We can’t let the Mountain Equipment Co-op story repeat itself
It’s been almost a year and a half since the demise of Mountain Equipment Co-op. There were a lot of elements of the sale of Mountain Equipment Co-op that were disappointing but I want to narrow in on a single line in the BC Cooperative Association Act which I believe is the crux of the issue.
If you agree that the Act should be reviewed, please e-mail the Honourable Minister of Finance, Selina Robinson, at FIN.Minister@gov.bc.ca
Initial concern from politicians
When it was announced that the co-op was being sold without members having a chance to put forward a recapitalization plan, politicians across the country expressed their concern. Although it was unlikely that this advocacy would make a difference once the matter was before the courts, I was optimistic that these same politicians would take steps in the aftermath to review the regulations that allowed this to happen. I have been communicating with the provincial government but unfortunately they remain unwilling to consider a review of the Co-operative Association Act. The tweets were appreciated but without any changes to the regulations, we should expect to see other co-ops suffer the same fate in the years ahead.
The Problem
Mountain Equipment Co-op was governed by the British Columbia Co-operative Association Act. Division 2, 72(2)(a) reads:
“(2)An association must not dispose of the whole or substantially the whole of the undertaking of the association unless
(a)the disposition is authorized by a special resolution of the members”
This makes sense. The Board of a co-op should not be allowed to sell the co-op without a vote of the membership.
But there is a catch. If a large company, including a co-operative, experiences financial stress, they can make a petition to the court for protection under the federal Companies’ Creditors Arrangement Act (CCAA). The CCAA then takes priority over provincial regulations. By necessity, the CCAA gives the court significant power, including the ability to authorize a sale or disposition without shareholder approval (section 36(1) of the CCAA).
The issue with the sale of Mountain Equipment Co-op is one of timing. The membership was not given a fair and equal chance to compete against other parties to recapitalize the co-op. Over a three month period, the co-op lurched to the brink of insolvency while the Board confidentially gave 158 parties a chance to buy the business. By the time members were made aware of what was happening, it was too late to put together a bid to save their own co-op and it was sold out from under them.
The court documents show that the Board became aware on June 10th that it was unlikely that it would find a new lender for the existing debt. At that time, they commenced a process to pursue the sale of the co-op. In the following three months, a comprehensive sale process was executed.
On September 11th, three days before entering CCAA protection and while still regulated by the BC Co-operative Association Act, the Board signed a sale agreement that was conditional on court approval under CCAA protection.
The co-op petitioned for CCAA protection on September 14th and that is a public process (with redactions.) After the membership found out what was happening, a passionate group from across the country came together to assemble a member-led bid. Unfortunately, it was too late for this to be practical. The court approved the sale to Kingswood which resulted in a complete loss to the members and effectively marked the end of the co-op (it continues as a numbered company while the remaining claims are sorted out.) I am confident that if members had been provided notice on June 10th, that the member plan would have been the superior option and the co-op would still exist today.
The Solution
The powers granted to the court under the CCAA should not be reduced. The CCAA is a last resort and the court must have the ability to do whatever is necessary to bring stability to a situation, even if it results in a complete loss for a group of stakeholders.
In my opinion, the only change that is needed is for members to be notified when the Board engages in meaningful discussions related to the sale or disposition of the business. This would allow the members to participate on a level playing field to assemble a plan for the recapitalization of the business.
An argument was made that the Board could not have provided notice to members in June because it may have led to business disruptions. For example, suppliers may have refused to ship product without pre-payment if they knew the co-op was at the verge of failure. I believe the counter argument is simple. When that is the case, the co-op should petition for protection at the same time they provide notice that they are entering a sales process. Once under CCAA protection, the court is able to designate key suppliers and require them to continue to provide shipments to the business. Although this means the sales process will occur under the protection of the CCAA (and therefore, it is still possible that the court will approve a sale that the members are opposed to,) it will allow members to prepare a plan on the same timeline as other bidders.
The Amendment
The proposed amendment is to add an additional line:
“If an association enters into formal discussions related to a planned disposition of the whole or substantially the whole of the undertaking, it must provide notice to the membership within 7 days.”
Conclusion
Whether or not you agree with this specific proposed amendment, I think we can all agree that the failure of Mountain Equipment Co-op was a significant loss for the co-operative and outdoor recreation communities in Canada. Such a loss should spur the question: Should we make changes to the regulation to prevent this from happening in the future? I would encourage everyone to write a short note to the Honourable Minister of Finance, Selina Robinson, (FIN.Minister@gov.bc.ca) to request a review of the Co-operative Association Act.
Happy Hiking,
Steve
