There is a lot of interest in cooperative CUSOs these days, CUSOs that are owned by multiple credit unions. Most of these CUSOs provide operational services which can significantly reduce operating costs while increasing operational efficiencies.
Some cooperative CUSOs provide non-traditional financial services which drive alternative revenue streams and offer valuable services to members. The question that many credit unions have is how do we work together effectively? A collaborative relationship is not unlike any other relationship between people. It takes trust and attention to make it work. There are stages in the relationship to consider.
The first stage of the cooperative relationship is not unlike dating. You wonder what it would be like to partner with particular credit unions. Would they have the same vision, passion and commitment that you do? Do they have the same needs? Do you trust them to do the right thing? Successful partnerships are driven by strong underlying economic and competitive forces to partner but they also require personal synergies. Do you like and trust your partners on an emotional level? If the trust is not there, the partnership will never be successful.
It is essential that the CEOâ€™s of the credit union have high personal trust in each other. The CEOâ€™s must see that the collaboration as essential and a shared sense of urgency to create the collaboration. The CEOâ€™s must see the long term benefits of the collaboration as more important than the short term problems that arise as a new relationship is implemented. In successful collaborations, the trust of the CEOâ€™s migrates to include the staff and directors of the credit unions. It is important that all the stakeholders buy into the vision for the collaboration in order for it to succeed. If the right fit exists, there will be excitement and passion for the possibilities of the CUSO.
Now that marriage looks like a strong possibility, it is time to discuss the nitty-gritty of the relationship. This is not romance. That moment has passed. This is the down and dirty side of determining how this relationship will be structured. Typically, the CUSO will be a limited liability company and the provisions governing the relationship will be contained in the operating agreement. The following is a sample of some of the more critical questions that have to be asked and thoughts on how to deal with them.
Are there any limitations on who can be an owner of the LLC? Depending on the strategic goals of the organizers, there could be limitation on who can be an owner. Will the CUSO be limited to natural person credit unions? Could a League be an owner? Can a non-credit union entity be an owner? Can natural persons be owners?
How will new owners be admitted and on what terms? Typically, this is an item that requires the unanimous or supermajority consent of the owners. The owners can establish the admission cost for the new owners at the time of their admission to the LLC. There is no need to try and predict the future. The owners can decide what is appropriate at the time the decision is made. Absent a strong need to bring in new owners for capital or business reasons, there should be a premium for new owners to join above the cost of the original owners that took the bigger investment risk of investing in a start-up business.
Profit and Loss
What is the basis for the allocation of profits and losses among the owners? The usual method of splitting profit and loss in a business is based on the percentage of ownership. However, many credit unions want to reward the users of the CUSO services and provide incentives to the owners to use the services. In CUSOs providing operational services, this can be done through a tiered pricing structure that rewards heavy usage. In CUSOs providing financial services, all or part of the return is sometimes based on the volume of business that is generated by the credit union owners, called a patronage dividend. Some CUSOs provide part of their return as a patronage dividend and the balance in proportion to the investment levels. Caution should be taken to make sure that patronage dividends do not violate laws such as RESPA or the state insurance laws.
How will the board of managers be selected? Credit unions want a say in who manages the CUSO. That is normal and expected. Typically, each owner will be able to appoint at least one manager to the Board. It is common that the person appointed by the credit union is required to be a member of the credit unionâ€™s senior management. This will insure a high level of representation and integration between the CUSO and the respective owners. Generally, the appointing owner can remove a manager it has appointed at any time. If the board is limited to a specific number of seats and there are more owners than seats, it is common to have a rotation system where all owners have representation on the board over time. Sometimes there is a desire to establish Class B ownership rights for credit unions making a smaller investment in the CUSO. They may have all the rights of owners with some limitations such as in the selection of board members. Class B owners may have a board seat that will represent them as a collective unit or be limited to appointing persons to an advisory board that has no management powers. There are other solutions that can be worked out depending on the goals of the parties.
