INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 18, 1997

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order pursuant to an order of reference of the House dated Wednesday, October 22, 1997 on consideration of Bill C-5, An Act respecting cooperatives.

To begin, today we have before us from the Department of Industry a number of people to give us a briefing on Bill C-5. Everyone should have a black binder that was prepared. What we have before us now is some speaking notes and a deck on the new Canada Cooperatives Act.

Mr. Hains, if you could introduce people you have with you, that would be great.

Mr. Jacques Hains (Director, Corporate Law Policy Directorate, Department of Industry): I'm with Industry Canada in the policy sector, where I was responsible for the development of this legislative proposal. I have a number of colleagues accompanying me today to assist in answering the questions committee members might have: Mr. Irving Miller, who is a counsel with the Department of Justice counselling Industry Canada; Mr. Lynden Hillier, the executive director of the Cooperatives Secretariat of Agriculture and Agri-Food Canada—they are responsible for liaising with Canadian cooperatives—Ms. Jennifer Elliott, who is a legal policy analyst with my directorate at Industry Canada; and Ms. Cheryl Ringor, who is a compliance officer with the Corporations Directorate of Industry Canada, which will be charged with administering this legislation if Parliament decides to enact it.

[Translation]

Over the past few weeks, we've had an opportunity to meet individually with committee members and the various political caucuses to provide briefings on Bill C-5, An Act respecting co-operatives. We have also met with the researchers of the committee to explain the bill to them in detail.

I believe you have already received a very good summary of the bill from the committee researchers. I will not take up too much time on the presentation. Rather, I will make a brief statement, so that we have as much time as possible for committee members to ask questions on the bill.

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There are two main points I would like to draw to your attention. First of all, as all the members of Parliament who spoke during the second reading debate on the bill recognized and stressed, we must remember that this bill was conceived, debated and proposed by the Canadian co-operative movement for Canadian co-operatives. I think it is most important to remember this fact.

[English]

Your committee will be able to verify with the two national cooperative associations, the Canadian Cooperative Association and le Conseil canadien de la coopération, when they appear on Thursday, that for them this has been a long and extensive comprehensive process of round table discussions, symposiums, and consultations extending over several years, which has led to their proposal, which is basically what you see in Bill C-5.

I wasn't part of these discussions over the last several years, but at times it must have been a difficult, delicate process of consultations and compromises, and things like that, because they were talking about adopting and proposing that Parliament adopt business types of arrangements and legislative tools at the same time as enhancing and entrenching in law cooperatives' principles. It is not necessarily obvious how the two can marry together and work together.

So at times it must have been, as I said, long, difficult, sensitive discussions among the cooperative movement itself. But the end result is that they have achieved a consensus. Again, it's not for me to say. You'll be able to verify that with them on Thursday. They have achieved a consensus that is essentially what you see in Bill C-5. They've presented that to the government as a consensus proposal, something they want, and the government has decided to respond to that several years of extensive work on the issue.

Since Bill C-5 was introduced last September, there has been one particular issue that has been brought to our attention, and no doubt has been brought to your attention, or will be right after the session. It's regarding members' right to dissent. The issue is particularly important for the western Canadian pools, and they will talk to that issue in a moment.

I want to indicate to the committee that we are aware of that issue and that, as we worked very collaboratively and cooperatively with Canadian cooperatives developing this legislation, we are working with them and the Canadian Cooperative Association and le Conseil canadien de la coopération to see what, if anything, can be done to address that issue.

I am hopeful, as we speak, Madam Chair, that we will be able to do something to assist the issue if your committee agrees with it.

That's the first point I wanted to make: that this is really their product developed by them and for them.

The second point is I would like to tell you and put on record what Bill C-5 aims to do.

It has three core objectives.

The first one is to provide our cooperatives with tools similar to those that other business entities have, to allow Canadian cooperatives to compete effectively against these other entities, provide them with a level playing field. The same arsenals that modern corporations have to thrive and prosper and compete should also be available to our Canadian cooperatives, but they're not now, Madam Chair. This is the first objective of Bill C-5 as proposed by the cooperatives themselves.

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Included in that, and most importantly, are the options that the law would offer to Canadian cooperatives to access new financing schemes for our cooperatives. They are principally of two types: one is an ability to issue non-par-value membership shares—this is not available now and cooperatives would like to have that ability; and secondly, to issue equity financing on stock exchanges to access investors' capital to allow them to raise the capital they need to grow, prosper, compete, and create wealth.

The second or third, depending how you count it, key objective of Bill C-5 is as we do that, as the law would afford cooperatives these modern more business-like tools, at the same time the law will be very clear that what this law deals with are cooperatives. So only entities that will be operated, administered, and do business according to established in law cooperative principles would be allowed to incorporate under this legislation.

Coming with that is a considerable strengthening and enshrining in law of members' control over the destiny of their cooperatives and giving them new remedies should they disagree with the orientations that the majority of their co-members want to take. These remedies do not exist now. The controls of members over their cooperatives is vague now. It will be clarified, strengthened, and put in law in Bill C-5, and this was very important for Canadian cooperatives.

So I would say that we should probably start there. This law first and foremost enshrines in law cooperative principles, and entities incorporating under it would have to abide by those at all times. Then it affords these more commercial-type tools.

I said I would be brief, so I would propose to stop here, Madam Chair, and make myself and my colleagues available to answer questions you might have.

The Chair: Mr. Pankiw.

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): Thank you, Madam Chair.

Mr. Hains, you mentioned the right to dissent, and you're referring to the right of individual cooperatives to not enter into the new options that would be available to them. Is that right? But that right would seem self-evident to me. Would it not to you? Why is that an issue?

Mr. Jacques Hains: The right to dissent?

Mr. Jim Pankiw: Yes.

Mr. Jacques Hains: The right to dissent is not in the current federal co-op legislation now. There's no such thing. In the many considerations that go into defining more members' control over the destiny of their cooperatives, it was felt very important to give members of the cooperatives a right to say that they don't like the directions their co-workers want to take. They want out; they're formally registering my right to dissent.

In modern corporate law this right exists for investors, for shareholders, who are not owners per se of their corporate entities. Memberships are owners. It was felt by them, by cooperatives, that therefore it was a very fundamental feature of membership control over the destiny of cooperatives to include this right to dissent.

It may not have come that easily to co-op members when they were discussing it over the years, and I understand that some co-ops, the pools in particular, have problems with that right, not so much the right itself but what it means for the capitalization of the cooperatives. But you can ask them to expand on that after this session.

Mr. Jim Pankiw: So you're talking about an individual member's right to dissent from the decision of the cooperative.

Mr. Jacques Hains: That's right.

Mr. Jim Pankiw: What would happen in that circumstance, conceivably?

Mr. Jacques Hains: What Bill C-5 proposes is that to dissent is a fundamental right, and then the dissenting members would be entitled to be paid out what they have invested in the cooperatives and what increased value that investment might have yielded over the years. When we consulted across the country last year on the co-ops proposals we found that there was a concern about the impact on capitalization of the cooperatives. So we have amended the original cooperatives proposals to add some safeguards that would deal with this issue. Two in particular say the directors of the cooperatives, the board members, if they fear complying with this right to dissent would jeopardize the viability of the cooperatives, could extend the pay-out period to five years.

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Mr. Jim Pankiw: About the pay-out, you spoke of the current value, but then you also spoke of the return they would have had in future years. Could you elaborate on that?

Mr. Jacques Hains: Yes, it's not only their membership shares per se but also some accrued value on that investment.

Ms. Jennifer Elliott (Legal Policy Analyst, Corporate Law Policy Directorate, Department of Industry): They are paid out whatever their interest is at the date the resolution actually goes through. I think the calculation is at that point they would be paid whatever their initial investment was and then fair value for their membership share or whatever other—

Mr. Jim Pankiw: Current value.

