Cooperative Information Report 40
Sample Legal Documents for Cooperatives
Donald A. Frederick, Attorney-Adviser
Cooperative Services Division
Agricultural Cooperative Service
U.S. Department of Agriculture
This report explains
the rationale for the primary legal documents required to establish and operate a
cooperative. It discusses each issue usually covered in each document and presents options
that organizers and leaders might consider in drafting and reviewing the documents. It
also provides sample language for use as a model in drafting new, and updating existing,
cooperative legal documents.
Key words: Cooperative, articles, bylaws, marketing agreement,
membership agreement, organization.
Cooperative Information Report Number 40
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 operations, 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 upate 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 poing; the working is not to be copied without review and thought.
SAMPLE LEGAL DOCUMENTS FOR
Statement of Purposes
Calling of Membership Meeting
PROPER STATE INCORPORATION STATUTE
ARTICLES OF INCORPORATION
Principal Place of Business
Meetings of Members
Directors and Officers
Duties of Directors
Duties of Officers
Operation at Cost and Members' Capital
Handling of Losses
Termination and Renewal
APPENDIX A, ELECTION OF DIRECTORS BY DISTRICTS
APPENDIX B, ALTERNATIVE EQUITY REDEMPTION BYLAWS
APPENDIX C, BASE CAPITAL PLAN
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 business affairs of the association to enhance the mutual well-being of the
This report explains the role each document
plays in building the organization and the various issues treated in each document. 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 venture.
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 organizers, 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 reinforces the need for
cooperative founders and leaders, and their professional advisers, to avoid adopting any
sample set of documents verbatim and to review existing documents on a regular basis.
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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
commit 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 cooperative form of business and the objectives of
the proposed association.
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 pressure to expand the
scope of operations too rapidly. For example, it is usually best not to mention furnishing
supplies in the organizational agreement if the new organization will limit its initial
activity to marketing fresh vegetables.
1. The undersigned, a producer of agricultural products,
hereinafter referred to as "Producer," together with other signers of agreements
similar hereto, propose to organize a cooperative association under the laws of the State
of , for the purpose of _________________.
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 consisting of the
2. (b) This committee may, by vote of a majority of its
members, increase its membership, fill any vacancy therein, and appoint any subcommittees
deemed necessary to conduct its affairs. The committee, or any subcommittee designated by
it, may prescribe an organization fee to be paid by each person signing an organization
agreement and may incur necessary obligations, make necessary expenditures, and take any
such action as may, in its discretion, be deemed advisable to further the organization of
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' commitment: 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
language is provided for each type of commitment:
3. Producer agrees to sign a marketing agreement 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_____ (units) in______ (year).
* * * * * * * * * * *
3. Producer agrees to sign a marketing agreement to commit
_____(units) of_____ (product), produced by Producer, to the cooperative for direct
marketing, processing, or other disposition as the cooperative sees fit.
* * * * * * * * * * *
3. Producer agrees to sign a marketing agreement to commit
all_____ (product) produced by Producer on ______acres 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_____
the cooperative is likely to have a minimum quality standard that must be met before
product will be accepted, that standard should also be explained and the person or entity
judging quality should be named.
Every new business
must have equity capital. In a cooperative, the members supply that capital. In this
provision the prospective member agrees to provide initial financial support for the
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 capital 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 investment is classified as
preferred stock in this report, it can also be structured as equity credits, revolving
fund credits, or any similar 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 terminated. Initial
development of the cooperative is totally dependent on promised financial support being
forthcoming. Leaders must have the tools to force compliance with this commitment, by
legal action if necessary.
4. Producer agrees to purchase one share of voting common stock
of the association, par value $_____ , payable on demand following a favorable vote by the
signees of agreements similar hereto to incorporate the association.
agrees to purchase_____ shares of nonvoting preferred stock of the association, par value
$_____ each, and agrees to pay for same as follows:
$_____ cash on demand
following incorporation of the association,
$_____ on or before , 19__ , and
$_____ on or before , 19__ .
understands that this stock subscription agreement is an irrevocable legally binding
obligation which will be relied upon by the association, other producers who subscribe to
its stock, and lending institutions from which the association will seek financing to
implement its cooperative purposes.
If a cooperative is
organized as a nonstock corporation, the sample language might be altered to call for
payment of a membership 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
Calling of Membership Meeting
One of the principal
responsibilities of the organization committee is to determine if enough firm interest
exists to justify forming 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 agreement usually calls for a meeting of the signees to make the final
decision to complete formation and begin operation of the cooperative. While the typical
agreement provides that the affirmative vote of a simple majority of signees approves
formation, the committee should move cautiously if substantial resistance develops. Few
associations overcome internal strife during the formation period to become useful and
viable cooperative enterprises.
5. If, on or before ______, 19__, the organization 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 operation 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 appropriate 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.
agreement will set minimum levels of support 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_______ , 19__ , bona fide producers of
agricultural products otherwise eligible to become members in the association agree to
execute marketing agreements covering_____ (units) of _____(product) and subscribe to
provide equity to the association equal to the sum of at least dollars ($_____ ), the
organization committee shall set a time and place for a meeting ... (continue as above).
There should be a
clearly stated obligation placed on the organization committee to keep good records and
make the 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 balance 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
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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 development of a successful cooperative is selection of the proper statutory
foundation for the association.
To operate effectively in today's business
world, a cooperative 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
Incorporation offers several advantages over
alternative structures, such as partnerships and unincorporated associations:
facilitates the orderly succession of ownership. 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.
corporation conveys to members and outsiders the image of a solid, long-lasting venture.
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
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.
powers are broad, those powers are limited to the ones granted by the State. For example,
when the State agricultural 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.
cooperative must obey business laws. Since managers and directors make the decisions for
the corporation, they have an obligation to know and make sure the association follows all
Persons who organize a
cooperative have several incorporation statutes to choose from:
States have special cooperative incorporation statutes. Some are broad, permitting the
incorporation of virtually 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.
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.
most cooperatives are incorporated under a law of the State where the principle office is
located, a few are organized under the laws of a different State.
It is usually best to
organize under a cooperative incorporation 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 applicable 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:
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.
States, if a nonprofit corporation goes out of business, members are prohibited from
sharing in any assets left after the debts are paid.
corporations sometimes have had more trouble than cooperative corporations enforcing
marketing agreements with their members. Cooperative statutes frequently provide specific
authority for enforcement of marketing agreements. Not-for-profit acts have no such
If the leadership
determines a cooperative is not organized under the appropriate State statute, it is
usually possible to reincorporate without seriously disrupting the ongoing business of the
association. This will ordinarily involve redrafting the organization papers to conform to
the new law and paying a modest fee to the appropriate State agency.
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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 official 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
It is usually permissible to include
information in the articles 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 documents 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
cooperative and its leaders to potential legal liability.
The following are the elements common to most
cooperative articles of incorporation.
The heading sets out the title of the
document, the name of the cooperative, and the title of the authorization statute.
