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D R A F T
FOR DISCUSSION ONLY
UNIFORM LIMITED COOPERATIVE
ASSOCIATION ACT
NATIONAL CONFERENCE OF
COMMISSIONERS
ON UNIFORM STATE LAWS
For Drafting Committee Meeting March 9-11, 2007
With Changes Shown in Strike and Score
WITH PREFATORY AND REPORTERS= NOTES
Copyright 82005
By
NATIONAL CONFERENCE OF
COMMISSIONERS
ON UNIFORM STATE LAWS
The
ideas and conclusions set forth in this draft, including the proposed statutory
language and any comments or reporter=s notes, have not been passed upon by the National
Conference of Commissioners on Uniform State Laws or the Drafting
Committee. They do not necessarily
reflect the views of the Conference and its Commissioners and the Drafting
Committee and its Members and Reporters.
Proposed statutory language may not be used to ascertain the intent or
meaning of any promulgated final statutory proposal.
February 7, 2007
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
LYLE W. HILLYARD, 175 E.
1st N., 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 E. 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 HOUGHTON, 5260 N.
Palm, Suite 421, Fresno, CA 93704
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
Prefatory Note................................................................................................................................ 1
[ARTICLE] 1 GENERAL PROVISIONS
SECTION 101. SHORT TITLE.................................................................................................. 11
SECTION 102. DEFINITIONS................................................................................................... 11
SECTION 103. LIMITED
COOPERATIVE ASSOCIATION SUBJECT TO AMENDMENT OR REPEAL OF [ACT]................................................................................................................................. 18
SECTION 104. NATURE, PURPOSE,
AND DURATION OF LIMITED COOPERATIVE ASSOCIATION 19
SECTION 105. PURPOSE AND DURATION OF LIMITED COOPERATIVE
ASSOCIATION................................................................................................................ 21
SECTION 105 106.
POWERS................................................................................................. 22
SECTION 106 107.
GOVERNING LAW.................................................................................. 23
SECTION 107 108.
SUPPLEMENTAL PRINCIPLES OF LAW.......................................... 23
SECTION 108 109.
NAME....................................................................................................... 23
SECTION 109 110.
RESERVATION OF NAME.................................................................... 26
SECTION 110.
REGISTERED NAME OF FOREIGN COOPERATIVE.............................. 27
SECTION 111. USE OF THE TERM ACOOPERATIVE@....................................................... 28
SECTION 112. EFFECT OF ORGANIC
RULES................................................................... 28
SECTION 113. REQUIRED
INFORMATION........................................................................... 31
SECTION 114. BUSINESS
TRANSACTIONS OF MEMBER PARTICIPANT WITH LIMITED
COOPERATIVE ASSOCIATION................................................................................................................ 33
SECTION 115. DUAL CAPACITY........................................................................................... 34
SECTION 116. DESIGNATED OFFICE
AND AGENT FOR SERVICE OF PROCESS.. 34
SECTION 117. CHANGE OF
DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS 36
SECTION 118. RESIGNATION OF
AGENT FOR SERVICE OF PROCESS.................... 37
SECTION 119. SERVICE OF PROCESS.............................................................................. 38
[ARTICLE] 2FILING AND ANNUAL REPORTS
SECTION 201. SIGNING OF RECORDS
TO BE DELIVERED FOR FILING TO THE [SECRETARY OF STATE]............................................................................................................................. 40
SECTION 202. SIGNING AND FILING OF RECORDS PURSUANT TO
JUDICIAL
ORDER............................................................................................................................ 41
SECTION 203. DELIVERY TO AND
FILING OF RECORDS BY [SECRETARY OF STATE]; EFFECTIVE TIME AND DATE............................................................................................................ 41
SECTION 204. CORRECTING FILED
RECORD.................................................................. 43
SECTION 205. LIABILITY FOR FALSE
INFORMATION IN FILED RECORD.................... 44
SECTION 206. CERTIFICATE OF GOOD
STANDING OR AUTHORIZATION.................. 44
SECTION 207. ANNUAL REPORT FOR
[SECRETARY OF STATE]................................. 45
SECTION 208. FILING FEES;
