Preface

A cooperative is a business. As such, it must operate ina manner compatible with all the laws that apply to a business,with cooperative principles, and with the needs and desires ofits member-patrons in mind.

To comply with each of these limitations on its opera-tions, a cooperative must have a set of organizational documentsthat is uniquely crafted to its particular situation. Drafting new,and updating old, legal documents of cooperatives takes bothtime and expertise. This report is intended to assist personsorganizing new cooperatives, managers and directors of existingcooperatives, and their professional advisers to develop andupdate the important legal documents of cooperatives. Itexplains issues to be considered and options that are available.It provides sample language to be used as a starting point; thewording is not to be copied without review and thought.

To help distinguish sample document language fromexplanatory text, a straight black line has been drawn along theleft-hand margin of the sample document language.

Contents

ORGANIZATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Statement of Purposes ...................................................... 2Organization Committee ................................................... 3Patronage Commitment ..................................................... 3Financial Commitment ...................................................... 4Calling of Membership Meeting ....................................... 6Accounting .......................................................................... 7

SELECTING THE PROPER STATEINCORPORATION STATUTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLES OF INCORPORATION ..*...................,..*.*.............t. 11

Heading ............................................................................ 11Name ................................................................................. 12Principal Place of Business ............................................. 12Purposes ............................................................................ 12Powers ............................................................................... 13Duration ............................................................................ 15Directors ........................................................................... 15Capital Structure ............................................................... 16Amendment ..................................................................... 20Signatures ......................................................................... 20

BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Membership ...................................................................... 21Meetings of Members ...................................................... 24Directors and Officers ....................................................... 26Duties of Directors ........................................................... 32

ii

Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Operation at Cost and Members’ Capital . . . . . . . . . . . . . . . . . . . . . . . . . 36Equity Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..I....... 39Consent . . . . . . . . . ..f................................................................ 4 0Nonmember Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Nonpatronage Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2Handling of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Dissolution . . . . . . . . ..f............................................................ 4 5Indemnification . . . . . . . . . ..I....................................I.............. 45Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

MARKETING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*................. 4 7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . ..I...........................................4 6Sales Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..I...........................4 9Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Termination and Renewal ..****...*.**.*.........................*...... 55Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

MEMBERSHIP APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

DIRECTOR HANDBOOK . . . . . . ..a.. a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

APPENDIX A. ELECTION OF DIRECTORSBY DISTRICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

APPENDIX B. ALTERNATIVE EQUITYREDEMPTION BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

APPENDIX C. BASE CAPITAL PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

. . .111

Sample Legal Documentsfor CooperativesDonald A. Frederick, Attorney-Adviser

One of the axioms of business planning is that a strongfoundation is essential if an organization is to have a strongstructure. An important component of a strong cooperativefoundation is a set of basic legal documents that conforms toFederal, State, and local law and facilitates conducting the busi-ness affairs of the association to enhance the mutual well-beingof the members.

This report explains the role each document plays in build-ing the organization and the various issues treated in each docu-ment. It discusses options available to members in handlingmany of the issues. It also presents sample language as an aid inpreparing initial documents, or in revising existing ones, tomake sure they promote the objectives of the cooperative ven-ture.

Most of the sample language in this report is suitable forvirtually any type of cooperative. Where the language must betailored to reflect specific functions of the association, wordingappropriate for an agricultural marketing cooperative is used.Counsel can help make the necessary modifications to coversupply and related service organizations and nonagriculturalactivities.

One point cannot be stressed too much! Cooperative orga-nizers, advisers, and leaders should not just sit down and copythese, or any other set, of legal documents and declare them astheir own. These foundation documents should only be adoptedafter review by a competent attorney, one who understands theunique characteristics of cooperatives and the industry in whichthe association does business. This will maximize the likelihoodthat the documents will conform to applicable law and meet thespecific needs of the association and its members.

One problem in drafting organizational papers is they canbe thorough or simple, but not both. This report contains many“compromises” between these two objectives. This only rein-forces the need for cooperative founders and leaders, and theirprofessional advisers, to avoid adopting any sample set of docu-ments verbatim and to review existing documents on a regularbasis.

1

The idea of forming a cooperative is usually conceived andnurtured by a few individuals who foresee coordinated groupaction as a solution to a problem confronting themselves andsimilarly situated persons. This organizing group often has toformulate a development plan, arrange for or provide seedmoney, and contribute sweat equity to get the association up andrunning.

The organization period involves considerable discussionand data collection. While these efforts provide a good forecastfor the level of support the cooperative is likely to attract, beforelaunching the venture it is a good idea to have those personswho say they want the services of the cooperative formally com-mit to use those services.

The organization agreement secures both a patronage and afinancial commitment from prospective members. It is also avehicle for educating prospective members about the coopera-tive form of business and the objectives of the proposed associa-tion.

Statement of Purposes

This first provision in a typical organization agreement setsout the services the proposed organization will perform. Theservices can be described in broad terms, such as to “process”and “market” certain farm commodities and “furnish” certainfarm supplies.

The language should refer only to services the cooperativewill provide from its inception. This minimizes member pres-sure to expand the scope of operations too rapidly. For example,it is usually best not to mention furnishing supplies in the orga-nizational agreement if the new organization will limit its initialactivity to marketing fresh vegetables.

1. The undersigned, a producer of agricultur-al products, hereinafter referred to as “Producer,”together with other signers of agreements similarhereto, propose to organize a cooperative association

2

under the laws of the State offor the purpose of

.

Organization Committee

Although the association has not yet been incorporated, adecision making process should be formalized. The organizerswill usually appoint some or all of their group to an officialorganization committee that will serve as the initial policy bodyfor the association. This provision lists the committee membersand sets out the committee’s authority.

2. (a) The association shall be organized withsuitable articles of incorporation and bylaws asdetermined by an organizational committee consist-ing of the following persons:

Name Address

2. (b) This committee may, by vote of a majori-ty of its members, increase its membership, fill anyvacancy therein, and appoint any subcommitteesdeemed necessary to conduct its affairs. The com-mittee, or any subcommittee designated by it, mayprescribe an organization fee to be paid by each per-son signing an organization agreement and mayincur necessary obligations, make necessary expen-ditures, and take any such action as may, in its dis-cretion, be deemed advisable to further the organiza-tion of the association.

3

Patronage Commitment

Most cooperatives, especially those involved in marketingagricultural commodities, need a minimum level of product tobe successful and the best possible projections of anticipatedvolumes to plan effectively. Their organization agreementsshould spell out the extent of the prospective members’ commit-ment: usually all production, a defined volume of product,. orproduction from a set number of acres. If either all productionor production from a set number of acres is used, a projection oflikely volume delivered should also be secured. Sample lan-guage is provided for each type of commitment:

Full Production.3. Producer agrees to sign a marketing agree-

ment committing all (product) produced byProducer, on land owned or leased by Producer, tothe cooperative for direct marketing, processing, orother disposition as the cooperative sees fit.Producer estimates such production will total( u n i t s ) i n (year).

***********Defined Volume.

3. Producer agrees to sign a marketing agree-ment to commit (units) of (prod-uct), produced by Producer, to the cooperative fordirect marketing, processing, or other disposition asthe cooperative sees fit.

***********

Set Acreage.3. Producer agrees to sign a marketing agree-

ment to commit all (product) produced byP r o d u c e r o n acres of land, owned or leased byProducer, to the cooperative for direct marketing,processing, or other disposition as the cooperativesees fit. Producer estimates such production willtotal -(units) in_ (year).

4

If the cooperative is likely to have a minimum quality stan-dard that must be met before product will be accepted, that stan-dard should also be explained and the person or entity judgingquality should be named.

Financial Commitment

Every new business must have equity capital. In a coopera-tive, the members supply that capital. In this provision theprospective member agrees to provide initial financial supportfor the cooperative.

Each prospective member should commit to purchase oneshare of common voting stock (or, in a nonstock cooperative, paya membership fee) for a fixed dollar amount, perhaps $1,000.This investment gives the member the right to vote on issuessubmitted to the membership.

