear Adam, New England Wind Legal Entity & Structure 1.

1.1

Background New England Wind (NEW) is an entity that has formed out of the New England Community Wind Farm Consortium. NEW is developing a community renewable energy project, namely a community owned and operated wind farm on the New England Tablelands. NEW has sought our advice regarding the development of its legal structure. We have been given a written brief dated 15 February 2011which included a research briefing matrix. We have also had a number of discussions with the project coordinator of the New England Community Wind Farm Study and the benefit of reading legal advice provided to the New England Wind Farm Consortium by Mr Hugh Piper of Wilson and Co Lawyers dated 15 March 2011(Wilson and Co Advice). We note that our instructions are limited to 2 broad areas of advice, namely (a) advice regarding a co-operative structure, looking briefly at an existing community owned wind farm in Hepburn, Victoria and (b) any comments considered relevant on the type of entity recommended in the Wilson and Co advice. Hepburn Wind A community owned and operated wind farm in Victoria Hepburn Wind will be the owner and operator of Australias first community owned wind farm, at Leonards Hill, just south of Daylesford in Victoria. Hepburn Community Wind Park Co-operative Ltd (Hepburn Wind) is a trading co-operative registered in Victoria. Hepburn Wind is managed by an elected board of Directors (the Board). Shares in Hepburn Wind may only be purchased by co-operative members. However, anybody can apply to become a member including individuals, companies, co-operatives, investment clubs and superannuation funds. Membership acceptance is at the sole discretion of the board. The Hepburn Wind project was initiated by the Hepburn Renewable Energy Association (now SHARE) in conjunction with Future Energy Pty Ltd.

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Trading or Non-Trading Co-operatives can be set up as a trading or a non-trading organisation. Renewable energy co-operatives tend to be trading co-operatives as they sell energy generated by the cooperative to third party distributors. A trading co-operative can share any unused or surplus funds with its members. However, to be classed as a co-operative for tax purposes, at least 90% of the business must be conducted with its members alone. Under the Income Tax Act 1936, the co-operatives income distributed to the members can be deducted against its taxable income. A non-trading co-operative will reinvest its profits or surplus funds back into the business to support the development of the co-operative. Provided the activities of the co-operative are not carried on for the profit or gain of its individual members, it will be classified as non-profit for income tax purposes. Accordingly, any profits or other funds in a non-trading co-operative should never be distributed to members. It is our view that a non-trading co-operative is unlikely to be suitable for an entity such as a renewable energy producer, the type envisaged by NEW. The Law of Co-operatives Each state and territory has its own legislation governing co-operatives. The state legislation is relatively consistent throughout Australia with the exception of Western Australia which has committed to adopting consistent legislation. The current law governing co-operatives is being revised and there is a proposal for a Co-operatives National Law Bill to formally establish a national framework. The plan is that New South Wales will enact the national law. Other states and territories will then have 12 months to apply the national law or enact consistent legislation. The Ministerial Council for Consumer Affairs claims that the inconsistencies that do exist between the states and territories, will be removed by the proposed national legislative framework which intends to achieve the following: provide a simple, affordable and efficient mechanism for the registration of a co-operative as an independent legal entity; ensure that a registered cooperative has the same rights, duties and compliance costs in each State and Territory; ensure that legislative measures for the oversight of cooperatives are no less favourable than measures in place for other forms of corporate body, including companies registered under the
Corporations Act 2001;

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ensure that a registered cooperative can operate on a national basis, equivalent to the manner in which a company can operate on a national basis.1

Ministerial Council for Consumer Affairs, Co-operatives A National Approach, Consultation Regulatory Impact Statement , 2010 p10 http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Consultations_and_Reviews_Cooperatives/$file/R egulatory_impact_statement.pdf

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We note that that mutualisation laws historically may take some time to eventuate. However, we would also note that a lot of work has already been undertaken.2 In NSW the legislation governing co-operatives is the Co-operatives Act 1992. In Victoria the legislation governing co-operatives is the Co-operatives Act 1996. The legislation in these two states is very similar. This comparison is made to enable an understanding that if New England Wind decided to model itself on the Hepburn Wind project there would be no great differences in terms of the legal form of the co-operative. Co-operative principles3 are provided in the NSW Co-operatives Act at s6, which states: Co-operative principles In this Act, a reference to co-operative principles is a reference to the principles adopted by the International Co-operative Alliance (ICA), being the following principles: Voluntary and open membership Co-operatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination. Democratic member control Co-operatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives members have equal voting rights (one member, one vote) and co-operatives at other levels are organised in a democratic manner. Member economic participation Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. They usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing the cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership. Autonomy and independence Co-operatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy. Education, training and information

