Demutualization

Demutualization

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Demutualization is the process by which a customer-owned mutual organization
Mutual organization
A mutual, mutual organization, or mutual society is an organization based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship...

 (mutual) or co-operative changes legal form to a joint stock company
Joint stock company
A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...

. It is sometimes called stocking or privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

. As part of the demutualization process, members of a mutual usually receive a "windfall" payout
Windfall gain
-Types of Windfall Gains:The list of windfall gains includes, but is not limited to:*Lottery winnings*Unexpected inheritance*Gains from demutualization-Uses of Windfall Gains:What people do with windfall gains is subject to much debate...

, in the form of shares in the successor company, a cash payment, or a mixture of both. Mutualization
Mutualization
Mutualization or mutualisation is the process by which a joint stock company changes legal form to a mutual organization or a cooperative. Demutualization is the reverse process....

 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. Furthermore, re-mutualization depicts the process of aligning or refreshing the interest and objectives of the members of the mutual society
Mutual organization
A mutual, mutual organization, or mutual society is an organization based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship...

.

The mutual traditionally raises capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 from its customer members in order to provide services to them (for example building societies
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...

, where members' savings enable the provision of mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

 to members). It redistributes some profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

 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.

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 demutualizationǜ', 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
    Canada
    Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

    , 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
Nationwide Mutual Insurance Company
Nationwide Mutual Insurance Company & Affiliated Companies is a group of large U.S. insurance and financial services companies based in Columbus...

 and the MassMutual
Massachusetts Mutual Life Insurance Company
Founded in 1851, Massachusetts Mutual Life Insurance Company is a leading mutual life insurance company with 1800 offices and 13 million clients worldwide. Mass Mutual is one of the largest Life Insurance companies globally and is currently ranked 93rd in the Fortune 500 list...

, 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
New York Life Insurance Company
The New York Life Insurance Company is one of the largest mutual life-insurance companies in the United States, and one of the largest life insurers in the world, with about $287 billion in total assets under management, and more than $15 billion in surplus and AVR...

 (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.

Security exchanges


The Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...

 became a shareholder-owned public corporation in 2000 through a public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

. "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
Commodities exchange
A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...

 to demutualize into a joint stock corporation. The Chicago Mercantile Exchange had its IPO on December 6, 2002.

The Chicago Board of Trade
Chicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...

 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." The Hong Kong Exchange underwent similar process of demutualization and was publicly traded.

SIX Group, a global financial service provider based in Switzerland, represents an extra ordinary form of a mutualised organisation. The owners are limited to an exclusive group of service consumers, in particular Swiss and foreign banks. This entails a closer relationship with the customer, since a customer might influence the customer-oriented behavior by the magnitude of its own equity holding of SIX Group - in this category the subsidiary SIX Swiss Exchange AG.

Life insurers


Over 200 US mutual life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...

 companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as Prudential
Prudential Financial
The Prudential Insurance Company of America , also known as Prudential Financial, Inc., is a Fortune Global 500 and Fortune 500 company whose subsidiaries provide insurance, investment management, and other financial products and services to both retail and institutional customers throughout the...

, MetLife, John Hancock
John Hancock Insurance
John Hancock Financial is a loose term for a United States insurance company which existed, in various forms, from its founding on April 21, 1862, until its acquisition in 2004 by the Canadian insurance company Manulife Financial. It was named in honor of John Hancock, a prominent patriot...

, Mutual of New York, Manulife, Sun Life, Principal
Principal Financial Group
Principal Financial Group is a publicly traded corporation based in Des Moines, Iowa, USA.The Principal Financial Group is a global financial services provider which offers a wide range of financial products and services, and is a U.S. leader in 401 plans. Headquartered in Des Moines, Iowa, the...

, 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.

The boards of directors of other mutual companies, which include Northwestern Mutual, Massachusetts Mutual
Massachusetts Mutual Life Insurance Company
Founded in 1851, Massachusetts Mutual Life Insurance Company is a leading mutual life insurance company with 1800 offices and 13 million clients worldwide. Mass Mutual is one of the largest Life Insurance companies globally and is currently ranked 93rd in the Fortune 500 list...

, New York Life, Pacific Life
Pacific Life
Pacific Life Insurance Company is an insurance company providing life insurance products, annuities, and mutual funds, and offers to individuals, businesses, and pension plans a variety of investment products and services. Pacific Life also counts more than half of the 100 largest U.S...

, Penn Mutual
Penn Mutual
The Penn Mutual Life Insurance Company, also commonly referred to as Penn Mutual, was founded in Philadelphia, Pennsylvania in 1847. It was the seventh mutual life insurance company chartered in the United States. It is headquartered in Horsham, Pennsylvania just outside of Philadelphia.-External...

, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia life
Acacia life
The Acacia Life Insurance Company was established in 1867 as a mutual insurance company, owned by its policyowners. Its headquarters are in Washington, D.C.In 1997, it formed a mutual insurance holding company, Acacia Mutual Holding Company of Washington, D.C...

, and Ameritas Life
Ameritas Life
Ameritas Life Insurance Corp is a mutual insurance company. Its headquarters are in Lincoln, Nebraska....

