Preface
A cooperative is a business. As such, it must operate in
a manner compatible with all the laws that apply to a business,
with cooperative principles, and with the needs and desires of
its member-patrons in mind.
To comply with each of these limitations on its opera-
tions, a cooperative must have a set of organizational documents
that is uniquely crafted to its particular situation. Drafting new,
and updating old, legal documents of cooperatives takes both
time and expertise. This report is intended to assist persons
organizing new cooperatives, managers and directors of existing
cooperatives, and their professional advisers to develop and
update the important legal documents of cooperatives. It
explains issues to be considered and options that are available.
It provides sample language to be used as a starting point; the
wording is not to be copied without review and thought.
To help distinguish sample document language from
explanatory text, a straight black line has been drawn along the
left-hand margin of the sample document language.
Contents
ORGANIZATION AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Statement of Purposes
......................................................
2
Organization Committee
...................................................
3
Patronage Commitment
.....................................................
3
Financial Commitment
......................................................
4
Callingof MembershipMeeting.......................................
6
Accounting..........................................................................
7
SELECTING THE PROPER STATE
INCORPORATION STATUTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
ARTICLES OF INCORPORATION ..*...................,..*.*.............t.
11
Heading............................................................................
11
Name.................................................................................
12
Principal Place of Business
.............................................
12
Purposes............................................................................
12
Powers...............................................................................
13
Duration............................................................................
15
Directors...........................................................................
15
Capital Structure
...............................................................
16
Amendment.....................................................................
20
Signatures.........................................................................
20
BYLAWS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
Membership......................................................................
21
Meetings of Members
......................................................
24
Directors and Officers
.......................................................
26
Duties of Directors
...........................................................
32
ii
Duties of Officers
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
Operation at Cost and Members’ Capital
. . . . . . . . . . . . . . . . . . . . . . . . .
36
Equity Redemption
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..I. . . . 39
Consent. . . . . . . . .
.f................................................................
4 0
Nonmember
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
Nonpatronage Income
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 2
Handling of Losses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Dissolution. . . . . . . .
..f............................................................
4 5
Indemnification. . . . . . . . .
..I....................................I..............
45
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
MARKETING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*.................
4 7
Introduction. . . . . . . . . . . . . . . . . . . . . . . .
..I. . .......................................
4 6
Sales Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..I. . .. . ..................
4 9
Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Termination and Renewal
..****...*.**.*.........................*......
55
MiscellaneousProvisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
MEMBERSHIP APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
DIRECTOR HANDBOOK . . . . . .
. a.. a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
APPENDIX A. ELECTION OF DIRECTORS
BY DISTRICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
APPENDIX B. ALTERNATIVE EQUITY
REDEMPTION BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
APPENDIX C. BASE CAPITAL PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
. . .
111
Sample Legal Documents
for Cooperatives
Donald A. Frederick, Attorney-Adviser
One of the axioms of business planning is that a strong
foundation is essential if an organization is to have a strong
structure.An important component of a strong cooperative
foundation is a set of basic legal documents that conforms to
Federal, State, and local law and facilitates conducting the busi-
ness affairs of the association to enhance the mutual well-being
of 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 handling
many of the issues. It also presents sample language as an aid in
preparing initial documents, or in revising existing ones, to
make sure they promote the objectives of the cooperative ven-
ture.
Most of the sample language in this report is suitable for
virtually any type of cooperative. Where the language must be
tailored to reflect specific functions of the association, wording
appropriate for an agricultural marketing cooperative is used.
Counsel can help make the necessary modifications to cover
supply and related service organizations and nonagricultural
activities.
One point cannot be stressed too much! Cooperative orga-
nizers, advisers, and leaders should not just sit down and copy
these, or any other set, of legal documents and declare them as
their own. These foundation documents should only be adopted
after review by a competent attorney, one who understands the
unique characteristics of cooperatives and the industry in which
the association does business. This will maximize the likelihood
that the documents will conform to applicable law and meet the
specific needs of the association and its members.
One problem in drafting organizational papers is they can
be 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 their
professional advisers, to avoid adopting any sample set of docu-
ments verbatim and to review existing documents on a regular
basis.
1
The idea of forming a cooperative is usually conceived and
nurtured by a few individuals who foresee coordinated group
action as a solution to a problem confronting themselves and
similarly situated persons. This organizing group often has to
formulate a development plan, arrange for or provide seed
money, and contribute sweat equity to get the association up and
running.
The organization period involves considerable discussion
and data collection. While these efforts provide a good forecast
for the level of support the cooperative is likely to attract, before
launching the venture it is a good idea to have those persons
who say they want the services of the cooperative formally com-
mit to use those services.
