Should carpetbaggers be stopped?

The Treasury plans to introduce laws making it more difficult for carpetbaggers to force mutual building societies to demutualise. The forum asks if the measures are necessary.

Last week the Treasury announced plans to introduce tougher laws to impede the “carpetbaggers” who try to force mutual societies to demutualise.

At present a 75 per cent majority of savers is needed to pass the conversion from building society to bank status. Only 50 per cent of borrowers are needed to pass a demutualisation vote. In July, the Common's Treasury committee put forward the suggestion that this ruling should be changed.

While the Treasury rejected the idea of a bill to protect building societies, it could see a case for increasing the number of members required to table resolutions and force special general meetings.

But are these measures necessary, or should the power be left with the building society members?

Andrew Peck, corporate partner at Linklaters & Alliance, who has acted on the demutualisation of four building societies, believes that building societies should be able to “go their own sweet way” without the constant threat of carpetbaggers.

He says: “There are some building societies for whom demutualisation is appropriate and others for whom it is not. My feeling is that building society directors have a lot more leeway than they may perhaps feel that they have got.

“I think that if a building society really wanted to put up a strong defence, for example saying that it didn't matter that members as a whole had voted in favour of conversion and the directors would not convert, it would be difficult to see what members could do.”

While Peck accepts that such a move may lose members, he argues that the building societies would also lose the carpetbaggers. As to the suggestion that the majority required to pass a conversion vote should be raised, Peck is sceptical. He says: “The majorities are already very high.”

He concedes that “one area that could be looked at is to put the borrowing members' resolution on a par with the investing members.

“The borrowing members are as much a part of the society as the investing members as they have a long-term contract that ties them to the society for 25 years, unlike the investing members.”

Marian Pell, insurance partner at Herbert Smith, has experience of the issue in the life insurance industry, which was also covered by the Treasury proposals.

She says the problem of carpetbagging is not as acute in the life insurance industry as it is harder for those hoping to become a member in order to cash in on windfalls.

She says: “The building societies are easier prey as the life companies are not so easy to get your money out of. However, some building societies have included catches on the windfalls such as the members have to give it all to charity or that to become a member you have to have such a high level of capital that it does away with the reason why they are there.

“It makes absolute sense to me to have some sort of opportunity to increase the influence of members while reducing the influence of likely carpetbaggers.”

She adds: “The voting power of an individual member of a building society is tiny compared to the shareholder in a company because any large shareholder would have a real number of votes.”

Chris Lawrenson, head of legal at the Building Societies Association welcomes the Treasury's suggestion that secondary legislation ought to be introduced to change the length of time an investor has to serve before becoming a member to two years.

He says: “We would also like to increase the number of members needed to call a special meeting, make a resolution, and nominate someone to the board from 100, 50 and 50 respectively to around 500 for each situation. In this age of the internet it is very easy for people to get enough members to sign up.

“We are walking a thin line between democracy and having a flexible workable framework.”