Forgot to address the dumbest argument against "permanent" equity in my last blog. The criticism of the use of permanent equity (most particularly if the Co-op does not distribute patronage earnings with NQNAs, but instead the Co-op creates an unallocated reserve as its permanent equity base), is that carpet baggers will pass through town and buy the Co-op's assets for pennies on a dollar.
This argument is specious because in a dissolution, the proceeds that remain after redeeming allocated equity are distributed on the basis of historical patronage to the co-op's patrons. The gist of the argument is that carpet baggers will want to buy up co-ops on the cheap because no one owns the unallocated reserve; hence, no one will attempt to protect it from the carpet baggers.
But the unallocated reserve is owned by all patrons. It is just that until a dissolution, we cannot identify the patrons who will receive the reserve because we cannot calculate historical patronage until a dissolution occurs. Yes, the analysis seems convoluted and circular but that is the law and it protects the remaining proceed for patrons, saving those proceeds for distribution on the basis of historical patronage. The carpet baggers will not receive any premium or advantageous discount if the assets are sold for their fair market value.
Further, the Co-op's board must protect that reserve (theoretically the fair market value of the co-op's assets minus debts could exceed the book value of all equity - allocated or not - which could be far in excess of the reserve, and the board must protect it - not just allocated equity - for distribution to patrons in the event the co-op dissolves).
If any Co-op board recommends to members that assets be sold for pennies on a dollar, for less than fair market value that is, the problem is a lack of leadership on the board's part, not permanent equity. Parenthetically, selling assets for pennies on a dollar would prove the axiom of one of my good friends who works for one of the regional co-ops. She likes to say that "we sometimes get suicide and good times mixed up in the co-op community".
Hence, the argument that permanent equity leads to take overs of co-ops by carpet bagging investor owned companies is ridiculous.
I agree that the argument that permanent equity leads to take overs of co-ops by carpet bagging investor owned companies is ridiculous.
ReplyDeleteOne need only look to the experiences of former co-op's, such as the Saskatchewan Wheat Pool, and the enormous redemption obligations (aka the lack of permanent equity) that precipitated their demutualization to realize that permanent equity is not part of the problem, but instead part of the solution.