The organization agreement secures both a patronage and a
financial commitment from prospective members. It is also a
vehicle 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 sets
out the services the proposed organization will perform. The
services can be described in broad terms, such as to “process”
and “market” certain farm commodities and “furnish” certain
farm supplies.
The language should refer only to services the cooperative
will provide from its inception. This minimizes member pres-
sure to expand the scope of operations too rapidly.
Fo example,
it is usually best not to mention furnishing supplies in the orga-
nizational agreement if the new organization will limit its initial
activity to marketing fresh vegetables.
1. The undersigned, a producer of agricultur-
al products, hereinafter referred to as “Producer,”
together with other signers of agreements similar
hereto, propose to organize a cooperative association
2
under the laws of the State of
for the purpose of
.
Organization Committee
Although the association has not yet been incorporated, a
decision making process should be formalized. The organizers
will usually appoint some or all of their group to an official
organization committee that will serve as the initial policy body
for the association. This provision lists the committee members
and sets out the committee’s authority.
2. (a) The association shall be organized with
suitable articles of incorporation and bylaws as
determined 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 any
vacancy therein, and appoint any subcommittees
deemed necessary to conduct its affairs. The com-
mittee, or any subcommittee designated by it, may
prescribe an organization fee to be paid by each per-
son signing an organization agreement and may
incur 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 marketing
agricultural commodities, need a minimum level of product to
be successful and the best possible projections of anticipated
volumes to plan effectively. Their organization agreements
should spell out the extent of the prospective members’ commit-
ment: usually all production, a defined volume of product,. or
production from a set number of acres. If either all production
or production from a set number of acres is used, a projection of
likely 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 by
Producer, on land owned or leased by Producer, to
the cooperative for direct marketing, processing, or
other 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 for
direct marketing, processing, or other disposition as
the cooperative sees fit.
***********
Set Acreage.
3. Producer agrees to sign a marketing agree-
ment to commit all
(product) produced by
P r o d u c e r o nacres of land, owned or leased by
Producer, to the cooperative for direct marketing,
processing, or other disposition as the cooperative
sees fit. Producer estimates such production will
total-(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 judging
quality should be named.
Financial Commitment
Every new business must have equity capital. In a coopera-
tive, the members supply that capital. In this provision the
prospective member agrees to provide initial financial support
for the cooperative.
Each prospective member should commit to purchase one
share of common voting stock (or, in a
nonstock
cooperative, pay
a membership fee) for a fixed dollar amount, perhaps $1,000.
This investment gives the member the right to vote on issues
submitted to the membership.
Often the initial investment tied to membership status does
not raise enough equity to fund the association. Additional cap-
ital is needed. Usually the organizers have substantial leeway in
collecting and recognizing this investment. Each prospective
member may be asked to make an equal contribution, or the
level can vary with anticipated patronage. While this invest-
ment is classified as preferred stock in this report, it can also be
structured as equity credits, revolving fund credits, or any simi-
lar term satisfactory to the organizers.
Organizers should avoid using any term usually associated
with debt capital, such as “note” or “bond,” and should also
avoid creating a second class of common stock, which is sure to
be confused with regular voting common stock.
The agreement should expressly state that this financial
commitment is irrevocable unless the organization effort is ter-
minated. Initial development of the cooperative is totally
dependent on promised financial support being forthcoming.
Leaders must have the tools to force compliance with this com-
mitment, by legal action if necessary.
I
4. Producer agrees to purchase one share of
voting common stock of the association, par value
$
payable on demand following a favorable
vozihe
signees of agreements similar hereto to
5
incorporate the association.
Producer further agrees to purchase
shares of nonvoting preferred stock of the associa-
t i o n , p a r v a l u e $
each, and agrees to pay for
same as follows:
S-cash on demand following incorpora-
tion of the association,
g-on or before
.
19 -9
and,
$---on or before
,19_.
Producer expressly understands that this stock
subscription 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 association
will seek financing to implement its cooperative pur-
poses.
If a cooperative is organized as a
nonstock
corporation, the
sample 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, rather
than 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 member
solicitation. An open-ended solicitation period may exceed the
patience 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 final
decision 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, the
committee should move cautiously if substantial resistance
6
develops. Few associations overcome internal strife during the
formation 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 sufficient
signup has been obtained to enable the association to
operate efficiently, the committee shall set a time
and place for a meeting of those persons who have
signed this agreement to determine, by majority vote,
whether to proceed with the formation and opera-
tion of the association, and to consider such other
business as may be deemed appropriate.
