Cooperatives: A Tool for Community Economic Development
CHAPTER 8
LEGAL STRUCTURE OF COOPERATIVES
| This chapter covers legal issues pertaining to starting and working
with cooperatives.
ISSUES COVERED INCLUDE:
|
| Forming any type of corporation limits the individual liability
of those associated with the incorporated firm.
|
A. Legal Status of Cooperatives
1. Incorporation
To conduct its business effectively, a cooperative must exist as a
legal entity separate from its members. Incorporation is necessary
to achieve such status.
Like other corporations, cooperatives obtain significant advantages from incorporation. The primary one is limited liability. Under incorporation, the personal liability of the individual owner/ members for the co-op’s losses are limited to the amount of equity each member has invested in the co-op.
All states have statutes pertaining specifically to cooperatives (in
Wisconsin, cooperatives are governed by Chapter 185). The documents
necessary to incorporate a co-op are the articles of incorporation and
the bylaws (see below for instructions on preparing these documents).
Filing the articles of incorporation creates the co-op as a legal entity;
while the bylaws provide the co-op with guidelines for conducting business.
It is advisable to obtain legal counsel to review the articles of incorporation
and bylaws.
| Government is not an enemy or a friend, but a tool in the conduct
of business that is necessary to ensure fair play. It is not expected
to be responsible for saving us.
|
2. Capper-Volstead Act
Around the beginning of the 20th century, the U.S. Congress passed
anti-trust laws designed to break up powerful corporate monopolies which
controlled a number of industries. This legislation did not acknowledge,
however, that many farmers had been collectively marketing their products
together for decades. Thus, additional legislation was needed to
enable farmers to continue doing so without violating anti-trust laws.
The Capper-Volstead Act of 1922 exempted farmer cooperatives from anti-trust legislation. The Act enabled members of co-ops to collectively market their products and to exchange pric-ing information among them. Note that cooperatives must meet certain criteria in order to qualify for exemptions under Capper-Volstead. It is advisable to seek legal counsel to determine if your cooperative is qualified to receive them.
B. Legal Documents Pertaining to Cooperatives
In order to exist legally and function effectively, a new cooperative
must develop the following legal documents:
1. articles of incorporation
2. bylaws
3. membership application
4. marketing agreement
These documents form the legal and operational basis for the co-op.
They should provide a solid foundation on which to build a new business,
and should be developed with care and legal counsel.
Each document is discussed separately below.
1. Articles of Incorporation
The articles of incorporation are filed with the state when the co-op
incorporates. They should be the first document the co-op develops.
In Wisconsin, a cooperative exists as a legal entity when articles are
filed and accepted by the state. The Department of Financial Institutions
(Secretary of State) has copies of the proper articles to file. The
Articles of Incorporation set out the basic characteristics of the cooperative,
including its name, address, and type of business. The specific information
required by law is described in the state statute. Note that articles
of incorporation are legally binding; all subsequent documents adopted
by the co-op must be consistent with the articles. Articles can be
amended by procedures established in most cases by state statute.
A copy of the cooperative articles of incorporation form for Wisconsin
appears in the Appendix. Although these may be used as a model to
draft articles for your co-op, we strongly suggest that a qualified co-op
lawyer review your draft articles before adopting them.
| Articles of Incorporation for Cooperatives*
Incorporation is usually the best method of organizing. Each State has special enabling laws under which cooperatives may incorporate. It may be preferable to incorporate under the state’s general corporation enabling act, but structure bylaws to operate as a cooperative. Incorporation gives the cooperative a distinct legal standing. Members generally are not personally liable for the debts of an incorporated organization beyond the amount of their investment. The articles indicate the nature of the cooperative business. The articles should specify rather broad operating authority when incorporating even though services may be limited at the beginning. These articles usually contain the name of the cooperative, principal place of business, purposes and powers of the association, proposed duration of the association, names of the incorporators (in most States), and information about the capital structure. In some States, the names of the first officers of the association must be included. Filing the articles of incorporation (usually with the Secretary of State) activates the cooperative corporation. After the organizing committee approves the articles, the attorney files for the corporation charter and includes the recording fees. Once chartered by the State, the cooperative should promptly adopt bylaws. SEE APPENDIX D FOR ARTICLES OF INCORPORATION FORMS. *From Galen Rapp and Gerald Ely, “How to Start a Cooperative,” Cooperative Information Report 7. Washington DC: United States Department of Agriculture, Rural Business-Cooperative Service. Revised September 1996. |
2. Bylaws
The co-op’s bylaws provide a more detailed description of the cooperative’s
internal structure and operations. They are a set of written rules
for how the co-op will function and govern itself. Bylaws are not
usually filed with the state in which the co-op will operate, but they
are considered legally binding on the cooperative and its members.