Often the initial investment tied to membership status doesnot raise enough equity to fund the association. Additional cap-ital is needed. Usually the organizers have substantial leeway incollecting and recognizing this investment. Each prospectivemember may be asked to make an equal contribution, or thelevel can vary with anticipated patronage. While this invest-ment is classified as preferred stock in this report, it can also bestructured as equity credits, revolving fund credits, or any simi-lar term satisfactory to the organizers.

Organizers should avoid using any term usually associatedwith debt capital, such as “note” or “bond,” and should alsoavoid creating a second class of common stock, which is sure tobe confused with regular voting common stock.

The agreement should expressly state that this financialcommitment is irrevocable unless the organization effort is ter-minated. Initial development of the cooperative is totallydependent on promised financial support being forthcoming.Leaders must have the tools to force compliance with this com-mitment, by legal action if necessary.

I4. Producer agrees to purchase one share of

voting common stock of the association, par value$ payable on demand following a favorablevozihe signees of agreements similar hereto to

5

incorporate the association.

Producer further agrees to purchaseshares of nonvoting preferred stock of the associa-

t i o n , p a r v a l u e $ each, and agrees to pay forsame as follows:

S- cash on demand following incorpora-tion of the association,

g-on or before . 19 -9and,

$--- on or before ,19_.

Producer expressly understands that this stocksubscription agreement is an irrevocable legally bind-ing obligation which will be relied upon by the asso-ciation, other producers who subscribe to its stock,and lending institutions from which the associationwill seek financing to implement its cooperative pur-poses.

If a cooperative is organized as a nonstock corporation, thesample language might be altered to call for payment of a mem-bership fee, rather than purchase of a share of common stock,and payment of an additional sum into an equity account, ratherthan purchase of nonvoting preferred stock.

Calling of Membership Meeting

One of the principal responsibilities of the organization com-mittee is to determine if enough firm interest exists to justify form-ing the cooperative. It is advisable to put a time limit on membersolicitation. An open-ended solicitation period may exceed thepatience of early signees to get started or abort the effort.

If the committee decides there is enough interest, the agree-ment usually calls for a meeting of the signees to make the finaldecision to complete formation and begin operation of the coop-erative. While the typical agreement provides that the affirma-tive vote of a simple majority of signees approves formation, thecommittee should move cautiously if substantial resistance6

develops. Few associations overcome internal strife during theformation period to become useful and viable cooperative enter-prises.

5. If, on or before 9 19-t the organi-zation committee is of the opinion that sufficientsignup has been obtained to enable the association tooperate efficiently, the committee shall set a timeand place for a meeting of those persons who havesigned this agreement to determine, by majority vote,whether to proceed with the formation and opera-tion of the association, and to consider such otherbusiness as may be deemed appropriate.

Not less than ten days before the meeting,notice of the time and place of the meeting shall besent to all signees by first-class mail, and an appro-priate notice shall be published in one or morenewspapers of general circulation in the area inwhich those who signed agreements like this onereside.

,

Sometimes the agreement will set minimum levels of sup-port that must be committed before the prospective memberswill vote to begin the venture, If the organizers decide to adoptthat option, the first paragraph of this provision might begin:

5. If, on or before 9 19-t bona fideproducers of agricultural products otherwise eligibleto become members in the association agree to exe-cute marketing agreements covering (units)of (product) and subscribe to provide equi-ty to the association equal to the sum of at least

I dollars, ($ ), the organization committee shallset a time and place for a meeting . . . (continue asabove).

Accounting

There should be a clearly stated obligation placed on theorganization committee to keep good records and make the

7

appropriate disposition of any funds remaining after the vote onformation of the cooperative is conducted.

6. The organization committee shall keepdetailed, accurate accounts of all receipts and of allexpenditures of every kind. It shall have such accountsaudited and render a written report thereof to theboard of directors of the association when organized.And it shall thereupon turn over to the association anybalance remaining in its hands free of obligation. Ifthe association is not organized, such unexpended bal-ance shall be prorated among, and returned to, thosewho contributed to the organization fund.

The agreement should conclude with spaces for theprospective member to sign the agreement, and provide his orher address, and for the chairperson of the organizing committeeto sign the agreement as an acceptance.

SELECTING THE PROPER STATEINCORPORATION STATUTE

While no drafting is involved, and thus no sample languageis provided in this section, an important step in the develop-ment of a successful cooperative is selection of the proper statu-tory foundation for the association.

To operate effectively in today’s business world, a coopera-tive must be a unique legal entity, separate from its members.The best way to create this unique entity is to form a cooperativecorporation.

A cooperative becomes a corporation when its organizersfollow the steps set out in a law authorizing the formation ofcorporations. There is no Federal incorporation statute.Cooperatives incorporate under an appropriate State law.

Incorporation offers several advantages over alternativestructures, such as partnerships and unincorporated associations:

l Incorporation facilitates the orderly succession of owner-ship. The entity has a perpetual life. As some members resign and

new people join, redemption and issuance of a share of commonstock or a membership certificate is a relatively simple means ofclarifying each person’s status and rights in the association.

l A corporation conveys to members and outsiders theimage of a solid, longlasting venture.

l If a cooperative is incorporated, the personal liability ofeach individual member, for losses suffered by the cooperative,is limited to the member’s equity in the cooperative.

The organization of a cooperative as a business corporationhas some important implications for how it conducts its affairs:

l A corporation derives all of its legal authority from theState. It is a “person” in the eyes of the law, just like a naturalperson. It can do many things natural persons can, such as signcontracts, borrow money, own property, and sue and be sued.

l While its powers are broad, those powers are limited tothe ones granted by the State. For example, when the State agri-cultural cooperative law says only agricultural producers canvote in farmer cooperative affairs, no one else has the right toparticipate in policy decisions made by the membership.

l The cooperative must obey business laws. Since man-agers and directors make the decisions for the corporation, theyhave an obligation to know and make sure the association fol-lows all applicable laws.

Persons who organize a cooperative have several incorpora-tion statutes to choose from:

l All States have special cooperative incorporationstatutes. Some are broad, permitting the incorporation of virtual-ly any business as a cooperative. Other are limited in scope.Many States have an Agricultural Cooperative Associations Actspecially written to authorize incorporation of associations ofproducers of agricultural products.

9

l Every State has a general business corporation statute. Acooperative can be incorporated under this law and have itscooperative character established through proper drafting of thearticles of incorporation and bylaws.

l While most cooperatives are incorporated under a law ofthe State where the principle office is located, a few are orga-nized under the laws of a different State.

.

It is usually best to organize under a cooperative incorpora-tion statute of the State where the association’s headquarters islocated. But it’s very important that the statute authorizing thecooperative permits a structure that meets the needs and desiresof the members. The General Business Corporation Act and out-of-State incorporation laws should be considered if the applica-ble cooperative law doesn’t permit the necessary organizationalstructure.

A few so-called cooperatives are organized under a generalnot-for-profit corporation statute. Usually this is done to make iteasier to obtain grant money. There are some potential adverselegal consequences of this type of incorporation that should bereviewed before following this path:

l Most not-for-profit corporation laws expressly forbid thedistribution of any earnings to members, trustees, officers, orother private persons. This means an association organizedunder such a statute can’t pay patronage refunds, one of themain reasons for operating a business as a cooperative.

0 In many States, if a nonprofit corporation goes out ofbusiness, members are prohibited from sharing in any assets leftafter the debts are paid.

l Nonprofit corporations sometimes have had more trou-ble than cooperative corporations enforcing marketing agree-ments with their members. Cooperative statutes frequently pro-vide specific authority for enforcement of marketing agreements.Not-for-profit acts have no such provision.

If the leadership determines a cooperative is not organized10

under the appropriate State statute, it is usually possible to rein-corporate without seriously disrupting the ongoing business ofthe association. This will ordinarily involve redrafting the orga-nization papers to conform to the new law and paying a modestfee to the appropriate State agency.

ARTICLES OF INCORPORATION

Once the leadership has determined the statute to use asthe legal authority for a cooperative, the first document preparedis the articles of incorporation (articles). It is the acceptance ofthe articles by the State that establishes the cooperative as aunique “person” under the law.

Most incorporation laws require a fairly common set ofprovisions to be included in the articles. These are discussedbelow.

