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We recently helped Gay Lea Foods, Ontario’s largest dairy co-operative, open its membership to dairy farmers in Manitoba. The proposition of opening an Ontario co‑operative’s membership rolls to those outside of the province presented some legal challenges that we were able to help Gay Lea overcome.
Gay Lea Foods Co‑operative Limited has been owned and operated by Ontario dairy farmers since 1958. It has grown to be the second largest dairy co‑operative in Canada and one of the largest non‑financial sector co‑operatives in Ontario.
Until recently, membership in Gay Lea was limited to active dairy farmers (or their family members) in Ontario. However, while Gay Lea was involved in upgrading a facility in Manitoba, Dairy Farmers of Manitoba reached out and asked whether Gay Lea would consider extending membership to dairy farmers in Manitoba.
Gay Lea members decided that they would be willing to accept members who were dairy farmers in other provinces, and in January, 2017, its by‑laws were amended to permit active dairy farmers (and their family members) from Canadian jurisdictions outside of Ontario to become members.
However, all members of Gay Lea are required to own a prescribed number of membership shares in Gay Lea (this is the case for all co‑operatives with share capital – the members must own membership shares in the amount required by the co‑operative). In order to sell these shares to its members, Gay Lea has to comply with the securities legislation in the jurisdiction where it is selling the shares in question.
Typically, in order to sell shares, a corporation has to issue a prospectus, which is intended to provide potential investors with disclosure about the business they are considering investing in. Prospectuses are prepared with a view to providing the appropriate level of disclosure to prospective investors who might otherwise have no connection to the corporation. This can be contrasted with co‑operative corporations, where their securities are primarily sold to persons who are involved to some degree in the business of the co‑operative.
In recognition of this difference between co‑operatives and business corporations, the securities laws of each of the provinces and territories in Canada provide co‑operatives with statutory exemptions from the prospectus requirement.
These statutory exemptions are not blanket exemptions; there are conditions that co‑operatives have to meet in order to qualify for the statutory exemption. These conditions vary from jurisdiction to jurisdiction, but one that is common to virtually all of the provinces and territories is that the statutory exemption applies only to co‑operatives that are incorporated under the legislation of that particular province or territory.
Because Gay Lea is incorporated under the Co‑operative Corporations Act of Ontario it does not have to provide a prospectus to distribute its securities in Ontario because the Securities Act of Ontario provides a statutory exemption for the distribution of “securities issued by a corporation to which the Co‑operative Corporations Act [of Ontario] applies.” However, when it wishes to sell securities in another jurisdiction, it cannot rely on this statutory exemption because it needs to comply with the securities legislation in that other jurisdiction, and just as Ontario’s statutory exemption only applies to co‑operatives incorporated under Ontario’s Co‑operative Corporations Act, the statutory exemption in that other jurisdiction will only apply to co‑operatives incorporated under their legislation.
This creates a significant problem for a co‑operative looking to expand its membership beyond a single province, because without an exemption from the prospectus requirement of the other jurisdiction’s securities laws, the co‑operative will not be able to sell membership shares (or any other securities) outside of its home jurisdiction without incurring the expense of preparing a prospectus.
Fortunately, the securities legislation of each of the provinces and territories also contain provisions that permit the securities regulator in that jurisdiction to provide discretionary exemptions on a case by case basis. In order for a co‑operative to get such a discretionary exemption, it has to persuade the securities regulator that it would not be harmful to the public interest to provide the exemption that is being sought.
That is the course that Gay Lea took to get a discretionary exemption to permit it to distribute securities in Manitoba without providing a prospectus, which will let Gay Lea expand its membership beyond Ontario. The decision of the Manitoba Securities Commission granting Gay Lea that discretionary exemption does not provide as broad an exemption as the statutory exemption Gay Lea has for the distribution of securities in Ontario under the Ontario Securities Act and places a number of conditions on distributing securities in Manitoba that Gay Lea does not have to deal with in Ontario. However, it does let Gay Lea expand its membership to Manitoba dairy farmers, and provides dairy farmers in Manitoba with the opportunity to join Gay Lea.
We were pleased that Gay Lea sought our assistance in obtaining this discretionary exemption, and look forward to assisting it in the future as it looks to expand its membership to other provinces and territories as well.
At Iler Campbell LLP, we are well equipped to help co‑operatives of all types and sizes with a wide variety of legal issues, from assisting with reviews of by‑laws to more complex and unusual issues such as obtaining discretionary exemptions from securities act requirements. Our objective in working with your organization is to help you meet your goals in the way that best suits your needs.