 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. Some of these mutual companies award dividends to their policyowners. For example, Northwestern Mutual expects to pay more than $5 billion in dividends to participating policyowners in 2008. Northwestern Mutual has paid its policyowners more than $65 billion in dividends, since the company was founded 151 years ago. Mass Mutual Financial Group's Web site defines life insurance policy dividends.

Agricultural cooperatives


Numerous agricultural supply and marketing cooperatives have demutualized.
One of the largest, CF Industries
CF Industries
CF Industries Holdings, Inc. is a North American manufacturer and distributor of agricultural fertilizers, based in Deerfield, Illinois, a suburb of Chicago....

, a manufacturer and distributor of fertilizers in the United States, was for 56 years a cooperative federation
Cooperative federation
A co-operative federation or secondary co-operative is a co-operative in which all members are, in turn, co-operatives.Historically, co-operative federations have predominantly come in the form of co-operative wholesale societies and co-operative unions...

. CF then demutualized and made an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

 of equity stock in 2005.

Another large example is Kerry Co-op of Ireland
Republic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...

, a milk and meat processor that demutualized in 1986, compensating its farmer members, and became the publicly traded Kerry Group
Kerry Group
Kerry Group , is a public food company headquartered in Ireland. It is quoted on the Dublin ISEQ and London stock exchanges. It evolved initially from a local dairy co-op in the Munster region of Ireland...

.

Building societies



A building society
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...

 is a form of mutual mortgage provision organization that emerged in the UK in the 19th century, for personal savings and home mortgages. For much of the 20th century, building societies had a large share of the retail savings market, and they had their zenith after the deregulation under the Building Societies Act 1986.
Following that Act, many of the larger societies, beginning with Abbey National
Abbey National
Abbey National plc was a UK-based bank and former building society, which latterly traded under the Abbey brand name. It became a wholly owned subsidiary of Grupo Santander of Spain in 2004, and was rebranded as Santander in January 2010, forming Santander UK along with the savings business of the...

, the second largest, in 1989, and including the Halifax Building Society, the largest, soon converted into joint stock banking companies, some of which were subsequently acquired by other banks. Many societies soon became targets of speculative "carpetbaggers", who opened savings accounts in order to obtain a windfall, in cash or shares, in the event of demutualization.
Most of the remaining societies, such as the Nationwide Building Society
Nationwide Building Society
Nationwide Building Society is a British building society, and is the largest in the world. It has its headquarters in Swindon, England, and maintains significant administration centres in Bournemouth and Northampton...

, the largest remaining mutual, adopted poison pill
Poison pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...

 clauses in their rules as a defense against carpetbaggers. These took the form of a charitable assignment provision that requires new members to assign any compensation from demutualization to charity.

Membership associations


The UK motorists' organization, The Automobile Association
The Automobile Association
The Automobile Association , a British motoring association founded in 1905 was demutualised in 1999 to become a private limited company which currently provides car insurance, driving lessons, breakdown cover, loans and motoring advice, and other services...

, demutualized and was purchased by Centrica plc
Centrica
Centrica plc is a multinational utility company, based in the United Kingdom but also with interests in North America. Centrica is the largest supplier of gas to domestic customers in the UK, and one of the largest suppliers of electricity, operating under the trading names "Scottish Gas" in...

 in 1999.
The sale was completed in July 2000 for £1.1 billion

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
Andrew Regan
Andrew Regan is a British-born polar explorer and entrepreneur. He is the chief executive officer of Corvus Capital, an investment company.-Personal life:...

 launched an unsuccessful hostile takeover bid to demutualize the UK's giant Co-operative Wholesale Society
The Co-operative Group
The Co-operative Group Ltd. is a United Kingdom consumer cooperative with a diverse range of business interests. It is co-operatively run and owned by its members. It is the largest organisation of this type in the world, with over 5.5 million members, who all have a say in how the business is...

, which, despite its name, was a large retailer in its own right. In 2007, the tiny Scottish retailer, Musselburgh and Fisherrow Co-operative Society
Musselburgh and Fisherrow Co-operative Society
A 2005 attempt by M&F Co-op to demutualize was halted by a Court of Session interdict, and resulted in an investigation by the Financial Services Authority , the regulator for Industrial and Provident Societies such as M&F Co-op....

, 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
Coop (Switzerland)
Coop is a Swiss cooperative which operates the largest in supermarket chain in Switzerland. In 2001, Coop merged with 11 cooperative federations which had been its main suppliers for over 100 years....

 and Migros
Migros
Migros is one of Switzerland's largest enterprises, its largest supermarket chain and largest employer. It co-founded Turkey's largest retailer, Migros Türk, which became independent of Migros Switzerland in 1975....

.

Retailers' co-operatives



Irish grocer-owned retailers' cooperative
Retailers' cooperative
A retailers' cooperative is a type of cooperative which employs economies of scale on behalf of its retailer members. Retailers' cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. It is common for locally owned grocery stores,...

, ADM Londis, changed its capital structure in 2004 to an unlisted public limited company
Public limited company
A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....

, allowing its owners to trade its stock privately at market value.

See also

  • Financial institution
    Financial institution
    In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...

  • Carpetbagger (United Kingdom)
  • Thatcherism
    Thatcherism
    Thatcherism describes the conviction politics, economic and social policy, and political style of the British Conservative politician Margaret Thatcher, who was leader of her party from 1975 to 1990...

  • Mutual insurance
    Mutual insurance
    A mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Under this idea, what would have been profits are...


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