Questions on Model Rules for a FairShares Coop

Gordon,

1. (Article 11). Under Co-operative Law, capital is normally withdrawable, but there can be constraints on its withdrawal. This clause exists only in the Co-operative Law model rules, not the Company Law model rules. Under FairShares Model Rules, the Redemption Fund exists to repay members who want to withdraw their shares (the Redemption Fund is 50% of Reserves). To prevent a 'run' on capital, capital can only be withdrawn if there are funds in the Redemption Fund (so if there are no Reserves, capital cannot be withdrawn). There is also a cap on the capital repayments that can be made in a single accounting period (50% of Reserves).

2. (Article 40). This is set at incorporation by the Founder members. Thereafter, it can be varied only by Special Resolution.

3. Par value shares are the norm in most (if not all) Co-operative Laws internationally. If you want shares that vary in price/value (i.e. shares that act like equity in a private company), I recommend you switch to Company Law and incorporate using the FairShares Company Model Rules. In the UK (and some other countries), switching to Company Law does not preclude you from gaining recognition as a Co-operative if you follow all the Values and Principles of the ICA. In some countries, however, you cannot use the word 'co-operative' in your legal documents if you are not registered under Co-operative Law so you will have to check local laws before you make a final decision.

Hope these answers are clear.

Best, Rory

Gordon,

Some answers to your additional queries.

#Query 1 (a). Can Founders be Users and Workers as well?

Yes - that's the aspect that separates the FairShares Model from other multi-stakeholder coop models (like Somerset Rules) where people have to choose which group the belong to. We think that's artificial - members are members by virtue of the relationships they have to the coop. It is one-shareholder, one-vote, so it is not an issue. However, if a person makes several contributions, we think it is okay to be rewarded for multiple contributions.

#Query 1 (b). Why is it a fixed pref dividend allocation to Founder Shares?

(FYI - I intend to give Founders TBD powers: temporary beneficial dictator - either 2 years or when members reach a certain size.)

On fixed pref, I have removed the fixed preference dividend from V3.0 (that's a legacy from the time we did not expect dividends to paid directly on Founder shares - Dojo4Life / AnyShare chose to do otherwise, so we should change in the model rules as well - well spotted!).

On powers, I think Founders already have the powers you want in several ways. Firstly, other shareholders are not admitted until you agree 'qualifying contributions' for Labour and User shareholders in General Meeting. In the early days, the General Meeting is entirely made up on Founders until you set the criteria. External Investor Shareholders are also subject to General Meeting approval. So, until you reach agreement on the qualifying contributions for membership and the admission of 'outside' members, Founders are effectively in control. I think it is better to scale with size than length of time - the number of members is probably a better measure of the maturity of the enterprise than the length of time it has existed.

Secondly, the member threshold for Director elections and social auditing (Clause 29, 31 and 47) means that Founders are the only Directors until the threshold is reached. You can set this threshold higher (e.g. to 500). That way, Founder directors retain Board control until the membership matures. We set this to 50 in the expectation that more 'worker coop' type FairShares enterprises would develop initially, but would advise that a number in the hundreds (or even thousands) would be more appropriate where there are a lot of user members, particularly internet based users.

Is this sufficient?

Query 2. "Multi-sided platforms, as you know, have different types of users. In the Brave Coop there will be end-users (humans) and probably (hopefully) enterprise/corporate/association/etc partners that use additional features, and pay for them. Would you suggest that these enterprise users are granted User Shares as well? Or should there be an additional class for them?"

I would put the emphasis on the qualifying contribution, rather than the person type. It was certainly our intention to recognise both human and legal persons in membership if the qualifying contribution is met, but we do have a requirement for applying the provisions to non-human actors requires a special resolution (see Clause 12(f) "Subject to special resolution, the provisions of clauses 12 (a) to (d) can be applied to other legal entities (companies, cooperatives, associations, foundations, charities etc.) who support the work of the company.").

A special resolution is easy to pass when you are small / start-up, but gets harder has more members join.

Query 3. Paying for Labour with Labour Shares

"The intention is to pay for certain services with either a mix of cash and, or solely with, shares - and I had assumed it would be with Labour Shares."