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A regulatory Impact Statement and an Exposure Draft Bill was been released in 2010. http://www.fairtrading.nsw.gov.au/Cooperatives_and_associations/Cooperatives/Cooperatives_legislation/Cooperatives _national_law.html#How_can_I_access_the_draft_legislation 3 International Co-operatives Alliance is an independent, non-governmental association which claims to unite, represent and serve co-operatives worldwide. The ICA was founded in 1895, and has 251 member organisations from 93 countries active in all sectors of the economy. Together these co-operatives represent nearly one billion individuals worldwide International Co-operative Alliance, http://www.ica.coop/al-ica/

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Co-operatives provide education and training for their members, elected representatives, managers and employees so they can contribute effectively to the development of their cooperatives. They inform the general public, particularly young people and opinion leaders, about the nature and benefits of co-operation. Co-operation among co-operatives Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures. Concern for the community While focusing on member needs, co-operatives work for the sustainable development of their communities through policies accepted by their members. 5.
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Active Membership Under the law, being a member shareholder of a co-operative requires something more than the equivalent shareholder of a public company. Co-operatives are unique in that they generally require 'active membership' on the part of the member. In this respect, the member is obliged to undertake active participation, support or a relationship with the primary activity of the co-operative. The primary activity of the co-operative needs to be specified in its rules in order to identify the aim of the co-operatives business or the community goal to be achieved. The manner and extent of the participation required of each member will usually be set out clearly in the rules of the co-operative as tests to gauge 'active membership'. For example, Hepburn Wind Rules state the Primary activities of the Hepburn Community Wind Park Co-operative Limited are to: (a) develop, own, operate and manage a wind farm or farms; (b) generate and supply energy from the co-operative wind farm or farms; (c) provide advice and assistance to its members to reduce energy usage and increase members energy efficiency; (d) raise community awareness of the benefits of sustainable and renewable energy4 In order to remain an active member of Hepburn Community Wind Park Co-operative Limited a member: (a) must purchase or consume energy generated directly or indirectly by the Cooperative; or (b) subscribe to the Co-operatives information advisory service relating to energy usage and efficiency; or (c) Subscribe to the Co-operatives newsletter. If a member fails to maintain an active membership with the co-operative, the board has to cancel that persons membership and that persons share in the co-operative will be forfeited. In practical terms, the definition of 'active membership' depends on the project itself. For example, it may be that a member simply needs to buy from the co-operative on a regular basis (that is, buy water from an irrigation project or electricity from a wind farm project).

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Appendix 2, Part 2, Rules of Hepburn Community Wind Park Co-operative Limited, http://www.hepburnwind.com.au/downloads/hw-rules.pdf

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Co-operatives are democratic institutions and each member has one vote only, irrespective of how many shares they hold. This is because the benefit to members is not primarily a return on share capital. The benefit is derived from the link between the objectives of the co-operative and the interests of the members. For example, again the rules of the Hepburn Wind state in this regard at rule 34: Attendance and voting at general meetings 1. The right to vote attaches to membership and not shareholding. ... 3. Subject to the Act and this rule, every member of the co-operative has only one vote at a meeting of the co-operative.

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Discussion of Co-operatives It has been said that: Increasingly, co-operatives are the corporate structure of choice for providing a communitybased infrastructure. This is mainly because the aims and purposes of a co-operative are in sharp contrast to a company's. A company's main aim is to make profit from customers, and provide dividends to third-party shareholders.5

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ICA claims that some of the largest businesses in the world are co-operatives, that cooperatives create over 100 million jobs worldwide, more than multinational companies. It claims that co-operatives are jointly owned and democratically controlled enterprises that are competitive and market leaders in many Countries and sectors. The ICA claims that cooperatives are entities with a soul.6 However, it has also been noted that co-operatives are in decline in Australia. The Ministerial Council for Consumer Affairs in its Regulatory Impact Statement for a National Approach to Co-operative Law states: The number of cooperatives in Australia appears to be falling. In the middle part of the twentieth century, cooperatives were a common feature of Australian life and a central feature in many regional centres. In recent years a number of large cooperatives have demutualised and become companies or have been taken over by companies. The number of small cooperatives also appears to be declining.7

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The Ministerial Council for Consumer Affairs states that: It has not been possible to identify all the reasons for the decline in the number of cooperatives, or the extent to which the legislative framework may have contributed to this decline. Changes in the general economy and in Australian culture are likely to have contributed as much or more to the decline. There is, however, a clear imperative to ensure that the legislation framework provides a level playing ground for cooperatives