The statute will also require that before the articles are offi-cial they must be recorded in the office of a designated Stateofficer. Failure to properly file the articles makes any businessactivity vulnerable to legal challenge.

It is usually permissible to include information in the arti-cles beyond that required by the incorporation statute.However, this is ordinarily not done because it is frequentlymore difficult to amend the articles than it is with other docu-ments that may contain the same information.

The articles are not a piece of paper to be prepared andthen forgotten. The articles are routinely given the same respectby the courts as a statute. Therefore, the articles are binding onthe directors, officers, and manager of a cooperative. Conductbeyond that authorized in the articles can subject the coopera-tive and its leaders to potential legal liability.

The following are the elements common to most coopera-tive articles of incorporation.

Heading

The heading sets out the title of the document, the name ofthe cooperative, and the title of the authorization statute.

11

ARTICLES OF INCORPORATION

(Name of Cooperative)

We, the undersigned, all of whom are engaged in theproduction of agricultural products, do hereby vol-untarily associate ourselves together for the purposeof forming a cooperative association, with (or with-out) capital stock, under the provisions of the

Act of the State of

Name

The official name of the cooperative must be stated in thebody of the articles and is usually the first provision:

ARTICLE I. NAME

The name of the association shall be

Principal Place of Business

This is a simple statement of the general location of thecooperative’s office:

ARTICLE II. PRINCIPAL PLACEOF BUSINESS

The association shall have its principal placeof business in the city ofCounty of , Stateof ’ .

Purposes

The purposes for which the cooperative is being organizedare specifically set out. While the purposes clause of the organi-zational agreement is limited to immediate objectives, the pur-

12

poses are usually stated as broadly as possible in the articles ofincorporation. Any service the cooperative may someday pro-vide is frequently authorized, at least in a general way. Thisreduces the likelihood the articles will have to be amendedwhenever the association is asked by the members to provideadditional services.

Powers

ARTICLE III. PURPOSES

The association is formed for the followingpurposes: To market for its members and other pro-ducers any and all agricultural products or any prod-ucts derived therefrom: to engage in any activity inconnection with the picking, gathering, harvesting,receiving, assembling, handling, grading, cleaning,shelling, standardizing, packing, preserving, drying,processing, transporting, storing, financing, advertis-ing, selling, marketing, or distribution of any suchagricultural products or any products derived there-from: to purchase for its members and others farmsupplies and equipment: to manufacture, process,sell, store, handle, ship, distribute, furnish, supply,and procure any and all such farm supplies andequipment; and to exercise all such powers in anycapacity and on any cooperative basis that may beagreed upon.

The State statute authorizing formation of a cooperativewill set out in detail the activities the cooperative may engagein. As a general rule, the statutory language is copied virtuallyverbatim into the articles. The following is an example of a typi-cal statutory provision restated as an article of incorporation:

ARTICLE IV. POWERS

I This association shall have the following pow-ers:13

(a) To borrow money without limitation as toamount of corporate indebtedness or liability: to givea lien on any of its property as security therefore inany manner permitted by law: and to make advancepayments and advances to members and other pro-ducers.

(b) To act as the agent or representative of anymember or members in any of the activities men-tioned in Article III hereof.

(cl To buy, lease, hold, and exercise all privi-leges of ownership over such real or personal prop-erty as may be necessary or convenient for the con-duct and operation of the business of the association,or incidental thereto.

(d) To draw, make, accept, endorse, guaran-tee, execute, and issue promissory notes, bills ofexchange, drafts, warrants, certificates, and all kindsof obligations and negotiable or transferable instru-ments for any purpose that is deemed to further theobjects for which this association is formed, and togive a lien on any of its property as security therefor.

(e) To acquire, own, and develop any interestin patents, trademarks, and copyrights connectedwith, or incidental to, the business of the associa-tion.

(fl To cooperate with other similar associa-tions in creating central, regional, or national coop-erative agencies, for any of the purposes for whichthis association is formed, and to become a memberor stockholder of such agencies as now are or here-inafter may be in existence.

(g) To have and exercise, in addition to theforegoing, all powers, privileges, and rights con-ferred on ordinary corporations and cooperative

14

marketing associations by the laws of this State andall powers and rights incidental or conducive to car-rying out the purpose for which this association isformed, except such as are inconsistent with theexpress provisions of the act under which this asso-ciation is incorporated, and to do any such thinganywhere; and the enumeration of the foregoingpowers shall not be held to limit or restrict in anymanner the general powers which may by law bepossessed by this association, all of which are here-by expressly claimed.

Duration

The articles will say how long the cooperative is autho-rized to exist. Virtually all modern laws permit perpetual exis-tence. Some laws in effect at the time longstanding cooperativeswere organized limited the permissible life of a cooperative to aset period of time, such as 50 years. Associations that have beenactive for several decades should check to make sure their dura-tion clause provides for perpetual operation.

I ARTICLE V. PERIOD OF DURATIONThis association shall have perpetual exis-tence.Directors

Most statutes require the articles to name the initial policy-makers of the cooperative. A majority of the incorporationstatutes ask for the number of directors and names and address-es of the initial board. The articles often require “at least” theminimum number of directors required by statute: the precisenumber is set in the bylaws. Some statutes ask for the namesand addresses of incorporators, in which case the appropriatetitle and references to incorporators would be substituted for“directors” in the example. If the law asks for both. then thisdraft provision is essentially inserted a second time and appro-

15

priately worded in each instance.

ARTICLE VI. DIRECTORS

This association shall have at least_ direc-tors.

The names and addresses of those who are toserve as the initial directors are:

NAME ADDRESS

Capital Structure

The articles usually contain a description of the capitalstructure of the cooperative. If stock is issued, the number ofshares authorized and the par value of each share of each classof stock (common, preferred) are set forth. The rights grantedowners of each class of stock, the restrictions on owners of eachclass, and the dividends to which each class is entitled are alsoexp l a ined .

If stock is not issued, a description must be included ofhow the rights and interests of the members will be determined.Sample language for both a stock and a nonstock association isprovided below.

The capital stock example provides for both voting com-mon and nonvoting preferred stock. Nonvoting preferred stockis a useful way to account for additional nonpatronage invest-ments by members. It has also been used as a way of raisingequity from nonmembers, such as other members of the commu-nity interested in supporting the cooperative. If any interest inthe cooperative is being sold to nonmembers, counsel must beretained to advise the association on applicable securities lawrequirements.

The sample language also assumes that the organization

16

limits each member to one vote. If proportional voting based onpatronage is utilized, counsel will have to prepare a descriptionof how votes will be accumulated and any limit on the numberof votes any one member can amass.

All of the information in the example below is importantand should be included somewhere in the organizational docu-ments. However, not all incorporation laws require that all of itbe in the articles. It may be possible to place some of these pro-visions in the bylaws.

ARTICLE VII. CAPITAL STOCK (stock cooperative)

Section 1. Classes and Authorized Amounts.The capital stock of the association shall consist ofshares of common stock with a par value of $per share, and shares of preferred stock with apar value of $ per share.

Section 2. Common Stock. The common stockof this association may be purchased, owned, or heldonly by agricultural producers who (1) patronize theassociation in accordance with uniform terms andconditions prescribed by it, and (2) have beenapproved by the board of directors.

‘Producer’ shall mean and include persons(natural or corporate) engaged in the production of

(product), or other agricultural products,including tenants of land used for the production ofany such product, and lessors of such land whoreceive as rent therefore part of any such product ofsuch land, and cooperative associations (corporate orotherwise) of such producers.

Each member shall hold only one share ofcommon stock and each eligible holder of commonstock shall be entitled to only one vote in any meet-ing of the stockholders upon each matter submittedto vote at a meeting of the stockholders.

In the event the board of directors of the asso-ciation shall find, following a hearing, that any of

17

the common stock of this association has come intothe hands of any person who is not eligible for mem-bership, or that the holder thereof has ceased to bean eligible member, such holder shall have no rightsor privileges on account of such stock, or vote orvoice in the management or affairs of the associationother than the right to participate in accordance withlaw in case of dissolution, The association shallrepurchase such stock for par value. If such holderfails to deliver any certificate evidencing the stock,the association may cancel such certificate on itsbooks and records, and the certificate is thereby nulland void.