This is covered in Clause 34 - you can pay people only in Labour Share dividends. Basically, you issue Labour Shares which gives the holder an entitlement to a share of the surpluses generated - but that is all. However, there is a proviso - if the relationship is an employment relationship (i.e. meets standards in employment law), then the rules oblige you to issue an employment contract and employment law will apply. So, it comes down the relationships you intend to have. This is not a model for by-passing employment law if the workforce are actually employees in law.

"Alternatively, we would view this as an investment-in-kind and "pay" them with Investor Shares but, again, how would I issue, for example, 10,000 fully-paid up $1 par value shares if I don't have the $10,000 in cash?"

You have this power already. Clause 43 states "Providers of labour (directors, employees, self-employed contractors) may, subject to mutual consent, be part-paid in Investor Shares, credited as fully paid". I think this would be preferable to changing the par value status of Labour Shares. Investor Shares are designed to be the share type that captures market / tradeable value, not Labour shares.

However, I agree that Labour Shares can have a notional value based on the dividend paid to Labour shareholders divided by the number of Labour shares issued. So, if you distribute Labour Share Dividends of £10,000 to 10 people holding 1 Labour Share each, then each Labour Share would have a notional value of £1,000. However, I would handle this in management accounts rather than financial account records. Could be a KPI!

Hope this help?

Why not have a stab at:

http://sites.google.com/view/fairsharesrules

This is our test site for V3.0 rules generation.

Best wishes
Rory

Find out more about Dr Rory Ridley-Duff at http://www.roryridleyduff.info
Find out more about the FairShares Model at: http://www.fairshares.coop

Hi Rory,

As always, I am immensely grateful for your time and effort here, thank you so much!

I'll definitely go through the test site as I know it's going to ask me questions that I have missed in my analysis so far (I can't believe I missed Clause 43 for a start!!)

I will also be working to have a draft set of Rules, one way or the other, by the end of next week. I will post/link them here in case anyone wants to have a look and comment.

All the best, and very much looking forward to meeting in London next month,
Gordon.

Gordon, if you use the Rules Generator, I can share the GoogleDoc result with you - then you can invite whoever you want to comment on the rules. Given were are Beta testing the system, ignore the 'fixed fee' message - we can waive it until June 2017 when it is officially released.

Clause 43 could be in a better place (i.e. next to the clause that describes remuneration!)

Thanks Rory - I'll definitely do that. I am, however, also working from a British Columbia-specific template and intend to integrate the FairShares model rules into that document (rather than vice versa) but we'll see where we end up.

Gordon - I am writing a report for the FairShares Labs partners. I just want to check you have no objection to me listing Brave as an early adopter of FairShares (and mentioning its arrangements to FairShares Labs partners). I have a copy of the amended rules we worked on, but wonder if you have a final set used to incorporate in Canada.

Incidentally, I recently published a book chapter on two early adopters of FairShares (in the UK and US) under Company Law. The next two international adopters (yourself and Gordon in Canada) have both used Cooperative Law (and there are two in New Zealand looking like they are going to use the Cooperative Companies Act 1996). How would you feel about me interviewing you as part of a new research project in the Cooperative Law adoptions of FairShares?

Hi Rory - no problem at all, of course! Happy to chat as well, we can schedule over email. I'm happy to send you the latest draft but they're still not final...

Yes - latest draft would help. For the research, we would wait until you have incorporated. Would still be good to Skype and catch up.

1. Cooperatives ussually are not allowed to reserve or reinvest more than 10% of their profits a year because only the members, not the co-op itself should make a profit. This is to stop managers empire building then paying themselves inflated salaries. This was the motive behind the wave of demutualisation of non co-ops.
2. The reason for par value shares (can only be sold at the purchase price) is because they are a fund raising tool. Coops in most countries can't pay dividends to investors and pay secured bonds instead. FairShares are not considered to be co-ops in most countries because shareholders have veto powers like the security council in the UN. There Russia and China and the US veto prosecuting Syria because they don't want to empower independant justice mechanis. Those countries, like fairshares are also members of the general assembly so they only need to use their veto if the general membership vote is not enough. Its the same in Fairshares.