Mattila,J, Co-op formation and initial capital, http://www.embark.com.au/display/public/content/Co-op+formation+and+initial+capital 6 International Co-operative Alliance, http://www.ica.coop/al-ica/ 7 Ministerial Council for Consumer Affairs, Co-operatives A National Approach, Consultation Regulatory Impact Statement , 2010 p11-12 http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Consultations_and_Reviews_Cooperatives/$file/R egulatory_impact_statement.pdf

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and that legislation does not create barriers for incorporated bodies which choose to implement cooperative principles.8
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The proposed Cooperatives National Law aims to: Provide a nationally consistent replacement for the separate legislation currently regulating co-operatives in States and Territories. Provide a method for efficiently applying and maintaining consistent co-operatives legislation including Regulations. Make it easier to understand the interactions between co-operatives legislation and the Corporations Act 2001. Ensure that provisions of the Corporations Act 2001, which are relevant to cooperatives, are applied consistently across States and Territories. Simplify financial and auditing requirements for small co-operatives. Reduce restrictions on co-operatives operating across borders. Introduce nationally consistent provisions for the supervision of co-operatives.

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A review of cooperatives legislation conducted in 2005 identified other problems with current cooperatives legislation. This review found that: Changes to corporate governance requirements in the Corporations Act 2001 have not flowed through to cooperatives. As a consequence different standards now apply for cooperatives and companies, including duties for directors and officers. Cooperatives legislation modifies some provisions in the Corporation Act 2001 and then applies them to cooperatives, but this is done in an inconsistent manner across jurisdictions - leading to different requirements in different States and Territories. Small proprietary companies are exempted from some requirements for financial reporting and auditing under the Corporations Act 2001, but there are no equivalent exemptions for small cooperatives. Cooperatives in New South Wales are specifically authorised to raise funds by issuing a new type of security known as a Cooperative Capital Unit. This form of security is not recognised in cooperatives legislation in other jurisdictions providing cooperatives in New South Wales with a potential competitive advantage. (Victoria has subsequently implemented provisions for Cooperative Capital Units and Western Australia is in the process of doing so). The Core Consistent Provisions specifically prohibit cooperatives from carrying on business across borders without approval from the local Registrar of Cooperatives.

Ministerial Council for Consumer Affairs, Co-operatives A National Approach, Consultation Regulatory Impact Statement , 2010 p12 http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Consultations_and_Reviews_Cooperatives/$file/R egulatory_impact_statement.pdf

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Compliance with these approval requirements imposes costs on cooperatives which place them at a competitive disadvantage to companies9 7.
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Wilson & Co Advice Co-operatives & Unlisted Public Companies We note that the Wilson and Co advice states the co-operative legal entity is not geared to promoting the social and political objectives of the project. We do not necessarily concur with this view. We see no legal or other prohibition or discouragement of a co-operative structure promoting the social and political objectives of the project, or no more so than an unlisted public company. We note that Hepburn Winds rules state that one of its primary activities is to raise community awareness of the benefits of sustainable and renewable energy. Furthermore we are of the view that the co-operative principles provided in the Co-operatives Act would support and encourage such activity, in this regard we note the principle entitled Concern for the community, which states: While focusing on member needs, co-operatives work for the sustainable development of their communities through policies accepted by their members. A wind farm co-operative could incorporate into its primary activities the promotion of the social and political objectives of the project. Regarding the second limitation of co-operatives noted in the Wilson and Co advice, we note that the matters prescribed by the Co-operatives Act that a co-operative must make provision for such as in Schedule 1 of the Act are not necessarily negatively viewed in regard to the particular project that NEW is engaging, nor are we sure how, as stated in the Wilson and Co advice such provisions makes a co-operative unsuitable as an entity for NEW. In this regard we note that all legal entities must make particular provision for particular matters. The Corporations Act 2001 (Cth) requires public companies to comply with its provisions, including that the company be governed by a constitution which complies with the Corporations Act 2001. It is arguable that the matters prescribed by the law for co-operatives are primarily to drive clarity and equity in the furtherance of the democratic functioning of the entity. We note that co-operatives must have a board of directors who have the same duties, obligations and responsibilities as the directors of a company. They must exercise care and diligence, act in good faith and avoid conflict with the interests of the co-operative. Perhaps the main difference between a director of a co-operative and a director of a company is that the director of a co-operative must also be a member of the co-operative. This is qualified in that a cooperative can have one non-member director for every three member directors. It is likely that if NEW was to set up a co-operative, it would be a trading co-operative with a share capital. If NEW is attracted to the design of a co-operative and committed to the principles that drive a co-operative, while there are currently some problems with inconsistency, it is envisaged that there will be a new national law and it has already been determined that the costs of moving to the national approach for existing co-operatives would be minimal. However, we reiterate our concerns noted already, that mutualisation laws may take some time to eventuate.