ARTICLES OF INCORPORATION
(Name of Cooperative)
We, the undersigned, all of whom are engaged in the production of
agricultural products, do hereby voluntarily associate ourselves together for the purpose
of forming a cooperative association, with (or without) capital stock, under the
provisions of the __________Act of the State of __________.
The official name of
the cooperative must be stated in the body of the articles and is usually the first
ARTICLE I. NAME
The name of the association shall be the ________________.
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______________ , State of ______________.
The purposes for which
the cooperative is being organized are specifically set out. While the purposes clause of
the organizational agreement is limited to immediate objectives, the purposes are usually
stated as broadly as possible in the articles of incorporation. Any service the
cooperative may someday provide 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.
ARTICLE III. PURPOSES
The association is
formed for the following purposes: To market for its members and other producers any and
all agricultural products or any products 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, advertising, selling, marketing, or distribution of any
such agricultural products or any products derived therefrom; 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 typical statutory provision
restated as an article of incorporation:
ARTICLE IV. POWERS
This association shall have the following
(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 producers.
(b) To act as the
agent or representative of any member or members in any of the activities mentioned in
Article III hereof.
(c) To buy, lease,
hold, and exercise all privileges of ownership over such real or personal property as may
be necessary or convenient for the conduct and operation of the business of the
association, or incidental thereto.
(d) To draw, make,
accept, endorse, guarantee, execute, and issue promissory notes, bills of exchange,
drafts, warrants, certificates, and all kinds of obligations and negotiable or
transferable instruments 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
(e) To acquire, own,
and develop any interest in patents, trademarks, and copyrights connected with, or
incidental to, the business of the association.
(f) To cooperate with
other similar associations in creating central, regional, or national cooperative
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 hereinafter may be in existence.
(g) To have and
exercise, in addition to the foregoing, all powers, privileges, and rights conferred on
ordinary corporations and cooperative marketing associations by the laws of this State and
all powers and rights incidental or conducive to carrying out the purpose for which this
association is formed, except such as are inconsistent with the express provisions of the
act under which this association 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 hereby expressly claimed.
The articles will say
how long the cooperative is authorized to exist. Virtually all modern laws permit
perpetual existence. 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 duration clause provides for perpetual operation.
ARTICLE V. PERIOD OF DURATION
This association shall have perpetual existence.
Most statutes require
the articles to name the initial policymakers of the cooperative. A majority of the
incorporation statutes ask for the number of directors and names and addresses 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 appropriately worded in each instance.
ARTICLE VI. DIRECTORS
This association shall have at least _____directors.
The names and addresses of those who are to serve as the initial
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 explained.
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 common and nonvoting preferred stock. Nonvoting preferred stock is a useful way to
account for additional nonpatronage investments by members. It has also been used as a way
of raising equity from nonmembers, such as other members of the community 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
The sample language also assumes that the
organization 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 documents. However, not
all incorporation laws require that all of it be in the articles. It may be possible to
place some of these provisions in the bylaws.
ARTICLE VII. CAPITAL STOCK (stock cooperative)
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.
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
'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
meeting of the stockholders upon each matter submitted to vote at a meeting of the
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, 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.
Preferred Stock. The preferred stock of this association may be issued to any person,
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
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 (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 certificate 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.
* * * * * * * * * * *
ARTICLE VII. MEMBERSHIP (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 benefit of its members as producers.
Membership in the association shall be restricted to producers and associations of
producers who shall patronize the association.
The voting rights of the members of the
association 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 proportion that the patronage of each member bears to
the total patronage of all the members of the association.
The articles may be
changed whenever the appropriate percentage of the membership (and, if required by
statute, the directors), 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 support 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 affirmative vote of two-thirds of the members actually voting on the
Those persons who ask
the State to authorize the cooperative, often called incorporators, complete the document
by signing it.
Signed this day of ______, 19___, by the undersigned
incorporators, all of whom are engaged in agriculture as bona fide producers of
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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 function.
Most incorporation laws give members
flexibility to structure 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
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 cooperative 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 policies 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 example, 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 decision requiring the flexibility possible under a policy
The first bylaw
usually states the qualifications to be a member of the cooperative. Membership should be
limited to persons who will patronize the cooperative. For an agricultural cooperative,
this means membership should be limited to producers of agricultural products and other
farmer cooperative associations. Limiting the membership to producers and producer
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 agricultural
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 necessarily the retained patronage
investments). This makes it clear to the former member that the termination was more than
a symbolic gesture and that he or she no longer has the right to participate 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.
ARTICLE I. MEMBERSHIP
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 business, and who agrees
to be a patron of the association, signs a marketing agreement with the association,
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.
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 incorporation, bylaws, or other agreements made with the association, the
association may suspend such holder's rights as a member and terminate the membership.
When a membership is terminated, the
association shall repurchase the member's share of common 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 certificate, 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.
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, publication 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 actually given. Otherwise any action taken at the meeting
may be open to legal challenge.
A statement on how voting will be conducted is
also appropriate 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 description 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
Language on voting on behalf of members
organized as partnerships and corporations can avoid an embarassing dispute right before
or even during a membership meeting over how such a member will vote on an issue. Many
cooperatives have members organized as partnerships or corporations designate, in writing,
who will cast the member's vote, and that person 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 voting, voting by mail, and cumulative voting. There is no "right" way to
handle these matters, although cumulative voting is usually 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 specified. 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 control 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
Annual Meeting. The annual meeting of the members of this association shall be held
in the State of__________ , during the month of______ , at such time and in such place as
the board of directors shall designate.
Special Meetings. Special meetings 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 membership, whichever is a greater
Notice of Meetings. Written notice of every regular and special meeting of members
shall be prepared and mailed to the last known post office address of each member not less
than (__) 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.
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 voting 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 writing, and no member shall vote more than one proxy. Cumulative voting is not
If a membership is held by a partnership,
corporation, or other legal entity, the member shall designate 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
Quorum. _______(__) members or percent (__%) of the membership, whichever is a larger
number, shall constitute a quorum at any properly called annual or special membership
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 cooperative experts consider the selection of directors as the
most important governance decision made by the membership.
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 number 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 outside
directors. The sample bylaw requires directors to be association members. If outside
directors are to be authorized, the number and manner of selection should be included in
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 elected 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
Officers are usually elected for one-year
terms. Even many statutes that require all directors to be association members permit some
officers, notably the secretary and treasurer, to be nonmembers of the association. This
allows staff employees who normally keep association records and books to have both the
appropriate title and attendant responsibilities.
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
replacement 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 quorum 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 delicately. Directors should not have the right to set their own
compensation. 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 termination
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.
ARTICLE III. DIRECTORS AND OFFICERS
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 standing.
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 person shall thereupon cease to be a director.
No director after having served for____ (__)
consecutive full term(s) shall be eligible to succeed himself or herself, but after a
lapse of____ (__) year(s) shall again be eligible.
Election of Directors. At the first annual meeting of the members of this
association, directors shall be elected to succeed the incorporating directors.