Not less than ten days before the meeting,
notice of the time and place of the meeting shall be
sent to all signees by first-class mail, and an appro-
priate notice shall be published in one or more
newspapers of general circulation in the area in
which those who signed agreements like this one
reside.
,
Sometimes the agreement will set minimum levels of sup-
port that must be committed before the prospective members
will vote to begin the venture,
If the organizers decide to adopt
that option, the first paragraph of this provision might begin:
5. If, on or before
9 19-tbona fide
producers of agricultural products otherwise eligible
to 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 shall
set a time and place for a meeting . . . (continue as
above).
Accounting
There should be a clearly stated obligation placed on the
organization committee to keep good records and make the
7
appropriate disposition of any funds remaining after the vote on
formation of the cooperative is conducted.
6. The organization committee shall keep
detailed, accurate accounts of all receipts and of all
expenditures of every kind. It shall have such accounts
audited and render a written report thereof to the
board of directors of the association when organized.
And it shall thereupon turn over to the association any
balance remaining in its hands
free of obligation. If
the association is not organized, such unexpended bal-
ance shall be prorated among, and returned to, those
who contributed to the organization fund.
The agreement should conclude with spaces for the
prospective member to sign the agreement, and provide his or
her address, and for the chairperson of the organizing committee
to sign the agreement as an acceptance.
SELECTING THE PROPER STATE
INCORPORATION STATUTE
While no drafting is involved, and thus no sample language
is 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 cooperative
corporation.
A cooperative becomes a corporation when its organizers
follow the steps set out in a law authorizing the formation of
corporations. There is no Federal incorporation statute.
Cooperatives incorporate under an appropriate State law.
Incorporation offers several advantages over alternative
structures, 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 common
stock or a membership certificate is a relatively simple means of
clarifying each person’s status and rights in the association.
l A corporation conveys to members and outsiders the
image of a solid, longlasting venture.
l If a cooperative is incorporated, the personal liability of
each 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 corporation
has some important implications for how it conducts its affairs:
l A corporation derives all of its legal authority from the
State. It is a “person” in the eyes of the law, just like a natural
person. It can do many things natural persons can, such as sign
contracts, borrow money, own property, and sue and be sued.
l While its powers are broad, those powers are limited to
the ones granted by the State. For example, when the State agri-
cultural cooperative law says only agricultural producers can
vote in farmer cooperative affairs, no one else has the right to
participate 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, they
have 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 incorporation
statutes. 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 Act
specially written to authorize incorporation of associations of
producers of agricultural products.
9
l Every State has a general business corporation statute.
A
cooperative can be incorporated under this law and have its
cooperative character established through proper drafting of the
articles of incorporation and bylaws.
l While most cooperatives are incorporated under a law of
the 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 is
located. But it’s very important that the statute authorizing the
cooperative permits a structure that meets the needs and desires
of 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 organizational
structure.
A few so-called cooperatives are organized under a general
not-for-profit corporation statute. Usually this is done to make it
easier to obtain grant money. There are some potential adverse
legal consequences of this type of incorporation that should be
reviewed before following this path:
l Most not-for-profit corporation laws expressly forbid the
distribution of any earnings to members, trustees, officers, or
other private persons.
This means an association organized
under such a statute can’t pay patronage refunds, one of the
main reasons for operating a business as a cooperative.
0 In many States, if a nonprofit corporation goes out of
business, members are prohibited from sharing in any assets left
after 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 organized
10
under the appropriate State statute, it is usually possible to rein-
corporate without seriously disrupting the ongoing business of
the association. This will ordinarily involve redrafting the orga-
nization papers to conform to the new law and paying a modest
fee to the appropriate State agency.
ARTICLES OF INCORPORATION
Once the leadership has determined the statute to use as
the legal authority for a cooperative, the first document prepared
is the articles of incorporation (articles). It is the acceptance of
the articles by the State that establishes the cooperative as a
unique “person” under the law.
Most incorporation laws require a fairly common set of
provisions to be included in the articles. These are discussed
below.
The statute will also require that before the articles are
offi-
cial they must be recorded in the office of a designated State
officer. Failure to properly file the articles makes any business
activity 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 frequently
more 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 and
then forgotten. The articles are routinely given the same respect
by the courts as a statute. Therefore, the articles are binding on
the directors, officers, and manager of a cooperative. Conduct
beyond 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 of
the cooperative, and the title of the authorization statute.
