UNIFORM LIMITED COOPERATIVE
ASSOCIATION ACT
drafted by the
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
and by it
APPROVED AND RECOMMENDED FOR ENACTMENT
IN ALL THE STATES
at its
ANNUAL CONFERENCE
MEETING IN ITS ONE-HUNDRED-AND-SIXTEENTH YEAR
PASADENA, CALIFORNIA
July 27 – August 3, 2007
WITH PREFATORY NOTE AND COMMENTS
Copyright ©2007
By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
February 26, 2008
ABOUT NCCUSL
The National Conference of Commissioners on Uniform State Laws (NCCUSL), also known as Uniform Law Commission (ULC), now in its 116th year, provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.
ULC members must be lawyers, qualified to practice law. They are practicing lawyers, judges, legislators and legislative staff and law professors, who have been appointed by state governments as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands to research, draft and promote enactment of uniform state laws in areas of state law where uniformity is desirable and practical.
• ULC strengthens the federal system by providing rules and procedures that are consistent from state to state but that also reflect the diverse experience of the states.
• ULC statutes are representative of state experience, because the organization is made up of representatives from each state, appointed by state government.
• ULC keeps state law up-to-date by addressing important and timely legal issues.
• ULC’s efforts reduce the need for individuals and businesses to deal with different laws as they move and do business in different states.
• ULC’s work facilitates economic development and provides a legal platform for foreign entities to deal with U.S. citizens and businesses.
• Uniform Law Commissioners donate thousands of hours of their time and legal and drafting expertise every year as a public service, and receive no salary or compensation for their work.
• ULC’s deliberative and uniquely open drafting process draws on the expertise of commissioners, but also utilizes input from legal experts, and advisors and observers representing the views of other legal organizations or interests that will be subject to the proposed laws.
• ULC is a state-supported organization that represents true value for the states, providing services that most states could not otherwise afford or duplicate.
DRAFTING COMMITTEE ON UNIFORM LIMITED COOPERATIVE
ASSOCIATION ACT
The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in drafting this Act consists of the following individuals:
PETER F. LANGROCK, P.O. Drawer 351, Middlebury, VT 05753, Chair
LOYD BENSON, P.O. Box 486, 124 N. Ninth St., Frederick, OK 73542
LYLE W. HILLYARD, 595 S. Riverwood Parkway, Suite 100, Logan, UT 84321
GENE N. LEBRUN, P.O. Box 8250, 909 St. Joseph St., Suite 900, Rapid City, SD 57709
REED L. MARTINEAU, P.O. Box 45000, 10 Exchange Pl., Salt Lake City, UT 84145
JAMES R. PENDER, 4001 N. Rodney Parham Rd., Suite 101, Little Rock, AR 72211
MARILYN E. PHELAN, Texas Tech University, School of Law, 1802 Hartford, Lubbock, TX
79409
HIROSHI SAKAI, 3773 Diamond Head Circle, Honolulu, HI 96815
KEVIN P. H. SUMIDA, 735 Bishop St., Suite 411, Honolulu, HI 96813
JAMES B. DEAN, 4155 E. Jewell Ave., Suite 703, Denver, CO 80222, Associate Reporter
THOMAS EARL GEU, University of South Dakota, School of Law, 414 E. Clark St., Suite 214,
Vermillion, SD 57069-2390, Reporter
EX OFFICIO
HOWARD J. SWIBEL, 120 S. Riverside Plaza, Suite 1200, Chicago, IL 60606, President
LEVI J. BENTON, State of Texas, 201 Caroline, 13th Floor, Houston, TX 77002, Division Chair
AMERICAN BAR ASSOCIATION ADVISOR
CRAIG A. HOUGHTON, 5260 N. Palm, Suite 421, Fresno, CA 93704, ABA Advisor
EXECUTIVE DIRECTOR
JOHN A. SEBERT, 211 E. Ontario St., Suite 1300, Chicago, IL 60611, Executive Director
Copies of this Act may be obtained from:
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
211 E. Ontario Street, Suite 1300
Chicago, Illinois 60611
312/915-0195
www.nccusl.org
UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT
TABLE OF CONTENTS
[ARTICLE] 1
GENERAL PROVISIONS
SECTION 103. LIMITED COOPERATIVE ASSOCIATION SUBJECT TO
AMENDMENT OR REPEAL OF [ACT]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
SECTION 104. NATURE OF LIMITED COOPERATIVE ASSOCIATION
SECTION 105. PURPOSE AND DURATION OF LIMITED COOPERATIVE
ASSOCIATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
SECTION 108. SUPPLEMENTAL PRINCIPLES OF LAW
SECTION 109. REQUIREMENTS OF OTHER LAWS
SECTION 110. RELATION TO RESTRAINT OF TRADE AND ANTITRUST LAWS
SECTION 112. RESERVATION OF NAME
SECTION 113. EFFECT OF ORGANIC RULES
SECTION 114. REQUIRED INFORMATION
SECTION 115. BUSINESS TRANSACTIONS OF MEMBER WITH LIMITED COOPERATIVE ASSOCIATION
SECTION 117. DESIGNATED OFFICE AND AGENT FOR SERVICE OF PROCESS
SECTION 118. CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS
SECTION 119. RESIGNATION OF AGENT FOR SERVICE OF PROCESS
SECTION 120. SERVICE OF PROCESS
[ARTICLE] 2
FILING AND ANNUAL REPORTS
SECTION 201. SIGNING OF RECORDS DELIVERED FOR FILING TO [SECRETARY
OF STATE]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 202. SIGNING AND FILING OF RECORDS PURSUANT TO JUDICIAL
ORDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 203. DELIVERY TO AND FILING OF RECORDS BY [SECRETARY OF STATE]; EFFECTIVE TIME AND DATE
SECTION 204. CORRECTING FILED RECORD
SECTION 205. LIABILITY FOR INACCURATE INFORMATION IN FILED RECORD
SECTION 206. CERTIFICATE OF GOOD STANDING OR AUTHORIZATION
SECTION 207. ANNUAL REPORT FOR [SECRETARY OF STATE]
[ARTICLE] 3
FORMATION AND INITIAL ARTICLES OF ORGANIZATION OF LIMITED
COOPERATIVE ASSOCIATION
SECTION 302. FORMATION OF LIMITED COOPERATIVE ASSOCIATION;
ARTICLES OF ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
SECTION 303. ORGANIZATION OF LIMITED COOPERATIVE ASSOCIATION
[ARTICLE] 4
AMENDMENT OF ORGANIC RULES OF LIMITED COOPERATIVE ASSOCIATION
SECTION 401. AUTHORITY TO AMEND ORGANIC RULES
SECTION 402. NOTICE AND ACTION ON AMENDMENT OF ORGANIC RULES
SECTION 403. METHOD OF VOTING ON AMENDMENT OF ORGANIC RULES
SECTION 404. VOTING BY DISTRICT, CLASS, OR VOTING GROUP.
SECTION 405. APPROVAL OF AMENDMENT
SECTION 406. RESTATED ARTICLES OF ORGANIZATION
SECTION 407. AMENDMENT OR RESTATEMENT OF ARTICLES OF
ORGANIZATION; FILING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 502. BECOMING A MEMBER
SECTION 503. NO POWER AS MEMBER TO BIND ASSOCIATION
SECTION 504. NO LIABILITY AS MEMBER FOR ASSOCIATION’S OBLIGATIONS
SECTION 505. RIGHT OF MEMBER AND FORMER MEMBER TO INFORMATION
SECTION 506. ANNUAL MEETING OF MEMBERS
SECTION 507. SPECIAL MEETING OF MEMBERS
SECTION 508. NOTICE OF MEMBERS MEETING
SECTION 509. WAIVER OF MEMBERS MEETING NOTICE
SECTION 510. QUORUM OF MEMBERS
SECTION 511. VOTING BY PATRON MEMBERS
SECTION 512. DETERMINATION OF VOTING POWER OF PATRON MEMBER.
SECTION 513. VOTING BY INVESTOR MEMBERS.
SECTION 514. VOTING REQUIREMENTS FOR MEMBERS.
SECTION 516. ACTION WITHOUT A MEETING
SECTION 517. DISTRICTS AND DELEGATES; CLASSES OF MEMBERS.
[ARTICLE] 6
MEMBER’S INTEREST IN LIMITED COOPERATIVE ASSOCIATION
SECTION 601. MEMBER’S INTEREST
SECTION 602. PATRON AND INVESTOR MEMBERS’ INTERESTS
SECTION 603. TRANSFERABILITY OF MEMBER’S INTEREST
SECTION 604. SECURITY INTEREST AND SET-OFF.
SECTION 605. CHARGING ORDERS FOR JUDGMENT CREDITOR OF MEMBER
OR TRANSFEREE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
[ARTICLE] 7
MARKETING CONTRACTS
SECTION 702. MARKETING CONTRACTS
SECTION 703. DURATION OF MARKETING CONTRACT
SECTION 704. REMEDIES FOR BREACH OF CONTRACT
[ARTICLE] 8
DIRECTORS AND OFFICERS
SECTION 801. BOARD OF DIRECTORS
SECTION 802. NO LIABILITY AS DIRECTOR FOR LIMITED COOPERATIVE ASSOCIATION’S OBLIGATIONS
SECTION 803. QUALIFICATIONS OF DIRECTORS
SECTION 804. ELECTION OF DIRECTORS AND COMPOSITION OF BOARD
SECTION 806. RESIGNATION OF DIRECTOR
SECTION 807. REMOVAL OF DIRECTOR
SECTION 808. SUSPENSION OF DIRECTOR BY BOARD.
SECTION 810. REMUNERATION OF DIRECTORS
SECTION 812. ACTION WITHOUT MEETING
SECTION 813. MEETINGS AND NOTICE
SECTION 814. WAIVER OF NOTICE OF MEETING
SECTION 818. STANDARDS OF CONDUCT AND LIABILITY
SECTION 819. CONFLICT OF INTEREST
SECTION 820. OTHER CONSIDERATIONS OF DIRECTORS
SECTION 821. RIGHT OF DIRECTOR OR COMMITTEE MEMBER TO
INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
SECTION 822. APPOINTMENT AND AUTHORITY OF OFFICERS
SECTION 823. RESIGNATION AND REMOVAL OF OFFICERS
[ARTICLE] 10
CONTRIBUTIONS, ALLOCATIONS, AND DISTRIBUTIONS
SECTION 1001. MEMBERS’ CONTRIBUTIONS
SECTION 1002. CONTRIBUTION AND VALUATION
SECTION 1003. CONTRIBUTION AGREEMENTS
SECTION 1004. ALLOCATIONS OF PROFITS AND LOSSES
SECTION 1006. REDEMPTION OR REPURCHASE
SECTION 1007. LIMITATIONS ON DISTRIBUTIONS
SECTION 1008. LIABILITY FOR IMPROPER DISTRIBUTIONS; LIMITATION OF ACTION
[SECTION 1009. RELATION TO STATE SECURITIES LAW
SECTION 1101. MEMBER’S DISSOCIATION
SECTION 1102. EFFECT OF DISSOCIATION AS MEMBER
SECTION 1103. POWER OF ESTATE OF MEMBER.
SECTION 1201. DISSOLUTION AND WINDING UP
SECTION 1202. NONJUDICIAL DISSOLUTION
SECTION 1203. JUDICIAL DISSOLUTION
SECTION 1204. VOLUNTARY DISSOLUTION BEFORE COMMENCEMENT OF ACTIVITY
SECTION 1205. VOLUNTARY DISSOLUTION BY THE BOARD AND MEMBERS.
SECTION 1207. DISTRIBUTION OF ASSETS IN WINDING UP LIMITED
COOPERATIVE ASSOCIATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
SECTION 1208. KNOWN CLAIMS AGAINST DISSOLVED LIMITED
COOPERATIVE ASSOCIATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
SECTION 1209. OTHER CLAIMS AGAINST DISSOLVED LIMITED COOPERATIVE ASSOCIATION.
SECTION 1210. COURT PROCEEDING
SECTION 1211. ADMINISTRATIVE DISSOLUTION
SECTION 1212. REINSTATEMENT FOLLOWING ADMINISTRATIVE
DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185
SECTION 1213. DENIAL OF REINSTATEMENT; APPEAL
SECTION 1214. STATEMENT OF DISSOLUTION
SECTION 1215. STATEMENT OF TERMINATION
[[ARTICLE] 13
ACTION BY MEMBER
SECTION 1301. DERIVATIVE ACTION
SECTION 1302. PROPER PLAINTIFF
SECTION 1304. APPROVAL FOR DISCONTINUANCE OR SETTLEMENT.
SECTION 1305. PROCEEDS AND EXPENSES
[ARTICLE] 14
FOREIGN COOPERATIVES
SECTION 1402. APPLICATION FOR CERTIFICATE OF AUTHORITY
SECTION 1403. ACTIVITIES NOT CONSTITUTING TRANSACTING BUSINESS
SECTION 1404. ISSUANCE OF CERTIFICATE OF AUTHORITY
SECTION 1405. NONCOMPLYING NAME OF FOREIGN COOPERATIVE
SECTION 1406. REVOCATION OF CERTIFICATE OF AUTHORITY
SECTION 1407. CANCELLATION OF CERTIFICATE OF AUTHORITY; EFFECT OF FAILURE TO HAVE CERTIFICATE
SECTION 1408. ACTION BY [ATTORNEY GENERAL]
[ARTICLE] 15
DISPOSITION OF ASSETS
SECTION 1501. DISPOSITION OF ASSETS NOT REQUIRING MEMBER
APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
SECTION 1502. MEMBER APPROVAL OF OTHER DISPOSITION OF ASSETS.
SECTION 1503. NOTICE AND ACTION ON DISPOSITION OF ASSETS.
SECTION 1504. DISPOSITION OF ASSETS.
[ARTICLE] 16
CONVERSION AND MERGER
SECTION 1603. ACTION ON PLAN OF CONVERSION BY CONVERTING LIMITED COOPERATIVE ASSOCIATION.
SECTION 1604. FILINGS REQUIRED FOR CONVERSION; EFFECTIVE DATE.
SECTION 1605. EFFECT OF CONVERSION.
SECTION 1607. NOTICE AND ACTION ON PLAN OF MERGER BY CONSTITUENT LIMITED COOPERATIVE ASSOCIATION
SECTION 1608. APPROVAL OR ABANDONMENT OF MERGER BY MEMBERS.
SECTION 1609. FILINGS REQUIRED FOR MERGER; EFFECTIVE DATE
SECTION 1610. EFFECT OF MERGER
SECTION 1612. [ARTICLE] NOT EXCLUSIVE
[ARTICLE] 17
MISCELLANEOUS PROVISIONS
SECTION 1701. UNIFORMITY OF APPLICATION AND CONSTRUCTION
SECTION 1702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT
UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT
Introduction to ULCAA
This Act (ULCAA) combines an unincorporated and flexible organizational structure with cooperative principles and values in order to obtain increased equity investment opportunity for capital intensive and start-up cooperative enterprises. It encourages equity investment by allowing, but not requiring, a limited cooperative association to have voting investor members in addition to patron members. Giving equity investors even limited voice in operations on an on-going basis is the biggest defining feature distinguishing this Act from other cooperative acts. Nonetheless, it is possible to view the distinction between debt and equity as one of degree rather than of kind. In effect this Act allows a limited cooperative association to substitute equity capital with limited, but real, governance rights for debt capital and lenders, through loan covenants, can control some activities of any kind of entity.
Another defining feature of this Act is that it is based in large part on unincorporated law and entities formed under it are intended to be unincorporated entities for state law purposes in the style of limited liability companies and limited partnerships. This feature may lead to rather sophisticated tax planning flexibility but is important, too, because cooperatives have historically functioned for specific purposes in a way analogous to, and sometimes in fact as, unincorporated associations. On the other hand, the names, but not necessarily the function, of the organic documents of a limited cooperative association are borrowed from corporate law based “traditional” cooperative statutes.
Limited cooperative associations are an alternative to other cooperative and unincorporated structures already available under state law. The Act is a free-standing act separate and apart from current cooperative acts and, therefore, is not a statutory replacement of other law. It is simply another statutory option under which to form an entity.
At the time of the promulgation of this Act, it is possible to qualify as a “cooperative” for some federal purposes without being organized as a cooperative under state law. That is, other forms of business organizations may be used for cooperative purposes. This Act, however, provides an efficient default template that encourages planners to utilize tested cooperative principles that reflect traditional cooperative values at a deeper level than provided in those other organizational structures. ULCAA may be correctly perceived as protecting cooperative principles within state law in ways not possible under more general organizational statutes.
The Act draws from existing statutes in Minnesota, Tennessee, Iowa, and Wisconsin, and, to a lesser extent, Wyoming which contemplate unincorporated cooperative entities and which encourage a greater use of outside equity furnished by “investors”. These laws began with Wyoming in 2001 and continued from Minnesota in 2003 through Nebraska in 2007. ULCAA seeks to provide a template for uniformity and further evolution in this area of law. In some ways, this Act is more protective of patron members than most of the existing statutes. Even before the enactment of these enabling laws, however, combinations of entities were being used to address equity capital concerns in cooperatives. See, e.g., Michael L. Cooke, Constantine Iliopoulis, Beginning to Inform the Theory of the Cooperative Firm: Emergence of the New Generation Cooperative 1999 Finn. J. Bus. Econ. 525 (Issue 4).
At the time of the promulgation of this Act, combination entities continue to be used to pair cooperatives with other entities in partnerships and joint ventures. Typically the “other entity” provides financing and the joint venture agreement provides for the allocation of profits and losses between the venturers and for the payment of fees for the provision of necessary inputs such as management services. The use of these multiple entity structures builds on the practical experience of “New Generation” cooperatives. The “New Generation” cooperative model differs from the historical cooperative model because it requires substantial up-front investment by patron members, connects equity investment with the right and obligation to deliver specified quantities of product to the cooperative, and allows patron members to transfer their equity in the cooperative by private sale to another person eligible to become a patron member.
The broad definition of “person” (Section 102(24)), the manner in which a person becomes a member (Section 502), and the flexibility provided by broadly allowing the purpose of a limited cooperative association to encompass activities that may (or may not) be for-profit (Section 105), continue a trend in unincorporated entity law. It is possible for ULCAA limited cooperative associations, therefore, to serve as joint venture conduits between and among for-profit entities, not-for-profit entities, and governmental divisions, if the organic law (and tax law) of those other entities allows them to do so; and, if the other law makes such ventures practicable. This use is consistent with several traditional cooperative values because cooperatives are self-help organizations that in some states are, or may be, formed under not-for-profit statues. Moreover, the federal income taxation of specific types of cooperatives is based on exempt organization concepts (though it is unlikely a limited cooperative association can comply with that scheme of taxation as currently formulated). If a limited cooperative association is able to navigate regulatory and tax complexity, the limited cooperative association might be an alternative entity for organizations in the growing social sector.
There are two final introductory matters concerning nomenclature and citation in the following comments to ULCAA. Throughout the comments it is necessary or helpful to contrast limited cooperative associations from cooperative organizations formed under other law. A convention adopted for purposes of the comments is that “cooperative organizations formed under other law” are termed “traditional cooperatives”. Reference and citation to frequently cited uniform or model acts are as follows: Revised Uniform Limited Liability Company Act is referenced as RULLCA (2006); Uniform Limited Partnership Act is referenced as ULPA (2001); Revised Uniform Partnership Act is referenced as RUPA (1997); Revised Uniform Limited Partnership Act with 1985 Amendments is referenced as RULPA (1976/1985); Model Entity Transaction Act is referenced as META; Revised Model Business Corporation Act (Model Business Corporation Act) is referenced as RMBCA.
Cooperative Principles
Cooperatives are unique organizations. Israel Packel emphasized the unique nature of the cooperative through four editions of his book on cooperatives from 1940 to 1970. He criticized attempts to interpret cooperatives solely by comparative classification as either “corporations” or “partnerships” by stating:
Instead of a direct approach as to whether a particular rule, in the light of the reason for the rule, should be applied to cooperatives, courts in the past tended to create the preliminary hurdle of determining whether cooperatives are to be treated as corporations, partnerships, or other joint ventures. [He later discussed Moore v. Hillsdale County Tel. Co., 137 N.W. 241 (Mich. 1912) (categorizing an unincorporated telephone cooperative as a joint venture).]
The uselessness of such an analysis becomes even more apparent when it leads to a statement that cooperatives “are somewhat of a hybrid, partaking both of the nature of a corporation and a partnership” [citing Philadelphia School Dist. v. Frankford Grocery Co., 103 A.2d 738 (Penn. 1954)].
Israel packel, The Organization and Operation of Cooperatives p. 5-6 (4th ed. 1970); contra, David Barton, What is a Cooperative, in Cooperatives in Agriculture, p. 1 (David Cobia, ed., 1989).
Even so, entity comparisons can be helpful for understanding the limited cooperative association. The basic features of limited cooperative associations formed under this Act (ULCAA) are flexible within bounds and largely based in contract consistent with other cooperative and unincorporated entity law. The organic rules, however, consistent with traditional cooperatives and corporations, are articles and bylaws though the articles are styled articles of organization, a term used in many limited liability company statutes. Member governance rights under the default rules share some aspects similar to those of limited partners in limited partnerships. For example, members do not have agency authority on behalf of the association. The governance structure is centralized with a board of directors like traditional cooperative statutes and, as a necessary result, the Act contains machinery necessary to support representational central authority.
Transferability of members’ interests and entity duration are similar to traditional cooperative and limited liability companies. Members’ liability is limited like both corporate and unincorporated limited liability entities. Allocation and distribution provisions are sui generis to this Act but are consistent with broad unincorporated concepts because they contemplate equity capital accounts in the names of the members.
Mechanical operation aside, the Act reflects cooperative principles except to the extent necessary to accommodate investor members for those limited cooperative associations choosing to have investor members. It is worth repeating that this Act does not require a limited cooperative association to have investor members. The Act results in an entity that is designed to function in close proximity to the way traditional cooperatives function in the absence of investor members.
Cooperative principles have historical roots that can be traced to the pre-revolutionary period in Pennsylvania where Benjamin Franklin helped form “what is considered the first formal cooperative business in the United States” in 1752. It was a mutual fire insurance company. Gene Ingalsbe & Frank Groves, Historical Development, in Cooperatives in Agriculture, 106 at 110-11 (David Cobia, ed., 1989).
The Rochdale Society of Equitable Pioneers, Ltd., however, is recognized as having “singular impact”on the cooperative movement. Id. at 109. It was a consumer cooperative formed in Rochdale, England, in 1844. The “Rochdale Principles” grew out of the experience of the Rochdale Society and probably “evolved from ‘rules of conduct and points of organization’” published by the Society in 1860. The number of “Rochdale Principles” varies depending on source probably “because the rules enumerated by the Rochdale Society continued to evolve from its founding... up to its publication in 1860 and thereafter.” David Barton, Principles in Cooperatives in Agricultures p. 22 (1989).
The number of stated enumerated principles varies between three and fourteen. In 1995, for example, the International Co-operative Alliance (ICA) listed the following seven cooperative principles: (1) voluntary and open membership; (2) democratic member control; (3) member economic participation; (4) autonomy and independence; (5) education, training and information for members; (6) cooperation among cooperatives; and, (7) concern for community. The 1995 list varies from ICA’s list promulgated in 1966. The 1995 list deleted “business at cost” and “limited return on capital” but added numbers (3), (4) and (7) as enumerated above. See Barton, supra, at pp. 31-2. Packel used the term “characteristics” rather than principles and suggested: “No single characteristic is necessarily all-controlling.” Packel, supra, at p. 5.
A frequently quoted passage from a dissent written by Justice Brandeis (and joined by Justice Holmes) concerning whether a stock cooperative was the same as a non-stock cooperative for purposes of an Oklahoma regulatory statute stated:
That no one plan of organization is to be labeled as truly co-operative to the exclusion of others was recognized by Congress in connection with co-operative banks and building and loan associations [citation omitted]. With the expansion of agricultural co-operatives it has been recognized repeatedly.
Frost v. Corporation Comm. (Oklahoma), 278 U.S. 515 at 546 (1929) (Brandeis, J., dissenting).
Justice Brandeis further stated:
And experts in the Department of Agriculture, charged with disseminating information to farmers and Legislatures, have warned against any crystallization of the co-operative plan, so as to exclude any type of co-operation.
Id.
The interpretation of cooperative principles has evolved under other law, too. For example, the Internal Revenue Service changed its interpretation of whether operating on a cooperative basis required more than 50 percent of the cooperative’s business be done with members on a patronage basis to qualify for tax treatment afforded one specific kind of cooperative. Rev. Rul. 93-21, 1993-1 C.B. 188 (stating that the 50 percent threshold is not necessary).
Cooperative principles undergird and animate many of ULCAA’s provisions. As a result, understanding the Act at a fundamental level is aided by an overview of cooperative values and principles.