____director(s) shall be elected for one (1) year; ____directors for two (2) years and
____directors 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
All directors shall be elected by secret
ballot, and the nominee(s) receiving the greatest number of votes shall be elected.
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 qualification 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.
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 regular or special meeting of the board.
Regular Board Meetings. In addition to the meetings mentioned above, regular meetings
of the board of directors shall be held monthly, or at such other times and at such places
as the board may determine.
Special Board Meetings. A special meeting of the board of directors shall be held
whenever 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 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.
Notice of Board Meetings. Oral or written notice of each meeting of the board of
directors shall be given each director by, or under the 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.
Quorum. A majority of the board of directors shall constitute a quorum at any meeting
of the board.
Reimbursement and Compensation. The association shall reimburse directors for all
reasonable expenses incurred in carrying 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 member
of the immediate family of any board member, shall occupy any position in the association
on regular salary.
Removal of Directors. Whenever any director shall fail to meet the qualifications as
described in Section 1 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 accordance 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
Members, through petition noting the charges
and signed by at least ____(__ ) members or __percent (__%) 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 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
This bylaw often establishes the general
relationship between the directors and the manager. An important responsibility 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 conducting its affairs, it should exercise its authority
to replace the manager, but it should not take on the manager's responsibilities.
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
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 committee. An executive committee with broad powers can
be useful, especially when the membership is spread over a large geographic 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.
ARTICLE IV. DUTIES OF DIRECTORS
Management of Business. The board of directors shall have general supervision and
control of the business and the affairs of the association 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, and
agents of the association.
Employment of Manager. The board of directors shall have power to employ, define
duties, fix compensation, and dismiss a manager 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.
Bonds and Insurance. The board of directors shall require the manager and all other
officers, agents, and employees charged by the association 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 company 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 association, or property which may be in the
possession of the association, or stored by it, and not otherwise adequately insured, and,
in addition, adequate insurance covering liability for accidents to all employees and the
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 transactions.
At least once in each year the board of
directors shall secure the services of a competent and disinterested 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 report shall be submitted to the directors
and the manager of the association and made available to the members of the association.
This report shall include at least a balance
sheet showing the true assets and liabilities of the association, and an operating
statement for the fiscal period under review.
Depository. The board of directors shall select one or more banks to act as
depositories of the funds of the association and determine the manner of receiving,
depositing, and disbursing the funds of the association and the form of checks and the
person or persons by whom they shall be signed, with the power to change such banks and
the person or persons signing such checks and the form thereof at will.
Committees. The board may, at its discretion, appoint from its own membership an
executive committee of___ members, and determine their tenure of office and their powers
and duties. The board may delegate to the executive committee all or any stated portion of
the functions and powers of the board, subject to the general direction, approval, and
control of the board. Copies of the minutes of any meeting of the executive committee
shall be mailed to all directors within seven (7) days following such meeting.
The board of directors may, at its discretion,
appoint such other committees as it deems appropriate.
Duties of Officers
While the tasks
that go with each major office of a corporation are generally well understood, it is still
important to have those duties spelled out in the bylaws. This will minimize any
uncertainty over the roles each plays in leading the association.
ARTICLE V. DUTIES OF OFFICERS
Duties of President. The president shall (1) preside over all meetings of the
association and of the board of directors; (2) call special meetings of the board of
directors; (3) appoint such committees as the board of directors may deem advisable for
the proper conduct of the cooperative; and (4) perform all acts and duties usually
performed by a presiding officer.
Duties of Vice President. In the absence or disability of the president, the vice
president shall perform the duties of the president, provided, however, that in case of
death, resignation, or disability of the president, the board of directors may declare the
office vacant and elect any eligible person president.
Duties of Secretary. The secretary shall keep a complete record of all meetings of
the association and of the board of directors and shall have general charge and
supervision of the books and records of the association. The secretary shall sign papers
pertaining to the association as authorized or directed by the board of directors. The
secretary shall serve all notices required by law and by these bylaws and shall make a
full report of all matters and business pertaining to the office to the members at the
annual meeting. The secretary shall keep the corporate seal and all books of blank
certificates, complete and countersign all certificates issued, and affix the corporate
seal to all papers requiring a seal; shall keep complete stock ownership records; shall
make all reports required by law; and shall perform such other duties as may be required
by the association or the board of directors. Upon the election of a successor, the
secretary shall turn over all books and other property belonging to the association.
Duties of Treasurer. The treasurer shall be responsible for the keeping and
disbursing of all monies of the association, and shall keep accurate books of accounts of
all transactions of the association. The treasurer shall perform such duties with respect
to the finances of the association as may be prescribed by the board of directors. At the
expiration of his term of office, the treasurer shall promptly turn over to his successor
all monies, property, books, records, and documents pertaining to his office or belonging
to the association.
Operation at Cost and Members' Capital
Many of the unique
aspects of the bylaws of a cooperative pertain to the association's financial affairs. Tax
law plays an important part in structuring these provisions. This report does not attempt
to explain cooperative taxation but only makes passing references to tax terms when
explaining the importance of certain bylaw provisions.
Since the overall objective of a cooperative is
to maximize the income of its members, leaders must have flexibility to acquire capital
and minimize taxes. The next several provisions, up to and including dissolution,
authorize business and tax planning options compatible with doing business on a
This section often starts with a
straightforward statement that the association will operate on a service-at-cost basis for
the mutual benefit of the members as patrons and then covers specific issues to implement
Language is usually included to allocate
margins on a patronage basis. Allocation can be based on the volume or the value of
business conducted on a patronage basis. Cooperatives dealing in one commodity, or in
similar commodities, usually use the volume method. Those that handle several products
with divergent values often use the dollar-value-of-business method. The sample language
assumes that the association is a marketing cooperative using the volume method.
Appropriate wording for supply cooperatives and those using the value method is provided
Marketing cooperatives have as an alternative
method of raising equity capital, the collection of per-unit retains. Language authorizing
this option should be included in their bylaws. The term "capital credits" is
used in the sample language to distinguish the retained margins and per-unit retains from
direct member investments in stock. This distinction simplifies establishing an equity
redemption program for patronage-based investments apart from any redemption of direct
The bylaw should specify whether dividends will
be paid on this patronage capital.
Since the completeness and accuracy of each
patron's account is vital to assigning financial obligations and benefits in the
appropriate manner, a provision obligating the association to keep the required records is
an important protection for the members.
A statement requiring the timely distribution
of written notices of allocation and per-unit retain certificate is both good business
practice and a requirement for favorable tax treatment under the Internal Revenue Code.
That statement should authorize the board to issue those notices and certificates, in
either qualified or nonqualified form, so as to maximize the tax planning alternatives
ARTICLE VI. OPERATION AT COST AND MEMBERS' CAPITAL
Operation at Cost. The association shall at all times be operated on a cooperative
service-at-cost basis for the mutual benefit of its member patrons.