Ms. Jennifer Elliott: Yes, it's called the “fair value”, but it would be a market value kind of thing.

Mr. Jim Pankiw: Okay. So there's no calculation of what membership would have returned in the future. That's a factor of the current value, is it not?

Mr. Jacques Haines: Yes, this is as of the day of resolution.

Mr. Jim Pankiw: Or is there another part to that value calculation?

Mr. Jacques Haines: No.

Ms. Jennifer Elliott: No, it's as of the day the resolution was passed.

Mr. Jim Pankiw: And that's it.

Ms. Jennifer Elliott: Yes.

The Chair: Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

I have just two questions. These were some of the questions that were being asked in the House, and I wanted to get a better clarification for the committee. How does this bill in any way interfere with or have any influence on the provincial cooperatives, if there is any overlap? My second question was from the concern I've heard. Does this assist or jeopardize the smaller cooperatives in any way into continuing with the cooperative philosophy and so on?

Mr. Jacques Hains: On the first question, how does that work with similar provincial laws, incorporations of body corporates are in federal and provincial jurisdictions. Every province in Canada has its own cooperatives legislation, as the federal government does. This proposes to replace the 1970 federal statute with a much more modern one.

As for business corporations, the federal jurisdiction has the Canada Business Corporations Act, and every province has a similar companies act or corporate legislation. They co-exist. What that means is that a cooperative, if it meets the requirements of the federal legislation, would have the choice of incorporating federally, if it meets the requirements of such incorporation, or incorporating provincially, as business corporations do. It's a choice of incorporation they have. It's co-existence.

On your second question, about whether any of what is being proposed in Bill C-5 would impact negatively on smaller cooperatives, the answer is that if they choose to incorporate smaller cooperatives under this legislation, they have to comply with the requirements of this legislation. But many of the key business-type features in this law, for example the ability to issue equity financing, are an option the law provides. It is for members, once they have incorporated under this proposed act, to decide and choose to take that route or not. It is not imposed on them.

Because of that enabling feature of many of the more business-type features of the law, smaller cooperatives which want to remain, for lack of a better term, more traditional may continue to do so. This statute would provide, in my view, our smaller cooperatives with a lot of advantages in clearly indicating that entities incorporated here have to abide and operate according to well-established cooperative principles, which the current federal statute is vague on.

The Chair: Mrs. Lalonde.

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[Translation]

Ms. Francine Lalonde (Mercier, BQ): When I met with you, Mr. Hains, I asked you what happened when a co-operative that is a federation and has its charter under Bill C-5 was made up of co-operatives from various provinces registered under provincial charters. What happens in situations of this type?

Mr. Jacques Hains: If I understand you correctly, you are referring to the fact that under Bill C-5, co-operatives, in order to incorporate under this federal statute, must do business and have a place of business in more than one province.

Ms. Francine Lalonde: But that would apply only to the main co-operative. Would this requirement also apply to the "daughter" co-operatives, if I can call them that?

Mr. Jacques Hains: No. Since the "daughter" co-operatives are themselves co-operative entities, if they meet the requirement of doing business in more than one province, they may be considered federal co-operatives. Thus, the federation could have federal co-operatives or provincial co-operatives if the latter did not do business in more than one province. It could have both. However, the federation itself could come under the federal Act because it has members and does business in more than one province.

Ms. Francine Lalonde: I did not get an answer to my question. If a federation were made up of co-operatives that might themselves be provincial federations, would the "daughter" co-operatives also be required to register under the federal charter?

Mr. Jacques Hains: No.

Ms. Francine Lalonde: So we could have a two-tier system. I'm going one step further with your question, Mr. Lastewka. I think that could give rise to a number of problems.

Mr. Jacques Hains: That is already the case at the moment. There are federally-chartered federations of co-operatives whose member co-operatives may be provincially chartered.

Ms. Francine Lalonde: At the moment, in Quebec, there are six co-operatives that have a federal charter only. In any case, I will be looking into this matter further. Thank you for your answer.

I have a sub-question, and I will ask it quickly. In the co-operative principles I have seen elsewhere, at the time the charter was registered, it had to include the purpose of the co-operative, because, if not, there are a number of provisions that do not apply, including those on the management of directors and the participation of members. Generally speaking, there's a further requirement that members have an interest in the co-operative and its purpose, and this interest is not material in nature.

These provisions are not in Bill C-5. Can you tell me why that is?

Mr. Jacques Hains: I think you should ask the co-operatives that question on Thursday.

Ms. Francine Lalonde: I will.

Mr. Jacques Hains: I think they will tell you that the current procedure for getting a federal charter, which is to state the specific purpose of the co-operative in its articles, is extremely restrictive. If a co-operative wanted to enter into some subcontracts with suppliers, who, for example, cannot fit within the purpose of the co-operative, it would not be sure that it could do so.

In other words, there were all these commercial uncertainties related to the fact that co-operatives were required to state their specific purpose in their articles. The co-operative movement suggests rather that co-operatives say that they plan to incorporate in order to get the same powers as any other commercial undertaking incorporated under other incorporation legislation. I'm referring to the powers of a natural person, which give a great deal of flexibility to co-operatives to enter into contractual relationships with suppliers. The Quebec legislation on co-operatives includes exactly the same provision.

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You are asking whether members know what they are purchasing when they decide to become members of a co-operative. I think that at that point it is a type of contract. When a person becomes a member of a forestry co-operative, he or she knows that it is a forestry co-operative, and not a housing co-operative.

If the purpose of the forestry co-operative were to change in five or ten years, then the member could decide to continue to be a member of the co-operative or to become a member of another forestry co-operative, because forestry co-operatives are what he or she is interested in.

Ms. Francine Lalonde: But there is no obligation to that co-operative. Thank you. You answered my question.

[English]

The Chair: Thank you, Madame Lalonde.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Ontario, Lib.): I have a very general sort of question. I understand that some of the initiative for this legislation is the finding of other sources of capital.

I once belonged to a cooperative and I know the cooperative movement is dear to the hearts of our western colleagues.

Presumably a shareholder on an equity market may not have an interest in the co-op itself. In other words, he doesn't buy things from the co-op. The object of the exercise is return on investment, etc. The shareholder has no real loyalty other than the temporary holding of share certificates.

On the other hand, the cooperative movement as I understand it was founded on some other, larger parameters, mainly the availability of supplies, fertilizers or whatever.

It seems to me that those two concepts are somewhat in conflict. How do you reconcile that? How do the co-ops reconcile their orientation towards being one thing for one group of shareholders and another thing for another group?

Mr. Jacques Hains: I think probably the best way to answer that question is to address it as the need for funding and the need for capital.

This bill proposes that a cooperative would continue to be controlled and owned by its members who use the services of the cooperative, and the more they use the cooperative the more patronage dividends they will get. That is the essence of a cooperative: to afford services or goods to the members and the users of the cooperative.

But there may come a point in their development, particularly for the larger cooperatives, where the internal financing that comes with the traditional cooperative is either through membership shares or through raising debts with financial institutions. It is not enough if they have become too big and they face too severe a competition. They need a massive infusion of capital that memberships alone could not provide to allow them to compete. They and the members of the cooperatives would then have the option to turn to the equity market to access this massive capital.

As you probably know, one of the western Canada pools has gone that route in recent years for that reason.

It will be their decision and the law would provide for that option. I think taking that decision would be a major step for them, which they would certainly very carefully consider and assess against the cooperative's principles. Clearly, when they decide to issue equity financing on the market, they will remain a cooperative, but they will have a major partner now in these shareholders, and they will have to take them into account.

Mr. Alex Shepherd: Are there provisions in this legislation that prevent the equity group, if I could call it that, from taking control? There's the question of effective control. Or if 30% of the stock is owned by outsiders and therefore the 70% of the people that came through on a traditional basis are in fact being controlled by the 30%...is that possible?