11
ARTICLES OF INCORPORATION
(Name of Cooperative)
We, the undersigned, all of whom are engaged in the
production of agricultural products, do hereby vol-
untarily associate ourselves together for the purpose
of 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 the
body 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 the
cooperative’s office:
ARTICLE II. PRINCIPAL PLACE
OF BUSINESS
The association shall have its principal place
of business in the city of
County of
,
Stateof
’
.
Purposes
The purposes for which the cooperative is being organized
are 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 of
incorporation. Any service the cooperative may someday pro-
vide is frequently authorized, at least in a general way. This
reduces the likelihood the articles will have to be amended
whenever the association is asked by the members to provide
additional services.
Powers
ARTICLE III. PURPOSES
The association is formed for the following
purposes: 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 in
connection 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 such
agricultural products or any products derived there-
from: to purchase for its members and others farm
supplies and equipment: to manufacture, process,
sell, store, handle, ship, distribute, furnish, supply,
and procure any and all such farm supplies and
equipment; and to exercise all such powers in any
capacity and on any cooperative basis that may be
agreed upon.
The State statute authorizing formation of a cooperative
will set out in detail the activities the cooperative may engage
in. As a general rule, the statutory language is copied virtually
verbatim 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 to
amount of corporate indebtedness or liability: to give
a lien on any of its property as security therefore in
any manner permitted by law: and to make advance
payments and advances to members and other pro-
ducers.
(b) To act as the agent or representative of any
member 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 of
exchange, drafts, warrants, certificates, and all kinds
of obligations and negotiable or transferable instru-
ments for any purpose that is deemed to further the
objects for which this association is formed, and to
give a lien on any of its property as security therefor.
(e) To acquire, own, and develop any interest
in patents, trademarks, and copyrights connected
with, 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 which
this association is formed, and to become a member
or stockholder of such agencies as now are or here-
inafter may be in existence.
(g) To have and exercise, in addition to the
foregoing, all powers, privileges, and rights con-
ferred on ordinary corporations and cooperative
14
marketing associations by the laws of this State and
all powers and rights incidental or conducive to car-
rying out the purpose for which this association is
formed, except such as are inconsistent with the
express provisions of the act under which this asso-
ciation is incorporated, and to do any such thing
anywhere; and the enumeration of the foregoing
powers shall not be held to limit or restrict in any
manner the general powers which may by law be
possessed 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 cooperatives
were organized limited the permissible life of a cooperative to a
set period of time, such as 50 years. Associations that have been
active for several decades should check to make sure their dura-
tion clause provides for perpetual operation.
I
ARTICLE V. PERIOD OF DURATION
This 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 incorporation
statutes ask for the number of directors and names and address-
es of the initial board. The articles often require “at least” the
minimum number of directors required by statute: the precise
number is set in the bylaws. Some statutes ask for the names
and addresses of incorporators, in which case the appropriate
title and references to incorporators would be substituted for
“directors” in the example.
If the law asks for both. then this
draft 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 to
serve as the initial directors are:
NAME
ADDRESS
Capital Structure
The articles usually contain a description of the capital
structure of the cooperative.
If stock is issued, the number of
shares authorized and the par value of each share of each class
of stock (common, preferred) are set forth. The rights granted
owners of each class of stock, the restrictions on owners of each
class, and the dividends to which each class is entitled are also
expla ined.
If stock is not issued, a description must be included of
how the rights and interests of the members will be determined.
Sample language for both a stock and a
nonstock association is
provided below.
The capital stock example provides for both voting com-
mon and nonvoting preferred stock. Nonvoting preferred stock
is a useful way to account for additional nonpatronage invest-
ments by members.
It has also been used as a way of raising
equity from nonmembers, such as other members of the commu-
nity interested in supporting the cooperative. If any interest in
the cooperative is being sold to nonmembers, counsel must be
retained to advise the association on applicable securities law
requirements.
The sample language also assumes that the organization
16
limits each member to one vote. If proportional voting based on
patronage is utilized, counsel will have to prepare a description
of how votes will be accumulated and any limit on the number
of votes any one member can amass.
All of the information in the example below is important
and should be included somewhere in the organizational docu-
ments. However, not all incorporation laws require that all of it
be 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 of
shares of common stock with a par value of $
per share, and shares of preferred stock with a
par value of $ per share.
Section 2. Common Stock.
The common stock
of this association may be purchased, owned, or held
only by agricultural producers who (1) patronize the
association in accordance with uniform terms and
conditions prescribed by it, and (2) have been
approved 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 of
any such product, and lessors of such land who
receive as rent therefore part of any such product of
such land, and cooperative associations (corporate or
otherwise) of such producers.