Margin Allocation. In order to induce patronage and to assure that this association
will operate on a service-at-cost basis in all its transactions with its members, the
association is obligated to account on a patronage basis to all member patrons on an
annual basis for all amounts received from business conducted with members on a patronage
basis, over and above the cost of providing such services, making reasonable additions to
reserves, and redeeming capital credits. Such allocation shall be on the basis on the
volume (dollar value) of product marketed through (purchased from) the association.
The association is hereby obligated to pay all such amounts to
the patrons in cash or by credits to a capital account of each member patron.
Per-Unit Retains. Each member also agrees to provide capital in such amounts as determined
by the board of directors based on physical units of product marketed through the
association. Such per-unit retains shall be allocated to the member's capital credit
Dividends. No dividends shall be paid on any capital credits.
Records and Documentation. The books and records of the association shall be set up
and kept in such a manner that at the end of each fiscal year, the amount of capital, if
any, so furnished by each member is clearly reflected and credited in an appropriate
record to the capital account of each member.
The association shall, within 8-1/2 months
after the close of each fiscal year, notify each member of the capital so credited to the
member's account. The notice shall be in the form of a written notice of allocation or
per-unit retain certificate (as those terms are used in Subchapter T of the Internal
Revenue Code) or other appropriate written document. The board shall have discretion to
issue such notices and certificates in either "qualified" or
"nonqualified" form as permitted by the Internal Revenue Code and other
Fiscal Year. The fiscal year of this association shall commence on the first day
of_______ (month) and end on the last day of ________(preceding month).
A bylaw authorizing redemption of
patronage capital and explaining the method to be used helps insure that, to the extent
possible, current patrons finance the cooperative.
There are three types of equity redemption
plans. Most cooperatives that have an equity redemption program use a revolving fund plan
whereby equities are redeemed in the order in which they were allocated. The first
paragraph of the sample bylaw presents this approach.
A limited number of cooperatives redeem a
percentage of all outstanding equities each year. Sample language to implement this plan
is found in section 1 of the Alternative Equity Redemption Bylaw (Appendix B).
A few cooperatives have adopted a base capital
plan. Under a base capital plan each member is assigned responsibility for providing a pro
rata share of needed capital based on proportional use of the cooperative during a base
period. A sample bylaw authorizing a Base Capital Plan is presented in Appendix C.
Associations interested in such a plan should contact a professional adviser who can draft
a scheme tailored to the association's unique needs.
Some cooperatives grant the board discretion to
retire outstanding member equity "out of order" as it deems in the best
interests of the association. Sample language for implementation of the discretionary
approach appears in the second paragraph of the sample bylaw below.
Other cooperatives provide a specific
redemption preference for equity of the estates of deceased members and/or retired members
who have reached a certain age. An event-specific preferences clause can be complex,
particularly if it attempts to deal with the special problems created by members organized
as legal entities and thus do not regularly retire or die. Sample language covering this
situation is provided in section 2 of the sample bylaw in Appendix B.
New associations are not going to be in a
position to redeem equity for several years. But an early commitment to develop a regular
equity redemption program and agreement on the rules for its implementation will
strengthen an association's cooperative character and give early supporters some assurance
that they will get their investment back at some time in the future.
ARTICLE VII. EQUITY REDEMPTION
Regular Redemption, Revolving Fund. If at any time the board of directors determines
that the financial condition of the association will not be impaired thereby, capital
credited to members' accounts may be redeemed in full or in part. Any such redemption of
capital shall be made in order of priority according to the year in which the capital was
furnished and credited, the capital first received by the association being the first
Discretionary Special Redemptions. Notwithstanding any other provision of these
bylaws, the board, at its absolute discretion, shall have the power to retire any capital
credited to members' accounts on such terms and conditions as may be agreed upon by the
parties in any instance in which the interests of the association and its members are
deemed to be furthered thereby and funds are determined by the board to be available for
If the cooperative
is to deduct the face value of written notices of allocation and per-unit retain
certificates from taxable income in the year issued, the Internal Revenue Code requires
patrons to consent to include those amounts in taxable income in the year they receive a
notice or certificate, even though the cooperative retains the funds. The simplest way to
obtain consent from members is to include a bylaw making consent a condition for
membership. The Internal Revenue Service has published a model consent bylaw which should
Another paragraph is inserted making it clear
that the cooperative must explain the meaning of consent to members and prospective
members; this reminds leaders that such an explanation is also a tax law requirement.
ARTICLE VIII. CONSENT
Each person who
hereafter applies for and is accepted to membership in this association, and each member
of this association on the effective date of this bylaw who continues as a member after
such date, shall, by such act alone, consent that the amount of any distributions with
respect to his patronage occurring after the effective date of this bylaw, which are made
in qualified written notices of allocation or qualified per-unit retain certificates (as
defined in 26 U.S.C. 1388), and which are received by him from the cooperative, will be
taken into account by him at their stated dollar amounts in the manner provided in 26
U.S.C. 1385(a) in the taxable year in which such written notices of allocation and
per-unit retain certificates are received by him.
Written notification of the adoption of this
Article, a statement of its significance, and a copy of the provision shall be given
separately to each member and prospective member before membership in the association.
The bylaws should
make it clear whether the association may or may not do business with nonmembers. The
sample bylaw assumes that the association will want the option to conduct nonmember
If the association does nonmember business, the
Capper-Volstead Act and many State incorporation laws require that a majority of the
association business be done with or for members. The first three sentences of the sample
bylaw are thus found in most cooperative bylaws.
If an association wishes to qualify for tax
treatment under section 521 of the Internal Revenue Code, it may not do more than 15
percent of its farm supply business with persons who are neither members nor producers
(business with the Federal government 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 with nonmembers on either a patronage or nonpatronage basis. However,
this association shall not market the products of nonmembers in an amount the value of
which exceeds the value of the products marketed for members. It shall not purchase
supplies and equipment for nonmembers in an amount the value of which exceeds the value of
the supplies and equipment purchased for members. It shall not purchase supplies and
equipment for persons who are neither members nor producers of agricultural products in an
amount the value of which exceeds fifteen percent (15%) of all its purchases. Business
done for the United States or any of its agencies shall be disregarded in determining the
limitations imposed by this section.
are combining to increase the proportion of cooperatives that have taxable earnings from
nonpatronage sources. These factors include a growing reliance on nonmember business to
sustain the cooperative, more forceful positions by IRS auditors to classify investment
income as nonpatronage sourced, and less use of section 521. The bylaws should recognize
this as special income and provide the board discretion to add it to a capital reserve,
distribute it to members, or put it to any other lawful use.
ARTICLE X. NONPATRONAGE INCOME
income of the association shall be its gross receipts derived from all sources which under
law do not qualify as patronage income, less all expenses properly attributable to the
production of such nonpatronage sourced income and all income taxes payable on such
receipts by the association. Nonpatronage income shall be used in behalf of the
association and its members in accordance with such lawful purposes, including assignment
to an unallocated reserve account and allocation in whole or in part to members, as may be
determined by the board of directors.