The common stock of this association may betransferred only with the consent of the board ofdirectors of the association and on the books of theassociation, and then only to persons eligible to holdit. No purported assignment or transfer of commonstock shall pass to any person not eligible to hold it,nor the rights or privileges on account of such stock,nor a vote or voice in the management of the affairsof the association.

This association shall have a lien .on all of itsissued common stock for all indebtedness of theholders thereof to the association.

No dividends shall be paid on the commonstock.

Section 3. Preferred Stock. The preferredstock of this association may be issued to any per-son, association, partnership, or corporation.

Preferred stock shall carry no voting rights.Noncumulative dividends not to exceed

percent (_%) per year may be paid on preferredstock at the absolute discretion of the board of direc-tors.

Preferred stock may be transferred only on thebooks of the association. It may be redeemed inwhole or in part on a pro rata basis at par, plus anydividends declared and unpaid, at any time on thirty

18

(30) days’ notice by the association, provided saidstock is redeemed in the same order as originallyissued by years. If the owner fails to deliver any cer-tificate evidencing such stock, the association maycancel the stock on its books.

This association shall have a lien on all of itsissued preferred stock for all indebtedness of theholders thereof to the association.

Upon dissolution or distribution of the assetsof the association, the holders of all preferred stockshall be entitled to receive the par value of theirstock, plus any dividend declared and unpaid, beforeany distribution is made on the common stock.

*ii*********

ARTICLE VII. MENBERSHIP(nonstock cooperative)

The association shall not have capital stockbut shall admit applicants to membership in theassociation upon such uniform conditions as may beprescribed in its bylaws. This association shall beoperated on a cooperative basis for the mutual bene-fit of its members as producers. Membership in theassociation shall be restricted to producers and asso-ciations of producers who shall patronize the associ-ation,

The voting rights of the members of the asso-ciation shall be equal, and no member shall havemore than one vote upon each matter submitted to avote at a meeting of the members.

The property rights and interests of eachmember in the association shall be unequal and shallbe determined and fixed on a patronage basis, andthe net proceeds from the business of the associationshall be allocated to member-patrons in the propor-tion that the patronage of each member bears to thetotal patronage of all the members of the association.

19

Amendment

The articles may be changed whenever the appropriate per-centage of the membership (and, if required by statute, the direc-tors), as set out in the incorporation statute, votes to amendthem. While the percentage is established by law, it is a goodidea to include that requirement in the articles to remind peoplethat the articles can be changed and to eliminate doubt as to thesupp,ort required when the issue of possible amendment arises.

While a majority of the statutes set the requirement at asimple or two-thirds majority of the members voting, severalstatutes require approval of a majority of the total membership.If turnout for member meetings is light, this poses a seriousobstacle to changing the articles.

ARTICLE VIII. Amendment

These articles may be amended upon the affir-mative vote of two-thirds of the members actuallyvoting on the proposed amendment.

Signatures

Those persons who ask the State to authorize the coopera-tive, often called incorporators, complete the document by sign-ing it.

S i g n e d t h i s day of ,19__, by theundersigned incorporators, all of whom are engagedin agriculture as bona fide producers of agriculturalproducts.

I

20

BYLAWS

Shortly after the cooperative is incorporated, the membersadopt a set of bylaws. Bylaws provide a detailed description ofthe structure and method of operation of the cooperative.Bylaws are a working plan for how the association should func-tion.

Most incorporation laws give members flexibility to struc-ture their cooperative as they see fit. Most references to bylawsare permissive, giving members the authority to write their ownrules on how to handle a particular issue.

Bylaws normally are not filed with the State. But like thearticles, they are treated in a manner similar to statutes by thecourts. Failure of the leadership to follow the bylaws can alsolead to legal liability.

Numerous provisions are usually found in cooperativebylaws. Some are similar to those included in bylaws of for-profit corporations, others are unique to cooperation. The mostcommon provisions are discussed in this report. But a coopera-tive is free to place virtually any rule on the conduct of its affairsin the bylaws, provided the provision doesn’t conflict with anapplicable law or the articles of incorporation.

While almost any activity can be covered by a bylaw, onlybroad issues of long-term significance to members should be thesubject of a bylaw. Operating decisions should not be covered inthe bylaws, but rather in board policy resolutions. Board poli-cies are directives to the management, issued by the board in itsrole as policymaker for the cooperative, that can be changed toreflect changing conditions at any time by the board. For exam-ple, whether the cooperative will do business with nonmembersis a general, long-term decision that should be covered in thebylaws. How nonmembers will be charged to insure that theypay their fair share of cooperative expenses is a short-term deci-sion requiring the flexibility possible under a policy statement.

Membership

The first bylaw usually states the qualifications to be amember of the cooperative. Membership should be limited to

21

persons who will patronize the cooperative. For an agriculturalcooperative, this means membership should be limited to pro-ducers of agricultural products and other farmer cooperativeassociations. Limiting the membership to producers and pro-ducer cooperatives is essential if the association wants to qualifyfor the limited antitrust protection of the Capper-Volstead Act,or for tax treatment under section 521 of the Internal RevenueCode, or if the cooperative is incorporated under a State law thatrequires that members be agricultural producers.

This bylaw may also include other reasonable prerequisitesto membership, such as agreeing to purchase a share of stock,sign a marketing agreement, and patronize the association on aregular basis.

This bylaw should also provide for the orderly terminationof a membership. This can be particularly important for an agri-cultural cooperative. The significant legal privileges listedabove are only available to associations of producers. Thisrequirement is only met if the membership of anyone who stopsfarming is revoked.

When a membership is terminated, it is a good practice toreturn the purchase price of the voting share of common stock,or the membership fee in a nonstock cooperative (but not neces-sarily the retained patronage investments). This makes it clearto the former member that the termination was more than a sym-bolic gesture and that he or she no longer has the right to partici-pate in the policymaking of the association.

This sample language is written for a stock cooperative. Ina nonstock cooperative, appropriate references to membershipcertificates and fees would be substituted for the terms commonstock and purchase price.

I ARTICLE I. MEMBERSHIPSection 1. Qualifications. Any person, firm,

partnership, corporation or association, includingboth landlord and tenant in share tenancies, who is abona fide producer of agricultural products in theterritory in which the association is engaged in busi-ness, and who agrees to be a patron of the associa-

22

tion, signs a marketing agreement with the associa-tion, purchases one share of common stock, andmeets such other conditions as may be prescribed bythe board of directors, may become a member of theassociation.

All applications for membership must beapproved by the board of directors. Member statusis effective as of the time the board approves theapplication for membership.

Section 2. Suspension or Termination. In theevent the board of directors of the association shallfind, following a hearing, that any of the commonstock of this association has come into the hands ofany person who is not eligible for membership, orthat the holder thereof has ceased to be an eligiblemember, or that such holder has not marketedthrough the association the products covered by amarketing agreement with the association, or nototherwise patronized the association for a period of(_) year(s), or otherwise violated the articles of incor-poration, bylaws, or other agreements made with theassociation, the association may suspend such hold-er’s rights as a member and terminate the member-ship.

When a membership is terminated, the associ-ation shall repurchase the member’s share of com-mon stock for par value. The holder shall return tothe association the certificate evidencing the holder’sshare of stock. If such holder fails to deliver the cer-tificate, the association may cancel such certificateon its books and records, and the certificate is thennull and void.

A suspended or terminated member shallhave no rights or privileges on account of any stockheld, nor vote or voice in the management or affairsof the association other than the right to participatein accordance with law in case of dissolution.

23

Meetings of Members

A cooperative is owned and controlled by its members. Abylaw sets out the ground rules for convening the members toexercise their control function.

An annual meeting is held each year to elect directors,review past performance and future plans, and conduct otherbusiness as needed.

It is often a good idea to set the time of the annual meetingas promptly as possible after the end of the fiscal year. Thisencourages management to close the books for the year in atimely fashion and the auditor to review financial results andissue the audit report without delay. Also, the members are stillfocusing on last year’s performance. If the annual meeting isdelayed too long, the members are often into another productioncycle and not able to properly exercise their control over thecooperative.