One of the fulcrums in this Act regarding cooperative values is Section 104 (“Nature of Limited Cooperative Association”). It addresses the values of member economic participation, autonomy, and independence. Autonomy, however, must be placed within the practical context of long-term debt, equity, and the use of combination entities. Voluntary membership remains voluntary in the sense that this Act requires the “consent” of both the person seeking to become a member and the association. See Section 113(a). Open membership has been compromised under existing law establishing entities similar to limited cooperative associations and remains so in ULCAA to allow (but not require) the formation of “closed” cooperatives. Closed cooperative structure assists patron members to share the increased value of the entity they helped build and provides member liquidity.
Section 1004 (“Allocations of Profits and Losses”) expressly provides for the values of member economic participation; education, training and information, and; cooperation among cooperatives. One of the key balancing points of the Act concerns “democratic member control.” Sections 405, 511(a) through 514, 804, and 816(a) (as well as the other voting provisions on fundamental changes) all concern the patron member control principle.
“Concern for community” is directly addressed by Section 820 which varies the law generally applicable to corporate directors, for example, to allow the directors of a limited cooperative association to consider cooperative principles as well as a number of community constituencies in making decisions. See also Section 1004(a)(2).
In sum, the Act expressly considers important traditional cooperative values and provides reasoned departures from those values only where necessary for purposes of reducing the cost of capital to limited cooperative associations in furtherance of the other cooperative principles.
Selected Features of the
Uniform Limited Cooperative Association Act (ULCAA)
The features and provisions discussed in this portion of the Prefatory Note are particularly important to understand and use the Act. They include:
• Structure and Interpretation of ULCAA
• Organic Rules
• Investor Members
• Voting Control
• Board of Directors: “Fiduciary” Duties
• Formation of a Limited Cooperative Association
• Financial Rights
• Allocations and Distributions
• Marketing Contracts
• Interrelationship with Other Law
Structure and Interpretation of ULCAA
The structure of ULCAA follows, in a general way, the structure of RULLCA (2006), ULPA (2001), and RUPA (1997). Wherever appropriate, similar captions to those acts are used.
Sections 107 (“Governing Law”), 108 (“Supplemental Principles of Law”) and 113 (“Effect of Organic Rules”) relate to the application and interpretation of the Act. The first two sections are common with other uniform acts.
Section 113 underpins the contractual unincorporated nature of ULCAA. In the first instance the fluidness (or ambiguity) caused by the strong influence of contract law on the organic rules may seem troublesome. This fluidness, however, is generally consistent with member based entities and is fundamental to unincorporated entities. Indeed, whatever ambiguity exists concerning the boundary of the interpretation of the organic rules and contract in ULCAA should provide no more practical consternation than does the definition of “operating agreement” in RULLCA (2006) which states, in relevant part, that “operating agreement”:
means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company. . . .
RULLCA (2006) § (13).
By way of overview Section 113(a) provides that the organic rules govern relationships internal to the association. The balance of Section 113 performs two functions. The first function is that it indirectly establishes the interpretive primacy of the organic rules both within Section 113(a) and other sections elsewhere in the Act that restrict, limit, qualify, or emphasize that primacy. Subsections (b) and (c) identify sections which limit the flexibility of the organic rules. Subsection (b) identifies provisions by section number that may be modified only in the articles of organization. Subsection (c), like subsection (b), identifies provisions by section number in which limitations exist; but, which may be modified in either the articles of organization or bylaws within those limitations. Thus, subsections (b) and (c) provide the necessary background rule for those sections that expressly limit the broad flexibility recognized in subsection (a). In addition to providing this negative definition to subsection (a), subsections (b) through (d) provide practical guidance for those drafting organic rules similar to the way provisions in RULLCA (2006), RULPA (2001), RUPA (1997) and RMBCA provide the same guidance.
On the other hand, many provisions that would clearly be interpreted as “flexible” under the application of the general rule of Section 113(a) contain an express statement that the organic rules may “otherwise provide.” When used in this manner the quoted phrase is for emphasis and for the convenience of those using the Act, for example, opinion givers. The use of the phrase should not be interpreted as a negative implication about the flexibility of provisions that govern the internal affairs of the association but which do not contain the phrase. Nonetheless, like other organizational acts, this Act contains administrative provisions. For example, Section 111 (“Name”) deals with the name of a limited cooperative association. Also, similar to other acts, these administrative provisions are mandatory even though they do not expressly so state.
Finally, as an introductory matter of interpretation, ULCAA does not contain restrictions concerning the effect of the organic rules on third parties as contained in some unincorporated laws; nor does it expressly state that the organic rules may be directly applicable to third parties as stated in others. There are two reasons for this treatment of the matter by this Act. First, at some level, expressly stating that the organic rules may not affect nonsignatory third parties seems to state the obvious. Second, and at the opposite interpretive extreme, cooperatives are somewhat unique among entities because their customers (patrons) are also typically their owners (patron members). Thus, whether the member is (or is not) a third party for a particular purpose will depend on unique facts and the organic rules themselves. This is not imprecision. It is recognition of the importance of context.
Moreover, some users of the cooperative may be “non-member patrons” (in the vernacular of the industry) and some items of the contract with “non-member patrons” may, in somewhat unusual circumstances, be addressed in the organic rules. These patrons may, under contract, share in “profits” or “savings.” As a result of these unique relationships concerning “contracts” among and between the constituencies requires careful case-by-case scrutiny of what is meant by “third parties” for particular purposes. Such determinations, particularly at this early developmental stage of limited cooperative association law, are ill-suited to be addressed by statutory mandate.
Organic Rules
The organic rules of a limited cooperative association are its articles of organization and bylaws. They are modified versions of similar governing schemes in corporate law but in some ways are similar to the governing records and schemes found in a few early limited liability company statutes. See, e.g., Tex. Civ. Code Ann. § 2.09 (1992) (articles of organization and regulations).
The articles of organization are the highest authority of organic rules and may be amended only with a super-majority vote of the members. See Section 405 (“Approval of Amendment”). They are filed publicly. The bylaws, as a matter of default, may be amended only by a majority vote of the members but the power to amend most bylaw provisions may be delegated to the board of directors by the articles of organization. Id. The exceptions to the delegation of authority to the board for purposes of amending the bylaws include five fundamental matters (amending equity structure; transferability of a member’s interest; allocation of profits and losses; quorum and voting rights; and, under certain circumstances, admission of new members). Id. Those five matters require super majority member vote whether located in the articles of organization or the bylaws.
Certain items must be contained in the articles of organization, some may be in the articles or bylaws. There is no penalty or adverse consequence under the Act if a limited cooperative association does not adopt bylaws even though the Act could be interpreted as requiring bylaws. See Comment to Section 304 (“Bylaws”).
Investor Members
The introduction of voting investor members requires ULCAA to expressly guard cooperative principles and values which focus on user-owners (patron members) and their cooperative entity while at the same time balancing control and financial return in such a way as to encourage equity investment by investor members. Article 5 (“Members”) contains the primary balancing point concerning voting rights and, relatedly, Article 8 (“Directors and Officers”) requires that the majority of the board be elected by patron members. Article 10 (“Contributions, Allocations, and Distributions”) contains the primary balancing point concerning capital, profits, and losses.
While the provisions of Articles 5 and 10 are flexible, they contain protections for both patron member and investor members. The general voting provisions favor patron members through a two-tiered voting structure but the organic rules can provide for significant influence, and possible blocking power, to investor members. Article 10 provides protections for patron members with respect to allocation of the association’s profits and losses by establishing a baseline for patron members that is to be met in making allocations. There remains, however, great flexibility in structuring the financial arrangements among the patron members and the investor members by defining “profits”and through commercial arrangements among the members.
Voting Control
Control by members is a gravaman of cooperative theory and regulation. Cooperative principles require control by patron members. This Act allows for investor members. As a result it contains provisions that balance the need for patron member control with the enhanced ability of the association to obtain equity from investor members. The most basic provision for patron member control in limited cooperative associations with investor members requires that a majority of the voting power be held by patron members. See Section 514.
Voting control is addressed in three places in the Act: (1) election of the board of directors; (2) amendment of the organic rules; and, (3) fundamental changes such as mergers and conversions.
A strong measure of control is vested in patron members by the provisions addressing election and composition of the board of directors. The Act requires that a specified number of directors be patron members relative to the size of the board. For example, if the board has nine or more members at least one-third of the members must be patron members. Further, and at least as important as the number of patron members on the board, a majority of the board of directors must be elected by patron members. See Section 804. Patron member “control” provided by the election of a majority of directors is leveraged by the default rule that directors may be removed without cause. See Section 807. ULCAA, however, allows more flexibility than in other law for the election of independent directors whose use is becoming more popular in traditional cooperatives. In summary, the director election provisions assure patron members have a significant place at the board table and “control” over the composition of the board while at the same time providing investor members the minimum electoral voice believed necessary as a matter of policy to encourage their equity investment.
Amendment of the articles of organization, voting on proposed fundamental changes, and the amendment of bylaws are consistent with patron member control. As compared to amendment of the articles, however, the percentage of the vote is lowered in the case of bylaw amendments except for specified provisions. See “Organic Rules” in this Prefatory Note. The mandatory minimum vote required for fundamental changes and amendment of the articles of organization is two-thirds vote. See, e.g., Section 405.
In associations with investor members the Act requires the vote for fundamental changes meet two tests:
(1) A majority of patron member voting power present must vote for the matter; and
(2) the total vote must meet either the two-thirds or majority default requirements, as appropriate.
See Comment to Section 405.
Patron member voting under ULCAA is not “block voting” as is provided by existing statutes similar to ULCAA. The difference is that under ULCAA a majority of the patron vote does not control the entire patron member voting power. Therefore, the Act changes the voting dynamic between patron members and investor members as compared to similar laws but still requires that a majority of patron members have, in effect, a veto power. The Act allows the association to provide similar “veto power” to investor members which is similar to the power frequently demanded by lenders in loan covenants and by venture capitalists for their equity investments. See Section 514(3). The requirement that patrons have at least a majority of the voting power also differs from most, but not all, of the existing statutes on which this Act is based which allow for lower quantums of voting power for patron members (as low as 15 percent). As a result the Act can be seen as both more flexible and more protective of “control” by patron members than most (but again not all) of the similar statutes existing as of the promulgation of ULCAA.
The Act specifically addresses patron member district voting, voting by classes, proxy voting, quorum requirements, and other matters related to voting as is common in traditional cooperative statutes.
Board of Directors: “Fiduciary” Duty
The application of corporate based concepts such as the business judgment rule is controversial within unincorporated entities. See Elizabeth S. Miller and Thomas E. Rutledge, The Duty of Finest Loyalty and Reasonable Decisions: The Business Judgment Rule in Unincorporated Business Organizations? 30 Del. J. Corp. L. 343 (2005). Even so, RULLCA (2006) Section 409 references the business judgment rule in the context of limited liability companies. There is no necessity for this Act to fuel or even enter this policy debate because the limited cooperative association, though intended to be an unincorporated association, also draws upon the long tradition and customary law applicable to cooperatives which for the past five decades has borrowed duties and standards from business and not-for-profit corporation law to identify the appropriate duties and measuring standards for its non-agent directors. These sources provide the context and flexibility necessary for judicial review in the broad range of entities that may be formed as limited cooperative associations under this Act.
States have had the opportunity to develop specific statutory policy regarding traditional cooperatives in the context of elected centralized management. This Act adopts those legislative formulations, as uniquely interpreted by the courts of individual states, as the appropriate starting place for the determination and continued evolution of the duties, responsibilities, and standards of directors of limited cooperative associations. As a result, ULCAA incorporates the preexisting law of the adopting state by reference in Sections 818 (“Standards of Conduct and Liability”), 819 (“Conflict of Interest”) and 901 (“Indemnification”). The standards of conduct of officers, on the other hand, are left to agency law as a matter of affirmative policy, not of omission.
This Act, however, contains an important modification concerning the matters that may be appropriately considered by the board of directors. Unless the articles of organization otherwise provide, directors may consider other constituencies, the community, and cooperative principles and values, without breaching their duties. See Section 820 (“Other Considerations of Directors”). It is only a default rule, but this modification is intended to reflect the traditional notion that cooperatives serve interests beyond narrowly defined constituencies. It provides a touch stone to the concern for public good as historically reflected by special treatment afforded cooperatives under some regulatory statutes and, more generally, helps explain the influence of not-for-profit law on traditional cooperatives.
Finally and as a more general matter, incorporation of material provisions by reference, while somewhat novel, is consistent with a nascent general trend to attempt to standardize like features of entity statutes for improved efficiency and predictability. E.g., Model Entity Transactions Act, Model Registered Agent Act.
Formation of a Limited Cooperative Association
The formation of a limited cooperative association is more formal than some other unincorporated associations though it shares with other statutes the requirement of a public filing. The required filing under this Act is the articles of organization. See Section 302 (“Formation of Limited Cooperative Association; Articles of Organization”).
The centralized management structure of a limited cooperative association includes a board of directors. The Act, therefore, has provisions dealing with the initial board as well as other provisions generally found in statutes governing traditional cooperatives.
ULCAA contemplates an unincorporated entity and unincorporated entities are governed principally by contract. This creates a theoretical issue about whether the entity can exist without members. See Comment to Section 301 (“Organization”). Mitigation of this important theoretical concern, which goes to the fundamental nature of an organization, is in contrast to practical filing considerations which sometimes necessitate filing before members are identified or known. The compromise solution is to allow filing but to require the association to have members before it commences business. See Section 501 (“Directors and Officers”). While mitigating the theoretical concern, these provisions may create practical formation issues that need to be carefully attended by advisors.
With one exception an association must have at least two members and the provisions concerning what happens when an association has but one member are functionally similar to the provisions found in ULPA (2001). The exception to the two member requirement is where another cooperative is the sole member. The exception is typical of traditional cooperative law.
One or more “organizers” may form the association and those organizers need not be members. See Article 3 (“Formation and Initial Articles of Organization of Limited Cooperative Association”).
Financial Rights
A member’s interest in a limited cooperative association consists of three clearly delineated rights: (1) governance rights; (2) financial rights; and, (3) the right or obligation, if any, to do business with the association. See Section 601. Of the three rights only financial rights are transferable as a matter of default under the Act. Financial rights serve the same function as “transferable interests” under other unincorporated law. See, e.g., ULPA (2001) Art. 7. As a result of this functional equivalency, ULCAA addresses the same issues concerning financial rights as other unincorporated law addresses under the rubric of “transferable interests.” See, e.g., Section 605 (“Charging Orders for Judgment Creditor of Member or Transferee”).
ULCAA, unlike unincorporated acts since the original UPA, delineates and identifies non-transferable rights. The identification is a practical necessity because patron members in a cooperative also use the cooperative. That is, cooperative organizations contract with their patron members for the purchase or sale of goods or services and this contract may be the primary reason a patron member becomes a member. Under other unincorporated law such contracts are analyzed either as third party contracts or, conceivable as subsumed under the concept of “transferable interest.” This Act must address these contracts apart from financial rights because of the central role they play in cooperatives.
Allocations and Distributions
The general trend among statutes governing unincorporated entities is to address distributions but to allow allocation of profits and losses to follow the agreement between the owners subject to the law of taxation and generally accepted accounting principles. State statutes relating to the formation and operation of traditional cooperatives have taken a minimalist approach to this matter focusing on the identity of those owning equity capital and by limiting return and voting rights for “non-patron” owners consistent with federal regulatory law. Illustratively, some traditional state cooperative statutes simply require cooperatives to operate in accordance with a “cooperative plan” without much further statutory definition or delineation.
ULCAA takes a different approach to allocations than either unincorporated law or traditional state cooperative statutes. It contains a more transparent fixed concept of the types of entities that can be reasonably called a kind of a cooperative by providing a framework that governs allocations for state law purposes. Thus, the Act addresses what it means to be a limited cooperative association. This finer treatment is necessary because ULCAA provides for investor members who are not limited to the users of the services provided by the association. One of two leverage points for this distributed definition of a limited cooperative association appears in the allocation provisions of profits and losses among members and, uniquely, members and the association as an entity. The other leverage point is a series of provisions surrounding member voting. See Prefatory Note (“Investor Members”, “Voting Control”).
Provisions addressing allocations and distributions appear in Sections 1004 (“Allocations of Profits and Losses”), 1005 (“Distributions”) and 1006 (“Redemption and Repurchases”). Two provisions are central to both allocations and the definitional function of allocations. The first provision is Section 1004(b). It states the default rule that all profits and losses must be allocated to patron members (the “users” of the limited cooperative association). This formulation of the default rule is intended to shift the burden of negotiation to prospective investor members.
The second central and defining provision concerning allocation is the mandatory rule that patron members be allocated at least 50 percent of the profits and losses. See Section 1004(c). The definition of profits to be allocated provided by Section 1004 is flexible. It contemplates structures and arrangements currently possible using multi-entity combinations but enables the structure to exist in a single entity. Distributions under the Act, on the other hand, have few restrictions consistent with the flexibility necessary for equity redemption plans common in traditional cooperatives. See Section 1005 (“Distributions”).
Section 1006 (“Redemption or Repurchase”) may be of special interest to those familiar with the role that redemption of equity plays in traditional cooperative business models. Although stated in slightly different terms than those typically used in the context of traditional cooperatives, Section 1006 attempts to coordinate unincorporated entity distributions with equity redemption under the cooperative model.
The allocation and distribution provisions in ULCAA are purely a matter of state law, a point that is difficult to overemphasize. Financial reporting requirements, regulatory law, and tax law apply independently from the state law requirements of the Act. Benefits under other law may (or may not) be available to limited cooperative associations formed pursuant to ULCAA.
Marketing Contracts
A key feature of some types of traditional cooperatives is the right or obligation of a member to sell product to or through the cooperative. See Prefatory Note (“Financial Rights”). Special statutory provisions applicable to “marketing contracts” are usually contained in the state statute under which these types of traditional cooperatives are formed. The provisions frequently apply only to agricultural marketing cooperatives.
In practice, the terms of the marketing contract are sometimes distributed in several “places” possibly including the organic rules or separate agreements denominated “membership agreement.” See Preliminary Comment to Article 7.
This Act, too, addresses marketing contracts. See Article 7 (“Marketing Contracts”). The ULCAA provisions are not limited in application to agricultural commodities but are limited to contracts where customers “sell, or deliver for sale or marketing on the person’s behalf . . . products, commodities or goods” to the limited cooperative association. See Section 701(1). The Article addresses breach, remedies for breach, and anticipatory repudiation of the marketing contract. An important aspect of these provisions is they may apply to non-member third persons. It is a matter of contract, context, and interpretation as to whether contractual terms contained in the organic rules will bind or apply to third persons. See Preliminary Comment to Article 7.
Although the marketing contract provisions contained in this Act address the same issues as addressed in traditional cooperative statutes they are not as protective of the limited cooperative association as older statutes, in part, because of the refinement of that other law over the decades.
The mere existence of provisions relating to marketing contracts in ULCAA and in the law of traditional cooperatives underscores the self-help and mutual benefit aspects of cooperatives. That is, in some contexts, one member’s breach of the marketing contract will cause the cooperative’s downstream contract with purchasers to be breached for failure to deliver the required quantity or quality of the commodity. This, in turn, effects the price each member receives under its contract and sounds in mutually dependent relationships stereotypical of unincorporated entities even extending to general partnerships.
Interrelationship with Other Law
Several sections of this Act expressly deal with the interrelation of this Act with other law. First, and as necessary background, ULCAA is a free standing act and its terms neither repeal nor modify existing state cooperative statutes nor entities formed under them. Neither does the Act change any regulatory or tax law. As a matter of general legal principle, regulatory law is simply outside the scope and jurisdiction of this Act just as it is outside the scope of other statutes addressing the formation and operation of a specific entity. See generally, Section 108. This common legal understanding is made explicit by Section 109 (“Requirements of Other Laws”) to avoid unintended interpretations because limited cooperative associations are a relatively new and unfamiliar entity.
Four other sections, however, directly address the relationship between ULCAA and specific provisions of other law because those provisions are included, at least in some states, within traditional cooperative statutes. These four sections (or portions of sections) are bracketed in the text of the Act meaning an adopting jurisdiction needs to be aware of the law governing traditional cooperatives in that jurisdiction.
One of these sections, Section 111(c), provides that the required use of the word “cooperative” within the context of “limited cooperative association” does not violate a specific law restricting the use of the word “cooperative” found in the traditional cooperative statutes of many states. This provision, like the rest of the provisions discussed here, should be adopted only by jurisdictions whose other law contains such a restriction. Another section that addresses the relationship of entities formed under this Act with other law involves exemptions to state restraint of trade and antitrust law for “cooperatives”. See Section 110 (“Relation of Trade and Antitrust Laws”).
A third section addressing a specific interrelationship issue is Section 1009 (“Relation to State Securities Law”). Section 1009 addresses the application of exemptions from state securities law and regulation for traditional cooperatives to the limited cooperative association. The fourth section concerns the law of a few states that allows cooperatives an alternative to the more generally applicable distribution of unclaimed property statutes. See Section 1010 (“Alternative Distributions of Unclaimed Property, Distributions, Redemptions, or Payments”).
A final section expressly addresses other law, but it is different in kind and approach from the sections previously discussed. It provides detail about the coordination between security interests in members’ interests under ULCAA and the Uniform Commercial Code. See Section 604 (“Security Interest and Setoff”).
UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT
GENERAL PROVISIONS
SECTION 101. SHORT TITLE. This [act] may be cited as the Uniform Limited Cooperative Association Act.Comment
The title of this Act indicates a limited cooperative association is a type of cooperative different from cooperatives modeled on a corporate form, is an unincorporated association, and has aspects of limited partnerships and other unincorporated limited liability entities combined with features of cooperative organizations thought by many to be the “traditional” cooperative.
SECTION 102. DEFINITIONS. In this [act]:
(1) “Articles of organization” means the articles of organization of a limited cooperative association required by Section 302. The term includes the articles as amended or restated.
(2) “Board of directors” means the board of directors of a limited cooperative association.
(3) “Bylaws” means the bylaws of a limited cooperative association. The term includes the bylaws as amended or restated.
(4) “Certificate of authority” means a certificate issued by the [Secretary of State] for a foreign cooperative to transact business in this state.
(5) “Contribution,” except as used in Section 1008(c), means a benefit that a person provides to a limited cooperative association to become or remain a member or in the person’s capacity as a member.
(6) “Cooperative” means a limited cooperative association or an entity organized under any cooperative law of any jurisdiction.
(7) “Designated office” means the office that a limited cooperative association or a foreign cooperative is required to designate and maintain under Section 117(a)(1).
(8) “Director” means a director of a limited cooperative association.
(9) “Distribution,” except as used in Section 1007(e), means a transfer of money or other property from a limited cooperative association to a member because of the member’s financial rights or to a transferee of a member’s financial rights.
(10) “Entity” means a person other than an individual.
(11) “Financial rights” means the right to participate in allocations and distributions as provided in [Articles] 10 and 12 but does not include rights or obligations under a marketing contract governed by [Article] 7.
(12) “Foreign cooperative” means an entity organized in a jurisdiction other than this state under a law similar to this [act].
(13) “Governance rights” means the right to participate in governance of a limited cooperative association.
(14) “Investor member” means a member that has made a contribution to a limited cooperative association and
(A) is not required by the organic rules to conduct patronage with the association in the member’s capacity as an investor member in order to receive the member’s interest; or
(B) is not permitted by the organic rules to conduct patronage with the association in the member’s capacity as an investor member in order to receive the member’s interest.
(15) “Limited cooperative association” means an association organized under this [act].
(16) “Member” means a person that is admitted as a patron member or investor member, or both, in a limited cooperative association. The term does not include a person that has dissociated as a member.
(17) “Member’s interest” means the interest of a patron member or investor member under Section 601.
(18) “Members meeting” means an annual members meeting or special meeting of members.
(19) “Organic law” means the statute providing for the creation of an entity or principally governing its internal affairs.
(20) “Organic rules” means the articles of organization and bylaws of a limited cooperative association.
(21) “Organizer” means an individual who signs the initial articles of organization.
(22) “Patron member” means a member that has made a contribution to a limited cooperative association and:
(A) is required by the organic rules to conduct patronage with the association in the member’s capacity as a patron member in order to receive the member’s interest; or
(B) is permitted by the organic rules to conduct patronage with the association in the member’s capacity as a patron member in order to receive the member’s interest.
(23) “Patronage” means business transactions between a limited cooperative association and a person which entitle the person to receive financial rights based on the value or quantity of business done between the association and the person.
(24) “Person” means an individual, corporation, business trust, cooperative, estate, trust, partnership, limited partnership, limited liability company, limited cooperative association, joint venture, association, public corporation, government or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.
(25) “Principal office” means the principal executive office of a limited cooperative association or foreign cooperative, whether or not in this state.
(26) “Record”, used as a noun, means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(27) “Required information” means the information a limited cooperative association is required to maintain under Section 114.