Handling of Losses
operate at cost over the long term, the financial world operates for accounting and tax
purposes in single-year segments. Sometimes cooperatives have a loss in that relatively
short framework. The bylaws should anticipate the possibility of a loss year. They should
explain how decisions will be made to allocate the loss on an equitable basis.
The proper treatment of losses by cooperatives
for tax purposes has long been a contentious issue between cooperatives and the Internal
Revenue Service. The sample bylaw reflects a moderate position that financial results on
patronage and nonpatronage business should be separated; gains and losses within each
category can be combined, or "netted," for tax purposes; and losses under either
category can be carried back or forward to offset earnings in other years under the
applicable provisions of the tax code for businesses in general. As the rules for handling
losses are subject to change from time to time, counsel should be asked to keep informed
on this issue and advise the association when this bylaw may need revision.
It may also be prudent to include a prohibition
on directors voting a direct assessment on the members. This will prevent outside
interests from pressuring the directors into an action likely to have a negative impact on
ARTICLE XI. LOSSES
Patronage Losses. In the event the association suffers a loss during any year on
business conducted with or for patrons, such loss may be apportioned among the patrons
during the year of loss so that such loss will, to the extent practicable, be borne by the
patrons of the loss year on an equitable basis. The board shall have full authority to
prescribe the basis on which capital furnished by patrons may be reduced or such loss
otherwise equitably apportioned among the patrons. In the event of a patronage loss in one
or more departments or divisions of the operation of this association, but not so much as
to cause an overall loss for the fiscal year, such loss or losses may be prorated against
each of the remaining profitable departments on the basis of their respective percentage
of the net margins during such fiscal year.
Nonpatronage Losses. If in any fiscal year the association shall incur a loss other
than on patronage operations, such loss may be charged against any reserve accumulated
from nonpatronage earnings in prior years.
General Provisions. The board shall have no authority to make assessments against
This section shall not be construed to deprive
the association of the right to carry backward or forward losses from any source
whatsoever in accordance with the Internal Revenue Code or state taxing statutes.
Many of the rules
to dissolve a cooperative are contained in various statutes and are too complex to
reproduce in the bylaws. One issue that should be addressed is how any assets that might
remain after all liabilities are met should be distributed. In a noncooperative
corporation this is usually done on the basis of stock ownership and, if the bylaws are
silent on this issue, this may be the rule imposed on cooperative members by a court. It
is a good idea to consider language in the bylaws of a cooperative making clear that such
a distribution will be on the basis on patronage.
ARTICLE XII. DISSOLUTION AND PROPERTY INTEREST OF
after all debts and liabilities of the association shall have been paid, all shares of
preferred stock and common stock redeemed, and all capital furnished through patronage
shall have been retired without priority on a pro rata basis, the remaining property and
assets of the association shall be distributed among the members and former members in the
proportion which the aggregate patronage of each member bears to the total patronage of
all such members insofar as practicable, unless otherwise provided by law.
As the trend
toward litigating to test the validity of various decisions by corporate leaders has
grown, so has the possibility that directors, officers and employees may be found
personally liable for the adverse consequences of their decisions. This has made some
people understandably reluctant to assume leadership positions, particularly as unpaid or
minimally compensated directors and officers.
State governments, recognizing the valuable
role directors and officers play in corporate affairs, have adopted a variety of laws
limiting liability of corporate leaders and permitting corporations to shield leaders from
direct personal loss for decisions they make on behalf of the corporation.
In many States this is a developing area of the
law, and the extent of permissible indemnification changes frequently. To encourage
members to serve as directors, and to make sure leaders don't shy away from innovative
ideas, cooperatives should consider a bylaw accepting the maximum amount of responsibility
for indemnification permitted by State law.
Prudent risk management usually includes the
purchase of liability insurance to protect against an indemnification claim that might
otherwise lead to significant exposure for the association. This coverage can seem quite
expensive, so the sample language uses the permissive term "may" rather than the
mandatory term "shall." But whenever possible, this insurance should be obtained
to avoid exposing member assets to unacceptable risk.
ARTICLE XIII. INDEMNIFICATION
The association shall indemnify its officers,
directors, employees, and agents to the fullest extent possible under the provisions of
the (applicable State law), as it may be amended from time to time.
The association may purchase liability
insurance coverage for any person serving as an officer, director, employee or agent to
the extent permitted by applicable State law.
It is important for cooperative leaders to
remember that bylaws are not set in stone. They can, and should, be changed whenever they
stand as a barrier to cooperative activity desired by the member-owners and permissible
under the law.
While the incorporation statute will include
language permitting amendment of the bylaws and setting out how this can be accomplished,
a bylaw on amendment is usually included to remind leaders that change is possible and to
call attention to any unusual legal requirement, such as a higher than normal positive
voting requirement, that may be applicable.
ARTICLE XIV. AMENDMENTS
If notice of the
character of the amendment proposed has been given in the notice of meeting, these bylaws
may be altered or amended at any regular or special meeting of the members by the
affirmative vote of____ (__) of the members present or voting by proxy.
Again, these are only
examples of the provisions common to most cooperative bylaws. Virtually any other rule can
be included that is permissible under law. It is up to the leaders and members of a
cooperative to craft a set of bylaws that guides the association to serving members'
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market farm products and other goods of their members will usually want a separate
contract with each member establishing the terms upon which they will conduct their
business transactions. This contract is commonly called a marketing agreement.
If the members only want the
cooperative to serve as a home-of-last-resort for product that can't be sold elsewhere,
then a marketing agreement is not necessary. But if the members want an organization that
will enhance the return they earn on all of their production, then a marketing agreement
is an important marketing tool.
The marketing agreement is a unique contract in
that, because the members own and control the cooperative, the members are entering into a
contract with themselves. But it is more accurate to picture the agreement as a contract
between each individual member and the membership as a whole.
An important key to making the system work is
for everyone to remember that the cooperative is democratically controlled by the members.
No individual member has a right to unilaterally cancel or change the marketing agreement,
and the leadership should not insist on arrangements that are contrary to the wishes of a
majority of the membership.
The marketing agreement builds on the patronage
commitment section of the organizational agreement. Each individual member's obligation to
the organization committee is transferred to the new cooperative entity.
While the basic content of the articles and
bylaws is standardized throughout the cooperative community, the substantive provisions of
the marketing agreement are influenced by the custom and trade of the market for the
commodity covered by the agreement. Thus the sample language may need substantial
modification to meet member needs.
As with the articles and bylaws, the terms of
the marketing agreement are binding until changed, but they are not etched in stone. The
association--represented by its officers and directors--and the members are free to adopt
an approach to any issue different than the approach set out in the organization agreement
or in previously adopted marketing agreements.
provisions identify the parties to the contract, the cooperative and the producer, and
usually establish any other requirements that the producer must meet, including any
initial equity investment obligation, to be a member of the cooperative.
