Demutualization 1040109 222423086 2008-06-29T07:32:47Z 203.218.232.198 /* Security exchanges */ '''Demutualization''' (or '''demutualisation''') is the process by which a customer-owned [[mutual organization]] (''mutual'') or [[co-operative]] changes legal form to a [[joint stock company]].<ref>{{Cite web |title=demutualization, n. |publisher=[[Oxford English Dictionary]] (subscription) |date=DRAFT ENTRY Mar. 2004 |accessdate=2008-05-20 |url=http://dictionary.oed.com/cgi/entry/00328152?query_type=word&queryword=demutualize&first=1&max_to_show=10&single=1&sort_type=alpha }}</ref> It is sometimes called '''stocking''' or [[privatization]]. As part of the demutualization process, members of a mutual usually receive a [[windfall gain|"windfall" payout]], in the form of shares in the successor company, a cash payment, or a mixture of both. The mutual traditionally raises [[capital]] from its customer members in order to provide services to them (for example [[building society|building societies]], where members' savings enable the provision of [[mortgage]]s to members). It redistributes some [[profit]]s 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.<ref>{{cite web | title = The Effect of UK Building Society Conversion on Pricing Behaviour (March 2003) | author = Shelagh Heffernan | publisher = Faculty of Finance, CASS Business School, City of London | url = http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf | format = pdf | accessdate = 2007-10-10 }}</ref> ('''Mutualization''' or '''mutualisation''' is the opposite process, wherein a shareholder-owned company is converted into a mutual organization, typically through takeover by an existing mutual organization.) {{Expand-section|date=June 2008}} == Types of demutualizations == There are three general methods in which an organization might demutualize, '''full demutualization''', '''sponsored demutualization''', and into a '''mutual holding company (MHC)'''. In any type of demutualization, insurance policies, outstanding loans, etc, are not directly affected by the organization's change of legal form. * In a '''full demutualization''', the mutual completely converts to a stock company, and passes on its own (newly issued) stock, cash, and/or policy credits to the members or policyholders. No attempt is made to preserve mutuality in any form. * A '''sponsored demutualization''' is similar; the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially ''bought'' by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead. * A '''mutual holding company''' is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including [[Canada]],<ref>{{cite web | title = Demutualization Regime for Canadian Life insurance Companies, page 16 (August 1998) | publisher = Department of Finance, Canada | url = http://www.fin.gc.ca/toce/1998/demutual_e.html | format = html and pdf | accessdate = 2007-01-08 }}</ref> disallow the formation of MHCs.) The core participants are isolated into a special segment of the company, still viewed as "mutual". The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public. Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as “Legalized Theft.” Some MHC demutualizations have been planned as the first of a two-stage process. The second stage would be full demutualization once the transition pains into MHC status are complete. In other cases, the MHC is the final stage. Note that some mutual companies, such as [[Nationwide Mutual Insurance Company]] and the [[Massachusetts Mutual Life Insurance Company| MassMutual]], own stock companies and are listed on a stock exchange. These are not MHCs, however; they are simply mutual companies which have majority control over one or more stock companies. Other mutual companies may own some of another company's stock, but as simply an asset, not something they actually control. Finally, many mutual companies, including Nationwide and MassMutual, have wholly owned subsidiaries. The subsidiaries may technically be stock companies, but the mutual owns all the stock. For example, the ''New York Life Insurance and Annuity Corporation'' (NYLIAC) is a wholly owned subsidiary of the [[New York Life Insurance Company]] (NYLIC). A person may purchase an insurance policy from either company, but only those who own participating policies from NYLIC are mutual members. Other policyholders are customers. ==Examples== ===Security exchanges=== The [[Chicago Mercantile Exchange]] became a shareholder-owned public corporation in 2000 through a [[initial public offering|public offering]]. "The road to this initial public offering began in June 2000, when Exchange members voted overwhelmingly to transform the then not-for-profit, membership-owned organization into a for-profit, shareholder-owned corporation. On [[November 13]], [[2000]], CME became the first U.S. [[securities exchange]] or [[commodities exchange]] to demutualize into a joint stock corporation.<ref>http://www.cme.com/about/ins/caag/profitcomp2799.html</ref> The Chicago Mercantile Exchange had its [[IPO]] on [[December 6]], [[2002]]. The [[Chicago Board of Trade]] similarly carried out an [[IPO]] in 2005, having previously been "... a self-governing, self-regulated Delaware not-for-profit, non-stock corporation that serves individuals and member firms."<ref>[http://www.cbot.com/cbot/pub/page/0,3181,1215,00.html CBOT - Organizational Profile<!