(28) “Sign” means, with present intent to authenticate or adopt a record:
(A) to execute or adopt a tangible symbol; or
(B) to attach to or logically associate with the record an electronic symbol, sound, or process.
(29) “State” means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
(30) “Transfer” includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, gift, and transfer by operation of law.
(31) “Voting group” means any combination of one or more voting members in one or more districts or classes that under the organic rules or this [act] are entitled to vote and can be counted together collectively on a matter at a members meeting.
(32) “Voting member” means a member that, under the organic law or organic rules, has a right to vote on matters subject to vote by members under the organic law or organic rules.
(33) “Voting power” means the total current power of members to vote on a particular matter for which a vote may or is to be taken.
Comment
This Section contains definitions for terms used throughout the Act. Section 1601 contains definitions specific to provisions of [Article] 16 limited to conversions and mergers.
Paragraph (1) [Articles of Organization] – This Act purposely uses the term “articles of organization” instead of “certificate of organization” or “articles of incorporation.” The articles of organization may state substantive rules that together with the bylaws, govern the association and its members. For example, throughout this Act there are references to “unless the organic rules otherwise provide.” Persons forming an association under this Act may find it advisable in some circumstances to place provisions varying the default rules under the Act in articles of organization. Therefore, the articles of organization filed under this Act may be more detailed in practice than a certificate of organization of a limited liability company filed under RULLCA (2006). Items required to be placed in the articles are listed in Section 302. In addition, other sections of this Act require items to be included in the articles of organization to be effective. See Section 113(b). Because an association under this Act is not an incorporated entity, it would be inappropriate to call the “articles” articles of incorporation. Articles of organization are included in the definition of “organic rules.” See also Prefatory Note (“Organic Rules”).
Paragraph (3) [Bylaws] – This definition must be read in conjunction with Section 304 of the Act and the various provisions permitting default rules to be varied by the organic rules. The definition is very broad when examined in light of Section 304(b) that permits the bylaws to contain any provision for managing and regulating the affairs of the association, unless prohibited by the Act or the articles of organization.
Section 304(a) states bylaws must be in a record.
Courts examining the relationship between a traditional cooperative and its members have found the relationship to be contractual with bylaws of the cooperative, and in some cases, other records being part of the contract. See Comment to Section 601. “Bylaws” has been used in this Act instead of operating agreement as used by limited liability companies or partnership agreement as used by partnerships to reflect the custom and practice in traditional cooperatives. Under this Act, bylaws may have a look and feel similar to corporate bylaws or may have a look and feel similar to a limited liability company operating agreement or a partnership agreement.
Paragraph (5) [Contribution] – This definition helps to distinguish capital contributions from other benefits which a member or other person provides to a limited cooperative association in a different capacity under Section 115. For example, if an individual provides services to the association in exchange for a membership in the association, the value of the services are a capital contribution. If the association hires the individual as an employee, the value of the services rendered to the association as an employee are not contributions.
The term is not used as the defined term in Section 1008(c). The term “contribution” plays an important role in the sections of this Act relating to financial rights and governance rights.
Paragraph (6) [Cooperative] – In this Act the term “cooperative” includes limited cooperative associations and all other types of cooperatives organized under any other cooperative law whether or not formed in this state. It includes entities formed under organic laws commonly considered cooperative laws. It does not include entities formed under other organic laws but operating on a cooperative basis as permitted, for example, under Subchapter T of the Internal Revenue Code.
Paragraph (7) [Designated office] – A limited cooperative association organized under this Act or a foreign cooperative must designate an office in this state under Section 117(a)(1). The designated office is the place where the association’s agent for service of process is located and where service of process may be made. “Designated office” has replaced the historic corporate term “registered office.”
Paragraph (9) [Distribution] – The term includes a transfer of money or other property by a limited cooperative association to a member or transferee in the form of a payment or other transfer of profits previously allocated to the member, dividends, cash portions of patronage dividends or refunds, repurchase redemption of retained allocated amounts not previously distributed, or any other form of payment or transfer with respect to the member’s or transferee’s financial rights. A distribution is different from an allocation. An allocation is a bookkeeping and accounting concept under this Act. “Allocation” may have important implications under income tax law. The term “distribution” does not typically include money or other property paid to a member for goods or services.
The term does not include amounts payable to a member by a limited cooperative association under commercial, contractual or other arrangements that are not within the association/member relationship even if these arrangements are made available only to members.
EXAMPLE: Wages paid to a worker in a worker owned limited cooperative association are not distributions.
EXAMPLE: A farmer sells oranges to an association for a fixed price. Payment of the price by the association is not a distribution.
EXAMPLE: A farmer sells oranges to an association for a price determined by the association’s proceeds from resale, less its expenses. Payment of the price by the association is not a distribution.
Paragraph (11) [Financial rights] – “Financial rights” include rights to participate in the financial results of the operations of a limited cooperative association. For example, the term includes the right to be allocated profits and losses, to receive a proportionate share of distributions made to members, to receive dividends if dividends are a method used to distribute funds, to receive patronage allocations and dividends, to receive rebates, to have retained patronage allocations and per unit retains credited to the member’s capital account, to receive an allocated share of losses, to receive payments for redemptions of retained patronage allocations or per unit retains, to receive a return of capital however described, to receive distributions upon dissolution and winding-up, as well as to receive any other allocations or distributions from the association that are a result of membership in the association.
Financial rights are separate and distinct from governance rights and other rights of a member, if any, to contract or otherwise transact business with a limited cooperative association. For example, in an agricultural limited cooperative association, membership may be required for an agricultural producer to be entitled to deliver his or her production to the association for processing. In an association where workers are the patron members, membership in the association may be required to be an employee of the association. Neither of these constitutes financial or governance rights but would be an integral part of the membership in the association.
Paragraph (12) [Foreign Cooperative] – A “foreign cooperative” is limited to entities formed under statutes similar to this Act. See, e.g., Minnesota, Minn. Stat. Annot. §§ 305B.001 et. seq. (2006); Wyoming, Wyo. Stat. Annot. §§ 17-10-201 et. seq. (2005).
A “foreign cooperative” includes an entity organized outside the United States if it is organized under a statute similar to this Act.
Paragraph (13) [Governance Rights] – “Governance rights” include, but are not limited to, the right of a member to vote on matters affecting a limited cooperative association to the extent the Act or the organic rules provide voting power to the member, the right to receive notices of members meetings and the right to participate in members meetings. “Governance rights” also include the right to petition the association or the board of directors and may be a required qualification, director or member of a committee of an association to the extent.
Paragraph (14) [Investor Member] – An “investor member” is a member who contributes capital to a limited cooperative association, may be provided governance rights, and is not required to conduct business with the association. The existence of investor members and patron members in a single entity is unusual, but not entirely novel, in traditional cooperatives whose organic law generally allows for preferred stockholders without governance rights. Allowing investor members to possess governance rights is an identifying feature of this Act.
Paragraph (16) [Member] – “Member” means both patron members and investor members. The definition recognizes a person can hold interests in a limited cooperative association either as a patron member or as an investor member. If a person holds both types of membership interests, each interest is governed by the provisions of the Act and the organic rules related to the particular type of membership. See Section 116.
A person may transact business with an association without being a member if the association’s organic rules or operating methods permit it. The organic rules may provide that the non-member may have financial rights in the association (e.g., rights to allocations of net profits) but not governance rights.
Paragraph (18) [Members Meeting] – This Act does not address record dates for voting at a members meeting (or for other matters, except to the extent an accounting date is used for determining allocations of profits and losses). The Act does not prohibit the organic rules, nor if the organic rules are silent, does it prohibit the board of directors from establishing a record date for determining voting members for purposes of a vote under the boards general authority.
Paragraph (20) [Organic Rules] – The definition of “organic rules” is confined to articles of organization and bylaws of a limited cooperative association. An association may have other contractual relationships providing benefits and obligations between the association and a member through a membership agreement, marketing contract, or other contractual relationship. Contracts of this type may have a material effect on the relationship of a member to the association but they are not included in the statutory term for purposes of this Act unless unique factual context otherwise requires. The board of directors may adopt policies and procedures that are not within the definition of organic rules. See Comment to Section 601.
Paragraph (22) [Patron Member] – A “patron member” is a member who is entitled or required to conduct patronage with a limited cooperative association, has governance rights, and may be required to pay a fee or make an investment to become a patron member. The fees or investments do not transform the patron member to an investor member or imply a dual capacity; that status is governed by the organic rules under this Act. Generally, an association must have two patron members to begin business. See Section 501.
Paragraph (23) [Patronage] – “Patronage” is a term of art adopted for this Act from traditional cooperative principles and concepts. “Patronage” may be conducted with a limited cooperative association by non-members as well as members if permitted by the association’s organic rules.
Paragraph (25) [Principal Office] – A limited cooperative association’s principal office may be the same or different than it’s designated office.
Paragraph (27) [Required Information] – Information required to be maintained under Section 114 is significant in relation to the ability for members to access information from a limited cooperative association under Section 505.
Paragraph (30) [Transfer] – The reference to “transfer by operation of law” is significant in connection with Section 603 (Transferability of Member Interest). That Section severely restricts a transferee’s rights (absent consent of the members or provisions in the organic rules), and this definition makes those restrictions applicable, for example, to transfers ordered by a family court as part of a divorce proceeding and transfers resulting from the death of a member. The restrictions also apply to transfers in the context of a member’s bankruptcy, except to the extent that bankruptcy law supersedes the Act. Section 603(a), however, references certain limitations on transfer restrictions under the Uniform Commercial Code.
This Act does not define “transferee” but uses it in its ordinary context of a person who receives a transfer. Where used, “transferee” is used in place of “assignee.”
Paragraph (31) [Voting Group] – Sections 511 and 517 of the Act permit patron members to be divided into geographic districts and for patron members and investor members to be divided into classes. If the members in a district or class have voting rights under the organic rules, the members in a district or class, or a combination of them, are a voting group whose voting procedures may be governed by the organic rules pursuant to Section 517. Similarly situated members are required to vote as a voting group where their rights are potentially affected adversely by the vote. E.g., Sections 404 and 1608(d).
Paragraph (32) [Voting Member] – The Act requires that every patron member be entitled to vote. The organic rules could create classes of investor members that do not have voting rights.
Paragraph (33) [Voting Power] – “Voting Power” encompasses all votes that may be cast by members as provided by this Act or the organic rules on a particular matter.
SECTION 103. LIMITED COOPERATIVE ASSOCIATION SUBJECT TO AMENDMENT OR REPEAL OF [ACT]. A limited cooperative association governed by this [act] is subject to any amendment or repeal of this [act].
Comment
Source: RUPA § 107 (1997) which was adapted from RMBCA § 1.02 and RULPA (1976/1985).
Even though this Act governs an unincorporated entity, the limited cooperative association is of recent origin and has not yet benefitted from judicial construction.
As explained in the Official Comment to RMBCA Section 1.02, the genesis of these provisions is Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat) 518 (1819), which held that the United States Constitution prohibits the application of newly enacted statutes to existing corporations, while suggesting the efficacy of a reservation of power provision. The purpose of the Section is to avoid any possible argument that a legal entity or its members have a vested right in any specific statutory provision and to ensure that the adopting jurisdiction may in the future modify its enabling statute as it deems appropriate and require existing entities to comply with the statutes as modified.
This Section has significance in the context of cooperative organizations where historically the organic rules have been construed to be part of contractual relationships among the cooperative organization and its members. Therefore this Section is included in this Act to avoid confusion.
An amendment or repeal of this Act would not affect a cause of action that had accrued prior to the amendment or repeal. This does not mean that a member of an association has a vested interest in the Act or the organic rules as they existed prior to the amendment or repeal. A cause of action could not be affected by an amendment or repeal if all the elements of the cause of action existed prior to the amendment or repeal. The amendment or repeal of this Act will not itself create a cause of action.
SECTION 104. NATURE OF LIMITED COOPERATIVE ASSOCIATION.
(a) A limited cooperative association organized under this [act] is an autonomous, unincorporated association of persons united to meet their mutual interests through a jointly owned enterprise primarily controlled by those persons, which permits combining:
(1) ownership, financing, and receipt of benefits by the members for whose interests the association is formed; and
(2) separate investments in the association by members who may receive returns on their investments and a share of control.
(b) The fact that a limited cooperative association does not have one or more of the characteristics described in subsection (a) does not alone prevent the association from being formed under and governed by this [act] nor does it alone provide a basis for an action against the association.
Comment
Section 104 is descriptive of an entity that is organized in conformity with this Act and, as such, there are no consequences if the limited cooperative association fails to conform to the description in this Section. Cooperative values and principles are distributed throughout the Act, though some are varied as a result of permitting investor members with limited governance rights.
This Section introduces cooperative values and principles in this Act. The values and principles reflected elsewhere in the Act are in some cases mandatory and in others matters of default unless the association “opts-out”.
Understanding the Act at a fundamental level is aided by an overview of cooperative values and principles. They have been stated in different ways, see Prefatory Note, and different kinds of cooperatives reflect them in various combinations and diverse ways.
As a matter of general consensus cooperative values and principles include voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; cooperation among cooperatives; and, concern for community.
Section 104 addresses the values of voluntary membership, member economic participation, and autonomy and independence. Voluntary membership is reflected by the term “persons united” in this Section and relationships that are “consensual” in Section 113(a). Open membership has been compromised under this Act and similar existing law in order to allow (but not require) the formation of “closed” cooperatives. Closed cooperative structure is necessary where an association desires for patron members to share fully in any increased value of their equity and to provide member liquidity.
A limited cooperative association is a self-help organization controlled by its members and is a separate entity from its members under Section 105. This principle of autonomy must, however, be placed within the practical context of long-term debt, equity, and contractual relationships both in this Act and in traditional cooperatives.
Section 1004 (“Allocations of Profits and Losses”) expressly provides for the values of member economic participation; education, training and information; and cooperation among cooperatives. One of the key balancing points of the Act concerns “democratic member control.” Sections 405, 511 through 514, 804, and 816(a) (as well as the other voting provisions on fundamental changes) all relate to this balance.
“Concern for community” is directly addressed in Section 820 which varies the law generally applicable to, for example, corporate directors, to allow the directors of a limited cooperative to consider a number of community constituencies in making decisions.
Another frequently articulated cooperative principle is “operation at cost.” This principle is frequently recognized through allocations of profits and losses among members in a traditional cooperative in a manner similar to allocations in partnerships. Section 1004 reflects this approach. “Operation at cost” can also be addressed through pricing of goods and services received from or provided to members in ways that financially benefit the members. This, in turn, will affect profits and losses available for allocation to members. This approach is taken in this Act.
In sum, this Act expressly considers important traditional cooperative values and provides reasoned departures from those values only where necessary for purposes of this Act. Its intention is to encourage the use of entities recognizing cooperative principles by providing greater options for obtaining equity financing, yet is flexible enough to form a limited cooperative association which operates like a traditional cooperative.
SECTION 105. PURPOSE AND DURATION OF LIMITED COOPERATIVE ASSOCIATION.
(a) A limited cooperative association is an entity distinct from its members.
(b) A limited cooperative association may be organized for any lawful purpose, whether or not for profit [except designated prohibited purposes].
(c) Unless the articles of organization state a term for a limited cooperative association’s existence, the association has perpetual duration.
Legislative Note: This Act does not preclude a limited cooperative association organized under this Act from pursuing any lawful purpose. If an adopting jurisdiction desires to prevent an association under this Act from being used for a particular purpose, this can be accomplished as follows. First, an exception for the particular purpose can be specified in subsection (b). Second, if there is another statute in the adopting jurisdiction that governs the particular purpose and that statute by its own terms does not already apply, the other statute could be amended to ensure that no entity organized under this Act may pursue the purpose identified in the other statute or that any entity organized under this Act will comply with the other statute. Third, Section 109 may identify a particular purpose or statute with which this Act should be coordinated; as is done in optional Section 109(c).
Comment
Subsection (a) – This Section, together with Section 104, identifies the “separate entity” concept of a limited cooperative association. See Comment to Section 104.
Subsection (b) – The phrase “any lawful purpose, whether or not for profit” means a limited cooperative association need not be formed or operated with a profit motive. Existing law in some states provides traditional cooperatives may be formed under not-for-profit cooperative statutes which reflect the cooperative value of operating at cost.
Like RULLCA (2006) Section 104(b) this Act does not use the term “business” in connection with the purpose of the entity. The expansive approach to purpose in this Act also comports with ULLCA (1996) and with ULPA (2001). See ULLCA (1996) § 112(a) (captioned with reference to “Nature of Business” and permitting “any lawful purpose, subject to any law of this State governing or regulating business”) and § 101(3) (defining “Business” as including “every trade, occupation, profession, and other lawful purpose, whether or not carried on for profit”); ULPA (2001) § 104(b) (permitting a limited partnership to be organized for any “lawful” purpose). Compare UPA (1997) § 6 (defining a general partnership as organized for profit), RUPA § 101(6) (same), and RULPA (1976/1985) § 106 (delineating the “Nature of [a limited partnership’s] Business” by linking back to “any business that a partnership without limited partners may carry on”).
The subsection does not prevent a limited cooperative association from being organized to carry on charitable activities, but this Act does not include any protective provisions pertaining to charitable purposes. Those protections must be (and typically are) found in other law, although sometimes that “other law” appears within a state’s non-profit corporation statute. See, e.g., Minn. Stat. Annot. § 317A.811 (2006) (providing restrictions on charitable organizations that seek to “dissolve, merge, or consolidate, or to transfer all or substantially all of their assets” but imposing those restrictions only on “corporations” which are elsewhere defined as corporations incorporated under the non-profit corporation act). Of course, tax law significantly effects charities and contains strict parameters beyond the scope of this Act.
Section 109 emphasizes that protective and other regulatory provisions outside this Act remain applicable to limited cooperative associations. Those laws and regulations are not supplanted by this Act or the organic rules of an association organized under this Act. See Section 109.
Subsection (c) – In this context, the word “perpetual” states the default rule consistent with statutes governing other entities. As in many current limited liability company statutes, this Act provides several methods that could be used to override perpetuity: a term specified in the articles of organization and occurrences specified in Sections 1202, 1203, 1205, and 1211. In this Act, “perpetuity” means that the Act does not require a definite term and creates no nexus between the dissociation of a member and the dissolution of the association beyond, in most cases, the requirement that a limited cooperative association have two members. See Section 501. (The dissociation of an association’s last remaining member does threaten dissolution under the compulsory provisions of Section 1202(3).)
SECTION 106. POWERS. A limited cooperative association may sue and be sued in its own name and do all things necessary or convenient to carry on its activities. An association may maintain an action against a member for harm caused to the association by the member’s violation of a duty to the association or of the organic law or organic rules.
Comment
Following RULLCA (2006) Section 105, and ULPA (2001) Section 105, this Act omits as unnecessary any detailed list of specific powers. Compare ULLCA § 12 (containing a detailed list).
The capacity to sue and be sued is mentioned specifically. It cannot be varied by the organic rules. The Section affirms the right of a limited cooperative association to maintain an action against a member in the circumstances described.
The omission of any reference to non-members in connection with a limited cooperative association maintaining an action against a member does not imply that an association may not sue non-members or restrict the association from engaging in business or other transactions with non-members. It is intended to broaden the rights of the association rather than narrow them.
SECTION 107. GOVERNING LAW. The law of this state governs:
(1) the internal affairs of a limited cooperative association; and
(2) the liability of a member as member and a director as director for the debts, obligations, or other liabilities of a limited cooperative association.
Comment
Source: RULLCA (2006) § 106.
This Section may not be varied by the organic rules. This Act is part of the law of this state. See generally, Section 113(a) (addressing the flexibility of this Act).
Paragraph (1) – The laws of this state, including this Act, govern the interpretation and enforcement of the organic rules and matters relating to relations among members as members and relations between the limited cooperative association and the members as members regardless of where the members are located. Compare Restatement (Second) of Conflict of Laws §302, Comment A (defining “internal affairs” with reference to a corporation as “the relations inter se of the corporation, its shareholders, directors, officers or agents”). Like any other legal concept, “internal affairs” in paragraph (1) may be indeterminate in some circumstances.
In some types of cooperatives marketing contracts are an integral part of an association’s business. Article 7 (“Marketing Contracts”) of this Act, like most traditional marketing cooperative statutes, allows all or part of a marketing contract to be included in the organic rules. The placement of the terms of the marketing contract in the organic rules or in a separate agreement is not necessarily determinative of whether those terms are part of the internal affairs of the association. See Comments to Section 601 and Section 701.
Paragraph (2) – This paragraph relates to Section 504 (the liability shield for members) and Section 802 (the liability shield of directors) but does not necessarily encompass a claim for which a member or director may be liable to a third party for (i) having purported to bind a limited cooperative association to the third party; or (ii) having committed a tort against the third party while acting on the association’s behalf or in the course of its business. That liability is not by status (i.e., not as a member) but rather results from behavior or conduct, which is governed by agency or other law.
SECTION 108. SUPPLEMENTAL PRINCIPLES OF LAW. Unless displaced by particular provisions of this [act], the principles of law and equity supplement this [act].
Comment
Source: RULLCA (2006) § 107.
SECTION 109. REQUIREMENTS OF OTHER LAWS.
(a) This [act] does not alter or amend any law that governs the licensing and regulation of an individual or entity in carrying on a specific business or profession even if that law permits the business or profession to be conducted by a limited cooperative association, a foreign cooperative, or its members.
(b) A limited cooperative association may not conduct an activity that, under law of this state other than this [act], may be conducted only by an entity that meets specific requirements for the internal affairs of that entity unless the organic rules of the association conform to those requirements.
[(c) If an activity of a limited cooperative association is within the scope of [reference to the Uniform Common Interest Ownership Act or to the Model Real Estate Cooperative Act], the requirements of [reference to the Uniform Common Interest Ownership Act or to the Model Real Estate Cooperative Act] apply, even if there is a conflicting provision in this [act].]
Legislative Note: If an adopting jurisdiction has enacted the Uniform Common Interest Ownership Act or the Model Real Estate Cooperative Act, the adopting jurisdiction should add subsection (c).
The phrase “limited cooperative associations” should be added by amendment to other statutes outside this Act that contain lists of entities and other law should be conformed as appropriate.
Comment
Source: Greatly expanded but conceptually similar to ULLCA (1996) § 112(a).
Section 109 may appear to be surplusage because it restates the application of known legal interpretive principles outside this Act. Nonetheless it attempts to make clear that this Act is limited to its terms; that it does not supersede other law, either directly or by implication, including regulatory law; and that a limited cooperative association organized under this Act is not exempt from separately qualifying as a “cooperative” under other law. Thus, it serves a similar purpose for domestic associations as does Section 1401(c) for foreign cooperatives which provides that a “certificate of authority does not authorize the cooperative to exercise any power not given a limited cooperative association in this state”. See RULLCA (2006) § 801(c). RUPA (1997) § 1101(c). To an extent, this is related to the policy that the use of the term “limited” is included in the name of the association to distinguish it from cooperatives formed under other law.
The following examples illustrate the application of this Section.
EXAMPLE: Ten construction workers desire to form a worker’s cooperative as a limited cooperative association. Organizing as a limited cooperative association will not excuse the limited cooperative from any contractor bonding requirements in other law. Further, the limited cooperative association will be required to comply with applicable wage and hour law.
EXAMPLE: Same scenario as in previous example except the jurisdiction in which the workers desire to form a limited cooperative association has a specific workers’ cooperative statute that expressly states all workers cooperatives must be organized under the workers cooperative statute. Workers cannot lawfully organize a workers cooperative under this Act in that jurisdiction.
EXAMPLE: A group of consumers desires to form a limited cooperative association to conduct business as a natural foods cooperative. The association must comply with the health regulations applicable to grocery businesses as well as laws relating to distribution of natural foods.
EXAMPLE: A real estate developer desires to organize as a limited cooperative association to develop property as a “housing cooperative.” The state has a housing cooperative law that applies to all “residential common interest communities.” In turn the statute defines “residential common interest community.” If the planned project organized as a limited cooperative association meets the definition of the “residential common interest community,” all the provisions of that law apply to the developer, the project, and the limited cooperative association. If the law contains disclosure requirements the association must make the required disclosures.
The number and types of regulatory laws are too numerous to list in the text of this Act and any exclusive list of laws or activities raises the risk of inadvertent omission. For example, the application for, the qualification of, and the licensing and examination of the following business professions would appear in a comprehensive statutory list: legal, medical, dental, optometry, engineers, architects, surveyors, public accountancy, opticians, psychologists, veterinary medicine, speech pathologists, audiologists, financial institutions, contractors, fumigators, pest control operators, real estate brokers and sales persons, electricians, plumbers, real estate appraisers, photographers, pharmacists, physical therapy, podiatry, barbering, nursing, social workers, embalmers and funeral directors, motor vehicle dealers, boxing contests, cable television, and degree granting institutions.
The list would include other general trade regulation and trade practice law such as trademark and trade names, trade secrets, franchise investment, business opportunity, consumer law, public accommodations, and many others.