Each member shall hold only one share of
common stock and each eligible holder of common
stock shall be entitled to only one vote in any meet-
ing of the stockholders upon each matter submitted
to 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 into
the hands of any person who is not eligible for mem-
bership, or that the holder thereof has ceased to be
an eligible member, such holder shall have no rights
or privileges on account of such stock, or vote or
voice in the management or affairs of the association
other than the right to participate in accordance with
law in case of dissolution, The association shall
repurchase such stock for par value. If such holder
fails to deliver any certificate evidencing the stock,
the association may cancel such certificate on its
books and records, and the certificate is thereby null
and void.
The common stock of this association may be
transferred only with the consent of the board of
directors of the association and on the books of the
association, and then only to persons eligible to hold
it. No purported assignment or transfer of common
stock 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 affairs
of the association.
This association shall have a lien .on all of its
issued common stock for all indebtedness of the
holders thereof to the association.
No dividends shall be paid on the common
stock.
Section 3. Preferred Stock. The preferred
stock 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 preferred
stock at the absolute discretion of the board of direc-
tors.
Preferred stock may be transferred only on the
books of the association. It may be redeemed in
whole or in part on a pro rata basis at par, plus any
dividends declared and unpaid, at any time on thirty
18
(30) days’ notice by the association, provided said
stock is redeemed in the same order as originally
issued by years. If the owner fails to deliver any cer-
tificate evidencing such stock, the association may
cancel the stock on its books.
This association shall have a lien on all of its
issued preferred stock for all indebtedness of the
holders thereof to the association.
Upon dissolution or distribution of the assets
of the association, the holders of all preferred stock
shall be entitled to receive the par value of their
stock, plus any dividend declared and unpaid, before
any distribution is made on the common stock.
*ii*********
ARTICLE VII. MENBERSHIP
(nonstock cooperative)
The association shall not have capital stock
but shall admit applicants to membership in the
association upon such uniform conditions as may be
prescribed in its bylaws.
This association shall be
operated on a cooperative basis for the mutual bene-
fit of its members as producers. Membership in the
association 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 have
more than one vote upon each matter submitted to a
vote at a meeting of the members.
The property rights and interests of each
member in the association shall be unequal and shall
be determined and fixed on a patronage basis, and
the net proceeds from the business of the association
shall be allocated to member-patrons in the propor-
tion that the patronage of each member bears to the
total 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 amend
them. While the percentage is established by law, it is a good
idea to include that requirement in the articles to remind people
that the articles can be changed and to eliminate doubt as to the
supp,ort
required when the issue of possible amendment arises.
While a majority of the statutes set the requirement at a
simple or two-thirds majority of the members voting, several
statutes require approval of a majority of the total membership.
If turnout for member meetings is light, this poses a serious
obstacle to changing the articles.
ARTICLE VIII. Amendment
These articles may be amended upon the affir-
mative vote of two-thirds of the members actually
voting 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 sday of
,19__, by the
undersigned incorporators, all of whom are engaged
in agriculture as bona fide producers of agricultural
products.
I
20
BYLAWS
Shortly after the cooperative is incorporated, the members
adopt a set of bylaws. Bylaws provide a detailed description of
the 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 bylaws
are permissive, giving members the authority to write their own
rules on how to handle a particular issue.
Bylaws normally are not filed with the State. But like the
articles, they are treated in a manner similar to statutes by the
courts. Failure of the leadership to follow the bylaws can also
lead to legal liability.
Numerous provisions are usually found in cooperative
bylaws. Some are similar to those included in bylaws of
for-
profit corporations, others are unique to cooperation. The most
common provisions are discussed in this report. But a coopera-
tive is free to place virtually any rule on the conduct of its affairs
in the bylaws, provided the provision doesn’t conflict with an
applicable law or the articles of incorporation.
While almost any activity can be covered by a bylaw, only
broad issues of long-term significance to members should be the
subject of a bylaw. Operating decisions should not be covered in
the bylaws, but rather in board policy resolutions. Board poli-
cies are directives to the management, issued by the board in its
role as policymaker for the cooperative, that can be changed to
reflect changing conditions at any time by the board. For exam-
ple, whether the cooperative will do business with nonmembers
is a general, long-term decision that should be covered in the
bylaws. How nonmembers will be charged to insure that they
pay 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 a
member of the cooperative.
Membership should be limited to
21
persons who will patronize the cooperative. For an agricultural
cooperative, this means membership should be limited to pro-
ducers of agricultural products and other farmer cooperative
associations.