Mr. Jacques Hains: I will ask Mr. Hillier to answer that question.

Mr. Lynden Hillier (Executive Director, Cooperatives Secretariat, Department of Agriculture and Agri-Food): I think the key to this, as Mr. Hains has pointed out, is member control. There are provisions in here all along to make sure the members are in charge of the decisions.

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First of all, if the cooperative is to become a distributing cooperative and have access to public markets, that's a fundamental change in that cooperative organization, and the members will decide on that by a two-thirds majority vote in the cooperative. That's the first step.

Further along the way, the members will decide whether any board positions are given to outside investors at all. If they do decide to give board positions to outside investors, there's a limit that no more than 20% of the board of directors can be composed of outside investors.

The one thing we heard clearly in the consultations across the country from the co-op sector is that we do want flexibility in terms of new opportunities for capital, but at the same time we want to ensure that the cooperative continues to be controlled by the members. So we've built these steps in all the way so that the members make the decisions to go that route and continue to have a clear majority position in terms of the board, with two-thirds of the board being members of the cooperative.

Mr. Alex Shepherd: But it's still possible to have control—

The Chair: Thank you, Mr. Shepherd, and thank you, Mr. Hillier.

Mr. Solomon.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Thanks, Madam Chair.

I have a few questions. First, a general question. What are the major differences in the legislation before us from what was proposed by the co-op movement?

Mr. Jacques Hains: There are a number. Many are technical. We have a list of maybe 17 or 18, but they are rather technical.

There are a number that are fundamental.

Mr. John Solomon: The fundamental ones would be fine.

Mr. Jacques Hains: When the cooperatives presented their model legislation to Minister Goodale, at the time, and Minister Manley—that was last year—we produced a discussion paper on their proposals. We sent it out to the largest cooperatives, the 50 cooperatives that are federally incorporated, all provinces, security commissions—in all, more than 200 people—requesting their comments and their views on the proposal that was being put to government. We received quite a number of comments, after which we visited the country from Moncton to Vancouver and talked face to face with those who had sent us some comments and with provincial counterparts, and so on. We heard a number of concerns and comments on the original proposal.

When we heard that, we took it back to the proponents, to the CCA and the CCC and we said, this is how your proposals are being received; you should perhaps reconsider your proposals.

I'll give you three examples of where Bill C-5 is departing from the original proposals of the cooperatives. One was this requirement that cooperatives, in order to be able to incorporate under this federal statute, would have to operate in more than one province. That was not part of the original proposals of the cooperatives, and when we visited the country there were many expressions of concern there. When we passed it back on to CCA/CCC, they revisited their position and came back with a new revised consensus position that, yes, we should put in that requirement.

Another one deals with the composition of the boards. The current federal statute requires that all board members of cooperatives be members of cooperatives. The original proposal by the cooperatives was that only a majority of board members be members of the cooperatives. Again, when we toured the country, many of the interlocutors said this is not enough; you can't go from 100% to only a majority, 50 plus one. The end result, the compromise, the consensus that was reached, again by CCA/CCC, was to put the two-thirds requirement that you see in Bill C-5. That's another departure.

The third one that I would bring to your attention is related to the right to dissent. The concern expressed by people we've met was the impact on the viability of the cooperatives. The end result was that the CCA/CCC agreed to the safeguards you find in Bill C-5 about giving a discretion to directors of the cooperatives to say that if they think this could jeopardize the viability of the cooperatives, they can extend the pay-out period over a maximum of five years.

Those are three departures.

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Mr. John Solomon: Thank you, Mr. Hains.

I have a couple more questions pertaining to the issue of dissent. When that was introduced in legislation, was it modelled after how other jurisdictions have handled dissent, for example, corporations or other cooperatives in other countries, or is this something brand-new?

Mr. Jacques Hains: Both. We've looked at the situation in corporate law in terms of right to dissent of shareholders and we've tried, to the extent possible, to harmonize with the requirements to exercise the right to dissent by shareholders in corporate law. We've also looked at co-op legislation of provinces and other jurisdictions to see if they had rights to dissent, and where some had we looked at their model as an inspiration for what is being proposed here.

What is being proposed here is that, in order to exercise their right to dissent, members of cooperatives would have to show that they would be adversely affected, and then they could trigger that fundamental right of theirs to say, “I want to be paid out. I'm gone.”

And then the thing I just mentioned to you about the safeguards: to safeguard the liability of the cooperatives, board members would have discretion to say, “Well, if we were to pay you all right away, this would be dangerous, so we will extend the pay-out period over five years”.

Mr. John Solomon: Just one further question on this issue.

We have before us an amendment to subclause 302(24) extending it from five to ten years. What does Industry Canada feel about this? Maybe some of your colleagues here could give us a view as to whether this ten-year dissenting period or pay-out period is reasonable or unreasonable when you factor in interest.

Mr. Jacques Hains: That's the issue I referred to in my opening statement. This issue came up after Bill C-5 was introduced. We are working with the pools and we are working very importantly with the other cooperatives, through the CCA and the CCC, to see what can be done to address that issue.

I can speak only for myself, but it seems as if this is a legitimate issue, for the pools in particular. It may not be a problem for the vast majority of cooperatives but it may be a problem for the pools, and therefore it might be a question of finding a way to address the pools issue without departing from the public policy that you see in Bill C-5 that says the safeguards there now shall be the norm, and the pools issue can be addressed by an exception or whatever.

We're working on that with them as we speak, and we hope that when the committee moves into clause-by-clause consideration we will have put a recommendation to the minister and if he agrees something will be proposed.

Mr. John Solomon: Actually, this is a two-pronged question, one in relation to this.

The first prong of the question is, from my personal conversations, the wheat pool in Saskatchewan didn't seem to have a problem with including the five-year dissent. I'm not sure what the other pools are doing.

The other question is: the act refers to some matters relating to non-profit housing; would this bill apply to any current housing co-ops in Canada?

Mr. Jacques Hains: I'll ask Mr. Hillier to answer your first question about why one of the pools is not sharing the concerns of the other two.

As for your second question, as to whether this legislation would apply to existing housing cooperatives, if they comply with the requirements that would be imposed by Parliament and if they chose to incorporate federally, they could use this legislation, yes.

Mr. Lynden Hillier: On the question of the differences between the pools, there are different capital structures. Saskatchewan Wheat Pool has a new capital structure that is different from those of the other two. The other two we'll explain in more detail later on, but they're rolling capital of members over on a longer-term basis, so that's why it presents a particular problem for them compared to Saskatchewan Wheat Pool.

The Chair: Mr. Bellemare.

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): My question is for Mr. Hains, Madam Chair.

You say that the bill was requested by co-operatives and is the result of consensus. Consensus is not the same as unanimity. Were there any dissident parties? If so, what were their concerns?

Mr. Jacques Hains: I think the best way to answer the question is to say that personally, we did not meet with any individuals who categorically opposed this idea.

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I am not aware of any co-operatives who are absolutely opposed to the bill. As you emphasize, Mr. Bellemare, that does not mean that there is complete unanimity on each proposal contained in the bill, but I think that generally speaking, the co-operatives can live with it.

I will complete my answer by saying that had any co-operatives been fiercely opposed to the bill, I am sure they would have asked to appear before your committee.

Mr. Eugène Bellemare: Are there any conflicts with the legislation governing provincial co-operatives?

Mr. Jacques Hains: Did you ask whether there were any conflicts?

Mr. Eugène Bellemare: Yes. There could be conflicts between the existing provisions in the various provinces and the proposed Act respecting co-operatives.

Mr. Jacques Hains: The provisions are different. This bill goes farther in some areas, and in others is harmonized with the provincial legislation.