Subsection (a) – This subsection is a general statement that the requirements of licensing and regulatory law apply to the conduct of activity by or through a limited cooperative association organized under it without attempting to provide a comprehensive list of specific professions, trades, or businesses.
EXAMPLE: Two real estate brokers desire to form a limited cooperative association for the sale of residential real estate on a commission basis. Nothing in this Act would preclude them from organizing a limited cooperative association. Nonetheless, the form of the organization in which they conduct that activity is still subject to the law regulating the sale of residential real estate on a commission basis. Therefore if those laws do not permit the limited cooperative association as a permissible form in which to conduct business, the real estate brokers may not organize as an association to conduct their business. Moreover, organizing as a limited cooperative association, even if allowed for this purpose, will not exempt it from the application of other applicable regulation or law such as disclosure requirements or standards for the maintenance of trust funds or escrow accounts.
Subsection (b) – Some other laws contain requirements for the internal affairs of any organization used to conduct a specific activity or to perform a specific function. This subsection is a general statement that those requirements apply to a limited cooperative association conducting those activities or performing those functions.
EXAMPLE: Same facts as in the previous example. The state housing cooperative law is silent concerning the type of entity permitted to be a “homeowners association.” The statute does require that all members of the homeowners association must be able to vote in particular matters by a proxy and that only homeowners may be members of the association. Under these facts the homeowners association could be formed as a limited cooperative association but it would be necessary that the organic rules provide for voting by a proxy and the membership restrictions required by the housing cooperative law.
Subsection (c) – This subsection recognizes that the state’s housing cooperative law contains a comprehensive and integrated regulatory scheme that extends to a substantial number of aspects of a housing cooperative. As a result, it might be argued that limited cooperative associations should not be able to be formed for that purpose. Exclusions described in terms of broad activities or purposes, however, are likely to be difficult to interpret and apply and run the risk of being either over or under exclusive. Expressly referencing a specific act mitigates these difficulties while clearly emphasizing the desired regulatory result which would probably otherwise apply because of subsections (a) and (b). This is consistent with the policy of permitting limited cooperative associations to be available for a broad range of endeavors.
[SECTION 110. RELATION TO RESTRAINT OF TRADE AND ANTITRUST LAWS. To the extent a limited cooperative association or activities conducted by the association in this state meet the material requirements for other cooperatives entitled to an exemption from or immunity under any provision of [the restraint of trade or antitrust laws of this state], the association and its activities are entitled to the exemption or immunity. This section does not create any new exemption or immunity for an association or affect any exemption or immunity provided to a cooperative organized under any other [law].]
Legislative Note: Some states’ existing general cooperative or marketing cooperative statutes contain an exemption from state restraint of trade and antitrust laws. In the context of a marketing cooperative such an exemption is historical and may be helpful because cooperatives are united groups of producers that could be interpreted to be fixing prices.
This Section is bracketed because some states as a matter of policy do not include an exception in their other cooperative statutes and, presumably, would not include them in this Act. Moreover because this Act, unlike other cooperative statutes, allows for investor members, it can be distinguished from cooperatives organized under other laws. It is appropriate, therefore, that adopting jurisdictions consider if their existing policy should be applied to limited cooperative associations.
Comment
Many state cooperative statutes, most particularly marketing cooperative statutes, contain special exemptions from state antitrust and restraint of trade laws. There is variety in the formulation of such exemptions even in marketing cooperative statutes and the variation reflects policy distinctions between states. This Section reflects the settled policy of this state by reference to existing law.
[(a) Use of the term “cooperative” or its abbreviation under this [act] is not a violation of the provisions restricting the use of the term under [insert cross-reference to law of this state].]
[(a)][(b)] The name of a limited cooperative association must contain the words “limited cooperative association” or “limited cooperative” or the abbreviation “L.C.A.” or “LCA”. “Limited” may be abbreviated as “Ltd.”. “Cooperative” may be abbreviated as “Co-op” or “Coop”. “Association” may be abbreviated as “Assoc.” or “Assn.”. [[A limited cooperative association or a member may enforce the restrictions on the use of the term “cooperative” under this [act].] [or] [A limited cooperative association or a member may enforce the restrictions on the use of the term “cooperative” [insert cross-reference to other laws of this state].]]
[(b)][(c)] Except as otherwise provided in subsection (d), a limited cooperative association may use only a name that is available. A name is available if it is distinguishable in the records of the [Secretary of State] from:
(1) the name of any entity organized or authorized to transact business in this state;
(2) a name reserved under Section 112; and
(3) an alternative name approved for a foreign cooperative authorized to transact business in this state.
[(c)][(d)] A limited cooperative association may apply to the [Secretary of State] for authorization to use a name that is not available. The [Secretary of State] shall authorize use of the name if:
(1) the person with ownership rights to use the name consents in a record to the use and applies in a form satisfactory to the [Secretary of State] to change the name used or reserved to a name that is distinguishable upon the records of the [Secretary of State] from the name applied for; or
(2) the applicant delivers to the [Secretary of State] a certified copy of the final judgment of a court establishing the applicant’s right to use the name in this state.
Legislative Note: The bracketed language in Sections 111(a) and 111(b) is optional. If the adopting jurisdiction has existing limitations in other law on the use of the term “cooperative,” this Section should be adopted to further the policy of the jurisdiction and to avoid violation of the other law by limited cooperative associations. Section 111(b) requires “cooperative” or an abbreviation thereof in a limited cooperative association’s name.
Many cooperative statutes include name protection provisions unique among organizational laws. If the adopting jurisdiction has a prohibition of the use of the word “cooperative” or a permitted abbreviation by any entity other than a cooperative organized under a statute providing for the formation of cooperative entities, this Act will not violate that statute if this Section is adopted with a reference to that statute in subsection (a). Moreover, if this Section is adopted with a reference to the other statute in subsection (b), restrictions on the use of the word “cooperative” or a permitted abbreviation under that statute may be enforced by a limited cooperative association or a member of an association organized under this Act. Alternatively, the adopting jurisdiction could amend the other statute to permit an association organized under this Act to use the word “cooperative” or a permitted abbreviation without violating that statute and to enforce the restrictions on the use of the word or abbreviations under that statute.
If the adopting jurisdiction does not have a statute prohibiting the use of the word “cooperative” or a permitted abbreviation by any entity that is not organized as a cooperative, the adopting jurisdiction may wish to consider providing a prohibition and remedies in this Section.
Comment
This Section does not supercede or preempt fictitious or assumed name statutes. A foreign cooperative must comply with those statutes in the adopting jurisdiction. See Sections 112 and 1405.
Subsection (b) – The name of a limited cooperative association must contain the prescribed words or abbreviations in order to differentiate an association organized under this Act from traditional cooperatives or other entities organized under other statutes.
Traditional cooperative statutes recognize the unique nature of cooperative organizations and frequently protect cooperatives from the appropriation of the term “cooperative” by entities other than cooperatives. They typically provide authority for both the cooperative and a member to enforce the prohibition against use of the term “cooperative” by an entity that is not a cooperative. This subsection is designed to extend that protection to a limited cooperative association as well as to coordinate the protection of the term “cooperative” with those other statutes.
A person doing business with a cooperative may impute cooperative values and principles to an organization using that term in its name. Restricting the use of “cooperative” may help avoid misleading the public.
SECTION 112. RESERVATION OF NAME.
(a) A person may reserve the exclusive use of the name of a limited cooperative association, including a fictitious name for a foreign cooperative whose name is not available under Section 111, by delivering an application to the [Secretary of State] for filing. The application must set forth the name and address of the applicant and the name proposed to be reserved. If the [Secretary of State] finds that the name applied for is available under Section 111, the [Secretary of State] shall reserve the name for the applicant’s exclusive use for a nonrenewable period of 120 days.
(b) A person that has reserved a name for a limited cooperative association may transfer the reservation to another person by delivering to the [Secretary of State] a signed notice of the transfer which states the name, street address, and, if different, the mailing address of the transferee. If the person is an organizer of the association and the name of the association is the same as the reserved name, the delivery of articles of organization for filing [by the Secretary of State] is a transfer by the person to the association.
Comment
The Act does not provide for renewal of a reserved name. It does not prevent a person from subsequently filing reservations for the same name for successive 120 day periods.
SECTION 113. EFFECT OF ORGANIC RULES.
(a) The relations between a limited cooperative association and its members are consensual. Unless required, limited, or prohibited by this [act], the organic rules may provide for any matter concerning the relations among the members of the association and between the members and the association, the activities of the association, and the conduct of its activities.
(b) The matters referred to in paragraphs (1) through [(9)] [(11)] may be varied only in the articles of organization. The articles may:
(1) state a term of existence for the association under Section 105(c);
(2) limit or eliminate the acceptance of new or additional members by the initial board of directors under Section 303(b);
(3) vary the limitations on the obligations and liability of members for association obligations under Section 504;
(4) require a notice of an annual members meeting to state a purpose of the meeting under Section 508(b);
(5) vary the board of directors meeting quorum under Section 815(a);
(6) vary the matters the board of directors may consider in making a decision under Section 820;
(7) specify causes of dissolution under Section 1202(1);
(8) delegate amendment of the bylaws to the board of directors pursuant to Section 405(f);
(9) provide for member approval of asset dispositions under Section 1501; [and]
[[(10)] subject to Section 820, provide for the elimination or limitation of liability of a director to the association or its members for money damages pursuant to Section 818;
[(11)] provide for permitting or making obligatory indemnification under Section 901(a); and]
[(10)] [(12)] provide for any matters that may be contained in the organic rules, including those under subsection (c).
(c) The matters referred to in paragraphs (1) through (25) may be varied only in the organic rules. The organic rules may:
(1) require more information to be maintained under Section 114 or provided to members under Section 505(k);
(2) provide restrictions on transactions between a member and an association under Section 115;
(3) provide for the percentage and manner of voting on amendments to the organic rules by district, class, or voting group under Section 404(a);
(4) provide for the percentage vote required to amend the bylaws concerning the admission of new members under Section 405(e)(5);
(5) provide for terms and conditions to become a member under Section 502;
(6) restrict the manner of conducting members meetings under Sections 506(c) and 507(e);
(7) designate the presiding officer of members meetings under Sections 506(e) and 507(g);
(8) require a statement of purposes in the annual meeting notice under Section 508(b);
(9) increase quorum requirements for members meetings under Section 510 and board of directors meetings under Section 815;
(10) allocate voting power among members, including patron members and investor members, and provide for the manner of member voting and action as permitted by Sections 511 through 517;
(11) authorize investor members and expand or restrict the transferability of members’ interests to the extent provided in Sections 602 through 604;
(12) provide for enforcement of a marketing contract under Section 704(a);
(13) provide for qualification, election, terms, removal, filling vacancies, and member approval for compensation of directors in accordance with Sections 803 through 805, 807, 809, and 810;
(14) restrict the manner of conducting board meetings and taking action without a meeting under Sections 811 and 812;
(15) provide for frequency, location, notice and waivers of notice for board meetings under Sections 813 and 814;
(16) increase the percentage of votes necessary for board action under Section 816(b);
(17) provide for the creation of committees of the board of directors and matters related to the committees in accordance with Section 817;
(18) provide for officers and their appointment, designation, and authority under Section 822;
(19) provide for forms and values of contributions under Section 1002;
(20) provide for remedies for failure to make a contribution under Section 1003(b);
(21) provide for the allocation of profits and losses of the association, distributions, and the redemption or repurchase of distributed property other than money in accordance with Sections 1004 through 1007;
(22) specify when a member’s dissociation is wrongful and the liability incurred by the dissociating member for damage to the association under Section 1101(b) and (c);
(23) provide the personal representative, or other legal representative of, a deceased member or a member adjudged incompetent with additional rights under Section 1103;
(24) increase the percentage of votes required for board of director approval of:
(A) a resolution to dissolve under Section 1205(a)(1);
(B) a proposed amendment to the organic rules under Section 402(a)(1);
(C) a plan of conversion under Section 1603(a);
(D) a plan of merger under Section 1607(a); and
(E) a proposed disposition of assets under Section 1503(1); and
(25) vary the percentage of votes required for members approval of:
(A) a resolution to dissolve under Section 1205;
(B) an amendment to the organic rules under Section 405;
(C) a plan of conversion under Section 1603;
(D) a plan of merger under Section 1608; and
(E) a disposition of assets under Section 1504.
(d) The organic rules must address members’ contributions pursuant to Section 1001.
Legislative Note: Bracketed subsections (a)(10) and (11) are illustrative. They apply only if the adopting jurisdiction selects both the state general business corporation act in Sections 818 and 901 and the act so selected provides for modification of those standards in the articles of incorporation. Thus, these provisions need to be conformed to the flexibility of choice provided by those sections.
Comment
The Act contains default rules which may be varied by the organic rules. This Section identifies specific provisions in the Act that may be altered, eliminated, revised or otherwise modified by the organic rules. Subsection (b) identifies those provisions that may be modified only in the articles of organization. Subsection (c) identifies those provisions that may be modified in either the articles or the bylaws (the “organic rules”). The provisions identified in subsections (b) and (c) are substantive only to the extent they provide guidance on the interpretation of phrases like “unless otherwise provided in the organic rules.” They serve the additional function of collecting references to provisions where variance from statutory default rules must be in the organic rules. Therefore, Section 113 does not perform the same function as Section 110 of RULLCA (2006). But see Prefatory Note (“Structure and Interpretation of ULCAA”).
Subsection (a) – This Act generally follows the approach of other unincorporated entity statutes. If a particular matter is not prohibited or specifically mandated by the Act, a limited cooperative association may deal with the matter as part of its internal governance structure. If the Act does not address a subject with a specific requirement, permission, limitation or prohibition, a limited cooperative association is not limited in its approach or activities with respect to the subject.
Subsections (b) and (c) – In this Act, where the phrase “unless the organic rules otherwise provide” is used, that phrase signals freedom for the organic rules to vary the provision in which the phrase appears unless the provision itself contains a constraint on that freedom. In effect these provisions contain default rules. See, e.g., Sections 504, 602 and 1005.
Other techniques are used to signal that sections are not mandatory. In some sections of the Act, there are specific prohibitions on how the Act may be varied or on how negation of a default result, such as a default delegation of authority to the board of directors, must be made. See, e.g., Sections 812(a) and 1004(d). Other provisions in the Act use the phrase “may provide” to emphasize the flexibility of the Act and to provide further guidance with respect to a particular subject. The phrase does not necessarily grant additional authority beyond what is already available. By way of illustration, where “may provide” is used, the organic rules may state specific rules, instructions or results or may state a procedure by which the subject matter will be decided, such as delegating authority to the board of directors. See, e.g., Sections 515(c) and (d) and 1004(a). For a more comprehensive discussion see the Prefatory Note (“Structure and Interpretation of ULCAA”; “Organic Rules”).
Subsection (d) – This subsection is included to make it clear that contributions must be addressed in the organic rules. The subject matter of this subsection may represent a trap for the unwary. Though there are no negative legal consequences for not addressing contributions provided in this Act changes in contribution requirements require super-majority member vote.
SECTION 114. REQUIRED INFORMATION.
(a) Subject to subsection (b), a limited cooperative association shall maintain in a record available at its principal office:
(1) a list containing the name, last known street address and, if different, mailing address, and term of office of each director and officer;
(2) the initial articles of organization and all amendments to and restatements of the articles, together with a signed copy of any power of attorney under which any article, amendment, or restatement has been signed;
(3) the initial bylaws and all amendments to and restatements of the bylaws;
(4) all filed articles of merger and statements of conversion;
(5) all financial statements of the association for the six most recent years;
(6) the six most recent annual reports delivered by the association to the [Secretary of State];
(7) the minutes of members meetings for the six most recent years;
(8) evidence of all actions taken by members without a meeting for the six most recent years;
(9) a list containing:
(A) the name, in alphabetical order, and last known street address and, if different, mailing address of each patron member and each investor member; and
(B) if the association has districts or classes of members, information from which each current member in a district or class may be identified;
(10) the federal income tax returns, any state and local income tax returns, and any tax reports of the association for the six most recent years;
(11) accounting records maintained by the association in the ordinary course of its operations for the six most recent years;
(12) the minutes of directors meetings for the six most recent years;
(13) evidence of all actions taken by directors without a meeting for the six most recent years;
(14) the amount of money contributed and agreed to be contributed by each member;
(15) a description and statement of the agreed value of contributions other than money made and agreed to be made by each member;
(16) the times at which, or events on the happening of which, any additional contribution is to be made by each member;
(17) for each member, a description and statement of the member’s interest or information from which the description and statement can be derived; and
(18) all communications concerning the association made in a record to all members, or to all members in a district or class, for the six most recent years.
(b) If a limited cooperative association has existed for less than the period for which records must be maintained under subsection (a), the period records must be kept is the period of the association’s existence.
(c) The organic rules may require that more information be maintained.
Comment
This Section defines a minimum amount of information that must be maintained by a limited cooperative association. The listed items do not specify all records that may be advisable for an association to maintain for legal or business purposes. The Section does not prohibit an association from maintaining other records. The organic rules may identify other records to be maintained and specify the time period they must be maintained. The organic rules may also provide that records may be kept longer than the time specified in this Section.
Although the Section provides periods during which some of the listed items are to be maintained for purposes of this Act, this does not define the time frame for which the items should be maintained for other purposes, e.g., records for purposes of taxation. As a practical matter, business practices may require that certain records such as minutes of directors and members meetings be maintained for longer periods. The period for maintenance of records is a matter for determination by the association except for the required minimum periods. The maintenance of records may also be governed by other law, for example, immigration compliance records and record retention for discovery under rules of civil procedure for pending or threatened litigation.
This Section coordinates with Section 505 (“Right of Member and Former Member to Information”). Section 505 that provides the rights of members and former members to access information required to be maintained under this Section. Conditions and limitations on a member’s rights to information are also contained in Section 505.
A similar provision to this Section appears in ULPA (2001) Section 111 and RMBCA Section 16.01. It does not appear in RUPA or RULLCA (2006). RULLCA (2006) Section 410(a)(1) has a different format and a potentially broader application. Compare RUPA (1997) § 403. This Act does not draw a distinction between “kept” and “maintained”. As in ULPA (2001) and RMBCA, this Act uses “maintained” for all purposes.
Subsection (a) – The requirement that a record of the required information be “available” at the “principal office” of the association does not mean the record must be maintained there at all times. It is sufficient if the record can be obtained and made available at the office and, therefore, includes records maintained electronically or in other forms that may or may not be instantaneously available.
Unlike ULPA (2001), this Act does not require the record to be maintained at a limited cooperative association’s “designated office” because under this Act and similar statutes the association could have multiple designated offices if it operates in multiple jurisdictions. To impose a requirement that the records be maintained in each of those offices could be overly burdensome to the association.
The association’s principal office under the Act is the principal executive office of the association or a foreign cooperative wherever located. Section 102(25).
The form of the record in which the information must be maintained is any form included in the definition of “record” in Section 102(26).
Subsection (a)(1) – “Officer” is not a defined term but means only individuals that have executive authority beyond the title of “officer”.
Subsections (a)(2) and (3) – These requirements apply to superseded as well as current articles of organization and bylaws.
Subsections (a)(8) and (13) – These subsections do not require a limited cooperative association to make a record of consents given and votes taken although this may be required by Sections 516 and 812.
Subsection (a)(15) – The information required by this provision is essential for determining the rights and interests of a member generally and is especially important where a member is both a patron member and an investor member. It is also necessary because the information is referenced in Section 505(f) permitting a member to access the member’s own information with respect to a limited cooperative association. This information may be particularly important where a member with dual capacity dissociates in one capacity but not the other.
Subsection (a) (18) – The emphasis in this subsection is on “all members.” The subsection does not require communications to an individual member; only communications directed to all members of a limited cooperative association or to all members in a district or class must be maintained.
Subsection (c) – This subsection is a good example of the operation of Section 113(c) because requiring greater information would be the rule even without this subsection. See Comment to Section 113 (“Subsections (b) and (c)”).
SECTION 115. BUSINESS TRANSACTIONS OF MEMBER WITH LIMITED COOPERATIVE ASSOCIATION. Subject to Sections 818 and 819 and except as otherwise provided in the organic rules or a specific contract relating to a transaction, a member may lend money to and transact other business with a limited cooperative association in the same manner as a person that is not a member.
Comment
Source: Derived from ULPA (2001) § 112.
SECTION 116. DUAL CAPACITY. A person may have a patron member’s interest and an investor member’s interest. When such person acts as a patron member, the person is subject to this [act] and the organic rules governing patron members. When such person acts as an investor member, the person is subject to this [act] and the organic rules governing investor members.
Comment
Source: ULPA (2001) § 113.
One person can be both a patron member and an investor member concurrently. Membership is governed by the provisions of the Act and the organic rules for each type of membership, respectively. See Comment to Section 102(16).
SECTION 117. DESIGNATED OFFICE AND AGENT FOR SERVICE OF PROCESS.
(a) A limited cooperative association, or a foreign cooperative that has a certificate of authority under Section 1404, shall designate and continuously maintain in this state:
(1) an office, as its designated office, which need not be a place of the association’s or foreign cooperative’s activity in this state; and
(2) an agent for service of process at the designated office.
(b) An agent for service of process of a limited cooperative association or foreign cooperative must be an individual who is a resident of this state or an entity that is authorized to do business in this state.
Comment
The Act uses the more current term “designated office” rather than “registered office” for the office to be maintained in this state. It is simply where the agent for service of process of a limited cooperative association is located.
Section 205 imposes liability on persons filing known inaccurate information that causes harm to those relying on the information.
SECTION 118. CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS.
(a) Except as otherwise provided in Section 207(e), to change its designated office, its agent for service of process, or the street address or, if different, mailing address of its principal office, a limited cooperative association must deliver to the [Secretary of State] for filing a statement of change containing:
(1) the name of the limited cooperative association;
(2) the street address and, if different, mailing address of its designated office;
(3) if the designated office is to be changed, the street address and, if different, mailing address of the new designated office;
(4) the name of its agent for service of process; and
(5) if the agent for service of process is to be changed, the name of the new agent.
(b) Except as otherwise provided in Section 207(e), to change its agent for service of process, the address of its designated office, or the street address or, if different, mailing address of its principal office, a foreign cooperative shall deliver to the [Secretary of State] for filing a statement of change containing:
(1) the name of the foreign cooperative;
(2) the name, street address and, if different, mailing address of its designated office;
(3) if the current agent for service of process or an address of the designated office is to be changed, the new information;
(4) the street address and, if different, mailing address of its principal office; and
(5) if the street address or, if different, the mailing address of its principal office is to be changed, the street address and, if different, the mailing address of the new principal office.
(c) Except as otherwise provided in Section 204, a statement of change is effective when filed by the [Secretary of State].
Comment
Source: Derived from RULLCA (2006) § 114.
Changes in the address of a designated office or the name of the agent for service of process may also be made in an annual report under Section 207(e).
For liability for filing inaccurate information see Section 205.
SECTION 119. RESIGNATION OF AGENT FOR SERVICE OF PROCESS.
(a) To resign as an agent for service of process of a limited cooperative association or foreign cooperative, the agent must deliver to the [Secretary of State] for filing a statement of resignation containing the name of the agent and the name of the association or foreign cooperative.
(b) After receiving a statement of resignation under subsection (a), the [Secretary of State] shall file it and mail or otherwise provide or deliver a copy to the limited cooperative association or foreign cooperative at its principal office.
(c) An agency for service of process of a limited cooperative association or foreign cooperative terminates on the earlier of:
(1) the 31st day after the [Secretary of State] files a statement of resignation under subsection (b); or
(2) when a record designating a new agent for service of process is delivered to the [Secretary of State] for filing on behalf of the association or foreign cooperative and becomes effective.
Comment
Source: Derived from RULLCA (2006) § 115 and ULPA (2001) § 116.
An agent for service of process (registered agent) of a limited cooperative association may resign by following the procedure provided in this Section. Section 205 may provide for damages when any record relating to the resignation is inaccurate and a person suffers a loss because of the inaccuracy.
SECTION 120. SERVICE OF PROCESS.
(a) An agent for service of process appointed by a limited cooperative association or foreign cooperative is an agent of the association or foreign cooperative for service of process, notice, or a demand required or permitted by law to be served upon the association or foreign cooperative.
(b) If a limited cooperative association or foreign cooperative does not appoint or maintain an agent for service of process in this state or the agent for service of process cannot with reasonable diligence be found at the address of the designated office on file with the [Secretary of State], the [Secretary of State] is an agent of the association or foreign cooperative upon which process, notice, or a demand may be served.
(c) Service of process, notice, or a demand on the [Secretary of State] as agent of a limited cooperative association or foreign cooperative may be made by delivering to the [Secretary of State] two copies of the process, notice, or demand. The [Secretary of State] shall forward one copy by registered or certified mail, return receipt requested, to the association or foreign cooperative at its principal office.