RULES AND REGULATIONS; ANNUAL REPORTS....... 47
[ARTICLE] 3FORMATION AND ARTICLES OF
ORGANIZATION
SECTION 301. ORGANIZERS................................................................................................. 48
SECTION 302. FORMATION OF LIMITED COOPERATIVE
ASSOCIATION;
ARTICLES OF ORGANIZATION................................................................................... 49
SECTION 303. ORGANIZATION OF LIMITED
COOPERATIVE ASSOCIATION.............. 50
SECTION 304. BYLAWS.......................................................................................................... 52
[ARTICLE] 4MEMBERS PARTICIPANTS
SECTION 401. MEMBERS PARTICIPANTS......................................................................... 55
SECTION 402. BECOMING A MEMBER
PARTICIPANT..................................................... 55
SECTION 403. NO RIGHT OR POWER AS MEMBER PARTICIPANT
TO BIND
LIMITED
COOPERATIVE ASSOCIATION................................................................... 56
SECTION 404. NO LIABILITY AS MEMBER
PARTICIPANT FOR LIMITED COOPERATIVE ASSOCIATION OBLIGATIONS................................................................................................................. 56
SECTION 405. RIGHT OF MEMBER
PARTICIPANT AND FORMER MEMBER PARTICIPANT TO INFORMATION................................................................................................................ 57
SECTION 406. ANNUAL MEMBERS= PARTICIPANTS= MEETINGS................................. 62
SECTION 407. SPECIAL MEMBERS= PARTICIPANTS= MEETINGS................................ 63
SECTION 408. NOTICE OF MEMBERS= PARTICIPANTS= MEETINGS............................ 65
SECTION 409. WAIVER OF MEMBERS= PARTICIPANTS= MEETING NOTICE.............. 66
SECTION 410. QUORUM OF MEMBERS
PARTICIPANTS................................................ 66
SECTION 411. VOTING BY PATRON MEMBERS
PARTICIPANTS.................................. 67
SECTION 412. DETERMINATION OF
VOTING POWER OF PATRON MEMBER PARTICIPANT. 68
SECTION 413. VOTING BY INVESTOR MEMBERS
PARTICIPANTS............................... 69
SECTION 414. VOTING REQUIREMENTS
FOR MEMBERS PARTICIPANTS................ 69
SECTION 415. MANNER OF VOTING.................................................................................... 70
SECTION 416. ACTION WITHOUT A
MEETING................................................................... 71
SECTION 417. DISTRICTS AND
DELEGATES; CLASSES OF MEMBERS PARTICIPANTS. 71
[ARTICLE] 5MEMBER PARTICIPANT
INTEREST
SECTION 501. MEMBER PARTICIPANT
INTEREST........................................................... 74
SECTION 502. PATRON AND INVESTOR
MEMBER INTERESTS PARTICIPANT INTEREST 76
SECTION 503. TRANSFERABILITY OF MEMBER
PARTICIPANT INTEREST................ 76
SECTION 504. SECURITY INTEREST
AND SET-OFF........................................................ 79
SECTION 505. CHARGING ORDERS FOR
A JUDGMENT CREDITOR OF MEMBER PARTICIPANT OR TRANSFEREE................................................................................................................ 80
[ARTICLE] 6AGRICULTURAL MARKETING
CONTRACTS
SECTION 601. AUTHORITY..................................................................................................... 84
SECTION 602. MARKETING CONTRACTS.......................................................................... 84
SECTION 603. DURATION OF
MARKETING CONTRACT................................................. 86
SECTION 604. REMEDIES FOR BREACH
OF CONTRACT.............................................. 86
SECTION 605. INDUCING BREACH OF MARKETING OR PURCHASE
CONTRACTS.................................................................................................................. 87
[ARTICLE] 7DIRECTORS AND
OFFICERS
SECTION 701. EXISTENCE AND
POWERS OF BOARD OF DIRECTORS.................... 89
SECTION 702. NO LIABILITY AS
DIRECTOR FOR LIMITED COOPERATIVE ASSOCIATION=S OBLIGATIONS................................................................................................................. 90
SECTION 703. QUALIFICATIONS OF
DIRECTORS AND COMPOSITION OF BOARD. 90
SECTION 704. ELECTION OF
DIRECTORS......................................................................... 91
SECTION 705. TERM OF DIRECTOR.................................................................................... 92
SECTION 706. RESIGNATION OF
DIRECTOR..................................................................... 93
SECTION 707. REMOVAL OF DIRECTOR........................................................................... 94
SECTION 708. SUSPENSION OF
DIRECTOR BY BOARD................................................ 96
SECTION 709. VACANCY ON BOARD................................................................................. 97
SECTION 710. COMPENSATION OF
DIRECTORS............................................................ 98
