Demutualization

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Demutualization (or demutualisation) is the process by which a customer-owned mutual organization (mutual) or co-operative changes legal form to a joint stock company.^[1] It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form of shares in the successor company, a cash payment, or a mixture of both.

The mutual traditionally raises capital from its customer members in order to provide services to them (for example building societies, where members' savings enable the provision of mortgages to members). It redistributes some profits to its members. By contrast a joint stock company raises capital from its shareholders and other financial sources in order to provide services to its customers, with profits or assets distributed to equity or debt investors. In a mutual organization, therefore, the legal roles of customer and owner are united in one form ("members"), whereas in the joint stock company the roles are distinct. This allows a broader capital base if the customers cannot or will not provide sufficient financing to the organization. However, a joint stock company must also try to maximize the return for its owners instead of only maximizing the return and customer services to its customers. This can lead to a decline in customer service to the extent that customers', management's and shareholders' interests diverge.^[2]

(Mutualization or mutualisation is the opposite process, wherein a shareholder-owned company is converted into a mutual organization, typically through takeover by an existing mutual organization.)

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Contents 1 Types of demutualizations 2 Examples 2.1 Security exchanges 2.2 Life insurers 2.3 Agricultural cooperatives 2.4 Building societies 2.5 Membership associations 2.6 Retail consumers' cooperatives 2.7 Retailers' co-operatives 3 See also 4 References 5 External links

[edit] Types of demutualizations

There are three general methods in which an organization might demutualize, full demutualization, sponsored demutualization, and into a mutual holding company (MHC). In any type of demutualization, insurance policies, outstanding loans, etc, are not directly affected by the organization's change of legal form.

• In a full demutualization, the mutual completely converts to a stock company, and passes on its own (newly issued) stock, cash, and/or policy credits to the members or policyholders. No attempt is made to preserve mutuality in any form.

• A sponsored demutualization is similar; the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially bought by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead.

• A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada,^[3] disallow the formation of MHCs.) The core participants are isolated into a special segment of the company, still viewed as "mutual". The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.

Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as “Legalized Theft.”

Some MHC demutualizations have been planned as the first of a two-stage process. The second stage would be full demutualization once the transition pains into MHC status are complete. In other cases, the MHC is the final stage.

Note that some mutual companies, such as Nationwide Mutual Insurance Company and the MassMutual, own stock companies and are listed on a stock exchange. These are not MHCs, however; they are simply mutual companies which have majority control over one or more stock companies. Other mutual companies may own some of another company's stock, but as simply an asset, not something they actually control. Finally, many mutual companies, including Nationwide and MassMutual, have wholly owned subsidiaries. The subsidiaries may technically be stock companies, but the mutual owns all the stock. For example, the New York Life Insurance and Annuity Corporation (NYLIAC) is a wholly owned subsidiary of the New York Life Insurance Company (NYLIC). A person may purchase an insurance policy from either company, but only those who own participating policies from NYLIC are mutual members. Other policyholders are customers.

[edit] Examples

[edit] Security exchanges

The Chicago Mercantile Exchange became a shareholder-owned public corporation in 2000 through a public offering. "The road to this initial public offering began in June 2000, when Exchange members voted overwhelmingly to transform the then not-for-profit, membership-owned organization into a for-profit, shareholder-owned corporation. On November 13, 2000, CME became the first U.S. securities exchange or commodities exchange to demutualize into a joint stock corporation.^[4] The Chicago Mercantile Exchange had its IPO on December 6, 2002.

The Chicago Board of Trade similarly carried out an IPO in 2005, having previously been "... a self-governing, self-regulated Delaware not-for-profit, non-stock corporation that serves individuals and member firms."^[5]

[edit] Life insurers

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Over 200 US mutual life insurance companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as Prudential, MetLife, John Hancock, Mutual of New York, Manufacturers Life, Sun Life, Principal, and Phoenix Mutual decided to demutualize and return to policyowners all the profits they had accumulated as mutual life insurers. Policyowners were awarded cash, stock and policy credits exceeding $100 billion in a wave of demutualizations, which have been regarded by some as very rewarding to the new owners although the effect on customers is not discussed. Others show that the demutualization process is detrimental to customers. ^[6]

Other large mutual life insurance companies decided to not return their accumulated profits to policyowners. The boards of directors of these other companies, which include Northwestern Mutual, Massachusetts Mutual, New York Life, Pacific Life, Penn Mutual, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia Life, and Ameritas Life decided to either remain mutual or they decided to form mutual insurance holding companies. At the end of 2006 there were fewer than 80 mutual life insurers in the United States.

[edit] Agricultural cooperatives

Numerous agricultural supply and marketing cooperatives have demutualised. One of the larger ones was Kerry Co-op of Ireland, a milk and meat processor that demutualised in 1986, compensating its farmer members, and became the publicly-traded Kerry Group.^[7]

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[edit] Building societies

For more details on this topic, see Building society#1980s and 1990s.

A building society is a form of mutual banking organization that emerged in the UK in the 19th century, for personal savings and home mortgages. The UK movement had its zenith after the deregulation of the Building Societies Act 1986. Yet, beginning with Abbey National in 1989, many of the larger societies, including Halifax Building Society, the largest, soon converted into joint stock banking companies. By 1997, many societies had become targets of speculative “carpetbaggers”, who joined to vote for demutualization and to gain the member windfall in cash or shares of stock. Some societies that valued mutuality, such as the largest remaining mutual, Nationwide Building Society, adopted poison pill clauses in their rules as defense against carpetbaggers. Nationwide's defense is a charitable assignment provision, that requires new members to assign any compensation from demutualization to charity.^[8]

[edit] Membership associations

The UK motorists' organisation, The Automobile Association, demutualized and was purchased by Centrica plc in 1999.

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[edit] Retail consumers' cooperatives

As well as the many agricultural supply cooperatives that demutualized, a small number of general retail consumer's cooperatives have demutualized or considered demutualization. In 1997, Andrew Regan launched an unsuccessful hostile takeover bid to demutualize the UK's giant Co-operative Wholesale Society, which, despite its name, was a large retailer in its own right. In 2007, the tiny Scottish retailer, Musselburgh and Fisherrow Co-operative Society, completed most or all of the steps necessary to demutualize. In 2008, a Swiss competition regulator recommended demutualization to Switzerland's leading supermarket chains, Coop and Migros.^[9]

[edit] Retailers' co-operatives

Irish grocer-owned retailers' cooperative, ADM Londis, changed its capital structure in 2004 to an unlisted public limited company, allowing its owners to trade its stock privately at market value.

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[edit] See also

• Financial institution
• Carpetbagger#United Kingdom
• Thatcherism
• Mutual insurance
• Category:Demutualized organizations

[edit] References

• John W. Carson, Conflicts of Interest in Self-Regulation
• Andreas M. Fleckner, Stock Exchanges at the Crossroads

[edit] External links

• The Feeling's Not Mutual An Analysis of Governor Pataki’s Proposed Mutual Holding Company Legislation (New York State Assembly, 1998)
• Policyowners for Demutualization of Mutual Life Insurance Companies
• Reorganization Status of Mutual Life Insurance Companies (USA)
• Co-operative Issues – Demutualisation – International Co-operative Alliance