Limiting the membership to producers and pro-
ducer cooperatives is essential if the association wants to qualify
for the limited antitrust protection of the Capper-Volstead Act,
or for tax treatment under section 521 of the Internal Revenue
Code, or if the cooperative is incorporated under a State law that
requires that members be agricultural producers.
This bylaw may also include other reasonable prerequisites
to membership, such as agreeing to purchase a share of stock,
sign a marketing agreement, and patronize the association on a
regular basis.
This bylaw should also provide for the orderly termination
of a membership. This can be particularly important for an agri-
cultural cooperative. The significant legal privileges listed
above are only available to associations of producers. This
requirement is only met if the membership of anyone who stops
farming is revoked.
When a membership is terminated, it is a good practice to
return 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 clear
to 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. In
a nonstock cooperative, appropriate references to membership
certificates and fees would be substituted for the terms common
stock and purchase price.
I
ARTICLE I. MEMBERSHIP
Section 1. Qualifications. Any
person, firm,
partnership, corporation or association, including
both landlord and tenant in share tenancies, who is a
bona fide producer of agricultural products in the
territory 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, and
meets such other conditions as may be prescribed by
the board of directors, may become a member of the
association.
All applications for membership must be
approved by the board of directors. Member status
is effective as of the time the board approves the
application for membership.
Section 2. Suspension or Termination. In the
event the board of directors of the association shall
find, following a hearing, that any of the common
stock of this association has come into the hands of
any person who is not eligible for membership, or
that the holder thereof has ceased to be an eligible
member, or that such holder has not marketed
through the association the products covered by a
marketing agreement with the association, or not
otherwise patronized the association for a period of
(_) year(s), or otherwise violated the articles of incor-
poration, bylaws, or other agreements made with the
association, 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 to
the association the certificate evidencing the holder’s
share of stock. If such holder fails to deliver the cer-
tificate, the association may cancel such certificate
on its books and records, and the certificate is then
null and void.
A suspended or terminated member shall
have no rights or privileges on account of any stock
held, nor vote or voice in the management or affairs
of the association other than the right to participate
in accordance with law in case of dissolution.
23
Meetings of Members
A cooperative is owned and controlled by its members. A
bylaw sets out the ground rules for convening the members to
exercise their control function.
An annual meeting is held each year to elect directors,
review past performance and future plans, and conduct other
business as needed.
It is often a good idea to set the time of the annual meeting
as promptly as possible after the end of the fiscal year. This
encourages management to close the books for the year in a
timely fashion and the auditor to review financial results and
issue the audit report without delay. Also, the members are still
focusing on last year’s performance. If the annual meeting is
delayed too long, the members are often into another production
cycle and not able to properly exercise their control over the
cooperative.
This bylaw should also authorize special member meetings
to handle any business that can’t wait until the next annual
meeting.
Members should receive sufficient advance notice so they
can plan to attend meetings. Many incorporation statutes have
specific minimum notice requirements, both in terms of lead
time (often 10 days or 2 weeks) and method (direct mail, publi-
cation in local newspaper). Associations incorporated under
such a law must make sure the bylaw provides at least as much
notice as the statute requires, and that appropriate notice is actu-
ally given. Otherwise any action taken at the meeting may be
open 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 is
only one aspect of this issue. The draft language limits each
member 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 as
partnerships and corporations can avoid an embarrassing dis-
pute right before or even during a membership meeting over
how such a member will vote on an issue. Many cooperatives
24
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 a
valid 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 discusses
proxy voting and voting by mail. Many cooperatives that permit
proxy voting limit the number of proxies a member can vote,
often to only one.
If voting by mail is allowed, it is often limited
to issues discussed in the meeting notice.
Finally, the minimum number of members that need be
present to conduct business, called a quorum, should be speci-
fied. If the statute permits, quorum requirements are frequently
set low (e.g.,
10 members or
10 percent of the membership,
whichever is greater) so meetings will not have to be adjourned
for lack of a quorum.While this exposes the association to con-
trol by an active minority, it is sometimes necessary in order to
make 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 held
in the State of
, during the month of
-9at such time and in such place as the board of
directors shall designate.
Section 2. Special
Meetings. Special meet-
ings of the members of the association may be called
at any time by order of the board of directors and
shall be called upon written request of at least
members, or at least
_ percent
(__%) of the mem-
bership, whichever is a greater number.
Section 3. Notice of Meetings. Written notice of
every regular and special meeting of members shall
be prepared and mailed to the last known post office
25
address of each member not less than
- 0 days
before such meeting.
Such notice shall state the
nature of the business expected to be conducted and
the time and place of the meeting. No business shall
be transacted at any special meeting other than that
referred to in the notice.