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Ministerial Council for Consumer Affairs, Co-operatives A National Approach, Consultation Regulatory Impact Statement , 2010 p11 http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Consultations_and_Reviews_Cooperatives/$file/R egulatory_impact_statement.pdf

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An unlisted public company can have unlimited shareholders to raise capital for profitable purposes, but it cannot advertise for investors. The liability of the members of public companies, like co-operatives, may be limited to the extent of the value of their shareholding. However, we understand that there may be significant actual costs in setting up the company in terms of company disclosure materials that would meet the standards required in the Corporations Act.10 We strongly advise that information about these costs be sought by NEW before making any final decision. We note that public companies with more than 50 members, which we understand is likely to be the case for any company that NEW might create, may be subject to the takeover provisions of the Corporations Act. Very basically, a company may be subject to the acquisition of particular shareholder interests where the acquiring interest held in the company is substantial. While it may be possible to structure a company to avoid takeovers, we are not necessarily of the view that it is possible to do so with any guarantee. It would appear that a public company structured to utilise the advantages of a profit driven agenda, remembering that the main aim of a public company is to provide a return on share capital to shareholders, means that it is subject to the more subtle and nuanced ways (such as interest working in association) of achieving substantial interest takeovers. We note that the Corporations Act requires that any action taken by directors in the face of a takeover bid must be for the benefit of the company as a whole. Although this proposition is well settled, there is debate as to whether the phrase "the company as a whole" refers to the company as a commercial entity or to the shareholders as a body. Usually, both formulations will give rise to the same result, but the interests can differ. For example, a cash bid at a high price by a bidder who intends to liquidate the company may be in the interests of the shareholders but would not be in the interests of the company as a commercial entity. Furthermore, if the company's interest as an ongoing commercial entity is the sole factor, actions taken by directors to maximise the price offered under the takeover bid cannot be justified. Conversely, if the interests of the shareholders are paramount, such actions can be justified on the grounds that it is in the shareholders' interests to ensure that the full value of their shares, including any control premium, is reflected in the price offered. The decided cases appear to support the view that directors should have regard to the interests of shareholders as well as the interests of the company as a commercial entity. However, if those interests conflict, the interests of the company as a commercial entity should prevail. There is nevertheless strong support for the view that, although both interests may be considered in a takeover situation, ultimately the interests of the current shareholders must prevail. Directors cannot frustrate an offer made at a high price merely to preserve the existence of the company as an ongoing concern. This view would appear to have greater support in practice.11

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Mattila,J, Review of Legal Structures, http://www.embark.com.au/display/public/content/Review+of+legal+structures For High Court statements on this general principle, see Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 [PDF]; Mills v Mills (1938) 60 CLR 150 [PDF]; Ngurli Ltd v McCann (1953) 90 CLR 425 [PDF]; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 [PDF]; 42 ALJR 123; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 [PDF]; 61 ALJR 216; 70 ALR 251; 11 ACLR 715; 5 ACLC 421. See also Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; [1974] 2 WLR 689;[1974] 1 All ER 1126; [1974] 1 NSWLR 68 [PDF]; (1974) 48 ALJR 5; 3 ALR 448 (PC).
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We would strongly advise that NEW be satisfied that such aspects of a legal structure are the types of matters that it understands and is satisfied would suit its long terms future needs and aspirations as a community owned wind farm or otherwise. We understand that there is some thought regarding a hybrid legal structure of sorts, with a cooperative as a shareholder in a public company. This may be a viable and desirable entity. However, again if the parent type company is a public company we advise that NEW would need to obtain particular expertise in the drafting of instruments of creation and understand that the long term interests of a community owned and operated wind farm may be subject to a different character in the long term. Conclusions Co-operatives and public companies tend to provide the most successful outcomes for community projects. However each has benefits and drawbacks. In general, it has been said that the co-operative structure has been popular with local communities, who seek benefits other than simply a return on share capital. However, corporate or institutional investors often prefer the public company structure, as it focuses on generating a return on their share capital.12 NEW must determine what priorities it has, in terms of delivering its design and innovation. This will include the ideological framework within which it is intending to operate.

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We hope this advice is of some assistance to you. Please do not hesitate to contact the writer on 02 6621 116 or by email at sue.higginson@edo.org.au regarding this advice. Yours sincerely Environmental Defenders Office (Northern Rivers) Ltd

Sue Higginson Senior Solicitor

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Mattila,J, Review of Legal Structures, http://www.embark.com.au/display/public/content/Review+of+legal+structures