Mr. Eugène Bellemare: So there are no areas of conflict?

Mr. Jacques Hains: I don't think there is any conflict, but it depends what you mean by conflict, Mr. Bellemare. If, for example, the provinces did not feel the need to give their co-operatives the option, through legislation, to issue shares on the markets, that is up to them. The proposal here is to offer co-operatives this option. Are there any conflicts? I do not think so. There is something else, but it is not a conflict.

Mr. Eugène Bellemare: I have my own idea about dissidence. It seems that if people want to dissent, they can be told to leave if they are not satisfied. I think the bill is a little like that. If individuals disagree, they can leave. Do I understand the bill correctly?

Mr. Jacques Hains: Personally, I would state it somewhat differently. Members are not told to leave if they are dissatisfied; members themselves leave because they no longer agree. I think it is important to make that distinction.

Mr. Eugène Bellemare: If the members in question think that the decision made is unwise financially, that they disagree and want to leave the co-operative, they cannot get their money back. It is locked in for at least five years. In fact, the co-operatives would like to keep the money more than five years, but the Act says that the money can be kept for up to five years. However, if after one or two years, the co-operative goes bankrupt or is having major financial problems, what protection is there for members' money and how can they get it back? They knew from the outset that there would be problems. What happens to their money, to their investment?

Mr. Jacques Hains: I think that these dissenting members, who've already expressed their dissent, and who expect to be paid, would be creditors, like all the full-fledged members of the co-operative. All these individuals would be creditors at the time of the bankruptcy.

Mr. Eugène Bellemare: But that is not right. Let us say that there are 10 members on the board and that the dissenting individuals are not on the board, but do have some business knowledge and see that the decision being made is incorrect. Those people are told to take their money and leave if they disagree with the decision. The only problem is that they cannot get their money back if they want to leave. So they are told that they will be given a line of credit and that they will be repaid within five years.

However, if, during the five-year period, there is some economic disaster in the co-operative, if it goes bankrupt then is left penniless, what will happen to these people's money? Is there any protection for it? Does the Act state that the money is put into a trust of some sort, or is it used to finance the activities of the co-operative?

Mr. Jacques Hains: First of all, it is important to remember that in order to decide that the dissenting member should not be paid immediately, the board of the co-operative has to have decided that repaying the members would endanger the co-operative. That is most important. If you are a dissenting member and if the co-operative can pay you immediately, it will definitely do so. The only case in which a co-operative would not refund your money is if that would endanger the co-operative. In that case, you would be told that you would get your money back in five years.

Mr. Eugène Bellemare: My question is not...

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Mr. Jacques Hains: Oh no, I understand. After that, what happens to the money that the co-operative owes you, but that it kept because otherwise the existence of the co-operative would have been in danger? The co-operative uses it as working capital. The Act does not require that these amounts be placed in a trust account. If it did, that would cancel the five-year period, and the co-operative would no longer be viable and would go bankrupt immediately. However, when the co-operative tries to get out of its financial difficulties in this way, even if it goes bankrupt two or three years later, the dissenting members are not treated worse than other members. That is, they are creditors as well.

Mr. Eugène Bellemare: I think there is something wrong somewhere.

[English]

The Chair: Thank you, Mr. Bellemare.

Thank you, Mr. Hains.

I just want to remind members that we have two other witnesses we're going to turn to at 4.30 p.m., so I will entertain Mr. Lowther and then Mr. Dubé.

Mr. Lowther.

Mr. Eric Lowther (Calgary Centre, Ref.): Thank you, Madam Chair.

I don't know which of the speakers would like to address this. With the provisions of this particular bill, it seems to me that you're hoping to create a level playing field. Yet at the same time, those people who elect to invest or buy shares in this process don't really have the same kind of level playing field they might have in an arrangement where it was strictly shareholder-owned and not a cooperative. How confident are you that you're going to be able to attract investors to this kind of scenario? Have you had any preliminary work done on that?

Mr. Jacques Hains: I think eventual possible shareholders of the cooperatives that have elected to go public have the same rights as shareholders investing in a business corporation. They can sell or trade their shares at their call. The value of these shares is the market value as determined on stock exchanges.

I don't think they are treated any differently. I would even say that they may be treated better in a cooperative, in the sense that they may be able to elect up to 20% of the composition of the cooperative. It would be up to cooperatives' members to decide that. So they're not treated any worse than if they invest in commercial business corporations.

Mr. Eric Lowther: But isn't there some overhead that comes with having to have the membership component sort of driving the board of the cooperative?

Mr. Jacques Hains: Yes, it's membership controls, and memberships decide at all times. But some of our cooperatives are very profitable, thank you very much.

Mr. Eric Lowther: Yes.

Mr. Jacques Hains: It would be a very interesting investment for investors to invest in these cooperatives knowing that the control of the cooperatives is not theirs, but the members'.

We had an interesting presentation by a professor from the co-op centre of the University of Saskatchewan on that very point. It illustrated that many of the largest Canadian cooperatives are more profitable than some of the most profitable corporate entities in Canada. When we have consulted with the investing community—institutional investors—we have found they would welcome the opportunity to invest in some of these very profitable cooperatives.

I will conclude my answer by saying that the western pool—I can never remember which one—issued equity financing on the market and didn't have any problems selling their shares.

The Saskatchewan Wheat Pool—thank you, sir.

The Chair: Thank you.

Thank you, Mr. Lowther.

Mr. Dubé.

[Translation]

Mr. Antoine Dubé (Lévis, BQ): My question may not have to do with this bill, but I would like to take advantage of what I have heard from our witnesses to ask them this. Is there a special co-operatives division within the department?

Mr. Jacques Hains: The policy sector of the Department of Industry where I work is responsible for reviewing the economic framework legislation such as the Bankruptcy Act, the Co-operatives Act and the Canada Business Corporations Act. We're responsible for all these areas at Industry Canada.

The sector where my colleague Ms. Ringor works deals with the administration of these acts, whether or not they have been amended. They administer the legislation and handle incorporation. The Co-operatives Act comes under the Department of Industry.

• 1625

The Co-operatives Secretariat is located at the Department of Agriculture and Agri-Food. That department handles relations, co-operation and partnerships between the federal government and the co-operatives. That is why it could be said that this is a joint project involving my colleague, Mr. Hillier, and myself. We work together with the co-operatives in developing the bill.

Mr. Antoine Dubé: I know my question may seem stupid, but I would like to know whether there is a fine line between financial co-operatives and other co-operatives.

Mr. Jacques Hains: That is an excellent question, Mr. Dubé, and something I should have mentioned in my opening remarks. The bill before us today covers non-financial federal co-operatives only. Federally chartered financial co-operatives come under the Minister of Finance, like other financial institutions.

Mr. Antoine Dubé: You're referring here to savings and credit co-operatives?

Mr. Jacques Hains: That is correct.

Mr. Antoine Dubé: Just to them.

Mr. Jacques Hains: Credit unions, for example, do not come under this bill, but a different one, for which the federal Minister of Finance is responsible.

Mr. Antoine Dubé: Thank you.

[English]

The Chair: Thank you, Mr. Dubé.

One final question from Mr. Solomon before we turn to our other witnesses.

Mr. John Solomon: Thank you very much, Madam Chair. I appreciate this.

Does this bill affect in any way the tax status of the co-ops?

Mr. Jacques Haines: We have asked our colleagues at the Department of Finance and Revenue Canada to look into this and they haven't identified any tax implications from the proposal here.

Mr. John Solomon: No tax implications.

Thank you.

The Chair: Now we have before us, from the Manitoba Pool Elevators, Mr. Anders Bruun, corporate secretary and general counsel; from the Alberta Wheat Pool, Mr. John S. Pearson, first vice-president, and Mr. Cam Mack, legal counsel.

Mr. Pearson.