-- Bot generated title -->]</ref> The Hong Kong Exchange underwent similar process of demutualisation and was publicly traded. <ref>http://www.hksfc.org.hk/sfc/misc/rep01/eng/ch_stat/frame.htm</ref> ===Life insurers=== {{Articleissues|section=y|citations missing=October 2007}} Over 200 US mutual [[life insurance]] companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as [[Prudential]], [[MetLife]], [[John Hancock]], [[Mutual of New York]], [[Manufacturers Life]], [[Sun Life]], [[Principal Financial Group|Principal]], and [[Phoenix Mutual]] decided to demutualize and return to policyowners all the profits they had accumulated as mutual life insurers. Policyowners were awarded cash, stock and policy credits exceeding $100 billion in a wave of demutualizations, which have been regarded by some as [http://www.bizjournals.com/boston/stories/2005/05/16/focus5.html very rewarding to the new owners] although the effect on customers is not discussed. Others show that the demutualization process is detrimental to customers. <ref>{{cite web | title = The Effect of UK Building Society Conversion on Pricing Behaviour (March 2003) | author = Shelagh Heffernan | publisher = Faculty of Finance, CASS Business School, City of London | url = http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf | format = pdf | accessdate = 2007-10-10 }}</ref> The boards of directors of other mutual companies, which include [[Northwestern Mutual]], [[Massachusetts Mutual Life Insurance Company|Massachusetts Mutual]], [[New York Life]], [[Pacific Life]], [[Penn Mutual]], [[Guardian Life]], [[Minnesota Life]], [[Ohio National Life]], [[National Life of Vermont]], [[Union Central Life]], [[Acacia Life]], and [[Ameritas Life]] decided to either remain mutual or they decided to form mutual insurance holding companies. At the end of 2006 there were fewer than 80 mutual life insurers in the United States. 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.<ref>{{cite web | title = Northwestern Mutual 2007 Annual Report (2007) | author = Northwestern Mutual | url = http://www.nmfn.com/tn/aboutus--fi_annual_report | accessdate = 2008-06-12 }}</ref> Mass Mutual Financial Group's Web site defines life insurance policy dividends.<ref>{{cite web | title = What Are Life Insurance Policy Dividends | author = Mass Mutual | url = http://www.massmutual.com/mmfg/products/insure/life/article_policydividends.html | accessdate = 2008-06-12 }}</ref> ===Agricultural cooperatives=== Numerous [[Agricultural cooperative|agricultural supply and marketing cooperatives]] have demutualised. One of the larger ones was Kerry Co-op of [[Republic of Ireland|Ireland]], a milk and meat processor that demutualised in 1986, compensating its farmer members, and became the publicly-traded [[Kerry Group]].<ref>{{Cite web |url=http://www.kerrygroup.com/page.asp?pid=89 |title=The Birth of a plc |publisher=[[Kerry Group]] |accessdate=2008-03-13 }}</ref> {{Expand-section|date=June 2008}} ===Building societies=== {{more|Building society#1980s and 1990s}} A [[building society]] is a form of mutual banking organization that emerged in the UK in the 19th century, for personal savings and home mortgages. The UK movement had its zenith after the deregulation of the Building Societies Act 1986. Yet, beginning with [[Abbey National]] in 1989, many of the larger societies, including [[Halifax Building Society]], the largest, soon converted into joint stock banking companies. By 1997, many societies had become targets of speculative “[[Carpetbagger#United Kingdom|carpetbagger]]s”, who joined to vote for demutualization and to gain the member windfall in cash or shares of stock. Some societies that valued mutuality, such as the largest remaining mutual, [[Nationwide Building Society]], adopted poison pill clauses in their rules as defense against carpetbaggers. Nationwide's defense is a charitable assignment provision, that requires new members to assign any compensation from demutualization to charity.<ref>{{Cite web |url=http://www.cbr.cam.ac.uk/pdf/WP205.pdf |title=MUTUALITY AND CORPORATE GOVERNANCE: THE EVOLUTION OF UK BUILDING SOCIETIES FOLLOWING DEREGULATION |publisher=ESRC Centre for Business Research, University of Cambridge |date=June 2001 |accessdate=2008-05-13}}</ref> ===Membership associations=== The UK motorists' organisation, [[The Automobile Association]], demutualized and was purchased by [[Centrica|Centrica plc]] in 1999. {{Expand-section|date=June 2008}} ===Retail consumers' cooperatives=== As well as the many agricultural supply cooperatives that demutualized, a small number of general retail [[consumer's cooperative]]s have demutualized or considered demutualization. In 1997, [[Andrew Regan]] launched an unsuccessful hostile takeover bid to demutualize the UK's giant [[The Co-operative Group|Co-operative Wholesale Society]], which, despite its name, was a large retailer in its own right. In 2007, the tiny Scottish retailer, [[Musselburgh and Fisherrow Co-operative Society]], completed most or all of the steps necessary to demutualize. In 2008, a Swiss competition regulator recommended demutualization to Switzerland's leading supermarket chains, [[Coop (Switzerland)|Coop]] and [[Migros]].<ref>{{Cite web |url=http://www.ica.coop/al-ica/ |quote=The advice comes from the Chairman of the Competition Commission (COMCO), Walter Stoffel. Stoffel argues that the co-operative form is not the most appropriate for the two Swiss giants of retailing. |accessdate=2008-05-14 |title="Home Page - Demutualisation Watch" |publisher=[[International Co-operative Alliance]] }}</ref> ===Retailers' co-operatives=== Irish grocer-owned [[retailers' cooperative]], [[ADM Londis]], changed its capital structure in 2004 to an unlisted [[public limited company]], allowing its owners to trade its stock privately at market value. {{Expand-section|date=June 2008}} == See also == * [[Financial institution]] * [[Carpetbagger#United Kingdom]] * [[Thatcherism]] * [[Mutual insurance]] * [[:Category:Demutualized organizations]] == References == {{reflist}} * John W. Carson, ''[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636602 Conflicts of Interest in Self-Regulation]'' * Andreas M. Fleckner, ''[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=836464 Stock Exchanges at the Crossroads]'' == External links == * [http://assembly.state.ny.us/Reports/Ins/199803/insureport.html The Feeling's Not Mutual] An Analysis of Governor Pataki’s Proposed Mutual Holding Company Legislation (New York State Assembly, 1998) * [http://policyownersfordemutualization.blogspot.com Policyowners for Demutualization of Mutual Life Insurance Companies] * [http://www.glenndaily.com/mhctable.htm Reorganization Status of Mutual Life Insurance Companies] (USA) * [http://www.ica.coop/coop/mutuality2.html Co-operative Issues – Demutualisation] – International Co-operative Alliance [[Category:Cooperatives]] [[Category:Corporate finance]] [[Category:Mutual organizations]] [[Category:Demutualized organizations| ]] [[de:Demutualisierung]] [[es:desmutualización]]