Section 4. Voting. Unless otherwise stated in
the articles of incorporation, or these bylaws, or
required by applicable law, all questions shall be
decided by a vote of a majority of the members vot-
ing thereon.
Each member shall be entitled to only one
vote, Voting by mail shall not be permitted. Proxy
voting 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 behalf
of the member. That designation shall remain in
effect until written notice of a properly authorized
change in the designated voter shall be received by
the association.
S e c t i o n 5. Q u o r u m .( members or
percent I%) of the membership, whichever is a
larger number, shall constitute a quorum at any
properly called annual or special membership meet-
ing.
Directors and Officers
While the members own and control the cooperative, the
responsibility for continuous supervision of the association is
usually delegated to a small group of democratically elected
leaders referred to as the board of directors, who in turn select
officers to carry out specific leadership duties. Many coopera-
tive experts consider the selection of directors as the most
important governance decision made by the membership.
26
This bylaw covers the administrative rules for the selection
of 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. The
incorporation law will usually prescribe a minimum number of
directors. There is no legal maximum on the size of a board, but
experience suggests that if more than about nine people are on a
local cooperative board, efficiency is reduced substantially.
Many State statutes require that all directors be members of
the 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, the
number and manner of selection should be included in the
bylaw.
Directors have access to pricing and other marketing plans
that could be used by a competitor to take business from the
cooperative. Thus, many cooperatives bar persons affiliated
with competitors of the association from being directors.
Cooperatives usually do not, however, bar such persons from
membership. For example, a farmer who sells produce directly
to a grocery chain may belong to and market some produce
through a cooperative that also sells wholesale, but that farmer
is frequently denied access to a seat on the cooperative board.
A few cooperatives guarantee board turnover by limiting
the number of consecutive terms a director can serve.
Director and Officer Selection.
The rules for election of
directors by the members, and officers by the directors, are set
out in the bylaws. In many cooperatives the directors are elect-
ed for three-year terms on a staggered basis. While directors are
usually elected from the membership at large, some cooperatives
elect directors on the basis of geographic regions, usually called
districts. Sample language authorizing the election of directors
by districts is set out in Appendix A.
Officers are usually elected for one-year terms. Even many
statutes 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 who
normally keep association records and books to have both the
appropriate title and attendant responsibilities.
27
Sometimes directors and officers are not able to serve their
full term. The bylaws should provide for a method to fill vacant
director and officer positions, Usually the remaining directors
select an interim director to fill a board vacancy until the next
membership meeting. Directors can usually select a replace-
ment officer at any properly called board meeting.
Meetings. The bylaws frequently provide much of the
same 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 is
director compensation. Many directors spend innumerable
hours each year overseeing and promoting the cooperative. It
seems 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 meeting
directors attend, or time they spend on cooperative affairs.
While reimbursement of reasonable expenses is usually covered
with 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 any
fee authorized, should be made by the members.
Nepotism. Many cooperatives also have a bylaw provision
preventing directors and members of their immediate families
from holding salaried positions with the cooperative. This
antinepotism language eliminates the chance some members
might view the awarding of the position as the result of undue
influence of the director, rather than selection on the basis of
merit.
Removal of Directors. Finally, it may be necessary at some
time to remove a director from that position. Sometimes termi-
nation is automatic, e.g., failure to maintain member status or
missing too many board meetings. The ultimate authority in a
cooperative is vested in the members, and they should be able to
remove a director at will.
As this is often a severe and divisive undertaking, it is best
to provide a procedure in the bylaws that affords due process for
the director under attack and conforms closely to any procedural
requirements set out in the incorporation statute.
28
ARTICLE III. DIRECTORS
AND OFFICERS
Section 1. Number and Qualification of
Directors. The association shall have a board of
directors of _ (_) members. Each director elected
shall be a member of this association in good stand-
ing.
No person shall be eligible to be a director if
that person is in competition with, or is affiliated
with any enterprise that is in competition with, the
association.
If a majority of the board of directors of
the association finds at any time following a hearing
that 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-d
again be eligible.
Section 2. Election of Directors. At the first
annual 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 meeting
thereafter, new directors shall be elected, for a term
of three (3) years each, to succeed those directors
whose terms are expiring.
All directors shall be elected by secret ballot,
and the nominee(s) receiving the greatest number of
votes shall be elected.
Section 3. Election of Officers. The board of
directors shall meet within seven (7) days after the
first election and within seven (7) days after each
annual election and shall elect by ballot a president,
vice president, secretary, and treasurer, each of
whom shall hold office until the election and qualifi-
29
cation of a successor, unless earlier removed., by
death, resignation, or for cause.