Mr. John Pearson (First Vice-President, Alberta Wheat Pool): Yes, Madam Chairperson, I'm John Pearson. I'm a farmer and a member of Alberta Wheat Pool, and I'm also first vice-president of Alberta Wheat Pool. With me are my colleague Cameron Mack, our outside legal counsel, and Anders Bruun, who is corporate secretary of Manitoba Pool Elevators and also their legal counsel.

I want to say it's our pleasure to have the opportunity to appear before the industry committee this afternoon. To our minds this is a very progressive and enabling piece of legislation, one the industry has worked with government to develop, and we're encouraged by the direction it's taking.

We do have some smaller concerns we're going to outline with you today. We've effectively given you the presentation we want to make. Maybe I can just highlight some of the issues. I'll introduce us as pools, maybe, and maybe move forward into the brief.

• 1630

Alberta Pool and Manitoba Pool Elevators are cooperatives, basically provincially incorporated. Manitoba Pool Elevators is incorporated under the provincial cooperatives act, and Alberta Pool has a special act of the province that it's incorporated under. We have over 70,000 members combined, and we employ over 2,100 Canadians. We move close to 55% of the grain in the provinces of Manitoba and Alberta.

Historically we've obtained most of our core financing from members. The surplus of our cooperatives over the year is allocated to members. A portion of that is paid in cash, a portion of it is retained as permanent equity in the organizations, and the balance is retained as reserves or can be paid as shares.

Typically, this equity does not normally bear interest and cannot be prematurely withdrawn by the member.

Most cooperatives have a rotational system or an extended term in which they pay out their equity, and that's consistent with both of the two cooperatives that are appearing today.

To wrap up my piece of it, the use of member equity is a fundamental characteristic of cooperatives and the stability of that equity is critically important to the cooperatives and also to the membership that own that cooperative.

I will say that all of us have the ability to borrow and to meet our financing needs through borrowing. But I think we all recognize that the equity that's retained as member reserves is really the strength of the two cooperatives that we current represent.

I'll turn to Anders to continue.

Mr. Anders Bruun (Corporate Secretary and General Counsel, Manitoba Pool Elevators): One of the things that's quite significant in terms of the amendment that we're proposing here is to have a grasp of the difficulties that the current language presents. I'd like to attempt to provide a more clear understanding of that with a couple of examples.

Keep in mind that the basic equity in co-ops such as Manitoba Pool and Alberta Pool is not investment money; it's retained profit from ongoing business that an individual has done with the pools. They go into the marketplace and buy from us on a competitive basis; they get good prices, good service, etc. The profit we earn in being in the marketplace is retained in the form of members' patronage accounts and is typically paid out when they retire from farming or when they reach age 65. So there's not an investment per se. It's an accumulation of the profit earned on their business by the cooperative.

The dissent and appraisal right in section 302 allows members to demand payment of their equity if the cooperative were to amend its articles to add change or to remove a restriction on the business a cooperative may carry on or if the cooperative amalgamates with another cooperative.

If, for example, a cooperative's article specified that its purpose was to buy grain from producers and to trade that grain in international markets and those articles restricted it from any other activity, the members of that cooperative would not be entitled to make the decision to build a flour mill to process that grain into flour and thereby earn money from that value-added processing in as straightforward a way as they might otherwise be. This is because someone can say, “Well, I just wanted to be a member of a grain trading cooperative. I didn't want to be in the flour milling business, so I dissent. By the way, could I have my money out? I'll probably still continue to sell grain to you—you're in business, you need to do business with me—but I'd like some money right now.” Under these provisions, that can happen. Under the earlier version of the legislation, the right to a pay-out was immediate. Under the bill before you, there is a five-year timeframe. We suggest it should be longer.

• 1635

The reality of it is, in that hypothetical situation, if 20% or 30% of the members saw the opportunity to pull their money out and if they dissented to take advantage of that opportunity, the cooperative wouldn't be able to get into the flour-milling business. It would probably be too difficult to do that.

Here's another example. I think this addresses the point raised by the member earlier about a struggling co-op. If you have two struggling co-ops that are in real difficulty and might fail—they do fail—it could very well be that the way for them to carry on in a satisfactory and financially solvent way is to merge. There have been real waves of co-op mergers in the United States in recent years because of economic pressure.

A merger creates an effective business unit. The cooperative goes on. It not only survives, but it goes on to thrive because of the new-found efficiencies.

Under clause 302, members can dissent from a plan of two wheat co-ops to merge and they can insist on payment out. If a significant percentage of members demand a pay-out of their equity, it may very well make the merger impossible, leaving the cooperatives to struggle forward separately.

The bill right now contains a provision allowing for a pay-out over five years, which is not that long a time for an organization to rework itself back to financial health. I think it took Chrysler about that long to get back into financial health.

The present statute carries interest at 10%, which is way more than the market rate right now. It's possible to borrow money at around 6%. That's quite an obligation to impose on a cooperative.

Say a significant number of members say they might be able to get some money right then, so they'll demand it. It could be that those two cooperatives can't merge. They struggle along separately, they fail separately, and everybody loses.

Those are the examples I've brought before this committee to illustrate the point we're trying to make here. We need a longer period of time for a co-op to pay those dissenting members. We need a more market-responsive interest rate to be paid on the money that has to be paid to dissenting members.

With that, I'll turn it over to Mr. Mack, who is going to provide an outline of the solution we're proposing.

Mr. Cam Mack (Legal Counsel, Alberta Wheat Pool): Thank you, Madam Chair and members. I would like to reiterate that we come before you today in support of this legislation on the whole. We also accept and support the proposition that members of a cooperative under this bill should have the fundamental right of dissent and appraisal, which Mr. Hains explained earlier.

In his submission, Mr. Bruun identified—I will repeat it—the core concern that we bring before you. It is our submission to the committee that the provision currently allowing payment to be extended over five years is too short. It should be extended to ten, which we respectfully suggest is more in keeping with the ongoing viability of cooperatives in the example Mr. Bruun mentioned, plus others. Indeed, it's also more in keeping with the traditional rotation of co-op capital.

It was mentioned earlier that clause 302 gives a basic right to members and provides a safe-harbour provision, allowing the extension for five years, which we submit should be ten years.

It also provides that the interest paid on that period would be 10%. Our concern in that regard is more technical in nature, but it amounts to the fact that we think putting an interest rate of any sort in legislation is probably going to prove to be inadequate drafting. This legislation should stand the test of time. It's difficult to predict what interest rates will do in a couple of years' time. Our submission to the committee is that it's better legislation to allow interest to be addressed through the regulations, so we have proposed this.

• 1640

We have a couple of other concerns that we have expressed to Industry Canada that I would really categorize as somewhat more technical in nature. I won't take the time of the committee to outline them at this point, Madam Chair. I would be happy to discuss them if there are questions about them.

In concluding my comments, I would like to express our thanks to the staff of Industry Canada for their very timely help and cooperation over the last couple of weeks in working through our concerns and in working with us up to our submissions today.

The Chair: Thank you very much, Mr. Mack.

[Translation]

Do you have a question, Ms. Lalonde?

Ms. Francine Lalonde: Yes. Would there be serious consequences if this amendment were not passed?

[English]

Mr. John Pearson: I'm sorry, but I didn't hear that.

The Chair: Would you repeat the question, please, Madame Lalonde?

[Translation]

Ms. Francine Lalonde: Do you foresee serious consequences if the amendment you are proposing were not passed?

[English]

Mr. John Pearson: I don't see absolute immediate consequences, but what I do see is a stalling process in getting things developed and in having cooperatives grow and consider new proposals.

Boards of directors of cooperatives treasure their capital very seriously and it's their responsibility to look after it on behalf of the members.