This bylaw should also authorize special member meetingsto handle any business that can’t wait until the next annualmeeting.

Members should receive sufficient advance notice so theycan plan to attend meetings. Many incorporation statutes havespecific minimum notice requirements, both in terms of leadtime (often 10 days or 2 weeks) and method (direct mail, publi-cation in local newspaper). Associations incorporated undersuch a law must make sure the bylaw provides at least as muchnotice as the statute requires, and that appropriate notice is actu-ally given. Otherwise any action taken at the meeting may beopen to legal challenge.

A statement on how voting will be conducted is also appro-priate in this bylaw. How many votes each member will have isonly one aspect of this issue. The draft language limits eachmember to one vote. If proportional voting is used, a descrip-tion of how members will qualify for multiple votes, and a limit,if any, on the number of votes any one member can accumulate,should be substituted in the applicable place.

Language on voting on behalf of members organized aspartnerships and corporations can avoid an embarrassing dis-pute right before or even during a membership meeting overhow such a member will vote on an issue. Many cooperatives24

have members organized as partnerships or corporations desig-nate, in writing, who will cast the member’s vote, and that per-son alone can vote for the member until the member provides avalid written notice of a change in the designee.

Other topics that should be addressed include proxy vot-ing, voting by mail, and cumulative voting. There is no “right”way to handle these matters, although cumulative voting is usu-ally prohibited. Sometimes the incorporation statute discussesproxy voting and voting by mail. Many cooperatives that permitproxy voting limit the number of proxies a member can vote,often to only one. If voting by mail is allowed, it is often limitedto issues discussed in the meeting notice.

Finally, the minimum number of members that need bepresent to conduct business, called a quorum, should be speci-fied. If the statute permits, quorum requirements are frequentlyset low (e.g., 10 members or 10 percent of the membership,whichever is greater) so meetings will not have to be adjournedfor lack of a quorum. While this exposes the association to con-trol by an active minority, it is sometimes necessary in order tomake sure that any business is conducted at all.

ARTICLE II. MEETINGS OF MEMBERS

Section 1. Annual Meeting. The annual meet-ing of the members of this association shall be heldin the State of , during the month of-9 at such time and in such place as the board ofdirectors shall designate.

Section 2. Special Meetings. Special meet-ings of the members of the association may be calledat any time by order of the board of directors andshall be called upon written request of at leastmembers, or at least _ percent (__%) of the mem-bership, whichever is a greater number.

Section 3. Notice of Meetings. Written notice ofevery regular and special meeting of members shallbe prepared and mailed to the last known post office

25

address of each member not less than- 0 daysbefore such meeting. Such notice shall state thenature of the business expected to be conducted andthe time and place of the meeting. No business shallbe transacted at any special meeting other than thatreferred to in the notice.

Section 4. Voting. Unless otherwise stated inthe articles of incorporation, or these bylaws, orrequired by applicable law, all questions shall bedecided by a vote of a majority of the members vot-ing thereon.

Each member shall be entitled to only onevote, Voting by mail shall not be permitted. Proxyvoting shall be allowed. Each proxy shall be in writ-ing, and no member shall vote more than one proxy.Cumulative voting is not permitted.

If a membership is held by a partnership, cor-poration, or other legal entity, the member shall des-ignate in writing the person who shall vote on behalfof the member. That designation shall remain ineffect until written notice of a properly authorizedchange in the designated voter shall be received bythe association.

S e c t i o n 5. Q u o r u m . ( members orpercent I%) of the membership, whichever is alarger number, shall constitute a quorum at anyproperly called annual or special membership meet-ing.

Directors and Officers

While the members own and control the cooperative, theresponsibility for continuous supervision of the association isusually delegated to a small group of democratically electedleaders referred to as the board of directors, who in turn selectofficers to carry out specific leadership duties. Many coopera-tive experts consider the selection of directors as the mostimportant governance decision made by the membership.26

This bylaw covers the administrative rules for the selectionof directors and officers and for the conduct of their meetings.Many important issues are discussed in this provision.

Number and Qualification of Directors. The specific num-ber and qualifications of directors must be established. Theincorporation law will usually prescribe a minimum number ofdirectors. There is no legal maximum on the size of a board, butexperience suggests that if more than about nine people are on alocal cooperative board, efficiency is reduced substantially.

Many State statutes require that all directors be members ofthe cooperative. Some permit, or even require, one or more out-side directors. The sample bylaw requires directors to be associ-ation members. If outside directors are to be authorized, thenumber and manner of selection should be included in thebylaw.

Directors have access to pricing and other marketing plansthat could be used by a competitor to take business from thecooperative. Thus, many cooperatives bar persons affiliatedwith competitors of the association from being directors.Cooperatives usually do not, however, bar such persons frommembership. For example, a farmer who sells produce directlyto a grocery chain may belong to and market some producethrough a cooperative that also sells wholesale, but that farmeris frequently denied access to a seat on the cooperative board.

A few cooperatives guarantee board turnover by limitingthe number of consecutive terms a director can serve.

Director and Officer Selection. The rules for election ofdirectors by the members, and officers by the directors, are setout in the bylaws. In many cooperatives the directors are elect-ed for three-year terms on a staggered basis. While directors areusually elected from the membership at large, some cooperativeselect directors on the basis of geographic regions, usually calleddistricts. Sample language authorizing the election of directorsby districts is set out in Appendix A.

Officers are usually elected for one-year terms. Even manystatutes that require all directors to be association members per-mit some officers, notably the secretary and treasurer, to be non-members of the association. This allows staff employees whonormally keep association records and books to have both theappropriate title and attendant responsibilities.

27

Sometimes directors and officers are not able to serve theirfull term. The bylaws should provide for a method to fill vacantdirector and officer positions, Usually the remaining directorsselect an interim director to fill a board vacancy until the nextmembership meeting. Directors can usually select a replace-ment officer at any properly called board meeting.

Meetings. The bylaws frequently provide much of thesame information for director meetings as for member meetings- regular and special meetings are authorized, notice and quo-rum requirements are set out.

Compensation . Another issue that should be addressed isdirector compensation. Many directors spend innumerablehours each year overseeing and promoting the cooperative. Itseems reasonable for the association to at least cover out-of-pocket expenses incurred on behalf of the association.

Some cooperatives also pay a modest fee for each meetingdirectors attend, or time they spend on cooperative affairs.While reimbursement of reasonable expenses is usually coveredwith a blanket authorization, fees should be handled more deli-cately. Directors should not have the right to set their own com-pensation. Both the decision to pay any fee, and the level of anyfee authorized, should be made by the members.

Nepotism. Many cooperatives also have a bylaw provisionpreventing directors and members of their immediate familiesfrom holding salaried positions with the cooperative. Thisantinepotism language eliminates the chance some membersmight view the awarding of the position as the result of undueinfluence of the director, rather than selection on the basis ofmerit.

Removal of Directors. Finally, it may be necessary at sometime to remove a director from that position. Sometimes termi-nation is automatic, e.g., failure to maintain member status ormissing too many board meetings. The ultimate authority in acooperative is vested in the members, and they should be able toremove a director at will.

As this is often a severe and divisive undertaking, it is bestto provide a procedure in the bylaws that affords due process forthe director under attack and conforms closely to any proceduralrequirements set out in the incorporation statute.

28

ARTICLE III. DIRECTORSAND OFFICERS

Section 1. Number and Qualification ofDirectors. The association shall have a board ofdirectors of _ (_) members. Each director electedshall be a member of this association in good stand-ing.

No person shall be eligible to be a director ifthat person is in competition with, or is affiliatedwith any enterprise that is in competition with, theassociation. If a majority of the board of directors ofthe association finds at any time following a hearingthat any director is so engaged or affiliated that per-son shall thereupon cease to be a director.

No director after having served for I ) c o n -secutive full term(s) shall be eligible to succeed him-self or herself, but after a lapse of _ I_) yed4 d-dagain be eligible.

Section 2. Election of Directors. At the firstannual meeting of the members of this association,directors shall be elected to succeed the incorporat-ing directors. _ director(s) shall be elected for one(1) year: _ directors for two (2) years and _direc-tors for three (3) years. At each annual meetingthereafter, new directors shall be elected, for a termof three (3) years each, to succeed those directorswhose terms are expiring.