If you draft the bylaws yourself, we strongly recommend that you have a lawyer who is knowledgeable about cooperatives review your bylaws before presenting them to the membership for approval. This will ensure that no aspect of your draft is in conflict with the articles of incorporation or your state’s statutes.
An outline of the major topic areas that the bylaws should cover appears
below.
Membership
Identifies the qualifications for eligibility and procedures for joining
the cooperative, including requirements for purchase of stock, if any.
Describes the procedure by which membership may be ended, either voluntarily
or involuntarily.
Meetings of Cooperative Members
Identifies the date for the annual meeting; how and when any special
meetings may be held; requirements for notice of upcoming meetings; procedures
for voting and requirements for a quorum; order of business at the annual
meeting.
Directors and Officers
Specifies the number and qualifications of directors; procedures for
electing directors and length of terms; election of officers by the board;
frequency of board meetings and requirements for notice of board meetings;
any special meetings; compensation of board members and requirements for
a quorum.
Duties of Directors
States the director’s specific powers and responsibilities, including:
guiding the cooperative and articulating its mission, goals, and policies
and periodically reviewing those goals. Authorizes directors to employ
a manager, define the manager’s duties, determine his or her compensation
and evaluate his or her job performance. Specifies the director’s
responsibility to maintain an appropriate accounting system and have the
co-op’s books audited or reviewed annually. This section also specifies
the board’s responsibility to indemnify directors, officers and management
against liability.
Duties of Officers
Specifies the duties of the president, vice president, secretary, and
treasurer. Also describes the terms of officers and excused absences
from board meetings.
Membership Capital Contributions
Specifies the required equity contribution by members and the method
by which the co-op will collect the contribution; what type of stock the
cooperative has the authority to issue; and any requirements regarding
the co-op’s stock certificates.
Profits and Losses
Specifies how the co-op’s profits, if any, will be distributed based
on each member’s patronage with the co-op. In addition, any losses
experienced by the co-op must be allocated across the membership.
Equity Redemption
Gives the board authority to determine at what time and in what manner
the cooperative will redeem members’ equity in the cooperative.
Nonmember Business
Specifies how the cooperative will distribute the benefits, if any,
resulting from business with non-members.
Dissolution
Identifies a procedure for dissolving the cooperative, and specifies
the distribution of any remaining assets.
Amending the Bylaws
Specifies a straightforward method by which the bylaws may be amended.
| ...prospective members must have enough trust in the individuals
associated with the cooperative and confidence that the projected member
benefits will be delivered to them, to write that check for their investment
in the new cooperative and make the commitment to join.
|
3. Membership Application
This document is used to apply for membership in the cooperative, and
should include the prospective members name, address, telephone, and signature,
as well as a statement that the individual agrees to abide by the co-op’s
bylaws and meets all membership qualifications.
It also specifies the equity contribution required (the number of shares of stock being purchased or the amount of the membership fee if it is a non-stock co-op), which is often submitted at the same time as the application.
This application, approved by the board of directors and signed by the co-op president, is the primary legal proof that the individual is a member of the co-op. However, a stock certificate can also serve to recognize that the person has been accepted as a member of the cooperative. Careful records should be kept of membership agreements, stock sales and other transactions between the member and the cooperative for tax purposes.
Please see the combined membership/marketing agreement on the next page.
| A couple hours of a lawyer’s time up front could save the co-op a great deal of money later on. |
4. Marketing Agreement
The marketing agreement, used primarily by agricultural marketing co-ops,
is a contract between each individual member and the co-op’s membership
as a whole. It is intended to benefit both the member and the co-op
by setting out the respective obligations of both parties in terms of product
delivery, sale, and payment.
As a contract, the membership agreement should carefully specify the production commitment of the producer (measured in either volume or acres), and the specific products to be marketed; describe how the value of the producer’s goods will be determined and when s/he will be paid for them; specify any actions that are considered in breach of the contract; and include an Act of God statement that releases both parties from their commitments to the contract in the event of a natural disaster which substantially harms the producer’s crop.