We have to be careful how we deal with that. It's been our experience that occasionally you will find dissenting members who want immediate returns of their capital and who maybe don't fully understand the implications of that for the rest of the members who are prepared to commit to the long-term viability of the organization.

[Translation]

Ms. Francine Lalonde: The fact is, your co-operatives are huge, collectively owned businesses that function in an environment that is sometimes hostile, and sometimes very hostile. So you think this provision would make you more fragile?

[English]

Mr. John Pearson: It's possible that it would. I can't absolutely predict that, but I think generally cooperatives have been very conservative in nature over the years in making sure that their capital is cared for very well.

The difficulty, I think, like the examples that Mr. Bruun pointed out, is that if we thought the dissenting members might consider a fast withdrawal in the organization, it probably would not allow us to consider making any decisions that might be a little risky.

What's interesting in the new marketplace we're dealing with is that it appears like risk is something we have to bear more of every day, so maybe that tends to not allow us to be as flexible in the marketplace some days.

Mr. Bruun, you might have some comments on that.

Mr. Anders Bruun: By way of additional comment, I can indicate that the three pools on the prairies, in Manitoba, Saskatchewan, and Alberta, did have merger negotiations in 1988-89. Manitoba Pool is subject to provincial legislation that contains a dissent provision that is as we originally saw...and there were concerns that in the event of a merger there would be a run on the bank, so to speak, and that a great deal of capital would be lost out of Manitoba Pool were the merger to go ahead.

• 1645

There were a number of other reasons why the merger did not go ahead at that time, so I can't say that was the only reason, but it certainly was a reason why it did not go ahead.

As history has unfolded, the Saskatchewan Wheat Pool has gone into the capital markets and is selling shares on the Toronto Stock Exchange. So one can only speculate on what the lost opportunities may be. Certainly, it's not going to be possible to have a prairie-wide co-op on a traditional member-financed basis any longer because of this. That opportunity has been lost.

In practical terms, the organizations that are here before you now are financially strong. Yes, we are in a hostile world. We are competing against enormous companies with enormous pools of capital that are hundreds of times larger than we are in fact. We've been doing that quite successfully on behalf of prairie farmers for a long time.

My guess would be that the more practical impact would be on the smaller cooperatives, who don't have the resources to come before this committee or to receive ongoing legal advice on questions like this and who may want to merge. While this is at the federal level, I do sit on a committee in Manitoba that's looking at the Manitoba statute. Our job on that committee is quite easy. We're just following the very thorough process the industry department and the Canadian Cooperative Association have gone through. We're just taking their ideas and putting them into our own legislation.

My point there is that this legislation will tend to become a model for the provincial legislation and through that will have its impact on the smaller co-ops. I think generally that's where the greatest good will come from the amendment we're adding, although I admit it certainly would have been helpful to us in 1989 had we not had to worry about dissent rights.

The Chair: Thank you, Mr. Bruun. Merci, Madame Lalonde.

Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you for your presentation. I have a question to ask you specifically regarding the proposed amendment to clause 302. In your brief you describe two situations where the section as it now stands in the proposed legislation would be detrimental to cooperatives. When Mr. Hains was here, he said there was general consensus specifically for that section; however, the situation of the pools is quite different from that which exists for most cooperatives. Do you agree with that? I don't see your proposed amendment as affecting or creating an exception only for the pools.

Mr. Cam Mack: Madam Chair, we want to be very careful to make it clear that our proposed amendment is not meant to be pool specific. The examples that Mr. Bruun gave you were merely to illustrate how this clause operates. We're mindful of the impact that this clause can have on the erosion of the members' source of capital; therefore, we believe it's a process that needs to be managed carefully.

In some of the questions earlier, it appears that the honourable members are well aware of the importance of the co-op maintaining a close nexus with its membership through the investment capital. Were the member capital to be run down dramatically in a shorter period, it may be necessary to replace that by capital through conventional loans or through institutional investment, jeopardizing the nexus with its members.

This amendment is not meant to take away those examples, Madam Chair. The examples are merely used to illustrate how serious the issue can be in extreme cases. What the amendment hopes to do is to manage the outflow of cash in a proper way and allow us to maintain a stability of member equity.

Ms. Marlene Jennings: Coming back to the presentation Mr. Hains made, he said it was because of the concerns that the Alberta Pool and the Manitoba Pool had raised concerning that specific issue, the right to dissent and withdraw capital; that discussions were ongoing, but it appeared from what he said that if there was a solution it would be an exception provided for the pool. That's what I understood. Perhaps I misunderstood him, but I understood that subclause 302(24) as it now stands would continue to stand in its present working form, but some mechanism may be found to provide an exception to the pools in this area.

• 1650

Mr. John Pearson: It's our thought that we would not want to be considered an exception in this. I think what we're suggesting is useful and attractive to all cooperatives. We've had broadly based support from cooperatives in Canada that this amendment and this minor change would be agreed to. We've identified it as a problem that could arise, but we think the legislation is probably better legislation with this minor change made to it.

The Chair: Mr. Solomon.

Mr. John Solomon: My father and my family were members of the Manitoba Pool for over 40 years, so I'm a bit familiar with the corporation, although I'm from Saskatchewan and represent a Saskatchewan rural district.

I have a number of questions I would like to ask, but maybe you could give me short answers to these, because we have limited time.

Has either pool taken a decision to incorporate federally, or have you taken a decision to pursue changes at the provincial legislation level that affect your pools, or has no decision been taken in those two areas?

Mr. John Pearson: From the Alberta Wheat Pool perspective, we are currently studying the current federal legislation and it's our understanding—and I'm fairly close to this, in that I'm also vice-chair of the Alberta Co-operative Council and we're working with the provincial government in the review of the co-op act in Alberta also—that the co-op act in the Alberta provincial legislation will be mirrored similarly to the federal legislation. So we're looking forward and seeing that the new legislation, both federally and provincially, is very enabling, and it may be appropriate legislation for us in the very near future.

Mr. Anders Bruun: We have not looked at moving under federal jurisdiction on our own specifically, but you being from Saskatchewan are no doubt aware that Alberta Pool and Manitoba Pool had a joint project on this the past spring, and it would probably have fallen under the federal co-op act.

Mr. Cam Mack: Madam Chair, just for completeness in the response, we should also point out that the three prairie pools also have common interests in Western Co-operative Fertilizers Limited, which is currently subject to the federal co-op legislation. They have that interest in the legislation also.

Mr. John Solomon: Thank you.

On the amendments, during the course of preparation of this bill, had you submitted the 10-year number and it was not accepted, or is this an afterthought you're now proposing?

Mr. John Pearson: To be frank, it wasn't something we identified early on in the consultative process. The importance of this particular issue started to become much more obvious to us in consultation with Manitoba Pool. So it's probably recently that we've put more effort into this.

Mr. John Solomon: Is this recommendation driven by the members of your organizations or your co-ops, or is it driven by the corporate office?

Mr. John Pearson: We've consulted with our membership in that we have a delegate system we use in Alberta and we've consulted with them. The delegates I've consulted as a board member of Alberta Pool say this makes sense to them, in that they do not want to see our capital jeopardized if we were to consider moving toward being federally incorporated.

Mr. Anders Bruun: Madam Chair, I might add a bit to that answer. I can indicate that from Manitoba Pool's perspective we have raised this issue from the beginning of the consultations. I think there is even an argument to be made that this dissent right is not at all appropriate in a cooperative context, because it's inconsistent with the revolvement of capital scheme that is in place. I can also advise that in the U.S. a number of state cooperative statutes are moving away from having a dissent right and are eliminating it, because it has hampered cooperatives from merging and otherwise moving forward.

• 1655

I guess if you start from the position that there should be no dissent right, 10 years could be called the compromise.