All directors shall be elected by secret ballot,and the nominee(s) receiving the greatest number ofvotes shall be elected.

Section 3. Election of Officers. The board ofdirectors shall meet within seven (7) days after thefirst election and within seven (7) days after eachannual election and shall elect by ballot a president,vice president, secretary, and treasurer, each ofwhom shall hold office until the election and qualifi-

29

cation of a successor, unless earlier removed., bydeath, resignation, or for cause.

The president and vice president shall bemembers of the board of directors. The secretaryand treasurer need not be directors or members ofthe association.

Section 4. Vacancies. Whenever a vacancyoccurs in the board of directors, other than from theexpiration of a term of office, the remaining directorsshall appoint a member to fill the vacancy until thenext regular meeting of the members. If the term ofthe vacating director does not expire at that regularmember meeting, a special election shall be held toselect a director to fill the year or years remaining inthat term.

If one or more officer positions becomevacant, such offices shall be filled by the board ofdirectors, through election by ballot, at either a regu-lar or special meeting of the board.

Section 5. Regular Board Meetings. In addi-tion to the meetings mentioned above, regular meet-ings of the board of directors shall be held monthly,or at such other times and at such places as theboard may determine.

Section 6. Special Board Meetings. A specialmeeting of the board of directors shall be held when-ever called by the president or by a majority of thedirectors. Only the business specified in the writtennotice shall be transacted at a special meeting. Eachcall for a special meeting shall be in writing, shall be

I signed by the person or persons calling the meeting,shall be addressed and delivered to the secretary,and shall state the time and place of such meeting.

Section 7. Notice of Board Meetings. Oral orwritten notice of each meeting of the board of direc-tors shall be given each director by, or under the

30

supervision of, the secretary of the association notless than _ hours prior to the time of meeting. Butsuch notice may be waived by all the directors, andtheir appearance at a meeting shall constitute awaiver of notice.

Section 8. Quorum. A majority of the boardof directors shall constitute a quorum at any meetingof the board.

Section 9 . Reimbursement andCompensation. The association shall reimbursedirectors for all reasonable expenses incurred in car-rying out their duties and responsibilities.

The compensation, if any, of the members ofthe board of directors shall be determined by themembers of the association at any annual or specialmeeting of the association.

No member of the board of directors, or mem-ber of the immediate family of any board member,shall occupy any position in the association on regu-lar salary.

Section 10. Removal of Directors. Wheneverany director shall fail to meet the qualifications asdescribed in Section I of this Article, or fails toattend three (3) consecutive board meetings, eitherregular or special, without just cause and providedthat notice of such meetings has been given in accor-dance with these bylaws, then it shall be the duty ofthe board to remove said director and to fill thevacancy in accordance with Section 4 of this Article.

Members, through petition noting the chargesand signed by at least _ (J members or _ per-cent (_%) of the membership, whichever is a greaternumber, may request the removal of any member ofthe board. Such director shall be notified in writingof the charges and given an opportunity to be heardat a membership meeting of the association.Removal of a director shall require a vote of of

31

I members voting. Any vacancy resulting from suchaction shall be filled by nomination and vote ofmembers at such meeting.Duties of Directors

The directors are responsible for the ongoing operations ofthe cooperative. They set policy and oversee the staff operationsthat implement that policy. Cooperative bylaws often containlanguage placing a legally binding obligation on the directors tocarry out their most important duties.

This bylaw often establishes the general relationshipbetween the directors and the manager. An important responsi-bility of the board is to hire and supervise the manager. Theboard sets manager compensation and benefits. The manager,not the board, runs the day-to-day business operations of thecooperative. This includes hiring and firing other employees. Ifthe board is dissatisfied with the way the cooperative is con-ducting its affairs, it should exercise its authority to replace themanager, but it should not take on the manager’s responsibili-ties.

The bylaw should also recognize another important boardresponsibility-protecting member assets-by providing forappropriate bonds and insurance, an accounting and auditingsystem, and board control of association funds.

Finally, the board should have the authority to appointcommittees so its work load can be handled efficiently.Sometimes specific reference is made to an executive commit-tee. An executive committee with broad powers can be useful,especially when the membership is spread over a large geo-graphic area and some directors have to travel some distance toattend meetings. But the other directors must be careful not toabdicate all board responsibility to the executive committee.

ARTI&E IV. DUTIES OF DIRECTORS

Section 1. Management of Business. Theboard of directors shall have general supervision andcontrol of the business and the affairs of the associa-

32

tion and shall make all rules and regulations notinconsistent with law, the articles of incorporation,or bylaws for the management of the business andthe guidance of the members, officers, employees, Iand agents of the association.

Section 2. Employment of Manager. Theboard of directors shall have power to employ,define duties, fix compensation, and dismiss a man-ager with or without cause at any time. The boardshall authorize the employment of such otheremployees, agents, and counsel as it from time totime deems necessary or advisable in the interest ofthe association. The manager shall have charge ofthe business of the association under the direction ofthe board of directors.

Section 3. Bonds and Insurance. The boardof directors shall require the manager and all otherofficers, agents, and employees charged by the asso-ciation with responsibility for the custody of any ofits funds or negotiable instruments to give adequatebonds. Such bonds, unless cash security is given,shall be furnished by a responsible bonding compa-ny and approved by the board of directors, and thecost thereof shall be paid by the association.

The board of directors shall provide for theadequate insurance of the property of the associa-tion, or property which may be in the possession ofthe association, or stored by it, and not otherwiseadequately insured, and, in addition, adequate insur-ance covering liability for accidents to all employeesand the public.

Section 4. Accounting System and Audits.The board of directors shall have installed anaccounting system which shall be adequate to meetthe requirements of the business and shall requireproper records to be kept of all business transac-tions.

33

Duti

34

At least once in each year the board of direc-tors shall secure the services of a competent and dis-interested public auditor or accountant, who shallmake a careful audit of the books and accounts of theassociation and render a report in writing thereon,which report shall be submitted to the directors andthe manager of the association and made available tothe members of the association.

This report shall include at least a balancesheet showing the true assets and liabilities of theassociation, and an operating statement for the fiscalperiod under review.

Section 5. Depository. The board of directorsshall select one or more banks to act as depositoriesof the funds of the association and determine themanner of receiving, depositing, and disbursing thefunds of the association and the form of checks andthe person or persons by whom they shall be signed,with the power to change such banks and the personor persons signing such checks and the form thereofat will.

Section 6. Committees. The board may, at itsdiscretion, appoint from its own membership anexecutive committee of _ members, and determinetheir tenure of office and their powers and duties.The board may delegate to the executive committeeall or any stated portion of the functions and powersof the board, subject to the general direction,approval, and control of the board. Copies of theminutes of any meeting of the executive committeeshall be mailed to all directors within seven (7) daysfollowing such meeting.

The board of directors may, at its discretion,appoint such other committees as it deems appropriate.

5 of Officers

Nhile the tasks that go with each major office of a corpora-

tion are generally well understood, it is still important to havethose duties spelled out in the bylaws. This will minimize anyuncertainty over the roles each plays in leading the association.

ARTICLE V. DUTIES OF OFFICERS

Section 1. Duties of President. The presidentshall (1) preside over all meetings of the associationand of the board of directors: (2) call special meet-ings of the board of directors; (3) appoint such com-mittees as the board of directors may deem advisablefor the proper conduct of the cooperative: and (4)perform all acts and duties usually performed by apresiding officer.

Section 2. Duties of Vice President. In theabsence or disability of the president, the vice presi-dent shall perform the duties of the president, pro-vided, however, that in case of death, resignation, ordisability of the president, the board of directorsmay declare the office vacant and elect any eligibleperson president.

Section 3. Duties of Secretary. The secretaryshall keep a complete record of all meetings of theassociation and of the board of directors and shallhave general charge and supervision of the booksand records of the association. The secretary shallsign papers pertaining to the association as autho-rized or directed by the board of directors. The sec-retary shall serve all notices required by law and bythese bylaws and shall make a full report of all mat-ters and business pertaining to the office to the mem-bers at the annual meeting. The secretary shall keepthe corporate seal and all books of blank certificates,complete and countersign all certificates issued, andaffix the corporate seal to all papers requiring a seal:shall keep complete stock ownership records: shallmake all reports required by law: and shall perform

35

such other duties as may be required by the associa-tion or the board of directors. Upon the election of asuccessor, the secretary shall turn over all books andother property belonging to the association.