SECTION 711. MEETINGS...................................................................................................... 99
SECTION 712. ACTION WITHOUT
MEETING....................................................................... 99
SECTION 713. MEETINGS AND NOTICE........................................................................... 100
SECTION 714. WAIVER OF NOTICE OF
MEETING.......................................................... 101
SECTION 715. QUORUM....................................................................................................... 102
SECTION 716. VOTING.......................................................................................................... 103
SECTION 717. COMMITTEES.............................................................................................. 103
SECTION 718. STANDARDS OF
CONDUCT AND LIABILITY......................................... 105
SECTION 719. CONFLICT OF
INTEREST.......................................................................... 106
SECTION 720. OTHER
CONSIDERATIONS OF DIRECTORS........................................ 107
SECTION 721. RIGHT OF DIRECTOR OR COMMITTEE MEMBER
TO
INFORMATION.............................................................................................................. 108
SECTION 722. APPOINTMENT AND
AUTHORITY OF OFFICERS................................. 108
SECTION 723. RESIGNATION AND
REMOVAL OF OFFICERS..................................... 109
[ARTICLE] 8INDEMNIFICATION
SECTION 801. INDEMNIFICATION....................................................................................... 111
[ARTICLE] 9CONTRIBUTIONS,
ALLOCATIONS, AND DISTRIBUTIONS
SECTION 901. MEMBERS= PARTICIPANTS= CONTRIBUTIONS.................................... 112
SECTION 902. FORMS OF
CONTRIBUTION AND VALUATION..................................... 113
SECTION 903. CONTRIBUTION
AGREEMENTS............................................................... 113
SECTION 904. ALLOCATIONS OF
PROFITS AND LOSSES.......................................... 114
SECTION 905. DISTRIBUTIONS........................................................................................... 120
SECTION 906. REDEMPTION OF
EQUITY......................................................................... 120
SECTION 907. LIMITATIONS ON
DISTRIBUTIONS............................................................ 121
[SECTION 908. RELATION RELATIONSHIP TO STATE
THE UNIFORM
SECURITIES LAW ACT]............................................................................................. 123
[SECTION 909. ALTERNATIVE
DISTRIBUTION OF UNCLAIMED PROPERTY, DISTRIBUTIONS, REDEMPTIONS, OR PAYMENTS. ........................................................................... 125
[ARTICLE] 10DISSOCIATION
SECTION 1001. MEMBER=S PARTICIPANT=S
DISSOCIATION...................................... 126
SECTION 1002. EFFECT OF
DISSOCIATION AS MEMBER PARTICIPANT................ 131
SECTION 1003. POWER OF ESTATE OF
MEMBER PARTICIPANT............................. 132
[ARTICLE] 11DISSOLUTION
SECTION 1101. DISSOLUTION............................................................................................ 133
SECTION 1102. NONJUDICIAL
DISSOLUTION................................................................. 133
SECTION 1103. JUDICIAL
DISSOLUTION.......................................................................... 134
SECTION 1104. VOLUNTARY
DISSOLUTION BEFORE COMMENCEMENT OF ACTIVITY 136
SECTION 1105. VOLUNTARY
DISSOLUTION BY THE BOARD AND MEMBERS. PARTICIPANTS. 136
SECTION 1106. WINDING UP............................................................................................... 137
SECTION 1107. DISTRIBUTION OF
ASSETS IN WINDING UP LIMITED COOPERATIVE ASSOCIATION........................................................................................................................................ 139
SECTION 1108. KNOWN CLAIMS
AGAINST DISSOLVED LIMITED COOPERATIVE ASSOCIATION 140
SECTION 1109. OTHER CLAIMS
AGAINST DISSOLVED LIMITED COOPERATIVE ASSOCIATION. 142
SECTION 1110. COURT PROCEEDING............................................................................. 143
SECTION 1111. ADMINISTRATIVE
DISSOLUTION........................................................... 145
SECTION 1112. REINSTATEMENT FOLLOWING ADMINISTRATIVE
DISSOLUTION.............................................................................................................. 146
SECTION 1113. DENIAL OF
REINSTATEMENT; APPEAL.............................................. 147
SECTION 1114. STATEMENT OF
DISSOLUTION............................................................. 148
SECTION 1115. STATEMENT OF
TERMINATION............................................................. 149
[ARTICLE] 12]ACTIONS BY MEMBERS PARTICIPANTS
SECTION 1201.