(d) Service is effected under subsection (c) on the earliest of:
(1) the date the limited cooperative association or foreign cooperative receives the process, notice, or demand;
(2) the date shown on the return receipt, if signed on behalf of the association or foreign cooperative; or
(3) five days after the process, notice, or demand is deposited by the [Secretary of State] for delivery by the United States Postal Service, if postage prepaid to the address of the principal office on file with the [Secretary of State].
(e) The [Secretary of State] shall keep a record of each process, notice, and demand served pursuant to this section and record the time of, and the action taken regarding, the service.
(f) This section does not affect the right to serve process, notice, or a demand in any other manner provided by law.
Comment
Source: RULLCA (2006) § 116 and ULPA (2001) § 117, which is based on ULLCA (1996) § 111.
FILING AND ANNUAL REPORTS
SECTION 201. SIGNING OF RECORDS DELIVERED FOR FILING TO [SECRETARY OF STATE].
(a) A record delivered to the [Secretary of State] for filing pursuant to this [act] must be signed as follows:
(1) The initial articles of organization must be signed by at least one organizer.
(2) A statement of cancellation under Section 302(d) must be signed by at least one organizer.
(3) Except as otherwise provided in paragraph (4), a record signed on behalf of an existing limited cooperative association must be signed by an officer.
(4) A record filed on behalf of a dissolved association must be signed by a person winding up activities under Section 1206 or a person appointed under Section 1206 to wind up those activities.
(5) Any other record must be signed by the person on whose behalf the record is delivered to the [Secretary of State].
(b) Any record to be signed under this [act] may be signed by an authorized agent.
Legislative Note: This Act contemplates signatures on all records delivered to the office where records regarding entities are filed in a jurisdiction adopting this Act. Signatures may be electronic. See Section 102(28). In those jurisdictions that do not require signatures, the sections of the Act that require a signature should be revised to relate to the person causing the record to be delivered for filing. This Act assumes other law in the adopting jurisdiction addresses false filings with the appropriate filing officer.
Comment
Source: Based on RULLCA (2006) § 203.
This Act does not provide that a person signing a record or delivering it for filing does so under penalties of perjury leaving that matter to other law of the state. For that approach, see RULLCA (2006) § 207(c). A person who knew information in a record was inaccurate and signed the record, or caused another person to sign it on the person’s behalf, may be liable for damages to any person who suffers a loss by relying on the inaccurate record. See Section 205.
Subsection (b) – This subsection does not require that the agent’s authority be memorialized in a writing or other record.
SECTION 202. SIGNING AND FILING OF RECORDS PURSUANT TO JUDICIAL ORDER.
(a) If a person required by this [act] to sign or deliver a record to the [Secretary of State] for filing does not do so, the [appropriate court], upon petition of an aggrieved person, may order:
(1) the person to sign the record and deliver it to the [Secretary of State] for filing; or
(2) delivery of the unsigned record to the [Secretary of State] for filing.
(b) An aggrieved person under subsection (a), other than the limited cooperative association or foreign cooperative to which the record pertains, shall make the association or foreign cooperative a party to the action brought to obtain the order.
(c) An unsigned record filed pursuant to this section is effective.
Comment
Source: Based on RULLCA (2006) § 204 and ULPA (2001) § 205, which are based on RULPA (1976/1985) § 205, which was the source of ULLCA (1996) § 120.
SECTION 203. DELIVERY TO AND FILING OF RECORDS BY [SECRETARY OF STATE]; EFFECTIVE TIME AND DATE.
(a) A record authorized or required by this [act] to be delivered to the [Secretary of State] for filing must be captioned to describe the record’s purpose, be in a medium and format permitted by the [Secretary of State], and be delivered to the [Secretary of State]. If the filing fees have been paid, and unless the [Secretary of State] determines that the record does not comply with the filing requirements of this [act], the [Secretary of State] shall file the record [and send a copy of the filed record and a receipt for the fees to the person on whose behalf the record was filed].
(b) The [Secretary of State], upon request and payment of the required fee, shall furnish a certified copy of any record filed by the [Secretary of State] under this [act] to the person making the request.
(c) Except as otherwise provided in Sections 118 and 204, a record delivered to the [Secretary of State] for filing under this [act] may specify an effective time and a delayed effective date that may include an effective time on that date. Except as otherwise provided in Sections 118 and 204, a record filed by the [Secretary of State] under this [act] is effective:
(1) if the record does not specify an effective time and does not specify a delayed effective date, on the date and at the time the record is filed as evidenced by the [Secretary of State’s] [endorsement] of the date and time on the record;
(2) if the record specifies an effective time but not a delayed effective date, on the date the record is filed at the time specified in the record;
(3) if the record specifies a delayed effective date but not an effective time, at 12:01 a.m. on the earlier of:
(A) the specified date; or
(B) the 90th day after the record is filed; or
(4) if the record specifies an effective time and a delayed effective date, at the specified time on the earlier of:
(A) the specified date; or
(B) the 90th day after the record is filed.
Comment
Source: Based on RULLCA (2006) § 205 and ULPA (2001) § 206, which was based on ULLCCA (1996) § 206.
This Act uses the concept of “filing” to refer to the official act of the Secretary of State, which is typically preceded by a person “delivering” some record “to the Secretary of State for filing.”
Subsections (c)(3)(B) and (c)(4)(B) – If a person delivers to the Secretary of State for filing a record that contains a delayed effective date that is longer than allowed, the Secretary of State: (i) will not reject the record; and (ii) is neither required nor authorized to inform the person that this Act will truncate the period of delay specified in the record.
SECTION 204. CORRECTING FILED RECORD.
(a) A limited cooperative association or foreign cooperative may deliver to the [Secretary of State] for filing a statement of correction to correct a record previously delivered by the association or foreign cooperative to the [Secretary of State] and filed by the [Secretary of State] if, at the time of filing, the record contained inaccurate information or was defectively signed.
(b) A statement of correction may not state a delayed effective date and must:
(1) describe the record to be corrected, including its filing date, or have attached a copy of the record as filed;
(2) specify the inaccurate information and the reason it is inaccurate or the manner in which the signing was defective; and
(3) correct the inaccurate information or defective signature.
(c) When filed by the [Secretary of State], a statement of correction is effective:
(1) when filed as to persons relying on the inaccurate information or defective signature before its correction and adversely affected by the correction; and
(2) as to all other persons, retroactively as of the effective date and time of the record the statement corrects.
Comment
Source: Based on RULLCA (2006) § 206 and ULPA (2001) § 207, which was based on ULLCA (1996) § 207.
This Section does not require correction of a filed record that has become inaccurate because of the passage of time or a change in circumstances that renders information in the record as originally filed to become inaccurate after the original filing date. The Act requires different types of filings in those circumstances and filing a correction is not the appropriate filing.
SECTION 205. LIABILITY FOR INACCURATE INFORMATION IN FILED RECORD. If a record delivered to the [Secretary of State] for filing under this [act] and filed by the [Secretary of State] contains inaccurate information, a person that suffers a loss by reliance on the information may recover damages for the loss from a person that signed the record or caused another to sign it on the person’s behalf and knew at the time the record was signed that the information was inaccurate.
Legislative Note: In an adopting jurisdiction that does not require signatures on records delivered for filing, the jurisdiction may want to consider revising the Section to cause the liability to be applicable to the person or persons delivering the record for filing or causing the record to be filed.
SECTION 206. CERTIFICATE OF GOOD STANDING OR AUTHORIZATION.
(a) The [Secretary of State], upon request and payment of the required fee, shall furnish any person that requests it a certificate of good standing for a limited cooperative association if the records filed in the office of the [Secretary of State] show that the [Secretary of State] has filed the association’s articles of organization, that the association is in good standing, and that the [Secretary of State] has not filed a statement of termination.
(b) The [Secretary of State], upon request and payment of the required fee, shall furnish to any person that requests it a certificate of authority for a foreign cooperative if the records filed in the office of the [Secretary of State] show that the [Secretary of State] has filed the foreign cooperative’s certificate of authority, has not revoked nor has reason to revoke the certificate of authority, and has not filed a notice of cancellation.
(c) Subject to any exceptions stated in the certificate, a certificate of good standing or authority issued by the [Secretary of State] establishes conclusively that the limited cooperative association or foreign cooperative is in good standing or is authorized to transact business in this state.
Comment
This Act differs from RULLCA (2006) and ULPA (2001) in using the term “certificate of good standing” instead of the more current term “certificate of existence.” The Committee believed a “certificate of good standing” remains a commonly understood term. “Good Standing” implies many of the items further delineated by RULLCA (2006) Section 208 and ULPA (2001) Section 209. Section 206(b), dealing with certificates of authorization, also differs from RULLCA (2006) and ULPA (2001).
SECTION 207. ANNUAL REPORT FOR [SECRETARY OF STATE].
(a) A limited cooperative association or foreign cooperative authorized to transact business in this state shall deliver to the [Secretary of State] for filing an annual report that states:
(1) the name of the association or foreign cooperative;
(2) the street address and, if different, mailing address of the association’s or foreign cooperative’s designated office and the name of its agent for service of process at the designated office;
(3) the street address and, if different, mailing address of the association’s or foreign cooperative’s principal office; and
(4) in the case of a foreign cooperative, the state or other jurisdiction under whose law the foreign cooperative is formed and any alternative name adopted under Section 1405.
(b) Information in an annual report must be current as of the date the report is delivered to the [Secretary of State].
(c) The first annual report must be delivered to the [Secretary of State] between [January 1 and April 1] of the year following the calendar year in which the limited cooperative association is formed or the foreign cooperative is authorized to transact business in this state. An annual report must be delivered to the [Secretary of State] between [January 1 and April 1] of each subsequent calendar year.
(d) If an annual report does not contain the information required by subsection (a), the [Secretary of State] shall promptly notify the reporting limited cooperative association or foreign cooperative and return the report for correction. If the report is corrected to contain the information required by subsection (a) and delivered to the [Secretary of State] not later than 30 days after the date of the notice from the [Secretary of State], it is timely delivered.
(e) If a filed annual report contains an address of the designated office, name of the agent for service of process, or address of the principal office which differs from the information shown in the records of the [Secretary of State] immediately before the filing, the differing information in the annual report is considered a statement of change.
(f) If a limited cooperative association fails to deliver an annual report under this section, the [Secretary of State] may proceed under Section 1211 to dissolve the association administratively.
(g) If a foreign cooperative fails to deliver an annual report under this section, the [Secretary of State] may revoke the certificate of authority of the cooperative.
Legislative Note: In adopting jurisdictions that require entities to file reports with the [Secretary of State] at times other than annually or at times different from those provided in this Section, this Section should be revised accordingly.
Comment
Source: Derived from RULLCA (2006) § 209.
This Act does not have a provision providing for the effective date of notices. It leaves the determination of the effective date of notice here, and elsewhere, to other law. See Prefatory Note.
The information provided in a certificate of good standing or authorization is current only as of the date of the certificate.
SECTION 208. FILING FEES. The filing fee for records filed under this [article] by the [Secretary of State] is [insert appropriate fee or citation to fee provision under other state law].
Legislative Note: A jurisdiction adopting this Act should consider establishing fees in this Section or cite to a fee structure statute concerning filing fees for records of limited partnerships or limited liability companies in the jurisdiction and provide a fee schedule for limited cooperative associations in the other statute.
If the adopting jurisdiction has a statute providing a unified fee structure the bracketed language should be a cross-reference to the appropriate unified schedule.
FORMATION AND INITIAL ARTICLES OF ORGANIZATION OF LIMITED COOPERATIVE ASSOCIATION
SECTION 301. ORGANIZERS. A limited cooperative association must be organized by one or more organizers.
Comment
The definition of “organizer” in Section 102(21) requires an organizer to be an individual.
This Act permits the organizing of limited cooperative associations without members at the time of organization. Section 501, however, requires the existence of at least two patron members before a limited cooperative association may begin business (unless the sole member is a cooperative). It may seem somewhat paradoxical that an unincorporated entity may exist, even if largely for filing convenience, without members. Some limited liability company statutes, however, provide for such “shelf” organizations. The member requirement for beginning business is an attempt to mitigate that theoretical issue. The member requirement, however, raises some common practice concerns such as providing an opinion on commencement of business. RULLCA (2006) Section 201 takes a different approach by permitting articles of organization to be filed without the limited liability company having members but not becoming effective until the company has at least one member.
Historically, cooperative statutes required multiple organizers who were to be members. Some statutes for specific types of cooperatives required permission by designated administrative agencies to form a cooperative. This Act requires neither.
SECTION 302. FORMATION OF LIMITED COOPERATIVE ASSOCIATION; ARTICLES OF ORGANIZATION.
(a) To form a limited cooperative association, an organizer of the association must deliver articles of organization to the [Secretary of State] for filing. The articles must state:
(1) the name of the association;
(2) the purposes for which the association is formed;
(3) the street address and, if different, mailing address of the association’s initial designated office and the name of the association’s initial agent for service of process at the designated office;
(4) the street address and, if different, mailing address of the initial principal office;
(5) the name and street address and, if different, mailing address of each organizer; and
(6) the term for which the association is to exist if other than perpetual.
(b) Subject to Section 113(a), articles of organization may contain any other provisions in addition to those required by subsection (a).
(c) A limited cooperative association is formed after articles of organization that substantially comply with subsection (a) are delivered to the [Secretary of State], are filed, and become effective under Section 203(c).
(d) If articles of organization filed by the [Secretary of State] state a delayed effective date, a limited cooperative association is not formed if, before the articles take effect, an organizer signs and delivers to the [Secretary of State] for filing a statement of cancellation.
Comment
A limited cooperative association is a unique unincorporated association. This Act borrows terminology and concepts from partnership, limited liability company, corporate and traditional cooperative laws but an association organized under this Act, despite some similarities, is none of those.
A limited cooperative association is both a creature of statute and contract like limited partnerships, limited liability companies, and some traditional cooperatives. Therefore, unlike in limited partnerships, for example, articles of organization have more significance in the internal governance of an association than does a certificate of limited partnership under limited partnership law.
This Section governs how a limited cooperative association comes into existence. An association is formed only if (i) articles of organization are prepared, signed and delivered to the specified public official for filing, (ii) the public official files the articles, (iii) the articles are in substantial compliance with this Section, and (iv) the articles become effective under Section 203(c). To commence business an association must have patron members. See Section 501.
Despite its foundational importance, the articles of organization of a limited cooperative association are not required to contain significant amounts of information. Under this Act bylaws must contain certain provisions that are fundamental to the organizational structure of a limited cooperative association if those matters are not contained in the articles or which override specific default rules hereunder. See Sections 113, 304(a) and 405(e). The bylaws of an association play a more powerful role than is typical in corporate law. Together the articles and bylaws are similar to the operating agreement of a limited liability company or the partnership agreement of a partnership. The relationship between the articles and bylaws of limited cooperative associations, therefore, places great weight on any planning decision to delegate authority to the board of directors to amend the bylaws.
The bylaws are, however, subject to the articles. See Section 304(a). Some matters must be addressed, if at all, in the articles to effectively vary the default rules of this Act. See Section 113(b).
Subsection (a)(1) – Section 111 contains name requirements. To be acceptable for filing, articles of organization must state a name for a limited cooperative association that complies with Section 111. See Comment to Section 111.
Subsection (a)(2) – For “the purposes for which the association is formed,” the articles of organization may state “any lawful purpose.” See Section 105(b); see generally Section 113(a).
SECTION 303. ORGANIZATION OF LIMITED COOPERATIVE ASSOCIATION.
(a) After a limited cooperative association is formed:
(1) if initial directors are named in the articles of organization, the initial directors shall hold an organizational meeting to adopt initial bylaws and carry on any other business necessary or proper to complete the organization of the association; or
(2) if initial directors are not named in the articles of organization, the organizers shall designate the initial directors and call a meeting of the initial directors to adopt initial bylaws and carry on any other business necessary or proper to complete the organization of the association.
(b) Unless the articles of organization otherwise provide, the initial directors may cause the limited cooperative association to accept members, including those necessary for the association to begin business.
(c) Initial directors need not be members.
(d) An initial director serves until a successor is elected and qualified at a members meeting or the director is removed, resigns, is adjudged incompetent, or dies.
Comment
The articles of organization of a limited cooperative association are not required to list initial directors. This Section addresses how initial directors are designated if they are not named in the articles and the steps to be taken by the initial directors at a first meeting of the directors.
Subsection (a) – This subsection contemplates adoption of initial bylaws by the initial directors. There are circumstances, however, under which bylaws might not be required such as where all provisions required to be in the bylaws or articles of organization are in the articles of organization. See Section 304(a) and Comment to Section 304.
Subsection (b) – The articles of organization may name initial members. See Section 302(b). This subsection permits the initial board of directors to admit new members. If initial members are identified in the articles of organization, the initial board may admit additional members. If the articles of organization provide requirements for membership qualification, the initial board of directors’ admission of members must comply with those requirements.
Subsection (c) – To facilitate the organizing process, the initial directors do not need to be members of the association. See Section 803.
(a) Bylaws must be in a record and, if not stated in the articles of organization, must include:
(1) a statement of the capital structure of the limited cooperative association, including:
(A) the classes or other types of members’ interests and relative rights, preferences, and restrictions granted to or imposed upon each class or other type of member’s interest; and
(B) the rights to share in profits or distributions of the association;
(2) a statement of the method for admission of members;
(3) a statement designating voting and other governance rights, including which members have voting power and any restriction on voting power;
(4) a statement that a member’s interest is transferable if it is to be transferable and a statement of the conditions upon which it may be transferred;
(5) a statement concerning the manner in which profits and losses are allocated and distributions are made among patron members and, if investor members are authorized, the manner in which profits and losses are allocated and how distributions are made among investor members and between patron members and investor members;
(6) a statement concerning:
(A) whether persons that are not members but conduct business with the association may be permitted to share in allocations of profits and losses and receive distributions; and
(B) the manner in which profits and losses are allocated and distributions are made with respect to those persons; and
(7) a statement of the number and terms of directors or the method by which the number and terms are determined.
(b) Subject to Section 113(c) and the articles of organization, bylaws may contain any other provision for managing and regulating the affairs of the association.
(c) In addition to amendments permitted under [Article] 4, the initial board of directors may amend the bylaws by a majority vote of the directors at any time before the admission of members.
Comment
The initial directors adopt the original bylaws. Section 303.
The Act does not provide a penalty and does not work a dissolution of a limited cooperative association or prevent it from being duly organized solely because it fails to adopt bylaws. Without bylaws much of the relationship between the limited cooperative association and its members will be covered by the Act’s default rules. The Act does not, however, provide default rules for all the fundamental governing provisions listed in this Section.
This Act provides default rules for many items that can be covered in bylaws and permits the bylaws to vary many of those default rules. This Act does not address or provide for all matters that are permitted in an association’s bylaws. See Section 113(c) and Section 304(b). Best practices might dictate that bylaws contain comprehensive provisions for the governance and financial structure of the association.
Bylaws have played a particularly central role in traditional cooperatives. Traditional cooperative statutes sometimes place power in the members to determine specific matters in the bylaws, such as the allocations of the profits or savings of the association. In practice bylaws have been a source for the cooperative principle of democratic control by members. See Comment to Section 104. Membership qualification and eligibility frequently appear in the bylaws. In the agricultural marketing cooperative, even the marketing contract sometimes appears in the bylaws. Under this Act, members are specifically required to address and vote on various matters unless the bylaws, or the articles of organization, otherwise provide.
Bylaws of traditional cooperatives have generally been considered to be part of the contract between the cooperatives and its members. See Section 102(3).
Subsection (a) – This subsection states the minimum requirements for bylaws of a limited cooperative association if those required provisions are not contained in the articles of organization. It draws upon the statutory requirements for bylaws of traditional cooperatives. In addition, it contains matters within the scope of limited liability company operating agreements and limited partnership agreements. See RULLCA (2006) § 110 and ULPA (2001) § 110. The primary focus of the required provisions is on governance and financial rights.
Oral bylaws are not permitted by this Act, however, not all policies or procedures adopted by the board of directors pursuant to Section 801(b) need be contained in the bylaws. Compare Section 304(b) with Section 801(b).
Subsection (a)(1) – This subsection, together with Section 1001, requires the organic rules to set forth the financial rights and obligations between the members and the limited cooperative association. The items contained in subsection (a)(1)(A) broadly include both financial benefits and burdens. Therefore, for example, provisions for additional capital contribution requirements must be made in the organic rules under Section 1001.
AMENDMENT OF ORGANIC RULES OF LIMITED COOPERATIVE ASSOCIATION
SECTION 401. AUTHORITY TO AMEND ORGANIC RULES.
(a) A limited cooperative association may amend its organic rules under this [article] for any lawful purpose. In addition, the initial board of directors may amend the bylaws of an association under Section 304.
(b) Unless the organic rules otherwise provide, a member does not have a vested property right resulting from any provision in the organic rules, including a provision relating to the management, control, capital structure, distribution, entitlement, purpose, or duration of the limited cooperative association.
Comment
This Section is important because it introduces the manner and method of amending the organic rules and provides background concerning the unique relationship and distinction between the articles of organization and bylaws of a limited cooperative association. See Sections 113 and 405(e). It is important because it contains a clear statement of authority to amend the organic rules.
All entities, whether they are incorporated or unincorporated, contain provisions for amending their internal governing rules. In many unincorporated entities, the default rule is unanimous consent. Under corporate statutes, a percentage vote which is less than unanimous is permitted. Corporate law has, and some original limited liability company law had, two levels of internal rules, such as articles of incorporation and bylaws. The articles are the highest authority within the organization and are a public filing. Under this Act, most items may be contained in the articles or the bylaws. If certain items are contained in the bylaws, they are subject to a different vote for amendment than other provisions in the bylaws. See Comment to Section 405.
Unlike some corporate law, under this Act, the default rule for all bylaw amendments includes member voting. These provisions are consistent with the nature of the limited cooperative association and underscore its unique management structure with centralized management, but democratic control. The organic rules may provide for greater voting percentages than the default rules, including unanimity. The Act provides mechanisms in this Article and elsewhere which balance and protect the interests of patron members and investor members when investor members are introduced into the association. See, e.g., Sections 405 (“Approval of Amendment”), 1004 (“Allocations of Profits and Losses”), and 1203 (“Judicial Dissolution”).
Subsection (a) – This subsection provides authority for amending the organic rules of a limited cooperative association. An amendment to either the articles or bylaws can add, change or delete provisions.
Subsection (b) – Without this subsection, it is possible that all amendments would require unanimity based on contract principles because the contractual nature of an association might give rise to vested property rights. See Prefatory Note. The subject of this Section also appears in corporate law for slightly different historical reasons. Much of the common law for traditional cooperatives has arisen under a corporate structure and, therefore, may be helpful here. This subsection does not directly address contracts between an association and its members or between members that are independent from the organic rules. This subsection does not address contracts between an association and its members or between members that are independent from the organic rules.
SECTION 402. NOTICE AND ACTION ON AMENDMENT OF ORGANIC RULES.
(a) Except as provided in Sections 401(a) and 405(f), the organic rules of a limited cooperative association may be amended only at a members meeting. An amendment may be proposed by either:
(1) a majority of the board of directors, or a greater percentage if required by the organic rules; or
(2) one or more petitions signed by at least 10 percent of the patron members or at least 10 percent of the investor members.
(b) The board of directors shall call a members meeting to consider an amendment proposed pursuant to subsection (a). The meeting must be held not later than 90 days following the proposal of the amendment by the board or receipt of a petition. The board must mail or otherwise transmit or deliver in a record to each member:
(1) the proposed amendment, or a summary of the proposed amendment and a statement of the manner in which a copy of the amendment in a record may be reasonably obtained by a member;
(2) a recommendation that the members approve the amendment, or if the board determines that because of conflict of interest or other special circumstances it should not make a favorable recommendation, the basis for that determination;
(3) a statement of any condition of the board’s submission of the amendment to the members; and
(4) notice of the meeting at which the proposed amendment will be considered, which must be given in the same manner as notice for a special meeting of members.
Comment
This Section is mandatory and establishes the two ways that an amendment to the organic rules may be proposed. There are two exceptions to the rules provided in this Section with respect to amendment of the bylaws. They are: (1) amendments by the initial directors permitted by Sections 401(a) and 305; and (2) that the articles may delegate authority to the board to adopt and amend most bylaws under Section 405(f).
An amendment to either the articles of organization or the bylaws may be proposed either by the board of directors or by petitions from members. This Section provides how a meeting of members will be called and notice of the meeting is to be given for voting on the amendment.
This same procedure is utilized not only for amendments but also for other fundamental changes such as mergers.
SECTION 403. METHOD OF VOTING ON AMENDMENT OF ORGANIC RULES.
(a) A substantive change to a proposed amendment of the organic rules may not be made at the members meeting at which a vote on the amendment occurs.
(b) A nonsubstantive change to a proposed amendment of the organic rules may be made at the members meeting at which the vote on the amendment occurs and need not be separately voted upon by the board of directors.