It is highly recommended that the co-op seek a knowledgeable lawyer
to review the marketing agreement draft before putting it to use.
A couple hours of a lawyer’s time up front could save the co-op a great
deal of time and money down the road.
| COMBINED MEMBERSHIP/MARKETING AGREEMENT
Membership Application for Cooperatives, including a Sample Outline* This form has five main parts: applicant’s statement asking to become a member of the cooperative, signature of the applicant, statement of cooperative acceptance of applicant, signatures of the president and secretary, and a statement of the duty and intent of the member. The application, signed by the member and approved by the board of directors,
is the legal proof that a patron is a member. A cooperative should have
a completed membership application on file from every member. Membership
and the amount of business done with members and nonmembers are important
factors for certain antitrust and taxation provisions.
Membership Application and Marketing Contract THIS AGREEMENT between the ________________________ , Inc., hereinafter
referred to as the Association, and the undersigned Producer, witnesseth:
The Producer
The Association:
*From Galen Rapp and Gerald Ely, “How to Start a Cooperative,”
Cooperative Information Report 7. Washington DC: United States Department
of Agriculture, Rural Business-Cooperative Service. Revised September
1996.
1. To establish various plans for making returns to the Producer.
In case of a breach of this contract by the Producer, the actual damage to the Association and other producers cannot be determined. Therefore, Producer agrees to pay to the Association as liquidated damages for such breach, the sum of _________ dollars ( ) per ____________ on all products that would have been delivered had the Producer not breached the said contract. And the Association shall further be entitled to equitable relief by injunction or otherwise to prevent any such breach or threatened breach thereof and the payment of all costs of litigation in connection with the exercise of any or all of the remedies available to the Association. This contract shall remain in effect for an initial term of ( ) years from the date hereof. Following the initial term, the contract may be cancelled by notice given in writing by either party to the other within ten (10) days after any yearly anniversary date, and such cancellation shall become effective on the last day of the second calendar month following the month during which such notice is given. Date _______________
(Some State laws provide for filling or recording cooperative marketing contracts in a county recorder’s office to give notice to third parties that the contract exists. And acknowledgment if the contract is to be filed or recorded.) Membership Certificate This certifies that ______________________________ of _____________________ is a member of _________________________________ Association and is entitled to all of the rights, benefits, and privileges of the Association. Date ______________________ ___________________________
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| Because the directors are also member/users of the co-op, they have a personal in investment in making sure that it is successful. |
D. Cooperative Board of Directors
(adapted from “Liability of Directors” by Robert Guenzel, Nebraska Cooperative Council)
A director of a cooperative has a special fiduciary relationship with that co-op and with its members. Cooperative directors have a duty to conduct the co-op’s affairs in the members’ interests; they are trustees of the members’ property.
It is the duty of the board to hire and evaluate the performance of the cooperative’s manager. If the manager fails to perform adequately, the board has a responsibility to the members to respond effectively.
Directors should always use their best business judgment in conducting the co-op’s affairs, making decisions as reasonably prudent people would. Directors should use reasonable care and skill to obtain knowledge useful to them in making such decisions. They must be willing to ask questions, even if such questions are inconvenient for co-op management. They must be willing to take steps to obtain sufficient appropriate information to make good decisions.
This does not mean, however, that the directors can ensure that the cooperative will be financially successful. Directors are required to use their best judgment; if the members feel that a director has not done so and one consequence is that the co-op has not made money, they can exercise their right to elect a different director.
A person nominated for a director’s position should carefully consider
the responsibilities inherent in that position. Directors may be liable
for damages if they are found to have exercised less than their best judgment.
| Criteria for Separating Cooperative Board and Executive
Decision Areas
There is no fine line of distinction between the executive’s and the board’s authority for specific action. The following ten criteria may be helpful in distinguishing board and executive decision areas. Criterion 1
Criterion 2
Criterion 3
Criterion 4
Criterion 5
Criterion 7
Criterion 8
Criterion 9
Criterion 10
The following are some decision areas that are often performed by the
Board Decisions Solely 1. Defining corporate objectives, policies, and goals (but
with opportunity for management participation and recommendations for setting
goals).
Management Decisions Primarily 1. Defining operating or management level objectives, goals,
and policies within constraints of corporation-wide decisions.
Shared Decision Areas The following were identified by respondents in a survey by the Agricultural
Cooperative Service. There is some difference from the above list.
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