Mr. John Solomon: How would that clause impact the 5-year dissent if it remained or the 10-year if it amended? How would it affect those who will turn 65 prior to those 10-year or 5-year terms expiring? For example, if a 62-year-old has a 10-year dissenting clause, would that person qualify at 65 for the equity he or she has in the co-op, or would that person have to follow the 10-year dissent rule?

Mr. Anders Bruun: That person would have a supervening right to be paid out at 65. So if the arrangement was to pay out 10% every year for 10 years, that person would probably get his or her 10% and then at age 65, in your example, get the remaining 70%.

Mr. John Solomon: The pool in Saskatchewan had no fear of the problem your two co-ops have. Its information was accurate and it didn't affect its capitalization at all—or at least very nominally—according to the president.

With respect to the dissenting clause, how would you square the rights of the minority who would dissent with those of the majority? Is there some other way to deal with this rather than putting a 10-year clause into an act?

Mr. Anders Bruun: The issue relating to Sask Pool going public is that when you go public you have shares you can sell and you can raise money to pay out your dissenting members immediately in the marketplace. The one time we would not have a problem with this is if our short-term plan was to go public. We'd just raise the money in the marketplace from the sale of shares and pay that group out. It's if we wish to remain cooperative in nature that this is an issue.

There is a fundamental balancing act here, and in a share capital corporation the rights of the individual are paramount. That individual has his rights as a shareholder, and those shareholder rights drive what the share capital corporation does.

In the cooperative there is a bit of a balance between the rights of capital and the rights of the group as a whole. With this amendment we've tried to find some sort of a balance there. Remember that the bylaws can specify the pay-out be over 10 years, but in the case of a cooperative with delegates, those delegates can move a bylaw amendment that shortens that right up.

So the members do have some form of control under this. It's a balancing act and one may never get it quite right, but you certainly can't look after the interests of the whole perfectly and the interests of an individual perfectly at the same time in all business—

Mr. John Solomon: Now you see the challenge before politicians.

The Chair: Thank you, Mr. Bruun.

Mr. Lastewka.

Mr. Walt Lastewka: I have just one question, and I appreciate your presentation. Was your amendment for changes to the 5 to 10 years? Could it be 5 years for some co-ops and 10 years for others? Could it be something for the co-ops to decide?

Mr. Cam Mack: The way we've structured the amendment from a technical standpoint is that the basic rule would be five years. Co-ops would have the flexibility in their incorporating documents to provide for a longer period of up to 10 years but not exceeding it, if they chose to do that. A cooperative would have to make a decision that the statutory period of five years was insufficient for it and would then have to provide for a 10-year period in its incorporating documents. That's technically how it would work.

Mr. Walt Lastewka: Thank you.

The Chair: Thank you.

Mr. Lowther.

Mr. Eric Lowther: I should probably know this but I don't, and I'm just going to ask you to clarify it for me. I don't have a problem with the 10-year provision and the whole opening of this up to capital markets.

• 1700

Do existing members—and I think you made reference to it, Mr. Bruun—already in the co-ops have a greater advantage than they did before in that they now have this pay-out option, whereas before they had to wait longer? Is that correct?

Mr. Anders Bruun: That's correct. It is advantageous to them under the federal legislation in that respect. They are getting more under this proposal than they have now.

Mr. Eric Lowther: Okay.

I'm curious; from your perspective, if this legislation did not happen and things stayed as they were, what would the co-ops look like some years down the road? The converse, of course, is that with this in place, what's the world going to look like five years, say, down the road?

Mr. John Pearson: That's an interesting comment. Boards of directors of cooperatives think quite a bit like that, too. They try to have some vision and look ahead quite a way to see what may happen, depending on what kind of structure we're going to be operating under.

If nothing changes, well, it very much depends on how much imagination and how strong your current capital base is in terms of what happens to your future. The advantage of this new act is that it provides a lot of enabling flexibility to cooperatives to make lots of different choices. That, I think, serves the cooperatives very well.

Mr. Eric Lowther: Without that in the current markets, some players would be at risk and may not—in fact, would not—be there.

Mr. John Pearson: I think that's very possible.

Mr. Eric Lowther: On the other hand, because of this legislation are we going to see more network, cooperative effort across Canada—larger conglomerates?

Mr. John Pearson: I think if you observe what's happening currently in the U.S., that's certainly the trend that seems to be occurring. I suspect conditions in the U.S. aren't very much different in the marketplace compared with Canada, and the same trend may occur here also. It just depends on the timing of it as much as anything.

Mr. Eric Lowther: What's the consumer advantage at the end of that, then?

Mr. John Pearson: I've been a member—

Mr. Eric Lowther: A softball question for you.

Mr. John Pearson: —of a cooperative for a long time. I'll give you an example of a situation from 1972.

The three pools in 1972 purchased federal grain. A number of our customers were one-year federal grain customers, and the next year they were Alberta pool customers. I can still remember the comment from a very large farmer in the subdistrict I represent. He told me the experience was just phenomenal to him, because in terms of the business he did, the service was in some cases even better. At the end of the year, he told me, he got a cheque from the cooperative that allowed him to take his family to Hawaii. Before, under a private capital corporation, he didn't own shares in that corporation and got basically no benefit other than just a service, and in his mind the services were equal.

Mr. Anders Bruun: As a supplement to that comment, the implicit worry is that cooperatives get too big to be truly responsive at a local level. I've just gone to our annual meeting. Through the various resolutions of delegates I was reminded where the authority in the organization comes from.

We have a system that nurtures and looks after the needs of large co-ops facing competition with large private capital corporations. In addition to looking after them we probably also need to make sure we have a very hospitable climate for new small cooperatives to form at a grassroots level, and to take care of those aspirations and needs at that level.

The Chair: Thank you, Mr. Lowther.

Mr. Bellemare.

[Translation]

Mr. Eugène Bellemare: I would like to thank the Alberta Wheat Pool and the Manitoba Pool Elevators for sending me their briefs in French. I congratulate you on that! I'm sure you are very proud Canadians.

• 1705

[English]

You seem to have a problem with 10%. It may seem like a large amount of money. It's outright money. It's cash on hand. It's a good return. What if it were borrowed money? Wouldn't that be a large amount of interest? Ten percent would not be a very good interest rate for someone who extended himself and borrowed money to get into the pool, if I understand the way pools operate, and I know very little.

Would it be better, in your case, in your mind, and for the advantage of everyone—the individual and the wheat pools—to state that it should be x%? Or, assuming that 10% was a good number, would you state that it should be 5% over prime? If prime fluctuates up and down, you would have that margin. Would that be a better formula for you?

Mr. John Pearson: Certainly from my perspective as a board member of a cooperative, that would be more appropriate. We currently have voluntary equity in Alberta Pool now. We offer prime plus 1.5% or prime plus 2% to members only to invest in the organization. It's surprising how much money our members invest that way. It's almost like a bank, in that they can get that money out very quickly.

We also have some other vehicles that aren't quite as flexible, which require them to place the money with us for a longer term. That money is invested with us as a preferred share and treated as dividends. They get a substantial benefit that way also.

In a lot of respects, our members are very comfortable placing that money with us because they're confident that we're very stable in the marketplace.

I think the suggestion you made is a good one. We're suggesting that it would probably be some number in relation to prime.

Mr. Eugène Bellemare: I'm happy that I suggested something that's interesting.

Some hon. members: Oh, oh.

Mr. Eugène Bellemare: Why didn't the department come up with that?

Mr. John Pearson: I'm not sure I can answer that.

Mr. Eugène Bellemare: I think the department witnesses are still here.

Mr. Hains?

Mr. Anders Bruun: The language we're looking at, and that we've been working on with them as recently as yesterday, makes provision for that as one of the options.

Mr. Eugène Bellemare: When we go to clause-by-clause, Madam Chairman, should that not be something that Mr. Hains—

The Chair: Mr. Hains, could you join us at the table for a moment?