(c) A vote to adopt a nonsubstantive change to a proposed amendment to the organic rules must be by the same percentage of votes required to pass a proposed amendment.
Comment
No substantive amendment to a proposed amendment to the organic rules may be made at a meeting of members where the proposed amendment is considered. What constitutes a “substantive” amendment is left to the particular facts and circumstances related to the proposed amendment. A nonsubstantive change certainly includes matters of spelling and punctuation that do not affect the meaning of the proposed amendment. Substantive amendments include changes that modify the meaning or effect of the proposed amendment.
SECTION 404. VOTING BY DISTRICT, CLASS, OR VOTING GROUP.
(a) This Section applies if the organic rules provide for voting by district or class, or if there is one or more identifiable voting groups that a proposed amendment to the organic rules would affect differently from other members with respect to matters identified in Section 405(e)(1) through (5). Approval of the amendment requires the same percentage of votes of the members of that district, class, or voting group required in Sections 405 and 514.
(b) If a proposed amendment to the organic rules would affect members in two or more districts or classes entitled to vote separately under subsection (a) in the same or a substantially similar way, the districts or classes affected must vote as a single voting group unless the organic rules otherwise provide for separate voting.
Comment
Section 405 provides the fundamental voting structure for the members in a limited cooperative association. This structure is repeated throughout the Act although the percentage votes are different in various areas. The rules of that Section apply whether there are only patron members of an association or a combination of patron members and investor members voting together as the entire membership. This Section 404 provides an alternative voting structure if the organic rules provide for members to be divided into districts or classes as authorized in Section 517. Where the members are to vote on the amendments to the organic rules by district or class, the rules of Section 405 apply in determining whether a proposed amendment is passed in each district or class.
The same alternative structure applies to other identifiable voting groups that would be affected differently from other members with respect to the items listed in Section 405(e)(1) through (5). “Voting group” is a defined term. See Section 102(31). The concept of voting group is protective. It gives a group of similarly situated members who share a specific burden under a fundamental change a right to vote separately in order to protect their interests. Voting groups are not provided in the organic rules. Rather only districts and classes are provided for in the organic rules. Voting groups for purposes of voting on a proposed amendment to the organic rules would be determined based upon the scope of the amendment and the members it would affect.
This Act does not attempt to provide a comprehensive default system for the use of districts or classes. The use of districts or classes provides a great deal of flexibility to the Act and permits the drafting of blocking power in a district or class under Section 405 (“Approval of Amendment”). It leaves the crafting of rules governing the use of districts or classes to the organic rules.
Limited cooperative associations should carefully craft provisions about districts and classes if they decide to establish them in their organic rules.
Subsection (b) – This subsection is a default rule for a limited cooperative association that has districts or classes, but does not address whether the votes in the classes or districts will be counted separately or together. The default rule reflects the overall cooperative principle of democratic control within the entire membership of a cooperative. The default rule provides that members in districts or classes that would be affected in a substantially similar way by a proposed amendment are counted together (and not separately by district or class) unless the organic rules otherwise provide.
SECTION 405. APPROVAL OF AMENDMENT.
(a) Subject to Section 404 and subsections (c) and (d), an amendment to the articles of organization must be approved by:
(1) at least two-thirds of the voting power of members present at a members meeting called under Section 402; and
(2) if the limited cooperative association has investor members, at least a majority of the votes cast by patron members, unless the organic rules require a greater percentage vote by patron members.
(b) Subject to Section 404 and subsections (c), (d), (e) and (f), an amendment to the bylaws must be approved by:
(1) at least a majority vote of the voting power of all members present at a members meeting called under Section 402, unless the organic rules require a greater percentage; and
(2) if a limited cooperative association has investor members, a majority of the votes cast by patron members, unless the organic rules require a larger affirmative vote by patron members.
(c) The organic rules may require that the percentage of votes under subsection (a)(1) or (b)(1) be:
(1) a different percentage that is not less than a majority of members voting at the meeting;
(2) measured against the voting power of all members; or
(3) a combination of paragraphs(1) and (2).
(d) Consent in a record by a member must be delivered to a limited cooperative association before delivery of an amendment to the articles of organization or restated articles of organization for filing pursuant to Section 407, if as a result of the amendment the member will have:
(1) personal liability for an obligation of the association; or
(2) an obligation or liability for an additional contribution.
(e) The vote required to amend bylaws must satisfy the requirements of subsection (a) if the proposed amendment modifies:
(1) the equity capital structure of the limited cooperative association, including the rights of the association’s members to share in profits or distributions, or the relative rights, preferences, and restrictions granted to or imposed upon one or more districts, classes, or voting groups of similarly situated members;
(2) the transferability of a member’s interest;
(3) the manner or method of allocation of profits or losses among members;
(4) the quorum for a meeting and the rights of voting and governance; or
(5) unless otherwise provided in the organic rules, the terms for admission of new members.
(f) Except for the matters described in subsection (e), the articles of organization may delegate amendment of all or a part of the bylaws to the board of directors without requiring member approval.
(g) If the articles of organization delegate amendment of bylaws to the board of directors, the board shall provide a description of any amendment of the bylaws made by the board to the members in a record not later than 30 days after the amendment, but the description may be provided at the next annual members meeting if the meeting is held within the 30-day period.
Comment
Voting structure is one of the key balancing points between patron members and investor members necessary to fulfill the purposes of the Act. The voting structure in this Section is also contained in correlative voting provisions concerning dissolution (Section 1205), conversion and merger (Sections 1603 and 1608), and disposition of assets (Section 1604). Another important balancing provision is Section 514(1) that requires the majority of voting power be held by patron members.
Existing traditional cooperative statutes provide a rather remarkable range of voting options. For example, within limitations, there can be voting or nonvoting preferred shareholders who are not necessarily required to be members. Nonetheless, this act permits investor members and because of the existence of investor members the Act provides a rather detailed allocation of voting power between investor members and patron members.
The articles of organization may be amended under subsection (a); and, generally, the bylaws may be amended under subsection (b). Specified items under subsection (e) may appear in either the articles or bylaws. Those items may be amended only in the same manner as the amendment of the articles. Amendments affecting a member’s liability require the consent of that member under subsection (d). As a general matter, the articles may provide that the bylaws can be amended by the board of directors. But see subsection (e).
Subsection (a) – The default vote to amend the articles of organization is two-thirds of the voting power present at the meeting.
In a limited cooperative association which permits investor members, however, the subsection requires a bifurcated approach to better protect the decisional power of patron members relative to investor members. First, it requires a two-thirds vote of all members present (patron members and investor members). Second, the votes of patron members are counted. A simple majority of patron members present and voting is required to adopt the amendment.
This bifurcated voting procedure assures patron members substantial decisional authority. Indeed requiring a majority of the patron members to vote for an amendment gives the patron members absolute blocking power on amendments.
EXAMPLE: Assume a limited cooperative association under which 34 votes are in patron members and 33 votes are in investor members and all members are present and voting. The total vote required to pass the amendment is two-thirds of the voting power of members present. Thus, the first voting prong requires at least 45 (two-thirds) votes of the total cast to be for the amendment. The second prong requires at least a majority of the 34 patron members votes to be for the amendment. Thus, at least 18 of the patron member votes must be cast for the amendment. If only 17 patron members voted for the amendment it would fail under the second prong even if all of the investor members voted for the amendment.
The bifurcated voting structure also provides investor members significant voting influence. The two-thirds majority under subsection (a)(1) would not be reached in the Example even if all the patron member votes were cast for the amendment unless a sufficient number of investor members vote to achieve the required two-thirds. In addition, using the flexibility afforded under Section 404, blocking power could be provided to investor members by establishing strict class voting for them in the organic rules. The same could be done for patron members..
Subsection (c) – The vote required to amend the organic rules may be varied by the organic rules but only within the parameters of this subsection.
Subsection (d) – If a member will have personal liability as a result of an amendment, the member must consent to the amendment.
Subsection (e) – The five matters listed in subsection (e) require the same vote as necessary to amend the articles of organization whether or not the matters are contained in the articles or the bylaws.
Subsection (g) – If bylaw amendments are delegated to the board of directors, a description of an amendment adopted by the board must be provided to the members in accordance with this subsection. See Subsection (f).
SECTION 406. RESTATED ARTICLES OF ORGANIZATION. A limited cooperative association, by the affirmative vote of a majority of the board of directors taken at a meeting for which the purpose is stated in the notice of the meeting, may adopt restated articles of organization that contain the original articles as previously amended. Restated articles may contain amendments if the restated articles are adopted in the same manner and with the same vote as required for amendments to the articles under Section 405(a). Upon filing, restated articles supersede the existing articles and all amendments.
Comment
This Section permits the board of directors to restate the articles of organization. A restatement of the articles is helpful after several amendments have been made over time. The board of directors, however, is not permitted to adopt any amendments to the articles when it restates them. If the restatement is to include amendments to the articles, the amendments must be adopted in the manner provided in this Article. If a restatement includes amendments, the entire restated articles may be adopted pursuant to this Act, but care should be exercised to comply with the notice requirements for amendments. See Section 402. Filing of restated articles is governed by Section 407.
SECTION 407. AMENDMENT OR RESTATEMENT OF ARTICLES OF ORGANIZATION; FILING.
(a) To amend its articles of organization, a limited cooperative association must deliver to the [Secretary of State] for filing an amendment of the articles, or restated articles of organization or articles of conversion or merger pursuant to [Article] 16, which contain one or more amendments of the articles of organization, stating:
(1) the name of the association;
(2) the date of filing of the association’s initial articles; and
(3) the changes the amendment makes to the articles as most recently amended or restated.
(b) Before the beginning of the initial meeting of the board of directors, an organizer who knows that information in the filed articles of organization was inaccurate when the articles were filed or has become inaccurate due to changed circumstances shall promptly:
(1) cause the articles to be amended; or
(2) if appropriate, deliver an amendment to the [Secretary of State] for filing pursuant to Section 203.
(c) If restated articles of organization are adopted, the restated articles may be delivered to the [Secretary of State] for filing in the same manner as an amendment.
(d) Upon filing, an amendment of the articles of organization or other record containing an amendment of the articles which has been properly adopted by the members is effective as provided in Section 203(c).
Comment
If a restatement of the articles of organization contains amendments, it must be filed. If a restatement does not contain amendments, this Section permits it to be filed. Amendments to the articles may also be included in articles of conversion or merger that are filed.
MEMBERS
SECTION 501. MEMBERS. To begin business, a limited cooperative association must have at least [two] patron members unless the sole member is a cooperative.
Legislative Note: The “two” in brackets means an adopting jurisdiction may increase the number of required patron members required for a limited cooperative association to begin business. It does not mean the number should be reduced unless the association is to be a wholly-owned subsidiary of a cooperative.
Comment
One person may organize a limited cooperative association under Section 301 but this Section adds an additional requirement that the association have at least two patron members to begin business unless the sole member is a cooperative. More than one member is required consistent with the general meaning of “cooperation.” The requirement of multiple members to begin business is, thus, somewhat analogous to partnership law that requires two members to form a partnership. In this regard compare of RUPA (1997) Section 202(a) to Section 301 of this Act. See Comment to Section 301. The reason a cooperative is allowed to be a sole member is because its “organic” law will provide the necessary “cooperation” among members.
A limited cooperative association has some flexibility in determining its number of members. A membership interest could be held in cotenancies such as tenancy in common or may be community property in community property jurisdictions. The organic rules may provide that co-owners will be treated as one person or will be treated individually as separate persons subject to the law governing those relationships. The organic rules may also address other ownership arrangements. For example, the organic rules of traditional agricultural marketing cooperatives sometimes contain provisions concerning cooperative memberships in the context of landlord-tenant relationships for agricultural land.
SECTION 502. BECOMING A MEMBER. A person becomes a member:
(1) as provided in the organic rules;
(2) as the result of a merger or conversion under [Article] 16; or
(3) with the consent of all the members.
Comment
This Section combines concepts from traditional cooperatives, limited liability companies and partnerships in determining how persons become members. Traditional cooperatives usually provide for the qualifications and the process for admitting members in their bylaws. Limited liability companies and partnerships usually provide for these matters in their operating agreements or partnership agreements, respectively, and frequently require member consent for admission as a member or partner in the entity.
Section 603 of the Act addresses transfers of membership interests, the limitations on transfers, and whether a transferee may become a member as a result of transfer.
Initial members may be (a) named in the articles of organization, (b) admitted by the board of directors pursuant to Section 303(b), or (c) admitted in a manner provided in the organic rules. Once initial members are admitted, additional members may be admitted pursuant to the organic rules or by unanimous consent of the members. The unanimous consent of all members is an exception to changing membership requirements through a change of the organic rules. See Section 405(e)(5) (with respect to the terms for admission of members in the bylaws).
The method for admitting new members is a mandatory provision for the organic rules under Section 304(a)(2) because admission of members is a central feature of a limited cooperative association. The provision deserves care in drafting. Nonetheless, Section 502(3) provides a “fail safe” mechanism if a membership provision is not contained in the organic rules.
Paragraph (2) - Subsection (2) recognizes that memberships may be continued or new memberships may be created in a merger or conversion.
SECTION 503. NO POWER AS MEMBER TO BIND ASSOCIATION. A member, solely by reason of being a member, may not act for or bind the limited cooperative association.
Comment
Source: Derived from ULPA (2001) § 302 and RULLCA (2006) § 301(a).
This Section confirms a member is not an agent for a limited cooperative association simply by being a member. This is similar to a limited partner in a limited partnership, shareholder in a corporation, and members under traditional cooperative law. It serves the same function as similar statements in limited liability company laws. One of its purposes is to reject any implication of “statutory apparent authority” in members by reason of their membership. The Section does not prohibit an association from specifically appointing a member to act as an agent of the association, for example, by an act of the board of directors, with power to bind the association under the law of agency as otherwise applicable.
SECTION 504. NO LIABILITY AS MEMBER FOR ASSOCIATION’S OBLIGATIONS. Unless the articles of organization otherwise provide, a debt, obligation, or other liability of a limited cooperative association is solely that of the association and is not the debt, obligation, or liability of a member solely by reason of being a member.
Comment
Source: Based on ULPA (2001) § 303.
This Section shields members from debts, obligations, and liabilities of a limited cooperative association unless the articles of organization provide otherwise. The shield may not be removed in bylaws. This Section does not apply to claims seeking to hold a member directly liable on account of the member’s own conduct.
EXAMPLE: A member personally guarantees a debt of a limited cooperative association. This Section does not govern the member’s liability as a guarantor.
EXAMPLE: A member purports to bind a limited cooperative association while lacking any agency law power to do so. The association is not bound, but the member is liable for having breached the “warranty of authority” (an agency law doctrine). This Section does not apply. The liability is not for an obligation of the association, but rather is the member’s direct liability resulting because the association is not indebted, obligated or otherwise liable. See Restatement (Third) of Agency § 6.10 (2006).
This Section does not eliminate a member’s liability for required contributions to capital of a limited cooperative association under the organic rules or contribution agreements. Sections 1001 through 1003. It does not eliminate a member’s liability for improper distributions. Section 1008. Liability for those obligations pertains to a person’s status as a member but is not for an obligation of the association.
This Section has no application to directors whose liability is addressed in Sections 802 and 818 through 820.
This Act does not address the equitable doctrine of “piercing the veil” which is well-established, and which courts regularly apply to limited liability companies. See Comment to RULLCA (2006) § 304(b). Because certain formalities are required in the operation of a limited cooperative association organized under this Act, corporate law regarding “piercing the corporate veil” (including the factor of “disregard of corporate formalities”) could properly be applied to associations organized under this Act under some circumstances even though they are unincorporated associations. Of course, disregard of formalities is but one factor of the multifactor analysis applied in cases of equitable piercing. Finally, some provision of regulatory law outside this Act may impose liability on members and this Section does not affect the operation of those regulations.
SECTION 505. RIGHT OF MEMBER AND FORMER MEMBER TO INFORMATION.
(a) Not later than 10 business days after receipt of a demand made in a record, a limited cooperative association shall permit a member to obtain, inspect, and copy in the association’s principal office required information listed in Section 114(a)(1) through (8) during regular business hours. A member need not have any particular purpose for seeking the information. The association is not required to provide the same information listed in Section 114(a)(2) through (8) to the same member more than once during a six-month period.
(b) On demand made in a record received by the limited cooperative association, a member may obtain, inspect, and copy in the association’s principal office required information listed in Section 114(a)(9), (10), (12), (13), (16) and (18) during regular business hours, if:
(1) the member seeks the information in good faith and for a proper purpose reasonably related to the member’s interest;
(2) the demand includes a description with reasonable particularity of the information sought and the purpose for seeking the information;
(3) the information sought is directly connected to the member’s purpose; and
(4) the demand is reasonable.
(c) Not later than 10 business days after receipt of a demand pursuant to subsection (b), a limited cooperative association shall provide, in a record, the following information to the member that made the demand:
(1) if the association agrees to provide the demanded information:
(A) what information the association will provide in response to the demand; and
(B) a reasonable time and place at which the association will provide the information; or
(2) if the association declines to provide some or all of the demanded information, the association’s reasons for declining.
(d) A person dissociated as a member may obtain, inspect, and copy information available to a member under subsection (a) or (b) by delivering a demand in a record to the limited cooperative association in the same manner and subject to the same conditions applicable to a member under subsection (b) if:
(1) the information pertains to the period during which the person was a member in the association; and
(2) the person seeks the information in good faith.
(e) A limited cooperative association shall respond to a demand made pursuant to subsection (d) in the manner provided in subsection (c).
(f) Not later than 10 business days after receipt by a limited cooperative association of a demand made by a member in a record, but not more often than once in a six-month period, the association shall deliver to the member a record stating the information with respect to the member required by Section 114(a)(17).
(g) A limited cooperative association may impose reasonable restrictions, including nondisclosure restrictions, on the use of information obtained under this section. In a dispute concerning the reasonableness of a restriction under this subsection, the association has the burden of proving reasonableness.
(h) A limited cooperative association may charge a person that makes a demand under this section reasonable costs of copying, limited to the costs of labor and material.
(i) A person that may obtain information under this section may obtain the information through an attorney or other agent. A restriction imposed on the person under subsection (g) or by the organic rules applies to the attorney or other agent.
(j) The rights stated in this section do not extend to a person as transferee.
(k) The organic rules may require a limited cooperative association to provide more information than required by this section and may establish conditions and procedures for providing the information.
Comment
Source: Derived from ULPA (2001) § 304.
This Section provides to members of a limited cooperative association rights of inspection of records of the association that must be maintained by it under Section 114, but the Section does not require an association to maintain any records that are not specifically required to be maintained under Section 114. These rights may not be reduced by the organic rules although subsection (h) does permit an association to impose reasonable restrictions on the use of information obtained by a member under this Section.
Cooperative associations present a conundrum with respect to information about the association. Cooperatives are owned and controlled by their members. Members need information for that purpose. Most cooperatives are, however, representative democracies governed by a board of directors or similar body elected by the members. This may reduce the need for information on the part of members and permit a cooperative to withhold confidential information from the members. The “particular purpose” provision of subsection (b) allows an evaluation of the need for the information demanded by the member making the demand to be measured against the needs of the association. If there is a change in information obtained by a member under this Section, the changed information is new information for purposes of this Section. The Section anticipates that both a member and the limited cooperative association will act in good faith with respect to the rights and obligations of each under this Section.
There is a burden on a member seeking records if the member is not located in the jurisdiction in which the association’s principal office is located and is, therefore, required to travel. This burden is reduced by the member being entitled to engage an attorney or agent in the jurisdiction where the principal office is located in order to access the records under Section 505(i). Nothing in the Act prevents the association from making records available at locations in addition to the principal office or electronically.
Records listed in subsections 114(a)(11), (14) and (15) regarding accounting records and contributions are not covered by the inspection rights of this subsection because of concerns over confidentiality and privacy.
Subsection (a) – The subsection permits a member to request, inspect and copy records specified in Section 114(a)(1) through (8) that are records that should be generally available and relate to the organization, general financial condition and membership actions of the association. No particular purpose is required for the inspection and copying.
Subsection (b) – The subsection permits a member to request, inspect and copy records specified in Section 114(a)(9), (10), (12), (13), (16) and (18) that may be records more likely to contain confidential information or information that may be more difficult to understand or harder for an association to produce than the records referenced in subsection (a). To obtain access to these records a member must act in good faith and state a “proper purpose” for seeking the records that must be directly connected to the member’s purpose. “Proper purpose” is a well recognized term. This subsection closely follows corporate provisions. See RMBCA § 16.02.
The six month time period in subsection (a) and “proper purpose” under subsection (b) serve an analogous function to the phrase, “except to the extent the demand or information demanded is unreasonable or otherwise improper under the circumstances” in RULLCA (2006) Section 410(a)(2)(B).
Subsection (c) – If a limited cooperative association refuses to produce information demanded by a member, it must state why it has refused the request.
Subsection (d) – A person dissociated as a member may obtain any of the information referenced in subsections (a) or (b) but in either case must follow the procedures for a member seeking to obtain information under subsection (b). The right to inspect and copy records under this Section does not extend to a transferee of a member who has not been admitted as a member in the limited cooperative association. If a member dies or is adjudged incompetent Section 1103 applies.
Subsection (f) – A member may obtain information regarding the member’s own interest in the limited cooperative association but the member may not obtain information about any other member except the names and addresses of other members under subsection (b).
Subsection (h) – The subsection permits a limited cooperative association to include nondisclosure restrictions on the use of information obtained by a member under the Section. Some of the information to which a member may have access under this Section could contain confidential information of the association. The association has the right to reasonably restrict the uses to which the information may be put by the member. The restriction could be in contractual form and a violation of the contract could result in damages or a right to injunctive relief in favor of the association.
SECTION 506. ANNUAL MEETING OF MEMBERS.
(a) Members shall meet annually at a time provided in the organic rules or set by the board of directors not inconsistent with the organic rules.
(b) An annual members meeting may be held inside or outside this state at the place stated in the organic rules or selected by the board of directors not inconsistent with the organic rules.
(c) Unless the organic rules otherwise provide, members may attend or conduct an annual members meeting through any means of communication if all members attending the meeting can communicate with each other during the meeting.
(d) The board of directors shall report, or cause to be reported, at the association’s annual members meeting the association’s business and financial condition as of the close of the most recent fiscal year.
(e) Unless the organic rules otherwise provide, the board of directors shall designate the presiding officer of the association’s annual members meeting.
(f) Failure to hold an annual members meeting does not affect the validity of any action by the limited cooperative association.
Comment
Section 506(a) requires every limited cooperative association to hold an annual meeting of members each year. Rather than having an annual meeting, the members may take action by written consent under Section 516. Unlike corporate statutes, this Section does not specifically require an election of directors to the board of directors at the annual meeting, but this is implied from subsection 805(a) that provides a director’s term expires at the annual meeting following the director’s election or appointment unless the organic rules otherwise provide. The purpose of an annual meeting is not limited and provides an appropriate forum for a member to raise any relevant question about the association’s operations unless inconsistent with notices of annual meetings where fundamental changes such as amendments to organic rules and mergers are to be considered. See Sections 402, 508(b), and 1607.
If an annual meeting is not held, directors’ terms are extended under Section 805(c) until a successor is elected or appointed and qualified.
The requirement of Section 506(a) that an annual meeting be held is phrased in mandatory terms to ensure that every member entitled to participate in the meeting has an opportunity to do so. There is no specific provision in this Act that governs the procedure for applying to a court for intercession if an annual meeting is not held but under appropriate circumstances a direct or derivative action could be brought for this purpose. Section 506(f) provides that failure to hold the annual meeting does not affect the validity of any action taken by the association.
The organic rules or the board of directors may fix the time and place for annual meetings. This gives the limited cooperative association the flexibility to meet at various times and various places depending on convenience and circumstances. Where authority is granted to the board to fix the time and place of the annual meeting, the authority must be exercised in good faith. See Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971) (relating to corporations). Failure to have annual meetings may also be evidence of oppression for purposes of Section 1203(2)(B).
The default rule in subsection (c) provides great flexibility by allowing conduct of meetings and member attendance through means of modern communication while protecting the deliberative function of the meeting. The use of the words “attend” and “conduct” encompass the ability to vote and, therefore, voting under subsection (c) is not “voting by other means” for purposes of Section 515(d).
SECTION 507. SPECIAL MEETING OF MEMBERS.
(a) A special meeting of members may be called only:
(1) as provided in the organic rules;
(2) by a majority vote of the board of directors on a proposal stating the purpose of the meeting;
(3) by demand in a record signed by members holding at least 20 percent of the voting power of the persons in any district or class entitled to vote on the matter that is the purpose of the meeting stated in the demand; or
(4) by demand in a record signed by members holding at least 10 percent of the total voting power of all the persons entitled to vote on the matter that is the purpose of the meeting stated in the demand.
(b) A demand under subsection (a)(3) or (4) must be submitted to the officer of the limited cooperative association charged with keeping its records.
