A capital idea: mutual capital instruments

Legislative changes this year have opened the way for mutual entities to issue equity capital in the form of mutual capital instruments (“MCIs”) without undermining their mutual status.

The Treasury Laws Amendment (Mutual Reforms) Act 2019 (Cth) (the “Mutual Reforms Act”) came into effect on 6 April 2019.

What is a mutual entity?

The Mutual Reforms Act introduces a definition of a “mutual entity” into the Corporations Act 2001 (Cth) (the “Corporations Act”). A mutual entity is defined as a company registered under the Corporations Act where the constitution of the company provides that a person has no more than one vote at a general meeting of the company for each capacity in which the person is a member of the company.

The reference to “each capacity” means that two or more persons can be joint members of the company, and also be members in their capacity as individuals. For example, A and B are individual members of a mutual entity C, and also a joint member (A + B). The constitution of C provides that a joint membership gets one vote. A and B each have a vote as individual members and can also have an additional vote for their joint membership, without affecting the status of C as a mutual entity.

A person is also allowed to vote as a proxy or representative for another member at a general meeting without breaching the one vote requirement.

The definition of a mutual entity is important because entities that are not mutual entities cannot issue MCIs. Since a mutual entity for this purpose must be a company registered under the Corporations Act, mutual bodies registered under other legislation do not have this benefit.

MCIs and MCI mutual entities

A new Part 2B.8 – Mutual Capital Instruments (MCIs) is introduced into the Corporations Act by the Mutual Reforms Act to allow for mutual entities to issue MCIs.

Not all mutual entities can issue MCIs. The mutual entity must be a public company and must not have voting shares (other than MCIs) quoted on a prescribed financial market. The constitution of the mutual entity must also state that the entity is intended to be an MCI mutual entity for the purposes of the Corporations Act. Finally, the mutual entity must not be a registered entity within the meaning of the Australian Charities and Not-for-profits Commission Act 2012 (Cth).

When a mutual entity meeting these requirements issues one or more MCIs, it is referred to as an “MCI mutual entity.”

A company that is limited by guarantee can be an MCI mutual entity, has the power to issue MCIs, and can pay dividends in respect of MCIs.

MCIs are securities under the Corporations Act, so the Corporations Act provisions that apply to the issue of shares also apply to MCIs. These include the fundraising and disclosure requirements of the Corporations Act.

The rights attaching to an MCI can only be varied or cancelled by a special resolution of the company, plus either a special resolution of all members holding the same class of MCI or obtaining the written consent of members with at least 75% of the votes in the class.

For a share to qualify as an MCI, the constitution of the mutual entity must provide that the share can only be issued as a fully paid share, and that dividends for the share are non-cumulative. It must also set out the rights attached to the share with respect to participation in surplus assets and profits.

The constitution can include other terms for MCIs, if they are not inconsistent with these mandatory provisions.

Amending the constitution for MCIs

The Mutual Reforms Act introduces a special procedure for a mutual entity to amend its constitution to enable it to issue MCIs. This special procedure is only available for 3 years (i.e. until April 2022).

The resolution to amend the constitution (an “MCI Amendment Resolution”) may be for any one or more of the following purposes:

  • to include a statement that the entity is intended to be an MCI mutual entity for the purposes of the Corporations Act;
  • to provide for the entity to issue MCIs;
  • to provide for the rights and obligations attached to MCIs; or
  • to make changes that are incidental or ancillary to the above.

The special procedure cannot be used if more than two MCI Amendment Resolutions have been considered at previous meetings of members, and an MCI Amendment Resolution must not result in the mutual entity ceasing to be a mutual entity.

Notice to members of a proposed MCI Amendment Resolution must set out an intention to propose the special resolution and must state the resolution.

Under the special procedure, an MCI Amendment Resolution must be passed by at least 75% of the votes cast by or on behalf of members present at the meeting (including members who have appointed proxies who are present at the meeting). When the resolution is passed in this way, it has effect as a special resolution, despite any other provisions in the mutual entity’s constitution.

The quorum for a meeting to consider or vote on an MCI Amendment Resolution is two members.


A mutual entity that issues MCIs is taken not to demutualise by doing so. Once a mutual entity becomes an MCI mutual entity, any resolution that would result in it ceasing to be an MCI mutual entity is not effective unless there are no MCIs, or the resolution provides for all MCIs on issue to be cancelled before or when it ceases to be an MCI mutual entity.

Other provisions of the Corporations Act

The Corporations Act provisions relating to reductions of share capital, share buybacks and providing financial assistance to acquire shares have also been amended by the Mutual Reforms Act. The approval of all members is required for these actions in relation to MCIs.

However, the provisions in the Corporations Act dealing with takeovers, compulsory acquisitions and buy-outs do not apply to MCIs.

Tax implications

The tax legislation is also amended by the Mutual Reforms Act so that the issue of MCIs does not cause a mutual entity to demutualise for income tax purposes or disturb the operation of income tax law as it applies to mutual receipts.

We hope this overview is useful. If you are a mutual entity considering the issue of MCIs, contact us if you need assistance.
Patrick Dwyer and Kathleen Harris
Legal Directors

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