The president and vice president shall be
members of the board of directors. The secretary
and treasurer need not be directors or members of
the association.
Section 4. Vacancies. Whenever a vacancy
occurs in the board of directors, other than from the
expiration of a term of office, the remaining directors
shall appoint a member to fill the vacancy until the
next regular meeting of the members. If the term of
the vacating director does not expire at that regular
member meeting, a special election shall be held to
select a director to fill the year or years remaining in
that term.
If one or more officer positions become
vacant, such offices shall be filled by the board of
directors, 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 the
board may determine.
Section 6. Special Board Meetings. A special
meeting of the board of directors shall be held when-
ever called by the president or by a majority of the
directors. Only the business specified in the written
notice shall be transacted at a special meeting. Each
call 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 or
written 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 not
less than_ hours prior to the time of meeting. But
such notice may be waived by all the directors, and
their appearance at a meeting shall constitute a
waiver of notice.
Section 8. Quorum. A majority of the board
of directors shall constitute a quorum at any meeting
of the board.
Section 9 .
Reimbursement
and
Compensation. The association shall reimburse
directors for all reasonable expenses incurred in car-
rying out their duties and responsibilities.
The compensation, if any, of the members of
the board of directors shall be determined by the
members of the association at any annual or special
meeting 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. Whenever
any director shall fail to meet the qualifications as
described in Section
I of this Article, or fails to
attend three (3) consecutive board meetings, either
regular or special, without just cause and provided
that notice of such meetings has been given in accor-
dance with these bylaws, then it shall be the duty of
the board to remove said director and to fill the
vacancy in accordance with Section
4 of this Article.
Members, through petition noting the charges
and signed by at least
_ (J members or _ per-
cent (_%) of the membership, whichever is a greater
number, may request the removal of any member of
the board. Such director shall be notified in writing
of the charges and given an opportunity to be heard
at a membership meeting of the association.
Removal of a director shall require a vote of
of
31
I
members voting. Any vacancy resulting from such
action shall be filled by nomination and vote of
members at such meeting.
Duties of Directors
The directors are responsible for the ongoing operations of
the cooperative. They set policy and oversee the staff operations
that implement that policy. Cooperative bylaws often contain
language placing a legally binding obligation on the directors to
carry out their most important duties.
This bylaw often establishes the general relationship
between the directors and the manager. An important responsi-
bility of the board is to hire and supervise the manager. The
board sets manager compensation and benefits. The manager,
not the board, runs the day-to-day business operations of the
cooperative. This includes hiring and firing other employees. If
the board is dissatisfied with the way the cooperative is con-
ducting its affairs, it should exercise its authority to replace the
manager, but it should not take on the manager’s responsibili-
ties.
The bylaw should also recognize another important board
responsibility-protecting member assets-by providing for
appropriate bonds and insurance, an accounting and auditing
system, and board control of association funds.
Finally, the board should have the authority to appoint
committees 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 to
attend meetings. But the other directors must be careful not to
abdicate all board responsibility to the executive committee.
ARTI&E IV. DUTIES OF DIRECTORS
Section 1. Management of Business. The
board of directors shall have general supervision and
control of the business and the affairs of the associa-
32
tion and shall make all rules and regulations not
inconsistent with law, the articles of incorporation,
or bylaws for the management of the business and
the guidance of the members, officers, employees,
I
and agents of the association.
Section 2. Employment of
Manager. The
board of directors shall have power to employ,
define duties, fix compensation, and dismiss a man-
ager with or without cause at any time. The board
shall authorize the employment of such other
employees, agents, and counsel as it from time to
time deems necessary or advisable in the interest of
the association. The manager shall have charge of
the business of the association under the direction of
the board of directors.
Section 3. Bonds and Insurance.
The board
of directors shall require the manager and all other
officers, agents, and employees charged by the asso-
ciation with responsibility for the custody of any of
its funds or negotiable instruments to give adequate
bonds. Such bonds, unless cash security is given,
shall be furnished by a responsible bonding compa-
ny and approved by the board of directors, and the
cost thereof shall be paid by the association.
The board of directors shall provide for the
adequate insurance of the property of the associa-
tion, or property which may be in the possession of
the association, or stored by it, and not otherwise
adequately insured, and, in addition, adequate insur-
ance covering liability for accidents to all employees
and the public.
Section 4. Accounting System and Audits.
The board of directors shall have installed an
accounting system which shall be adequate to meet
the requirements of the business and shall require
proper 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 shall
make a careful audit of the books and accounts of the
association and render a report in writing thereon,
which