Section 4. Duties of Treasurer. The treasurershah be responsible for the keeping and disbursingof all monies of the association, and shall keep accu-rate books of accounts of all transactions of the asso-ciation. The treasurer shall perform such dutieswith respect to the finances of the association as maybe prescribed by the board of directors. At the expi-ration of his term of office, the treasurer shallpromptly turn over to his successor all monies, prop-erty, books, records, and documents pertaining to hisoffice or belonging to the association.

Operation at Cost and Members’ Capital

Many of the unique aspects of the bylaws of a cooperativepertain to the association’s financial affairs. Tax law plays animportant part in structuring these provisions. This report doesnot attempt to explain cooperative taxation but only makes pass-ing references to tax terms when explaining the importance ofcertain bylaw provisions.

Since the overall objective of a cooperative is to maximizethe income of its members, leaders must have flexibility toacquire capital and minimize taxes. The next several provi-sions, up to and including dissolution, authorize business andtax planning options compatible with doing business on a coop-erative basis.

This section often starts with a straightforward statementthat the association will operate on a service-at-cost basis for themutual benefit of the members as patrons and then covers spe-cific issues to implement that statement.

Language is usually included to allocate margins on apatronage basis. Allocation can be based on the volume or thevalue of business conducted on a patronage basis. Cooperativesdealing in one commodity, or in similar commodities, usuallyuse the volume method. Those that handle several products3s

with divergent values often use the dollar-value-of-businessmethod. The sample language assumes that the association is amarketing cooperative using the volume method. Appropriatewording for supply cooperatives and those using the valuemethod is provided in parentheses.

Marketing cooperatives have an alternative method of rais-ing equity capital, the collection of per-unit retains. Languageauthorizing this option should be included in their bylaws.

The term “capital credits” is used in the sample languageto distinguish the retained margins and per-unit retains fromdirect member investments in stock. This distinction simplifiesestablishing an equity redemption program for patronage-basedinvestments apart from any redemption of direct investments.

The bylaw should specify whether dividends will be paidon this patronage capital.

Since the completeness and accuracy of each patron’saccount is vital to assigning financial obligations and benefits inthe appropriate manner, a provision obligating the association tokeep the required records is an important protection for themembers.

A statement requiring the timely distribution of writtennotices of allocation and per-unit retain certificate is both goodbusiness practice and a requirement for favorable tax treatmentunder the Internal Revenue Code. That statement should autho-rize the board to issue those notices and certificates, in eitherqualified or nonqualified form, so as to maximize the tax plan-ning alternatives available.

ARTICLE VI. OPERATION AT COSTAND MEMBERS’ CAPITAL

Section 1. Operation at Cost. The associationshall at all times be operated on a cooperative ser-vice-at-cost basis for the mutual benefit of its mem-ber patrons.

Section 2. Margin Allocation. In order toinduce patronage and to assure that this association

37

will operate on a service-at-cost basis in all its trans-actions with its members, the association is obligat-ed to account on a patronage basis to all memberpatrons on an annual basis for all amounts receivedfrom business conducted with members on a patron-age basis, over and above the cost of providing suchservices and making reasonable additions toreserves. Such allocation shall be on the basis onthe volume (dollar value) of product marketedthrough (purchased from) the association.

The association is hereby obligated to pay allsuch amounts to the patrons in cash or by credits toa capital account of each member patron.

Section 3. Per-Unit Retains. Each memberalso agrees to provide capital in such amounts asdetermined by the board of directors based on physi-cal units of product marketed through the associa-tion. Such per-unit retains shall be allocated to themember’s capital credit account,

Section 4. Dividends. No dividends shall bepaid on any capital credits.

Section 5. Records and Documentation. Thebooks and records of the association shall be set upand kept in such a manner that at the end of each fis-cal year, the amount of capital, if any, so furnishedby each member is clearly reflected and credited inan appropriate record to the capital account of eachmember.

The association shall, within 8-l/2 monthsafter the close of each fiscal year, notify each mem-ber of the capital so credited to the member’saccount. The notice shall be in the form of a writtennotice of allocation or per-unit retain certificate (asthose terms are used in Subchapter T of the InternalRevenue Code) or other appropriate written docu-ment. The board shall have discretion to issue such

38

notices and certificates in either “qualified” or “non-qualified” form as permitted by the Internal RevenueCode and other applicable law.

Section 6. Fiscal Year. The fiscal year of thisassociation shall commence on the first day of

(month) and end on the last day of(preceding month).

Equity redemption

A bylaw authorizing redemption of patronage capital andexplaining the method to be used helps insure that, to the extentpossible, current patrons finance the cooperative.

There are three types of equity redemption plans. Mostcooperatives that have an equity redemption program use arevolving fund plan whereby equities are redeemed in the orderin which they were allocated. The first paragraph of the samplebylaw presents this approach.

A limited number of cooperatives redeem a percentage ofall outstanding equities each year. Sample language to imple-ment this plan is found in section 1 of the Alternative EquityRedemption Bylaw (Appendix B).

A few cooperatives have adopted a base capital plan.Under a base capital plan each member is assigned responsibili-ty for providing a pro rata share of needed capital based on pro-portional use of the cooperative during a base period. A samplebylaw authorizing a Base Capital Plan is presented in AppendixC. Associations interested in such a plan should contact a pro-fessional adviser who can draft a scheme tailored to the associa-tion’s unique needs.

Some cooperatives grant the board discretion to retire out-standing member equity “out of order” as it deems in the bestinterests of the association. Sample language for implementa-tion of the discretionary approach appears in the second para-graph of the sample bylaw below.

Other cooperatives provide a specific redemption prefer-ence for equity of the estates of deceased members and/or retiredmembers who have reached a certain age. An event-specificpreferences clause can be complex, particularly if it attempts to

39

deal with the special problems created by members organized aslegal entities and thus do not regularly retire or die. Sample lan-guage covering this situation is provided in section 2 of the sam-ple bylaw in Appendix B.

New associations are not going to be in a position to redeemequity for several years. But an early commitment to develop aregular equity redemption program and agreement on the rules forits implementation will strengthen an association’s cooperativecharacter and give early supporters some assurance that they willget their investment back at some time in the future.

Consent

ARTICLE VII. EQUITY REDEMPTION

Section I. Regular Redemption, RevolvingFund. If at any time the board of directors determinesthat the financial condition of the association will notbe impaired thereby, capital credited to members’accounts may be redeemed in full or in part. Anysuch redemption of capital shall be made in order ofpriority according to the year in which the capital wasfurnished and credited, the capital first received bythe association being the first redeemed.

Section 2. Discretionary Special Redemptions.Notwithstanding any other provision of these bylaws,the board, at its absolute discretion, shall have thepower to retire any capital credited to members’accounts on such terms and conditions as may beagreed upon by the parties in any instance in which theinterests of the association and its members are deemedto be furthered thereby and funds are determined bythe board to be available for such purposes.

If the cooperative is to deduct the face value of writtennotices of allocation and per-unit retain certificates from taxableincome in the year issued, the Internal Revenue Code requirespatrons to consent to include those amounts in taxable income

40

in the year they receive a notice or certificate, even though thecooperative retains the funds. The simplest way to obtain con-sent from members is to include a bylaw making consent a con-dition for membership. The Internal Revenue Service has pub-lished a model consent bylaw which should be adopted.

Another paragraph is inserted making it clear that thecooperative must explain the meaning of consent to membersand prospective members: this reminds leaders that such anexplanation is also a tax law requirement.

ARTICLE VIII. CONSENT

Each person who hereafter applies for and isaccepted to membership in this association, andeach member of this association on the effective dateof this bylaw who continues as a member after suchdate, shall, by such act alone, consent that theamount of any distributions with respect to hispatronage occurring after the effective date of thisbylaw, which are made in qualified written noticesof allocation or qualified per-unit retain certificates(as defined in 26 U.S.C. 1388), and which arereceived by him from the cooperative, will be takeninto account by him at their stated dollar amounts inthe manner provided in 26 U.S.C. 1385(a) in the tax-able year in which such written notices of allocationand per-unit retain certificates are received by him.