DIRECT ACTION BY PARTICIPANT........................................................ 152
SECTION 1201 1202.
DERIVATIVE ACTION..................................................................... 153
SECTION 1202 1203.
PROPER PLAINTIFF....................................................................... 156
SECTION 1203 1204.
PLEADING........................................................................................ 158
SECTION 1204 1205. COURT APPROVAL FOR DISCONTINUANCE OR
SETTLEMENT.............................................................................................................. 158
SECTION 1205 1206.
PROCEEDS AND EXPENSES..................................................... 159
[ARTICLE] 13FOREIGN
COOPERATIVES
SECTION 1301. GOVERNING LAW..................................................................................... 160
SECTION 1302. APPLICATION FOR
CERTIFICATE OF AUTHORITY............................ 161
SECTION 1303. ACTIVITIES NOT
CONSTITUTING TRANSACTING BUSINESS......... 162
SECTION 1304. FILING OF
CERTIFICATE OF AUTHORITY............................................ 163
SECTION 1305. NONCOMPLYING NAME
OF FOREIGN COOPERATIVE.................... 164
SECTION 1306. REVOCATION OF
CERTIFICATE OF AUTHORITY.............................. 164
SECTION 1307. CANCELLATION OF
CERTIFICATE OF AUTHORITY; EFFECT OF FAILURE TO HAVE CERTIFICATE............................................................................................................... 166
SECTION 1308. ACTION BY
[ATTORNEY GENERAL]...................................................... 167
[ARTICLE] 14AMENDMENT OF
ORGANIC RULES
SECTION 1401. AUTHORITY TO AMEND
ORGANIC RULES.......................................... 168
SECTION 1402. NOTICE AND ACTION
ON AMENDMENT OF ARTICLES OF ORGANIZATION OR BYLAWS........................................................................................................................ 169
SECTION 1403. METHOD OF VOTING
ON AMENDMENT OF ORGANIC RULES...... 170
SECTION 1404. CHANGE TO
AMENDMENT OF ORGANIC RULES AT MEETING.... 170
SECTION 1405. [RESERVED: VOTING BY DISTRICT, OR CLASS,
OR VOTING GROUP]. 171
SECTION 1406. APPROVAL OF
AMENDMENT............................................................... 172
SECTION 1407. EMERGENCY BYLAWS........................................................................... 175
SECTION 1408. RESTATED ARTICLES............................................................................. 176
SECTION 1409. AMENDMENT OR RESTATEMENT OF ARTICLES OF
ORGANIZATION............................................................................................................ 176
[ARTICLE] 15CONVERSION,
MERGER, AND CONSOLIDATION
SECTION 1501. DEFINITIONS.............................................................................................. 179
SECTION 1502. CONVERSION............................................................................................ 181
SECTION 1503. ACTION ON PLAN OF
CONVERSION BY CONVERTING LIMITED COOPERATIVE ASSOCIATION.............................................................................................................. 182
SECTION 1504. VOTING BY CLASS OR DISTRICT].......................................................... 184
SECTION 1504 1505.