THIS AGREEMENT, made as of this___ day of_____ 19__ , by
and between , herein referred to as "Producer," and __________, an agricultural
cooperative having an office at _______________, herein referred to as
A. Association is an
agricultural cooperative organized under the laws of the State of________________ .
B. Producer is a
member of the Association who produces______________.
. C. Producer
has purchased one share of common voting stock and paid to Association the sum of dollars
($___), calculated at the rate of $___per____ (unit) of_______ (product) as specified in
Producer's membership application, receipt of which is acknowledged as an equity
investment in the Association. This entitles Producer to all the benefits of membership in
the Association as long as Producer complies with the articles of incorporation and bylaws
of the Association and the provisions of this agreement.
In consideration of the mutual covenants and
obligations contained herein, the parties agree as follows:
This provision outlines how the
association will sell the products and pay the member-patrons. The first paragraph
normally defines the obligation of the producer to deliver product to the association. The
same three options outlined in the patronage commitment examples for the organization
agreement--full production, defined volume, and set acreage--are available for use in
setting the delivery commitment once operation begins. The defined volume option is
utilized in this example, so if another type of obligation is adopted, appropriate
modification of the first paragraph should be made.
The second paragraph explains how the
association will distribute the proceeds of resale to the member. Two ways of accounting
for these proceeds are common. One is sometimes referred to as a gross margin operation.
The association agrees to pay the member the going market price for the product, less
deductions for operating expenses. After the end of the fiscal year, any margin is
returned to the producers as a patronage refund.
The other is called the pooling method. In this
arrangement all proceeds above expenses are returned to the producers on the basis of
patronage. Such associations do not generate margins, as such, and thus lack access to
retained patronage refunds to obtain equity.
Pooling cooperatives must rely on per-unit
retains and other means of raising capital. An example of draft language for each option
is set forth below.
Other terms of sale should also be included in
the agreement. Sample language on several areas commonly covered are provided:
responsibilities for delivery and for inspection and grading of the product; authorization
for the association to pledge the product and sales proceeds as collateral for loans and
otherwise exercise the rights of ownership; authorization for the association to withhold
fees to cover operating expenses and capital retains from checks to growers; and an
explanation of how the parties to the contract will deal with liens against the product.
Sale of _______(product). Association agrees to buy and Producer agrees to sell to
Association____ (number)_____ (units) of (product) as defined by USDA standards and grown
by Producer. This agreement is intended by the parties to pass an absolute title to______
(number)_____ (units) of _______(product) grown by Producer as soon as they have a
potential existence but such (product) shall be at the risk of Producer until delivery.
****** OPTION - Gross Margin Operation
Payment to Producer. Association shall market Producer's_______ (product) and
Producer shall accept as payment for Producer's (product) a price based on the current
market price in the area for_______ (product) of like grade and quality.
Association shall pay the amount due Producer,
less deductions authorized in Section 6 of this agreement, not more than___ days after
delivery of____ (product) to Association or Association's prescribed buying location.S
****** OPTION - Pooling Operation ******
Payment to Producer. The Association may at any time pool any or all (product) of
Producer with any other_______ (product) of a similar kind and grade. Producer
shall receive, for_______ (product) pooled, a unit price equal to the average net unit
price obtained for the pooled______ (product), less deductions authorized in Section 6 of
Association shall make an advance payment to
Producer of __percent of the current market price in the area for___ (product) of like
grade and quality not more than ___days after delivery of_______ (product) to Association
or Association's prescribed buying location.
Delivery. All_____ (product) shall be delivered by Producer at Producer's expense at
the earliest reasonable time after harvesting, or at such time as called for by
Association, to Association's principal place of business or to one of Association's
authorized buying locations as prescribed by Association. The Association will use its
best efforts to locate buying locations within a reasonable distance from Producer's farm.
Inspection and Grading. Prior to acceptance by Association, all______ (product) shall
be inspected and graded by the USDA in accordance with USDA standard rules and
All purchases and/or marketings of
________(product) received by Association from Producer shall be based upon USDA grade,
and Producer agrees to accept the grading established by USDA.
Loans and Security. Association shall have the power to borrow money for any purpose
on the security of the ______(product) delivered to Association, the products derived
thereupon, and evidence of such products or by-products, or cash or accounts arising from
the sale thereof, and to give a lien, either legal or equitable, thereon as the absolute
owner and/or marketing agent thereof. Association may commingle such products and
by-products with other products and by-products of like grade and variety and shall
exercise all other rights of ownership without limitation.
Deductions. Association agrees to purchase from and/or market for Producer the______
(product) set forth in Section 1 and to pay to Producer for said ______(product) the price
set forth in Section 2, less the following deductions authorized by Producer:
a. An amount to be determined annually by the board of directors,
in the sole discretion of the board, to meet the general contingencies of the business of
the Association including operating expenses.
b. A $___.__ per___ (unit) capital retain deduction by the
Association on the purchase price of each____ (unit) of_______ (product) received from
Liens. Producer shall notify the Association of any lien on any______ (product)
covered by this agreement. Producer shall obtain permission from the lien holder for
Association to market such_____ (product) and to retain any deductions from the payments
to Producer authorized hereunder and under the articles of incorporation and bylaws of the
Association. After any such deductions, Producer authorizes the Association to apply the
balance of the sale proceeds, or so much thereof as necessary, for payment of the lien.
As a member owned
and controlled entity, one of the most sensitive areas of management and leadership in a
cooperative is the disciplining of members who violate their agreements with the
association. But unless each member honors his or her obligations to the association, the
collective strength of the venture is weakened and the entity's chance of success is
This is especially true where a marketing
agreement is in effect. Management has to be able to anticipate the amount of product that
will be delivered so it can plan for its processing and resale. Disruptions in anticipated
delivery by natural causes, such as drought, are usually excused under a so-called
"Act of God" clause in the cooperative's contracts with buyers. But if members
simply do not deliver product to the association as promised, management may be forced to
buy product on the open market to meet association commitments or even default on its own
Usually a member knowingly violates the
marketing agreement because the member thinks he or she can get a better price somewhere
In the short term, this may indeed be the case.
No firm always has the best price in a competitive market. But a cooperative must view
itself as a long-term undertaking. If some members are allowed to forsake the cooperative
for personal short-term gain, they do so at the expense of those members who honor their
agreement. Because the marketing agreement is a contract between each individual member
and the membership as a whole, the leadership has the responsibility to protect the
interest of the group as a whole. That means taking steps, including legal action if
necessary, to enforce the marketing agreement.
Most State cooperative incorporation statutes
permit contractual provisions to facilitate enforcement of marketing agreements. One is
the inclusion of language providing for liquidated damages. In general corporate law, an
injured party must prove the extent of the loss with great specificity to be eligible for
compensation. This can be very difficult to do when agricultural commodities are involved.
Their value changes by the day, or even by the minute. So in this instance, the parties
can agree through contract on a specific level of damages, called liquidated damages, that
will be the penalty for violating the contract. The level must be high enough to truly
discourage breaches of the contract and to compensate the other members for their loss. A
frequently used rule-of-thumb is 25 percent of the estimated market value of the commodity
if it had been delivered under the contract.