Mr. Bellemare, when we go to clause-by-clause, I understand that—hopefully—there will be an amendment ready that we all agree on.

Maybe you can answer that, Mr. Hains.

Mr. Jacques Hains: That's our challenge, Madame Chair, and our aim.

The Chair: Okay.

Mr. Eugène Bellemare: Okay. So if that's the direction we seem to be heading in, we could say it's prime plus 5% and then you still have the 10%.

Mr. Jacques Hains: Details have to be worked out—

Mr. Eugène Bellemare: Who works out the—

Mr. Jacques Hains: What I can tell the honourable member is that we are going to discuss these details with the clients, with the pools, but also, very importantly, with the other cooperatives through their two national associations.

Your suggestion is a very good one and I thank you very much for it. We will certainly look at it very seriously among the range of options we will be talking over, within the next 48 hours, I believe.

Mr. Eugène Bellemare: Thank you saying I made a small contribution to westerners; to mankind.

Mr. Jacques Hains: A great contribution!

Mr. Eugène Bellemare: Now, what about protecting the individual?

Let's go back to this, Mr. Pearson. If someone like yourself, a farmer, who overextended himself for some reason—and it's always in hindsight that it's decided that he or she is overextended—and has to pull out, are you still saying, yes, you may dissent, you may pull out, it's tough luck? Or do you have provisions where you say, ooh, this guy here is really going to go under?

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Mr. John Pearson: We currently have provisions in our organization for ceased farmers who go out of business, to pay them out over a 10-year period. That appears in some cases to be satisfactory, and I will admit, in other cases, a very small number of cases, it doesn't appear to be satisfactory.

We have provisions in there also that they can shift that money, that equity, into a preferred share class that would be retained until they were age 70. You may not think that would be something they'd be interested in, but we have farmers that are prepared to keep those funds with us.

Mr. Eugène Bellemare: Are you required by law to have a reserve in order to protect the investments people make, in the same manner as a caisse populaire or a credit union would have to have reserves?

Mr. John Pearson: We have retained earnings that are permanent equity of the organization, and that has a value. In the past, where members have lent us funds, we would have had a line of credit that was guaranteed at the bank. If there were a fast run on that line of membership contribution, they could have it immediately. But that's only with the funds that the members place with us in something called member loans, and we don't consider that long-term equity.

The Chair: Thank you, Mr. Pearson, and Mr. Bellemare.

For people who are interested, it's my understanding that the flashing is for a quorum call, not yet for the vote, but we'll reconfirm that in a moment.

Mr. Shepherd, you had a brief question.

Mr. Alex Shepherd: I guess what we're trying to do is find some kind of a balance, as you mentioned.

Let me clarify something. At some point in time these people are no longer receiving or participating in the process of the co-op per se; in other words, their investment becomes fixed and we don't pay them any interest. That's the normal thing, if they don't dissent. Now we have a dissenting group that, in a sense, in my mind, represents captive capital, people who can't leave. I can see all kinds of problems where people would dissent to get the 10% interest rate. I can see problems on both sides.

Why isn't one of the solutions that if you're going to insist that these people be married to you, that they at least be able to continue to share the equity of the operation?

Mr. Cam Mack: Madam Chair, if I may reply, I think it's important to recall that the very nature of a cooperative is that a member benefits based on that member's patronage. So the member doesn't have an investment that normally, by itself, attracts an appreciation; the member will continue to benefit as a result of ongoing business. If the member chooses to become a member again, the member would resume that package of rights.

Mr. Alex Shepherd: But I'm trying to deal with the issue of the fact that he wants to leave, that if he doesn't have the right to leave and if there's no interest at all, you end up with an interest-free injection of capital, in a sense, because you don't have to discharge that liability—liability or equity, however you look at it.

So, yes, an interest rate of 10% is an artificial rate, but in recognition of the fact that you want those people to stay, wouldn't it be appropriate that they can then click in to some kind of share of the future profits, even though they're possibly no longer customers?

Mr. Cam Mack: Madam Chair, I think one thing that's important to remember is that what we're talking about is a situation where the members had reached an understanding with the cooperative about how their capital would be held and used over a period of time. That would be the deal that would be represented in the bylaws. It would say that member capital is held, used by the organization, and rotated over a period.

We're talking about a situation where a member has taken a look at a business decision of the organization that makes a fundamental change and has decided that it changes his feeling for the organization to the point where he or she wants to withdraw the capital. In effect, there's been a change of heart about the contract on both sides.

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This provision attempts to deal with that process and manage it carefully and stage it out over time, to allow the member the flexibility to withdraw in that situation but also to prevent the cooperative from being subject to an extreme rundown of its capital over an inappropriately short period.

I should also like to point out that the section, because of other provisions in the act, can only be acted upon by the directors acting—and I'll say it in short words—reasonably. The directors can't make a decision to string out a payment like this unless they have good grounds for doing it, and if they were to do that, a member would have the usual variety of rights available to challenge the board.

Mr. Alex Shepherd: What's the other alternative? As I understand it, you can hold this money for the total of ten years, as opposed to saying, possibly on year six and year seven, “Do a pro rata distribution up to the tenth year”. Would that be more reasonable?

Mr. Cam Mack: The section has a flexibility in it that would allow the board to come up with any number of different payment options within the maximum ten-year period. Depending on the interest rate that applies, it may even be that the board will decide it can get its capital on the loan market on more attractive terms than what it has to pay the members. That would depend on what the regulations say. So it also has that flexibility.

At the end of the day the board would want to make the best business decision, and if it believes it can take out that captive member capital through other means that are more attractive to it, it would of course do that.

Mr. Alex Shepherd: I see the problem as being that the individual does not have a lot of opportunities. If the board says, “I'm going to hold your money for ten years”, that's what you do.

Mr. John Pearson: I think I should interject here and say that it's been my experience that most board members act, as my colleague says, in a very reasonable manner and do take the consideration of members, dissenting members particularly, very seriously.

Our thought isn't to be unreasonable and to hold people off and take advantage of them. My goodness, that's not the foundation of our organizations at all. Our thought is to work something out with the member, but at the same time we need to have provisions that allow us not to be influenced by a group of members seeing an opportunity to take advantage of us because of some legislation.

Mr. Anders Bruun: If I may, Madam Chairman, I would urge the committee to consider the position of the majority of members who want to vote for a merger because they are of the honest view that a successful merger is the only way for the organization to thrive and for all members of the cooperative to be paid out their equity in the ordinary course of equity revolvement within a cooperative. There is that larger group that has an interest or right as well.

The Chair: I want to remind everyone that on Thursday morning we'll be having the two large cooperative associations before us, and then we'll be going to clause-by-clause consideration.

Mrs. Jennings.

Ms. Marlene Jennings: I'm sorry; this is a question just in listening to you.

You may wish to answer this, Mr. Hains.

Under the proposed legislation, foreign you would provide, because you can actually have people who can buy. If shares are issued, people will be able to be shareholders but not actual members of the corporation. Would that allow for foreign ownership of shares?

Mr. John Pearson: Yes. If you place non-participating shares on the stock exchange, to the best of my knowledge it would not mean any restriction in terms of who would own non-participating shares.

Ms. Marlene Jennings: Okay. And that's not seen as being a concern?

Mr. John Pearson: No, we don't see that as being a major problem.

Mr. Anders Bruun: It may even be advantageous, for example, to have a large Japanese flour milling co-op as this nice little tie-in.

Ms. Marlene Jennings: True. Okay. Thank you.

The Chair: I want to thank the witnesses for their presentation in advance and for their presentation and answering the questions today, and the department for the briefing in advance as well, the briefing book. It gives the members an opportunity to prepare for committee. It's been a very interesting discussion.

We'll adjourn to the call of the chair.