(c) Any voting member may withdraw its demand under subsection (a)(3) or (4) before receipt by the limited cooperative association of demands sufficient to require a special meeting of members.
(d) A special meeting of members may be held inside or outside this state at the place stated in the organic rules or selected by the board of directors not inconsistent with the organic rules.
(e) Unless the organic rules otherwise provide, members may attend or conduct a special meeting of members through the use of any means of communication if all members attending the meeting can communicate with each other during the meeting.
(f) Only business within the purpose or purposes stated in the notice of a special meeting of members may be conducted at the meeting.
(g) Unless the organic rules otherwise provide, the presiding officer of a special meeting of members shall be designated by the board of directors.
Comment
This Section provides the means for calling and holding special members meetings of the limited cooperative association. Any meeting of members other than an annual meeting is a special meeting. The primary difference between an annual meeting and a special meeting under this Act is that any issue relevant to the association may be discussed at an annual meeting subject only to special notice requirements for certain matters under this Act, for example, voting on amendments to the organic rules, mergers, sales of assets. Only issues provided in the call and notice of a special meeting may be discussed at a special meeting. If an annual meeting is not held, members could demand that a special meeting be held to consider specific items that would ordinarily be considered at an annual meeting.
Democratic control by members is a cooperative principle. Inherent in this principle is the members’ right to voice opinions and the board of director’s ability to receive advice and direction from members at a deliberative meeting. Therefore this Section provides several ways by which a special meeting may be called and the organic rules may provide other ways to call special meetings or state circumstances under which special meetings are required.
Members may suggest a place for a special meeting, but the ultimate authority for determining the place is the organic rules or the board of directors under Subsection (d). The Act does not specifically state who sets the time and date of a special meeting. Generally the board of directors acting for the limited cooperative association would set the time and date under its management authority in Section 701 and the notice provisions of Section 508(a).
If demands stating different purposes for a special meeting are received by a limited cooperative association, the board of directors has reasonable discretion to combine or otherwise coordinate the demands into one meeting.
SECTION 508. NOTICE OF MEMBERS MEETING.
(a) A limited cooperative association shall notify each member of the time, date, and place of a members meeting [at least 15 and not more than 60] days before the meeting.
(b) Unless the articles of organization otherwise provide, notice of an annual members meeting need not include any purpose of the meeting.
(c) Notice of a special meeting of members must include each purpose of the meeting as contained in the demand under Section 507(a)(3) or (4) or as voted upon by the board of directors under Section 507(a)(2).
(d) Notice of a members meeting must be given in a record unless oral notice is reasonable under the circumstances.
Comment
This Act requires that notice of meetings be given to all members of a limited cooperative association whether they are entitled to vote at the meeting or not. This seems more consistent with cooperative principles than corporate statutes under which, generally, only shareholders who are entitled to vote at a meeting are entitled to notice. See RMBCA § 7.05(a).
This Act does not contain a provision that relieves a limited cooperative association from giving notice to a member if mailings to the member have been returned as undeliverable over a period of time as is found in RMBCA § 16.06 and a number of state corporate statutes.
Subsection (d) – The subsection permits oral instead of written notice if oral notice of a members meeting is “reasonable under the circumstances.” This recognizes there may be situations when oral notice is appropriate, but it is likely this would be an exception rather than a rule. Reliance on oral notice, however, may create evidentiary issues if a dispute concerning notice arises. If membership would be small enough that oral notice might be appropriate, the members might consider taking action by consent under Section 516.
SECTION 509. WAIVER OF MEMBERS MEETING NOTICE.
(a) A member may waive notice of a members meeting before, during, or after the meeting.
(b) A member’s participation in a members meeting is a waiver of notice of that meeting unless the member objects to the meeting at the beginning of the meeting or promptly upon the member’s arrival at the meeting and does not thereafter vote for or assent to action taken at the meeting.
Comment
Patron members are entitled to vote under Section 511. The organic rules may provide for voting or nonvoting investor members under Section 513. Section 508 requires notice of members meetings be given to all members, including members who are not entitled to vote at the meeting, including an investor member not entitled to vote at the meeting.
Subsection (b) – This Act requires objections to be made at the beginning of the meeting or promptly after the member’s arrival at the meeting if the member does not wish attendance at the meeting to constitute waiver of notice of a meeting.
SECTION 510. QUORUM OF MEMBERS. Unless the organic rules otherwise require a greater number of members or percentage of the voting power, the voting member or members present at a members meeting constitute a quorum.
Comment
This Section states a default rule. Absent a provision in the organic rules to the contrary, one person with a voting interest in a limited cooperative association who is in attendance at a duly called meeting would constitute a quorum for the meeting, the meeting could proceed, and actions taken at the meeting could be valid if the votes meet the voting requirements in, e.g. Section 405.
With the interaction of Sections 509 and 510, a member who attends a meeting for the sole purpose of objecting to the meeting would nevertheless be present for purposes of a quorum under Section 510. Section 509 relates solely to a waiver of notice, not to presence at a meeting, for purposes of a quorum.
SECTION 511. VOTING BY PATRON MEMBERS. Except as provided by Section 512(a), each patron member has one vote. The organic rules may allocate voting power among patron members as provided in Section 512(a).
Comment
In following cooperative principles of ownership by patrons and democratic control cooperative statutes have, historically, limited voting power of any one member to one vote. The “one member, one vote” principle, for example, is a requirement in a number of federal statutes in order for an entity to be a cooperative for the purposes of the federal statute or to be operating on a “cooperative basis.” Many of those federal statutes, however, provide an additional or alternative requirement based on the cooperative principle of a limited return on investment by capping the percentage return that may be paid on member investments in their cooperative. See, e.g., 12 U.S.C.A. § 1141(j)(a) (definition of “cooperative association” for Agricultural Marketing Act), 12 U.S.C.A. § 3015(a) (definition of “eligible cooperative” for National Consumer Cooperative Bank), 15 U.S.C.A. § 521 (definition of fishing association). In recent years, revisions to some traditional state cooperative statutes have permitted percentage voting by members although in some cases with a limitation. For example, the Colorado Cooperative Act permits voting by patronage or patronage equity in the cooperative, but all members must have at least one vote and no member may have more than two and one-half percent of the total votes of the members of the cooperative. Col. Rev. Stat. § 7-56-305(3) (2006). The Ohio Cooperative Law and the Oregon Cooperative Corporation Act permit voting based on patronage. Ohio Rev. Code § 1729.17 (2004); Or. Rev. Stat. § 62.265 (2003).
Section 513 governs voting by investor members.
SECTION 512. DETERMINATION OF VOTING POWER OF PATRON MEMBER.
(a) The organic rules may allocate voting power among patron members on the basis of one or a combination of the following:
(1) one member, one vote;
(2) use or patronage;
(3) equity; or
(4) if a patron member is a cooperative, the number of its patron members.
(b) The organic rules may provide for the allocation of patron member voting power by districts or class, or any combination thereof.
CommentIf the strict “one member, one vote” principle in subsection (a)(1) is not followed, the Act permits the use of three other methods: a member’s use or patronage of the limited cooperative association, a member’s equity in the association, or if the member of the association is itself a cooperative by the number of patron members in the member cooperative. The association may combine two, three, or all four methods in establishing the voting power among patron members but no patron member may be deprived of a vote. See Section 511.
Subsection (a) – This Act permits the organic rules to provide for more than one vote per member in a limited cooperative association; but, in the absence of other provisions in the organic rules, defaults to one member one vote. Section 512(a) provides the means through which the organic rules may allocate voting power among the patron members.
Subsection (a)(2) – Use of patronage of the limited cooperative association can be measured in a variety of ways. For example, it can be based on a dollar volume of business conducted by a patron member with the association.
EXAMPLE: A member sells and delivers wheat to the association. The member is paid $60,000 for the wheat sold and delivered. Over a one year period, the association paid $2,000,000 for all the wheat it purchased from all of its members. The association’s organic rules base voting power on patronage measured by the purchase price paid to each member for wheat purchased from each member during the year. The member that was paid $60,000 would be entitled to 3% of the voting power of all of the voting members in the association.
If the association in this example had ten members, and each had only one vote, each member would have 10% of the voting power. If voting in this example is based on patronage percentages, the fact that the member did not have ten percent of the voting power does not violate Section 511 because the member is entitled to vote the member’s percentage of total member patronage as determined under the organic rules of the association. CAVEAT: There is a potential drafting trap for planners who do not provide for circumstances where a patron member for some reason does not conduct patronage during the relevant patronage measuring period.
If voting is allocated based on patronage, each patron member conducting patronage with the association will be eligible to vote, even though the percentage weight of that vote may be a smaller percentage proportion than represented by one vote. A complicating feature in this Act is that in no event, consistent with traditional cooperative principles, may any patron member be deprived of voting under Section 511. Thus, for example, a patron member, so long as it is a member, must be allocated some vote even though it did not conduct patronage during the relevant measuring period.
It would then be possible for the organic rules to provide each patron member with one vote and then allocate an additional number of votes fixed in the organic rules based solely on proportional patronage conducted with the association. The number of votes fixed in the organic rules could be less than, equal to, or far greater than the number of votes allocated based on membership alone.
Other types of patronage measurement include the quantity of business a member conducts with the association measured in units, weight or other methods of measuring quantities such as hours worked in a worker owned association.
Subsection (a)(3) – The organic rules could base voting on a percentage of equity in the limited cooperative association or on each dollar of equity in the association. The equity could be paid in capital or retained allocations in the capital accounts of the members that have not been distributed, or a combination of both.
EXAMPLE: A member has $1,000 of paid in capital in an association that has a total of $20,000 in paid in capital from all voting members. In addition, the member has $15,000 of retained allocations in the member’s capital account that have not been distributed. All of the members together have $100,000 of retained allocations in their capital accounts collectively.
The organic rules of the association could provide that voting power will be based on paid in capital. The member would have 1/20, or 5%, of the total voting power in the association.
The organic rules could provide that voting power will be based on retained allocations. The member would have 15/100, or 15%, of the total voting power.
The organic rules could provide that voting power will be based on total equity in the association, a combination of paid in capital and retained allocations. The member would have a total of $16,000 in equity ($1,000 of paid in capital plus $15,000 of retained allocations). Total equities of the association as a whole would be $120,000 ($20,000 of paid in equity plus $100,000 of retained allocations). The member would have 16/120, or 13.3%, of the total voting power.
CAVEAT: Voting based on equity may cause unintended consequences for other regulation and governmental programs.
Subsection (a)(4) – The paragraph does not refer to a limited cooperative association itself but rather to a cooperative that is a patron member of the association. In that case, the organic rules could provide that in counting the total voting power in the association the number of members of the cooperative member could be counted among the voting members.
EXAMPLE: An association has 20 individual members and a cooperative entity as a member that itself has 15 members. The organic rules could provide for adding all the individual members of the association and the 20 members of the cooperative together for a total of 35 votes of which 15 would be cast by the cooperative member.
Paragraph (4) is not the exclusive way that votes may be allocated to a cooperative that is a member but is in addition to the other alternatives.
Subsection (b) – Cooperatives that have drawn members from large geographic areas have frequently divided the members into geographic districts for purposes of the election of directors or voting generally on matters affecting the cooperative. Because the voting power in traditional cooperatives has usually, although not exclusively, been confined to one class of voting membership or stock, there has been little need for classifying members by class of membership or stock for voting purposes.
This Act permits more complex membership structures than are usually seen in traditional cooperatives. This subsection authorizes the association to divide patron members into districts, classes of membership, or combinations of districts and classes.
SECTION 513. VOTING BY INVESTOR MEMBERS. If the organic rules provide for investor members, each investor member has one vote, unless the organic rules otherwise provide. The organic rules may provide for the allocation of investor member voting power by class, classes, or any combination of classes.
Comment
This Act does not require a limited cooperative association to have investor members.
If there are to be investor members the organic rules must provide for them. If they do not do so, all of the members must be patron members by default. See Section 502(a). If the organic rules provide for investor members, they may provide for any means of allocating voting power among them including the use of classes and combinations of classes. If the organic rules do not provide another means of allocating voting power, each investor member will have one vote following the cooperative “one person, one vote” principle. See Comment to Section 411. However, unlike patron member voting under Section 411, this Section permits the organic rules to provide for nonvoting investor members. The distinction is articulated in the Act by using the phrase “[u]nless the organic rules provide for a larger number” in Section 411(a) and the phrase “unless the organic otherwise provide” without any modifier in this Section. No matter of the quantum of votes a member votes, the voting provisions of an association must meet the requirements of Section 514.
SECTION 514. VOTING REQUIREMENTS FOR MEMBERS. If a limited cooperative association has both patron and investor members, the following rules apply:
(1) the total voting power of all patron members may not be less than a majority of the entire voting power entitled to vote.
(2) action on any matter is approved only upon the affirmative vote of at least a majority of:
(A) all members voting at the meeting unless more than a majority is required by [Articles] 4, 12, 15 through 16 or the organic rules; and
(B) votes cast by patron members unless the organic rules require a larger affirmative vote by patron members.
(3) The organic rules may provide for the percentage of the affirmative votes that must be cast by investor members to approve the matter.
Comment
This Act seeks to balance financial and governance rights between patron members and investor members where a limited cooperative association has both types of members. In doing so, this Act does not follow the similar statutes in Minnesota, Wisconsin, Tennessee and Iowa that were catalysts in the development of this Act. This Act establishes a floor for patron member voting power below which the organic rules may not go. The organic rules may provide for greater voting power for patron members than required in this Section.
Paragraph (1) – At least a majority of the voting power in an association must be in the patron members if the association has both patron and investor members.
Paragraph (2) – If there are investor members this Section mandates two tests must be met for members to take action: (1) a majority of all members voting must be in the affirmative; and, (2) a majority of patron members voting must be in the affirmative. The two test approach is used for voting by members throughout the Act. The organic rules may require a larger affirmative vote for all members voting or may increase the affirmative vote required by patron members. By mandating patron member votes to be counted separately, this Act gives the patron members blocking power in all votes but does not necessarily give them the ability to dictate affirmative action.
Voluntary dissolution, amendments to the organic rules, conversions, mergers and certain dispositions of assets have special minimum voting requirements under Sections 405, 1205, 1504, 1603, and 1608.
EXAMPLE: An association has 30 members of which 20 are patron members and 10 are investor members all of whom attend and vote at a meeting of members. The bylaws provide for voting on a “one member, one vote” basis. The association has a majority of the total voting power in patron members. On a particular proposition, 12 of the patron members vote “yes” and eight vote “no.” Four investor members vote “yes” and six vote “no.” A majority of all members (16 of 30) voted “yes” and a majority of the patron members (12 of 20) voted “yes.” The proposition passes.
EXAMPLE: In the preceding example, eight of the patron members vote “yes”and 12 vote “no.” All of the investor members vote “yes.” Clearly a majority of all the members (18 of 30) voted “yes” but the proposition does not pass because a majority of the patron members did not vote “yes.”
EXAMPLE: In the first example, 18 patron members vote “yes” and two vote “no.” All of the investor members vote “no.” The proposition passes because a majority of the members (18 of 30) voted “yes” and a majority of the patron members (18 of 20) voted “yes” even though the proposition received no votes from the investor members. But see Comment to paragraph (3).
Paragraph (3) – In addition to the requirement for separately counting patron member votes, the organic rules may provide for a percentage of affirmative votes of the investor members necessary for a matter to be approved. That percentage does not necessarily need to be a majority and, unlike patron member voting percentage under paragraph (2), may be below a majority. A separate affirmative vote by investor members as permitted by this paragraph may result in giving investor members blocking power. This paragraph is for emphasis because it would be allowed under the general flexibility of the Act if the Act were silent. See Section 113.
SECTION 515. MANNER OF VOTING.
(a) Unless the organic rules otherwise provide, voting by a proxy at a members meeting is prohibited. This subsection does not prohibit delegate voting based on district or class.
(b) If voting by a proxy is permitted, a patron member may appoint only another patron member as a proxy and, if investor members are permitted, an investor member may appoint only another investor member as a proxy.
(c) The organic rules may provide for the manner of and provisions governing the appointment of a proxy.
(d) The organic rules may provide for voting on any question by ballot delivered by mail or voting by other means on questions that are subject to vote by members.
Comment
Subsection (a) – Many traditional cooperatives have not permitted voting by a proxy at membership meetings because of a belief that voting by a proxy is inconsistent with cooperative principles. In other cooperatives, such as housing cooperatives, proxies are viewed as an essential protection of members’ democratic control. This Act permits the organic rules to provide for voting by a proxy. If the organic rules do not expressly permit voting by a proxy, voting by a proxy is not permitted.
The word “proxy” is often used ambiguously, sometimes referring to the grant of authority to vote, sometimes to the document granting the proxy, and sometimes to the person to whom the authority is granted. This Act uses the term “proxy” to mean the person to whom authority to vote is granted.
The appointment of a proxy is, at base, the appointment of an agent and is governed by agency law and principles except that subsection (c) permits the organic rules to provide the manner of and provisions governing appointment of a proxy. The organic rules are entitled to provide how an appointment is to be made and proven, the duration of an appointment, whether an appointment may be irrevocable, and any other matter relating to a proxy that is not prohibited by this Act.
Subsection (b) – If voting by a proxy is permitted, patron members may only authorize other patron members; and, investor members may only authorize other investor members to be their proxy. If a member is both a patron member and an investor member, the member must authorize only another patron member to vote for the member as a patron member, and the member may only authorize other investor members to vote for the member as an investor member. This could be accomplished by appointing another member that is both a patron member and investor member.
Subsection (d) – The subsection gives broad power for the organic rules to provide for membership voting to be conducted in ways other than by being in attendance at a meeting or by authorizing a vote to be cast by a proxy. The power can be extended to all or less than all matters brought before the members at a meeting. The power can be utilized to prohibit other means of voting. Secret ballots could be required. Voting by mail could be authorized.
For purposes of subsection (d), attendance and voting pursuant to Sections 506(c) and 507(e) are not “voting by other means” because the member is present. See Comments to Sections 506(c) and 507(e).
An association may desire to study whether it is wise or a best practice to authorize both voting by mail or other means and by a proxy at the same time. If voting by mail or other means is permitted, votes may be cast without the benefit of discussion provided by attendance at a meeting. Although a member authorizing a proxy to vote for the member would not have that benefit, at least the proxy could have that advantage if the proxy had discretion in how to vote. On the other hand, if mail or other means are not permitted, less than a representative vote may be obtained.
SECTION 516. ACTION WITHOUT A MEETING.
(a) Unless the organic rules require that action be taken only at a members meeting, any action that may be taken by the members may be taken without a meeting if each member entitled to vote on the action consents in a record to the action.
(b) Consent under subsection (a) may be withdrawn by a member in a record at any time before the limited cooperative association receives a consent from each member entitled to vote.
(c) Consent to any action may specify the effective date or time of the action.
Comment
Almost half of the state business corporation statutes allow for less than unanimous consent in writing for action by shareholders and the consents are generally effective if signed and delivered by the number of shareholders necessary to pass a matter if it were voted on at a meeting. Unincorporated law rarely, if ever, requires meetings but does contemplate written consents. See RULLCA (2006) § 407(d). This Act retains the historical and more prevalent requirement that written consent to action without a meeting must be unanimous. The unanimity requirement provides that each member has the ability to force a meeting for purposes of voting and discussion of the matter to be voted upon. This is consistent with the deliberative function of meetings and cooperative principles.
SECTION 517. DISTRICTS AND DELEGATES; CLASSES OF MEMBERS.
(a) The organic rules may provide for the formation of geographic districts of patron members and:
(1) for the conduct of patron member meetings by districts and the election of directors at the meetings; or
(2) that districts may elect district delegates to represent and vote for the district at members meetings.
(b) A delegate elected under subsection (a)(2) has one vote unless voting power is otherwise allocated by the organic rules.
(c) The organic rules may provide for the establishment of classes of members, for the preferences, rights, and limitations of the classes, and:
(1) for the conduct of members meetings by classes and the election of directors at the meetings; or
(2) that classes may elect class delegates to represent and vote for the class in members meetings.
(d) A delegate elected under subsection (c)(2) has one vote unless voting power is otherwise allocated by the organic rules.
Comment
This Section is the specific authorization for a limited cooperative association to divide patron members into geographic districts and all members into classes. It must do so, if at all, in its organic rules. The preferences, rights, and limitations applicable to any class authorized may be provided in the organic rules not inconsistent with this Act. The organic rules may provide for members to hold meetings by district or class, the election of directors from districts or classes, and the authority of members in districts or classes to elect delegates to annual or special membership meetings. Delegates to membership meetings have only one vote unless the organic rules provide for different allocation of voting from districts pursuant to Section 512(a) or different aggregate or representative voting under Sections 511 through 513.
Section 404 addresses voting by district, class or other voting groups with respect to proposed amendments to the organic rules.
Subsections (a) and (b) – The geographic locations of patron members in a limited cooperative association may cause them to reflect different perspectives with respect to the association. For this reason, many traditional cooperatives, especially in agriculture, have permitted the division of members into geographic districts within which the members can address localized concerns, have representatives or delegates represent those interests in association wide meetings, and otherwise benefit from more localized structures within larger organizations. These subsections permit the organic rules to provide for formation of geographic districts of patron members, the conduct of district meetings, the election of directors from districts, and provides a default rule for voting by a delegate elected by a district to represent the district in a full membership meeting. The subsections do not provide details for the structure or operation of a district leaving that to the organic rules and, under its general management authority, the board of directors.
Investor members may not be divided into districts under this Act because the geographic location of investor members is unlikely to affect their perspectives with respect to the association in the same way or with the significance that geographic location could affect the relationships between patron members and the association.
Subsections (c) and (d) – The concept of “class” is a familiar one in the context of business corporation law where shares with identical or different preferences, limitations and rights including voting, may be issued. See, e.g., RMBCA § 6.01. Although the term “class” is used less frequently in unincorporated law the agreement that governs the relationship between the members frequently provides great variation in preferences, limitations, and rights among and between members. This Act expressly authorizes that the organic rules may provide classes of membership. An example of the use of a class would be to have two classes of investor members each of which elects one member of the board of directors. Of course, any such structure would also need to comply with Section 804.
Similar to other provisions, the authorization emphasizes the flexibility inherent in the Act and contemplates that the board of directors could be delegated the authority of establishing classes by the organic rules in a way that would emulate a “series” of shares in corporate law.
MEMBER’S INTEREST IN LIMITED COOPERATIVE ASSOCIATION
SECTION 601. MEMBER’S INTEREST. A member’s interest:
(1) is personal property;
(2) consists of:
(A) governance rights;
(B) financial rights; and
(C) the right or obligation, if any, to do business with the limited cooperative association; and
(3) may be in certificated or uncertificated form.
Comment
This Act has its genesis in cooperative principles and laws. Its structure combines elements of cooperative law, limited liability company law, and aspects of general and limited partnerships and corporate laws. The entity that may be formed under this Act is intended to be an unincorporated entity for state law purposes. With the flexibility of organizational structure and rights and obligations within an unincorporated entity structure, the relationships between the limited cooperative association and its members (and to some extent among the members themselves) have strong contractual underpinnings. This is consistent with cooperative common law where the courts have found the relationships between a cooperative and its members to be based on contract. In those cases, the articles of incorporation and bylaws of a cooperative, and sometimes additional contracts, are components of a contract even when the cooperative is organized under a corporate form of cooperative statute. The determination of the terms of the contract are made on a case by case basis and the cases are well-known. See, e.g., State ex rel. Boldt v. St. Cloud Milk Producers’ Association, 200 Minn. 1, 273 N.W. 603 (Minn. 1937); Tennessee Cotton Growers’ Association v. Hanson, 2 Tenn. App. 118 (1926); Boyle v. Pasco Growers’ Ass’n, Inc., 170 Wash. 516 17 P.2d (1932); New England Trust Co. V. Abbott, 162 Mass. 148, 38 N.E. 432 (1894).
The contractual interpretive gloss is a unique feature of cooperatives. This Act envisions its interpretation will be consistent with general cooperative law and reflect approaches similar to other unincorporated law.
Nonetheless, this Act provides for the fundamental governance rights and financial rights within a limited cooperative association and between the association and its members as well as the governance and financial relationships among all the members. The Act permits the organic rules of an association to vary, with certain limitations (for example, Section 514 that requires certain voting power for patron members), many of the rules provided by the Act as default rules so that the governance and financial relationships within the association can be designed to fit the objectives and needs of the association and its members. See Section 113.
Paragraph (1) – Like RULLCA (2006) and ULPA (2001), a member’s interest in a limited cooperative association is personal property. Section 603(a) deals with transferability and the results of transfers or attempted transfers, either voluntary or involuntary.
Paragraph (2) – The paragraph delineates in summary form the three basic rights of a member’s interest in a limited cooperative association. Detailed provisions with respect to governance rights and financial rights are contained in other parts of the Act.
