Demutualization: Understanding the Conversion to Public Ownership

Demutualization refers to the process by which a mutual company converts into a public share company. A mutual company is an institution owned by its mutual owners who enjoy exclusive use of its productive assets.

Essentially, the company is owned by its users. When a mutual company decides on a legal ownership restructuring process, the owners may choose to acquire a listing on the public stock exchange as an initial public offering (IPO)Initial Public Offering (IPO)An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is.

Summary

• Demutualization refers to the process by which a mutual company with mutual owners converts into a public share company with shareholders.
• After demutualization, a company will achieve a distinct separation of legal liability between the owners and its new non-owner customers.
• A growing company may use demutualization to gain access to a broader customer base and a lower cost of capital.

How Demutualization Works

Demutualization refers to the transformation of the legal structure of a company from a mutual ownership form into an alternative legal corporate entity. It may allow a growing company to gain access to a wider captive customer base and a lower cost of capitalCost of CapitalCost of capital is the minimum rate of return that a business must earn before generating value. Before a business can turn a profit, it must at least generate sufficient income to cover the cost of funding its operation..

A company owner in a mutual structure is the recipient of the company’s services. Mutual liability is evenly shared between all the owners, meaning the services provided by the mutual company are exclusive only to the company owners. A mutual liability ownership structure exposes all the mutual owners to any liability incurred by the mutual organization.

After demutualization, a company will achieve a distinct separation of legal liability between the owners and its new non-owner customers. The legal structure after demutualization allows the company to gather new customers with limited legal liability. With limited legal liability, new customers will no longer be exposed to unlimited risks from the mutual form of legal liability. The new legal structure allows the company to pursue more new customers.

A mutual company forms its capital asset base strictly from its mutual liability ownership structure. So, a mutual company may raise capital from its own users, among various other sources of capital fundingSources of FundingCompanies always seek sources of funding to grow the business. Funding, also called financing, represents an act of contributing resources to finance a.

Demutualization may be an advantageous activity, as it allows a mutual company to gain access to other lower-cost forms of capital funding. It allows the newly formed legal entity to raise capital from outside sources. The company is also capable of becoming a larger organization with more customers. In such a scenario, lenders may be more willing to loan a larger amount of capital.

Types of Demutualization

The two types of demutualization are:

1. Full demutualization

In full demutualization, the mutual company converts entirely into a public share company. Eligible policyholders will be compensated in the form of cash, newly issued shares of common stockCommon StockCommon stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock., or policy credits in exchange for their membership interests.

2. Sponsored demutualization

In a sponsored demutualization, the mutual company is also fully converted into a public share company. Again, like full demutualization, all policyholders are compensated. The difference is that mutual ownership is essentially bought by a single stock parent corporation, not the original mutual company.

Instead of receiving stock certificates from the original mutual company, policyholders will receive stock certificates in the new parent company instead. Risk and liability are transferred entirely to the new parent company.

Examples of Demutualization

From 2000 to 2010, several companies underwent demutualization, such as:

• Sun Life Assurance Company, March 2000
• Prudential Insurance Company, December 2000
• TMX Group, October 2003
• New York Stock Exchange (NYSE), April 2005
• Mastercard, May 2006
• Visa, March 2008

Related Readings

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