Marketing agreements also usually authorize the
association to go to court and seek a restraining order against either actual or
anticipated breach of the contract.
The agreement may also make the offending party
liable for legal fees incurred by the association in defending the agreement.
Liquidated Damages. The remedy at law would be inadequate and it would be
impracticable and difficult to determine the actual damages to the Association should
Producer fail to deliver the (product) covered by this agreement. Therefore, regardless of
the cause of such failure, Producer agrees to pay to the Association for all such______
(product) delivered or disposed of by Producer, other than in accordance with the terms of
this agreement, a sum equal to___ % of the fair market value of the product at the close
of business on the day the product should have been delivered to the Association, as
liquidated damages for the breach of this agreement.
All parties agree that this agreement is one of
a series dependent for its true value on the adherence of all the contracting parties to
all of the agreements, but the cancellation of any other similar agreement or the failure
of any of the parties thereto to comply therewith shall not affect the validity of this
Failure to deliver the______ (product)
committed herein due to ACTS OF GOD shall not constitute a breach of this agreement.
Specific Performance. Producer agrees that in the event of a breach or threatened
breach by Producer of any provisions of this marketing agreement regarding delivery
of______ (product), the Association shall be entitled to a preliminary restraining order
and an injunction to prevent breach or further breach hereof and to a decree of specific
performance hereof. The parties agree that this is a contract for the purchase and sale of
personal property under special circumstances and conditions and that the Association may,
but shall not be obligated to, go into the open markets and buy______ (product) to replace
any that Producer may fail to deliver.
Legal Costs and Expenses. If the Association brings any action whatsoever by reason
of a breach or threatened breach of this agreement, Producer shall pay to the Association
all court costs, costs for bonds, travel expenses and all other expenses arising out of or
caused by the litigation, including reasonable attorney's fees expended or incurred by
Association in such proceedings, and all such costs and expenses shall be included in the
Termination and Renewal
want to have to get every member to sign a new agreement each year, and the producers
aren't going to want to be obligated to continue to patronize the cooperative if it isn't
meeting their needs. A provision providing that the contract automatically renews itself
for another year unless either the cooperative or the member provides notice during a
specific period of time--usually about a month during a slow period in production and
cooperative activity--that it wants to terminate the agreement gives adequate flexibility
and stability to the relationship.
Termination and Renewal. After this agreement has been in effect one year from
the date of execution, either party may terminate it in any year by notifying the other
party in writing between_____ (date) and____ (date). It is mutually agreed that failure to
so terminate in any year shall constitute conclusive evidence that the parties have
renewed this agreement for another year.
cooperatives have adopted numerous additional provisions to tailor their marketing
agreements to their individual needs. Examples of some of the more common, but by no means
all, of these types of provisions are provided.
Nonconformimg agreements. From time to time,
the association may want to alter the terms of its marketing agreement. This may occur
when numerous agreements are in effect, and it is a good cooperative practice to treat all
member equitably. Therefore, a provision permitting nonconforming contracts, but offering
persons with ongoing agreements the option to change to the new agreement, often called a
"most favored nation clause," can be useful. If the association wants to bring
all agreements back to uniformity, it can do so during the next time period for
terminating existing agreements.
Nonconforming Agreements. Association may enter into agreements with other growers
differing in terms from those contained herein, consistent with the bylaws of the
Association, without invalidating this agreement, provided that Producer at Producer's
request may sign a similar agreement as a substitute for this agreement.
agreements. One of the most difficult legal situations to untangle involves the
member who signs more than one contract for the sale of the same commodity. A clause
forbidding such activity helps place the responsibility for injuries suffered by the
cooperative on the member.
Section 13. No Contrary Agreements. Producer warrants that Producer has not
contracted to sell, market, consign, or deliver and will not contract to sell, market,
consign, or deliver any (product) during the term of this agreement to any person, firm or
corporation, contrary to this agreement.
of membership. If a member is going to disregard the terms of the marketing
agreement, the cooperative is usually better off without that person as a member. A
provision giving the board authority to revoke the membership of a member who violates the
agreement gives appropriate discretion to the directors in dealing with a breach of the
Forfeiture of Membership. Violation of this agreement in any material respect by
Producer shall be grounds for the board of directors to terminate Producer's membership in
articles and bylaws. A similar provision requiring members to abide by the articles
and bylaws, as written at the time the agreement is signed or subsequently amended, makes
it clear that a member can't abrogate the agreement if the membership approves a change in
the cooperative organizational documents the individual member doesn't like. That member
must honor the agreement until the annual period for orderly termination arrives.
Articles and Bylaws. Producer agrees to conform to and observe the articles of
incorporation and bylaws of the Association now in force and as they may be amended
Sometimes reorganizations occur during the year at either the association or the member
level. The right of a new entity replacing one of the parties to enforce the contract can
be clarified in the agreement itself. Because the association is the members as a whole,
it can usually assign its rights at will. However, to protect against one member assigning
rights to an unqualified person, usually a member must have board approval to assign
Assignment. This agreement may be assigned by the Association in its sole discretion.
Producer may assign this agreement, but only upon written authorization granted by the
board of directors of the Association.
agreement. A major cause of disputes over business contracts is the unwritten
exception. One party to the contract will say, "I know the contract says that,
but you told me you would do this."
Marketing agreements will frequently include
language stating that the organizational documents and the agreement itself are the only
contracts between the parties and no oral or other types of agreements will be honored.
The manager, in particular, needs to be reminded of this rule. Special unauthorized
promises or "deals" for selected members can do serious harm to the cohesiveness
of the association.
Entire Agreement. It is agreed that the articles of incorporation and the bylaws of the
Association, now or hereafter in effect, and this marketing agreement constitute the
entire agreement between the Association and Producer, and that there are no oral or other
conditions, promises, covenants, representations, or inducements in addition to, or at
variance with, any terms of this agreement.
Governing law. Even if an association intends to limit its activity to a single
State, disputes that involve the marketing agreement can arise from transactions that
cross State lines in any number of ways. To avoid arguments over which State's law shall
be applied, the contract might have a clause naming the State. This can be particularly
important if the association is incorporated under a statute of a State different from the
one where its headquarters are located.
Section 18. Governing Law.
This agreement shall be governed by the laws of the State of ________.
To make the contracts official, they must be signed by both parties. If the producer is a
business and not a real person, the association should check to make sure the signee for
the business is authorized to enter into such agreements for the business.
IN WITNESS WHEREOF, these parties have executed this agreement as
of the day, month and year first above written:
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When a person
applies for membership in a cooperative, it is a good idea to have a simple document that
ties the loose ends together and, when approved, serves as official notice that the
applicant is a bona fide member of the association. If the articles, bylaws, and marketing
agreement are well drafted, this need be little more than a summary of the commitments
made. Applicant certifies that the requirements of membership have been met, and the
appropriate cooperative officers, usually the president and secretary, acknowledge board
approval of the applicant.