Paragraph (2)(C) – One reason for the existence of cooperatives is for patron members to engage in business with the cooperative as a form of self-help. This subparagraph expressly recognizes the right or obligation of a member to engage in business with the cooperative as a component of the member’s interest in the association. The right or obligation is typically evidenced by a marketing or use contract, a membership agreement, or a combination of the two. In addition, portions of those contracts or agreements are sometimes contained in the organic rules. Marketing or similar contracts are usually interpreted the same way as third party contracts. The placement of provisions that would otherwise be interpreted as a third party contract in either a membership agreement or the organic rules may affect whether those provisions are interpreted solely as a matter of third party contract. Such a determination will depend on all the facts and circumstances of the particular scenario.
A membership agreement should not be confused with a control agreement (for example, the typical shareholders’ agreement in business corporation planning).
This Act does not provide details of the rights or obligations of a member to do business with the limited cooperative association leaving maximum flexibility for development of them to the organic rules and separate contract. For example in an agricultural limited cooperative association, membership may be required for an agricultural producer to be entitled to deliver production to the association for processing. In an association where workers are the patron members, membership in the association may be required to be an employee of the association. Typically, but again depending on the facts and circumstances, neither of these requirements would constitute financial or governance rights but, nonetheless, would be an integral part of the membership in the association.
Some traditional cooperatives provide in their organic rules and operating policies that simply engaging in business with the cooperative constitutes an application for membership in the cooperative or automatically constitutes a person as a member of the cooperative. For example, rural telephone cooperatives almost always provide that a request for service also constitutes an application for membership and, in some cases, require a person to be a member to obtain telephone service. This Act does not prohibit this type of provision in the organic rules.
Traditional cooperatives may engage in business with persons who are not members of the cooperative unless prohibited by the organic rules. Traditionally cooperatives have referred to those persons as “non-member patrons.” This Act does not prevent a limited cooperative association from engaging in business or other activities with non-members. These arrangements are not addressed in this Act. They are governed by general contract law. If an association engages in business or other activities with non-members, the organic rules may authorize the non-members to share in profit of the association but this would be done through a contract. Nothing in this Act prohibits an association from engaging in business with “non-member patrons.” The organic rules of an association could address “non-member patrons” as well.
Paragraph (3) – A limited cooperative association formed under this Act is not required to issue membership certificates, but it may do so. If it does so, it is required to note restrictions on transfer of membership interests on the certificate under Section 603(d)(2).
SECTION 602. PATRON AND INVESTOR MEMBERS’ INTERESTS.
(a) Unless the organic rules establish investor members’ interests, a member’s interest is a patron member’s interest.
(b) Unless the organic rules otherwise provide, if a limited cooperative association has investor members, while a person is a member of the association, the person:
(1) if admitted as a patron member, remains a patron member;
(2) if admitted as an investor member, remains an investor member; and
(3) if admitted as a patron member and investor member remains a patron and investor member if not dissociated in one of the capacities.
Comment
Subsection (a) – A limited cooperative association may have both patron members and investor members. Investor members are not permitted unless the organic rules provide for them.
Subsection (b) – If a limited cooperative association has investor members, persons who become a member as either a patron member or as an investor member will remain that type of member so long as the person remains a member of the association. A person may hold memberships in both capacities. See Section 116. The organic rules could provide that a patron member is converted to an investor member upon the occurrence of specified events, such as ceasing to qualify as a patron member under the organic rules. If a person holds memberships in both capacities, the member could dissociate in one capacity but not in the other or, subject to the Act and the organic rules of the association, could transfer one type of membership interest but not the other.
SECTION 603. TRANSFERABILITY OF MEMBER’S INTEREST.
(a) The provisions of this [act] relating to the transferability of a member’s interest are subject to [reference to Uniform Commercial Code].
(b) Unless the organic rules otherwise provide, a member’s interest other than financial rights is not transferable.
(c) Unless a transfer is restricted or prohibited by the organic rules, a member may transfer its financial rights in the limited cooperative association.
(d) The terms of any restriction on transferability of financial rights must be:
(1) set forth in the organic rules and the member records of the association; and
(2) conspicuously noted on any certificates evidencing a member’s interest.
(e) A transferee of a member’s financial rights, to the extent the rights are transferred, has the right to share in the allocation of profits or losses and to receive the distributions to the member transferring the interest to the same extent as the transferring member.
(f) A transferee of a member’s financial rights does not become a member upon transfer of the rights unless the transferee is admitted as a member by the limited cooperative association.
(g) A limited cooperative association need not give effect to a transfer under this section until the association has notice of the transfer.
(h) A transfer of a member’s financial rights in violation of a restriction on transfer contained in the organic rules is ineffective as to a person having notice of the restriction at the time of transfer.
Comment
Generally – Unincorporated entity law restricts transferability of interests because of the personal and contractual nature of the entities. Members choose to form unincorporated entities in reliance on their knowledge of, and comfort with, the persons with whom they will be associated. The governing law generally distinguishes between the governance (or management) rights of members and their financial rights. See, e.g., RULLCA (2006) § 501 (transferable interest is personal property); § 502(a)(3)(A) (transfer does not entitle transferee to participate in management or conduct of company’s activities); § 502(a)(3)(B) (transferee has right to receive distributions to which transferor would otherwise be entitled).
This Act draws the same basic distinction. Thus, subsections (b) and (c) provide the default rule that only financial rights may be transferred, and subsection (f) states that a transferee of financial rights does not thereby become a member. Subsection (e) provides that a transferee of financial rights receives only the right to share in the allocation of profits and losses and the right to receive the distributions to which the transferring member would otherwise have been entitled. A member who transfers financial rights retains governance rights. See Comment to Section 102(13).
Governance rights are a statutory component of a member’s interest, which is itself defined in Section 601(1) as personal property. The differentiation between financial rights and governance rights under this Act, and the exclusion of management rights from transferable interests under other unincorporated entity acts, rests in part on the fact that governance rights are as close to contracts for unique personal services as they are to purely commercial transactions or even the servicing and maintenance agreements attendant to the purchase of other property. This is especially true in a small, closely held entity.
Subject to Uniform Commercial Code – Unlike some entity statutes, such as RULLCA (2006), this Act specifies all of the rights and obligations that are components of a member’s interest and addresses assignments of governance rights as well as financial rights. RULLCA provides rules governing assignments of “transferable interests,” which are the equivalent of “financial rights” under this Act, but does not have a term equivalent to “governance rights” under this Act and does not deal with their assignment.
In transactions subject to Article 9 of the Uniform Commercial Code (“UCC”), Sections 9-406 and 9-408 must be consulted to determine the effectiveness of the provisions of this Act limiting transferability. Assuming the interest being transferred is not a “security” or “financial asset” as defined in UCC Article 8, it will be a “general intangible” (UCC Section 9-102(a)(42)) for purposes of Article 9 and the limited cooperative association will be an “account debtor” (UCC Section 9-102(a)(3)). If the account debtor’s principal obligation is a monetary obligation, it will be a “payment intangible” (UCC Section 9-102(a)(61)), a subset of general intangibles. Thus, a member’s financial rights constitute both a general intangible and a payment intangible, while the full set of rights that constitute a member’s interest are a general intangible but not a payment intangible.
UCC Article 9 applies to an assignment of any general intangible as collateral for an obligation, but it does not apply to the sale of a general intangible unless it is a payment intangible. If a general intangible that is not a payment intangible (a member’s interest) is assigned as collateral for an obligation, or if a payment intangible (a member’s financial rights) is sold, UCC Section 9-408 must be consulted. Under UCC Section 9-408(c), a legal rule restricting alienation, such as that set forth in Section 503(b) of this Act, “is ineffective to the extent that [it]: (1) would impair the creation, attachment, or perfection of a security interest; or (2) provides that the assignment or transfer or the creation, attachment, or perfection of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy. . . .” The same result would obtain under UCC Section 9-408(a) if the restriction on assignment or provision making an assignment an event of default constituted a term in an agreement between an account debtor and a debtor (a limited cooperative association and its member).
These provisions are not as far-reaching as they may at first appear. While a member may create a security interest in the rights at issue and will not be in default for doing so, the security interest in favor of the lender or buyer will not be enforceable if the statutory or agreement-based transfer restriction is effective under law other than the UCC. Of course, the provisions of this Act permitting restrictions on transfer constitute such a law. UCC Section 9-408(d) provides inter alia that, if the transfer restriction is effective under other law, the security interest created by the debtor is not enforceable against the account debtor, does not impose a duty on the account debtor, does not require the account debtor to recognize the security interest or deal in any manner with the secured party, does not entitle the secured party to use or reassign the rights, and does not entitle the secured party to trade secrets or confidential information. In other words, the secured party may have a perfected security interest in the rights but, other than pursuing proceeds if such are generated or attempting to use the security interest to enhance the value of its secured claim in bankruptcy, the secured party is powerless to enforce its security interest unless the limited cooperative association agrees to waive some or all of its rights.
If a payment intangible is assigned as collateral for an obligation, UCC Section 9-406(d) rather than UCC Section 9-408(a) applies to contractual restraints on alienation, and UCC Section 9-408(c), discussed above, applies to legal restrictions. UCC Section 9-406(d) overrides terms in an agreement between an account debtor and a debtor restricting assignment or making it an event of default. Unlike UCC Section 9-408(a), the override extends to the “creation, attachment, perfection, or enforcement of a security interest [emphasis supplied].” Although the secured party has enforcement rights, those rights are limited as a practical matter to collection of sums due from the account debtor under UCC Section 9-607 and do not extend to enforcement by a foreclosure sale under UCC Section 9-610 or the acceptance of collateral in whole or partial satisfaction of the secured obligations under UCC Section 9-620. Such a sale or acceptance would be governed by UCC Section 9-408. See UCC Sections 9-406(e) and 9-408(b). Thus, when financial rights are used as collateral for a loan, the only risk to the limited cooperative association is that it will be required to direct payments that otherwise would have gone to the member to a secured party instead.
Because members other than the member attempting to create a security interest are not account debtors, a contract among all the members would not be an agreement between an account debtor and a debtor. Thus, the restrictions on agreement-based anti-alienation provisions discussed above would not be applicable.
This Section has no application to agreement-based rights and obligations between a limited cooperative association and members under contracts that exist outside a member’s financial or governance rights in an association and the right or obligation of a member to do business with the association. See Comment to Section 601 and Preliminary Comment to Article 7.
Subsection (b) – If there are restrictions on transfers of interests in a limited cooperative association, except for financial rights, the interests are not transferable unless permitted by the organic rules, the association’s membership records, and on certificates of interest if the association issues certificates. An association does not need to issue certificates. See Section 601(3).
Subsection (c) – To be effective, a restriction or prohibition on the transfer of financial rights in a limited cooperative association must be set forth in the organic rules. The default rule that financial rights are transferable is based on laws governing other unincorporated entities, where such rights are considered to be personal property that is not subject to transfer restrictions except to the extent a restriction is set forth in the entity’s organic document. See Carter G. Bishop and Daniel S. Kleinberger, Limited Liability Companies: Tax and Business Law, ¶ 8.06[2] (discussing the “pick your partner” principle in the contexts of partnerships and limited liability companies); Cf. Larry E. Ribstein and Robert R. Keatinge, Ribstein and Keatinge on Limited Liability Companies (2d ed.) § 7:8, p. 7-15 (2007).
Subsection (e) – If a transferee is entitled under the Act and the organic rules to receive transfer of financial rights from a member of a limited cooperative association, the transferee is entitled to share in allocations of profit and loss and distributions of the association. This does not mean a transferee would have a greater right than the transferor. If it is a requirement that a patron member transact patronage with an association to participate in allocations of profit and loss, a transferee of financial rights from that member would not be permitted to receive a share of allocations of profit and loss if the member did not transact patronage with the association during the period for which the allocations are determined.
Subsection (f) – A transferee of the financial rights of a member of a limited cooperative association does not automatically become a member of the association because of the transfer. For a transferee to become a member (with all the rights of a member including governance rights) requires an act of the association to admit the transferee as a member of the association. A mere transfer of financial rights does not alone dissociate the transferor member. See Section 1101. Therefore, under the default rules, the transferor retains all other rights including the right to vote as a member. If the transferor is dissociated pursuant to Section 1101, the voting rights associated with the membership vanish. The organic rules could vary this result, however, by admitting the transferee as a member. If the organic rules admit the transferee, they should address the case of a transfer to a transferee who is an existing member; especially if the association uses the one member - one vote manner of voting.
Subsection (g) – This subsection recognizes an administrative necessity by relieving a limited cooperative association of any obligation with respect to a transfer of a membership interest in the association, or any portion of an interest, if the association has no knowledge or notice of the transfer or attempted transfer. As in other parts of the Act, what constitutes effective “notice” in this Section is left to other law. Provisions dealing with “notice” could also be written in the organic rules.
Subsection (h) – A transfer of all or a portion of a member’s interest in violation of a restriction on transfer is not effective against a person who had knowledge of the restriction. Conversely, if a transferee had no notice of the restriction, the transfer is effective.
SECTION 604. SECURITY INTEREST AND SET-OFF.
(a) A member or transferee may create an enforceable security interest in its financial rights in a limited cooperative association.
(b) Unless the organic rules otherwise provide, a member may not create an enforceable security interest in the member’s governance rights in a limited cooperative association.
(c) The organic rules may provide that a limited cooperative association has a security interest in the financial rights of a member to secure payment of any indebtedness or other obligation of the member to the association. A security interest provided for in the organic rules is enforceable under, and governed by, [reference to Article 9 of the Uniform Commercial Code].
(d) Unless the organic rules otherwise provide, a member may not compel the limited cooperative association to offset financial rights against any indebtedness or obligation owed to the association.
Comment
This Section succinctly addresses recurring security interest issues that arise concerning members’ interest and that are common to both cooperative and unincorporated entities. Under subsections (a) and (b) a member may create an enforceable security interest in its financial rights but, unless the organic rules provide otherwise, may not create an enforceable security interest in governance rights. The word “enforceable” is significant here and ties into the relationship between the provisions of this Act relating to transferability and those of UCC Sections 9-406 and 9-408. This relationship is discussed in the Comment to Section 603 (“Subject to Uniform Commercial Code”).
Subsection (c) – This subsection permits the organic rules of a limited cooperative association to create an enforceable UCC Article 9 security interest in the financial rights of a member to secure the indebtedness or the performance of obligations of a member to the association with the organic rules themselves constituting the security agreement. In other words, the organic rules will have the same legal effect as a UCC Article 9 security agreement authenticated by the debtor (member) and describing the collateral as the member’s financial rights. If the organic rules provide for such a security interest, issues of perfection, priority, and the manner of enforcement are governed by the relevant provisions of the UCC.
The creation of the security interest in the organic rules is consistent with the mutual self-help purpose of a cooperative which recognizes all members are inter-reliant. That is, a default by one member of an obligation to the cooperative can affect all members.
The usefulness of the ability of a cooperative to protect itself, and thus all of its members, in the event of a failure of one member to meet its obligations to the cooperative can arise in many contexts. If members in a supply cooperative fail to pay for goods received from the cooperative, the failure damages all other members by reducing the receipts of the cooperative used to cover its expenses in providing services to its members. Some agricultural cooperatives pay for commodities received by them through “net proceeds contracts” where the purchase price is determined by the total amounts received for the commodities by the cooperative less the cooperative’s expenses during a marketing period. Many of these cooperatives make advances towards the purchase price during the marketing period. If at the end of the marketing period, it is discovered the cooperative has overpaid its members, the security interest (although unperfected) can assist the cooperative in recovering the overpayments for the equitable treatment and benefit of all the members. This subsection constitutes a balancing of the interests of the member and creditors of the member, on one hand, and the association and its other members and creditors on the other. It reflects one of the unique features of cooperatives: those who own them are both their primary customers and sources of capital. This feature is present in limited cooperative associations even though it is arguably diluted by the possible existence of non-patron investor members.
Subsection (d) – Under the default rule of this subsection, no member of a limited cooperative association may require the association to offset amounts due to the member from the association against amounts due to the association from the member. An association may, however, offset against amounts due a member in accordance with other law.
SECTION 605. CHARGING ORDERS FOR JUDGMENT CREDITOR OF MEMBER OR TRANSFEREE.
(a) On application by a judgment creditor of a member or transferee, a court may enter a charging order against the financial rights of the judgment debtor for the unsatisfied amount of the judgment. A charging order issued under this subsection constitutes a lien on the judgment debtor’s financial rights and requires the limited cooperative association to pay over to the creditor or receiver, to the extent necessary to satisfy the judgment, any distribution that would otherwise be paid to the judgment debtor.
(b) To the extent necessary to effectuate the collection of distributions pursuant to a charging order under subsection (a), the court may:
(1) appoint a receiver of the share of the distributions due or to become due to the judgment debtor under the judgment debtor’s financial rights, with the power to make all inquiries the judgment debtor might have made; and
(2) make all other orders that the circumstances of the case may require to give effect to the charging order.
(c) Upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, the court may foreclose the lien and order the sale of the financial rights. The purchaser at the foreclosure sale obtains only the financial rights that are subject to the charging order, does not thereby become a member, and is subject to Section 603.
(d) At any time before a sale pursuant to a foreclosure, a member or transferee whose financial rights are subject to a charging order under subsection (a) may extinguish the charging order by satisfying the judgment and filing a certified copy of the satisfaction with the court that issued the charging order.
(e) At any time before sale pursuant to a foreclosure, the limited cooperative association or one or more members whose financial rights are not subject to the charging order may pay to the judgment creditor the full amount due under the judgment and succeed to the rights of the judgment creditor, including the charging order. Unless the organic rules otherwise provide, the association may act under this subsection only with the consent of all members whose financial rights are not subject to the charging order.
(f) This [act] does not deprive any member or transferee of the benefit of any exemption laws applicable to the member’s or transferee’s financial rights.
(g) This section provides the exclusive remedy by which a judgment creditor of a member or transferee may satisfy the judgment from the member’s or transferee’s financial rights.
Comment
Source: RULLCA (2006) § 505.
Charging order provisions appear in various forms in UPA, ULPA, RULPA (1976/1985), ULLCA, ULPA (2001), and RULLCA (2006). RULLCA (2006) § 505 built on those previous acts, while: (i) modernizing the language; (ii) making explicit certain points that had been at best implicit; and (iii) seeking to delineate more precisely the types of extraordinary circumstances that would have to exist before a court enforcing a charging order would be justified in interfering with a limited liability company’s management or activities. Much of this comment is closely derived from the comments to RULLCA (2006) § 505.
This Section balances the needs of a judgment creditor of a member or transferee with the needs of the limited cooperative association and its members. The Section achieves that balance by allowing the judgment creditor to collect on the judgment from distributions with respect to financial rights of the judgment debtor in the association while prohibiting interference in the management and activities of the association by the judgment creditor or a court. If the organic rules permit the entire interest of a member in an association to be transferred, this Section only permits a charging order to reach the member’s or transferee’s financial rights. It does not permit a charging order to reach governance rights in the association prior to foreclosure under those circumstances. See Comment to RULLCA (2006) § 505.
Under this Section, the judgment creditor of a member or transferee is entitled to a charging order against the relevant financial rights. While the order is in effect, it entitles the judgment creditor to whatever distributions would otherwise be due to the member or transferee whose interest is subject to the order. However, the judgment creditor has no voice in determining the timing or amount of those distributions. The charging order does not entitle the judgment creditor to accelerate any distributions or to otherwise interfere with the management and activities of the limited cooperative association.
“Distributions” may be made in a variety of ways under Section 1005 including the distribution of property. The charging order would apply to those distributions, but this would not compel the association to accelerate the time at which the property would be distributed or converted to money by the association in its ordinary course of operations.
This Section may not be varied by the organic rules.
Subsection (a) – The phrase “judgment debtor” encompasses both members and transferees. As a matter of civil procedure and due process, an application for a charging order must be served both on the limited cooperative association and the member or transferee whose financial rights are to be charged. See Comment to RULLCA (2006) § 505.
Subsection (b) – Paragraph (2) refers to “other orders” rather than “additional orders”. Therefore, given appropriate circumstances, a court may invoke either paragraph (1) or (2), or both.
Subsection (b)(1) – The receiver contemplated here is not a receiver for the limited cooperative association, but rather a receiver for the distributions. The principal advantage provided by this paragraph is a probable expanded right to information. However, that right goes no further than “the extent necessary to effectuate the collections of distributions pursuant to a charging order”. See Comment to RULLCA (2006) § 505.
Subsection (b)(2) – This paragraph must be understood in the context of the balance described in the general comment to this Section. In particular, the court’s power to make orders “that the circumstances of the case may require” is limited to “giv[ing] effect to the charging order.”
EXAMPLE: A judgment creditor with a charging order believes that the limited cooperative association should invest less of its surplus in operations, leaving more funds for distributions. The creditor moves the court for an order directing the association to restrict re-investment. Subsection (b)(2) does not authorize the court to grant the motion.
EXAMPLE: A judgment creditor with a judgment for $10,000 against a member obtains a charging order against the member’s financial rights. Having been properly served with the order, the limited cooperative association nonetheless fails to comply and makes a $3,000 distribution to the member. The court has the power to order the association to pay $3,000 to the judgment creditor to “give effect to the charging order.”
Under subsection (b)(2), the court also has the power to decide whether a particular payment is a distribution, because that decision determines whether the payment is part of the financial rights subject to the charging order. To the extent a payment is not a distribution, it may not be part of the financial rights and, if not, would not be subject to subsection (g).
Issues have arisen in the income tax area, as well as in some non-tax areas, with respect to whether monies distributed by business corporations or allocated and distributed by S corporations as dividends to stockholders employed by the corporations are really compensation or whether amounts treated by a corporation as compensation for services rendered by a stockholder are really disguised dividends. Whether a charging order applies to amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business under a bona fide retirement program or other benefits program or for other purposes for which compensation is ordinarily due, is a question of importance to this Section. The same issues could arise with limited cooperative associations. A court may be required to examine the true nature and purpose of monies or other property transferred to a member who is an employee of a limited cooperative association. Even in the context of other entities, however, case law is scant, but there is authority holding that compensation is a distribution. PB Real Estate, Inc. v. Dem II Properties, 719 A.2d 73, 75 (Conn. Appl Ct. 1998) (rejecting the defendants’ claim that the payments at issue were merely compensation for their services to their law firm, which was organized as a limited liability company, noting that the defendants’ characterization was at odds with the firm’s business records and tax returns and holding that the payments received were distributions subject to the charging order). See Comment to RULLCA (2006) § 505.
As in RULLCA, this Act has no specific rules for determining the fate or effect of a charging order when the limited cooperative association undergoes a merger or conversion under Article 16.
Subsection (c) – The phrase “that distributions under the charging order will not pay the judgment debt within a reasonable period of time” comes from case law. See, e.g., Nigri v. Lotz, 453 S.E.2d 780, 783 (Ga. Ct. App. 1995).
Enforcement of a charging order is by a foreclosure sale of the interest to which the charging order applies. See subsection (g).
Subsection (e) – The Comment to subsection (e) of RULLCA § 503 states: “This Act [RULLCA] jettisons the confusing concept of redemption [of the judgment under charging order provisions] and substitutes an approach that more closely parallels the modern, real-world possibility of the LLC or its members buying the underlying judgment (and thereby dispensing with any interference the judgment creditor might seek to inflict on the LLC).” This subsection follows RULLCA’s approach. The change in nomenclature is particularly helpful in the context of this Act because in traditional cooperatives equity accounts are frequently “redeemed.” Redemptions provide funds to members and maintain ownership of the cooperative by active members. The definition of “distribution” in Subsection 102(9) is broad enough to include payments in redemption of a membership interest in a limited cooperative association under Section 1006 making those payments a part of a member’s financial rights. A charging order could reach distributions to redeem the interest. The procedure provided in RULLCA and followed in this Act is appropriate for limited cooperative associations.
At the same time, when possible, buying the judgment remains superior to the mechanism provided by this subsection, because this subsection requires full satisfaction of the underlying judgment, while the limited cooperative association or the other members might be able to buy the judgment for less than face value. On the other hand, this subsection operates without need for the judgment creditor’s consent, so it remains a valuable protection in the event a judgment creditor seeks to do mischief to the association.
A unanimous vote of members is required for an association to pay a member’s judgment creditor under this subsection unless otherwise provided in the organic rules.
Subsection (g) – This subsection does not override Article 9 of the Uniform Commercial Code (“UCC”), which may provide different remedies for a secured creditor acting in that capacity. A secured creditor with a judgment might decide to proceed under UCC Article 9 alone, under this Section alone, or under both UCC Article 9 and this Section. In the last-mentioned circumstance, the constraints of this Section would apply to the charging order but not to the UCC Article 9 remedies. The effect of Section 604 with respect to the creation of security interests in membership interests in a limited cooperative association needs to be considered in connection with UCC Article 9 security interests and related remedies if a creditor seeks a security interest in a membership interest in an association in which the creditor’s debtor is a member. See Comments to Sections 603 and 604.
MARKETING CONTRACTS
Preliminary Comment