Written notification of the adoption of thisArticle, a statement of its significance, and a copy ofthe provision shall be given separately to each mem-ber and prospective member before membership inthe association.

Nonmember Business

The bylaws should make it clear whether the associationmay or may not do business with nonmembers. The samplebylaw assumes that the association will want the option to con-duct nonmember business.

41

If the association does nonmember business, the Capper-Volstead Act and many State incorporation laws require that amajority of the association business be done with or for mem-bers. The first three sentences of the sample bylaw are thusfound in most cooperative bylaws.

If an association wishes to qualify for tax treatment undersection 521 of the Internal Revenue Code, it may not do morethan 15 percent of its farm supply business with persons whoare neither members nor producers (business with the Federalgovernment can be disregarded in making this computation).The last two sentences in the example cover this situation.

ARTICLE IX. NONMEMBER BUSINESS

This association may conduct business withnonmembers on either a patronage or nonpatronagebasis. However, this association shall not market theproducts of nonmembers in an amount the value ofwhich exceeds the value of the products marketedfor members. Itshall not purchase supplies andequipment for nonmembers in an amount the valueof which exceeds the value of the supplies andequipment purchased for members. It shall not pur-chase supplies and equipment for persons who areneither members nor producers of agricultural prod-ucts in an amount the value of which exceeds fifteenpercent (15%) of all its purchases. Business done forthe United States or any of its agencies shall be dis-regarded in determining the limitations imposed bythis section.

Nonpatronage Income

Several factors are combining to increase the proportion ofcooperatives that have taxable earnings from nonpatronagesourced. These factors include a growing reliance on nonmem-ber business to sustain the cooperative, more forceful positionsby IRS auditors to classify investment income as nonpatronagesources, and less use of section 521. The bylaws should recog-

42

nize this as special income and provide the board discretion toadd it to a capital reserve, distribute it to members, or put it toany other lawful use.

I ARTICLE X. NONPAlXONAGE INCOMEThe nonpatronage income of the association

shall be its gross receipts derived from all sourceswhich under law do not qualify as patronageincome, less all expenses properly attributable to theproduction of such nonpatronage sources incomeand all income taxes payable on such receipts by theassociation, Nonpatronage income shall be used inbehalf of the association and its members in accor-dance with such lawful purposes, including assign-ment to an unallocated reserve account and alloca-tion in whole or in part to members, as may bedetermined by the board of directors.

Handling of Losses

While cooperatives operate at cost over the long term, thefinancial world operates for accounting and tax purposes in sin-gle-year segments. Sometimes cooperatives have a loss in thatrelatively short framework. The bylaws should anticipate thepossibility of a loss year. They should explain how decisionswill be made to allocate the loss on an equitable basis.

The proper treatment of losses by cooperatives for tax pur-poses has long been a contentious issue between cooperativesand the Internal Revenue Service. The sample bylaw reflects amoderate position that financial results on patronage and nonpa-tronage business should be separated: gains and losses withineach category can be combined, or “netted,” for tax purposes;and losses under either category can be carried back or forwardto offset earnings in other years under the applicable provisionsof the tax code for businesses in general. As the rules for han-dling losses are subject to change from time to time, counselshould be asked to keep informed on this issue and advise theassociation when this bylaw may need revision.

43

It may also be prudent to include a prohibition on directorsvoting a direct assessment on the members. This will preventoutside interests from pressuring the directors into an actionlikely to have a negative impact on member relations.

ARTICLE XI. LOSSES

Section z . Patronage Losses. In the event the associ-ation suffers a loss during any year on business con-ducted with or for patrons, such loss may be appor-tioned among the patrons during the year of loss sothat such loss will, to the extent practicable, beborne by the patrons of the loss year on an equitablebasis. The board shall have full authority to pre-scribe the basis on which capital furnished bypatrons may be reduced or such loss otherwise equi-tably apportioned among the patrons. In the event ofa patronage loss in one or more departments or divi-sions of the operation of this association, but not somuch as to cause an overall loss for the fiscal year,such loss or losses may be prorated against each ofthe remaining profitable departments on the basis oftheir respective percentage of the net margins duringsuch fiscal year.

Section 2. Nonpatronage Losses. If in any fis-cal year the association shall incur a loss other thanon patronage operations, such loss may be chargedagainst any reserve accumulated from nonpatronageearnings in prior years.

Section 3. General Provisions. The boardshall have no authority to make assessments againstmembers.

This section shall not be construed to deprivethe association of the right to carry backward or for-ward losses from any source whatsoever in accor-dance with the Internal Revenue Code or state taxingstatutes.

44

Dissolution

Many of the rules to dissolve a cooperative are contained invarious statutes and are too complex to reproduce in the bylaws.One issue that should be addressed is how any assets that mightremain after all liabilities are met should be distributed. In anoncooperative corporation this is usually done on the basis ofstock ownership and, if the bylaws are silent on this issue, thismay be the rule imposed on cooperative members by a court. Itis a good idea to consider language in the bylaws of a coopera-tive making clear that such a distribution will be on the basis onpatronage.

I ARTICLE XII. DISSOLUTION AND PROPERTYINTEREST OF MEMBERSUpon dissolution, after all debts and liabilities

of the association shall have been paid, all shares ofpreferred stock and common stock redeemed, and allcapital furnished through patronage shall have beenretired without priority on a pro rata basis, theremaining property and assets of the associationshall be distributed among the members and formermembers in the proportion which the aggregatepatronage of each member bears to the total patron-age of all such members insofar as practicable,unless otherwise provided by law.

Indemnification

As the trend toward litigating to test the validity of variousdecisions by corporate leaders has grown, so has the possibilitythat directors, officers and employees may be found personallyliable for the adverse consequences of their decisions. This hasmade some people understandably reluctant to assume leader-ship positions, particularly as unpaid or minimally compensat-ed directors and officers.

State governments, recognizing the valuable role directorsand officers play in corporate affairs, have adopted a variety of

45

laws limiting liability of corporate leaders and permitting corpo-rations to shield leaders from direct personal loss for decisionsthey make on behalf of the corporation.

In many States this is a developing area of the law, and theextent of permissible indemnification changes frequently. Toencourage members to serve as directors, and to make sure lead-ers don’t shy away from innovative ideas, cooperatives shouldconsider a bylaw accepting the maximum amount of responsibil-ity for indemnification permitted by State law.

Prudent risk management usually includes the purchase ofliability insurance to protect against an indemnification claimthat might otherwise lead to significant exposure for the associa-tion. This coverage can seem quite expensive, so the samplelanguage uses the permissive term “may” rather than the manda-tory term “shall.” But whenever possible, this insurance shouldbe obtained to avoid exposing member assets to unacceptablerisk.

I ARTICLE XIII. INDl3MNIFICATIONThe association shall indemnify its officers,

directors, employees, and agents to the fullest extentpossible u n d e r t h e p r o v i s i o n s of the(applicable State law), as it may be amended fromtime to time.

The association may purchase liability insur-ance coverage for any person serving as an officer,director, employee or agent to the extent permittedby applicable State law.

Amendment

It is important for cooperative leaders to remember thatbylaws are not set in stone. They can, and should, be changedwhenever they stand as a barrier to cooperative activity desiredby the member-owners and permissible under the law.

While the incorporation statute will include language per-mitting amendment of the bylaws and setting out how this canbe accomplished, a bylaw on amendment is usually included to

46

remind leaders that change is possible and to call attention toany unusual legal requirement, such as a higher than normalpositive voting requirement, that may be applicable.

ARTICLE XIV. AMEXWMENTS

If notice of the character of the amendmentproposed has been given in the notice of meeting,these bylaws may be altered or amended at any regu-lar or special meeting of the members by the affirma-t i v e v o t e o f (_) of the members present or vot-ing by proxy.

Again, these are only examples of the provisions commonto most cooperative bylaws. Virtually any other rule can beincluded that is permissib