Applicant's Statement. I hereby apply for
membership in________________ and agree to abide by the articles of incorporation and
bylaws of the association, now and hereafter in effect, copies of which have been
presented to me for inspection. I certify that I am a producer of ________, have tendered
the purchase price of one share of common voting stock, have signed a marketing agreement,
and met such other qualifications for membership as have been explained to me.
After my membership shall have been in effect
for one year from the date of its acceptance by the association, either party may
terminate it by notifying the other party in writing of this intention between_____ (date)
and_____ (date) of any year. If neither of the parties to this agreement so notifies the
other, it is mutually agreed that this shall constitute conclusive evidence that the
parties have renewed this agreement for another year.
Date , ________199_.
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This certifies that ____________________ is a member of___________ and is entitled to all
of the rights, benefits, and privileges of membership in the association.
Date________ , 199__.
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earlier, familiarity with the documents reviewed in this report is an ongoing
responsibility of each cooperative leader, particularly members of the board of directors.
The same is true for other important cooperative papers; e.g., audit reports and current
financial statements, board policies, loan agreements, the manager's job description, and
minutes of board and membership meetings.
As the manager's job is to run the day-to-day
operations of the cooperative, the manager acquires the necessary familiarity with these
items as part of his or her ongoing duties.
Directors usually don't have the continuous
contact with the business that the manager does. They need to have the documents available
so they can look up information and ask informed questions when necessary. A good director
handbook meets this need.
The director handbook can be nothing more than
a solid three-ring binder that contains up-to-date copies of all documents the directors
need to set cooperative policy. Every new director should get a current handbook as soon
as he or she is elected to the board. At each board meeting the manager or the president
should distribute minutes of the previous meeting and new versions of any documents that
have been modified or adopted since the last meeting. Time should be taken to make sure
the directors place the new pages in the proper place in the book and to let the directors
review and ask questions about the additions and replacements.
The director handbook will get the important
cooperative papers out of the file cabinet and into the mainstream of the decision-making
process. It will minimize the likelihood leaders will innocently violate a provision of
the articles and bylaws, contracts, or other written guidelines. It will provide ready
answers to questions about the limitations on managerial discretion imposed by these
documents. And it will facilitate the conduct of business meetings in a professional and
efficient manner. In summary, it will soon become a valuable tool for cooperative
management and planning.
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Appendix A. Election of Directors by Districts (bylaw
ARTICLE III. DIRECTORS AND OFFICERS
Election of Directors by Districts. (First paragraph as in sample language on page ,
main text. Next, add the following:)
The territory in which the association has
members shall be divided into (same number as number of directors) districts. The
respective districts and their boundaries shall be established by resolution of the board
The board of directors may from time to time
change the boundaries of one or more districts by adding territory not included within any
district, by adding to one district territory previously included in another district, or
by excluding from a district a part of its territory.
There shall be as many directors as there are
districts, one director to be elected by the members of each district. However, when the
number of districts is an even number, there shall be one additional director to be known
as a director-at-large and to be elected by all members of the association. A district
director must be a resident of, or be a producer of agricultural products in, the district
for which such director is elected or appointed.
Any questions as to the effect of any changes
made in district boundaries, or the number or identity or districts, shall be conclusively
determined by the board of directors.
Nominations for directors, either for a
district or at large, shall be made by petition addressed to the secretary of the
association requesting placement on the ballot of the name of the person so nominated.
Such a petition nominating a district director shall be signed by not less than ___members
of that district. Such a petition nominating a director-at-large shall be signed by not
less than ___members of the association.
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Appendix B. Equity Redemption (alternative bylaw)
ARTICLE VII. EQUITY REDEMPTION
Regular Redemption, Percent of All Equities. It shall be the policy of the
association, when other redemption priorities set forth herein have been met, and when
funds are available, to redeem in cash a percentage of each member patron's capital
credits, rather than ratably by year. The time and method of any such redemption shall be
determined by the board of directors.
Specified Special Redemptions. The association shall give priority to redemption of
members' capital credits held by deceased persons for the settlement of their estate. The
association shall thereafter grant priority redemption to capital credits of former
members who have attained their 65th birthday and are no longer actively engaged in
agricultural production as actual producers or landlords in share tenancy. The time and
method of such redemption shall be determined solely by the board of directors, dependent
upon the financial condition of the association. In the case of redemption of the equities
of those persons who have attained age 65 and retired from farming, preference may be
given to the oldest retirees in establishing the order of priority among those eligible.
In the case of a corporation or partnership
holder of members' capital credits, such corporation or partnership shall be considered
eligible for priority treatment to the same extent as the individual stockholders of such
corporation or partners of the partnership would have qualified, if each individual
stockholder or partner were an individual member-patron of this association. Any
redemption shall be made to the corporation or partnership, and not to the individual
stockholder or partner thereof.
Each corporation or partnership shall report to
the association the percentage of ownership interest in the corporation or partnership of
each of its stockholders or partners. Failure to report accurately the percentage of
individual ownership interest shall disqualify any allocations made to the corporation or
partnership by this association from redemption priority. If a corporation or partnership
should dissolve, its capital credits in this association shall be prorated among, and
transferred to, the individual stockholders or partners and considered for redemption on
an individual ownership basis. The amount of any redemption or prorate related to a
corporate or partnership member shall be determined by the percentage of ownership
interest as reported by the corporation or partnership.
When two or more persons are holders of capital
credits as tenants in common, without a designation of rights of survivorship, they shall
be deemed by this association to be acting as partners and shall be subject to the same
requirements as a partnership.
Capital credits held in joint tenancy with
rights of survivorship shall be considered for priority of redemption according to the
qualifying status of the youngest member of the joint tenancy or, in the event of death of
one of the joint tenants, of the survivor.
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Appendix C. Base Capital Plan (bylaw provision)
ARTICLE VII. EQUITY REDEMPTION
Members' Equity Requirements. Each year the board of directors shall determine the
amount of equity capital necessary for successful operation of the cooperative.
The total amount of member volume and the
volume each member has marketed through the association during the past_____ ( ) years
shall be calculated.
Each member's equity requirement is equal to
the amount of equity, determined necessary by the board of directors, multiplied by the
member's proportion of the association's total member volume during the base___ year
Member Investment. Members can invest equity to meet their requirements by direct
cash investment, allocated patronage refunds, and per-unit capital retains.
Member Account Adjustments. At the end of each fiscal year the association shall
recalculate each member's capital credits account to include all per-unit retains for the
year and each member's share of patronage refunds for the year.
(a) If a member's total capital credits are less than the
member's equity requirement for that year, cash returns on business done with the
association will be limited to those required by the Internal Revenue Code or other
(b) If the member's capital credits, less any cash that must be refunded to comply with
the Internal Revenue Code or other applicable law, are greater than the member's equity
requirement for that year, the excess shall be redeemed in cash within 8-1/2 months after
the close of the association's fiscal year.
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