What types of decisions will be required by the owners and not the board? This is not an issue if all the owners have equal representation on the board of managers, as all credit unions will be represented. If that is not the case, some of the very important decisions usually require the concurrence of all the owners or a super majority of ownership interests.
What types of decisions will require unanimous consent, super majority consent and majority consent? The state LLC statutes should be consulted to see if there are any decisions that the law requires to be unanimous. The more routine day-to-day management decisions only require a simple majority. CUSOs can elect to require unanimous consent or a super majority to approve more significant matters. The advantage of a super majority is that one or two credit unions in a CUSO owned by many credit unions could not block a near consensus of the other owners. The disadvantage is that your credit union might be the credit union that is on the short end of the stick. In CUSOs owned by five or less credit unions, unanimous consent is the norm for the important decisions.
Will the LLC have officers? Officers, such as president and secretary, are not required in LLCs. LLCs are run by managers. However, credit unions like the familiarity of officers and most LLC CUSOs have officers.
Will non-owners be served? I recommend that non-owners be served only after the owners are receiving the services at the performance level they expect. The advantage of serving owners is that owners have a stake in the success of the CUSO and are more likely to be good customers and supporters of the CUSO. This is why CUSOs often permit smaller credit unions to buy into the CUSO as Class B owners.
Should the operating agreement limit the services provided? I recommend defining the purposes of the CUSO broadly to permit the greatest flexibility in what services the CUSO can offer the credit unions and their members. However, if there are a lot of owners, it will be more difficult to have multiple services in the CUSO, as it is unlikely that all owners will want all the services. For example, if not all credit union owners participate in all the services how will profits and losses be allocated among the credit union owners? Therefore, we often see credit unions in multiple CUSO relationships with varied credit union partners.
Will there be geographic limitations on the services? This is a strategic question that is tied to the business plan.
How will an owner withdraw from the LLC? Some LLC operating agreements do not permit or discuss the withdraw of an owner. We think that is a mistake for CUSOs, as most credit unions do not want to stay with a partner that is not supportive. We recommend that a credit union be permitted to withdraw and that the withdrawing credit union receive its net capital account back less any sums due the CUSO. To avoid a cash flow issue to the CUSO, the CUSO can be given an option to pay the capital account over time without interest. It is not typical that a credit union is paid for equity growth of its ownership interest in this situation. For operational services CUSOs that operate near break even, no appreciation in equity value is expected. In some financial servicers CUSOs, equity appreciation is expected. Make sure every owner understands whether equity appreciation is a goal.
Will you kick an owner out for non-payment of its obligations or failing to support the CUSO? Many credit unions do not want a credit union as a co-owner unless the credit union is committed to supporting the CUSO. Otherwise, the economies and efficiencies are reduced. Other credit unions donâ€™t mind if credit unions just want to be non-active investors. If credit unions want to remove a credit union for non-support, you should be very specific in the operating agreement on what is meant by non-support. The non-support should be subject to objective measurements. If non-support occurs, we recommend that the non-supporting credit union be given a written notice with a right to cure before the forced divestiture occurs. The amount paid to the departing owner in an involuntary withdrawal is usually the same as for voluntary withdrawals.
Another common reason to cause an involuntary withdraw is if the credit union owner converts to a savings and loan or savings bank.
Right of First Refusal
In the event that an owner desires to sell its ownership interest to a ready willing and able buyer, it is typical to require the selling owner to first offer its ownership interest to the CUSO and/or the other owners. This provision helps keep the ownership â€œin the family.â€
Start the relationship with a shared trust and passion. Implement the relationship with a clearly written agreement that will govern how the relationship will fulfill the shared vision and will serve as a pre-nuptial agreement that will enable the relationship to be concluded with dignity and grace. Fall in love with your heart but make sure your head covers the contingencies.
Guy A. Messick is an attorney with Messick & Lauer P.C. in Media, PA and General Counsel to NACUSO. He can be contacted at 610-891-9000 or firstname.lastname@example.org.