FILINGS REQUIRED FOR CONVERSION; EFFECTIVE DATE. 184
SECTION 1505 1506.
EFFECT OF CONVERSION........................................................... 186
SECTION 1506 1507.
MERGER........................................................................................... 189
SECTION 1507 1508. NOTICE AND ACTION ON PLAN OF MERGER BY
CONSTITUENT LIMITED COOPERATIVE ASSOCIATION.................................... 190
SECTION 15081509.
APPROVAL OR ABANDONMENT OF MERGER BY MEMBERS PARTICIPANTS
OF CONSTITUENT LIMITED COOPERATIVE ASSOCIATION.............................. 191
SECTION 15091510.
FILINGS REQUIRED FOR MERGER; EFFECTIVE DATE.......... 193
SECTION 15101511.
EFFECT OF MERGER..................................................................... 195
SECTION 15111512.
CONSOLIDATION. ........................................................................... 196
SECTION 15121513.
[ARTICLE] NOT EXCLUSIVE.......................................................... 197
[ARTICLE] 16DISPOSITION OF
ASSETS
SECTION 1601. DISPOSITION OF ASSETS NOT REQUIRING MEMBER
PARTICIPANT
APPROVAL........................................................................................ 198
SECTION 1602. MEMBER PARTICIPANT
APPROVAL OF OTHER DISPOSITION OF ASSETS. 199
SECTION 1603. NOTICE AND ACTION ON
DISPOSITION OF ASSETS....................... 199
SECTION 1604.
METHOD OF VOTING............................................................................... 200
SECTION 16041605.
ACTION ON DISPOSITION OF ASSETS....................................... 200
[ARTICLE] 17MISCELLANEOUS
PROVISIONS
SECTION 1701. RELATION TO
RESTRAINT OF TRADE AND ANTITRUST LAWS..... 202
SECTION 1702. REQUIREMENTS OF
OTHER LAWS..................................................... 203
SECTION 1703. UNIFORMITY OF
APPLICATION AND CONSTRUCTION.................... 204
SECTION 1704. RELATION TO
ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT................................................................................................................................ 204
SECTION 1705.
SAVINGS CLAUSE................................................................................... 204
SECTION 17061705.
EFFECTIVE DATE........................................................................... 204
SECTION 1706.
SAVINGS CLAUSE................................................................................... 204
UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT
Prefatory Note
(1) This Draft attempts to provide an unincorporated and flexible
organizational structure buttressed and combined with cooperative principles
and values in order to obtain an increased equity investment opportunity
necessary for both capital intensive and start-up businesses. It is an alternative to other cooperative and
unincorporated structures already available under state laws.
It
attempts to provide a flexible breastwork of mandatory and default rules that
are grounded in cooperative values and participant governance. Nonetheless, the flexibility in this draft is
not necessarily Ahard-wired@ such that it will in all cases be qualified as a
cooperative, for example, under definitions of Acooperative@ for various federal law provisions. See generally (3), infra.
To
the extent it is already possible to qualify as a Acooperative@ for federal purposes without being organized as a
state law cooperative, other flexible forms of business organizations, like the
LLC, may be used for cooperative purposes.
This Draft, however, provides an efficient default template that
encourages planners to utilize tested cooperative principles for a broad range
of entities and purposes.
(2) Introduction
and Process
(a)
Freestanding and Nonexclusive Nature of the Act
The
Committee is charged with drafting a Limited Cooperative Association
Act. The Act is to be a
free-standing act separate and apart from current cooperative acts and,
therefore, is not a statutory replacement of other law but; rather, another
statutory option for organizing cooperatives as a way to encourage economic
development.
It
is important to remember that this act does not replace any existing state
co-op laws and, therefore, fulfills a different niche in the cooperative
economic ecosystem. Thus, some
provisions will be different than the more corporate-like framework of existing
traditional statutes. It is intended to
provide a cooperative structure as an alternative to the LLC; and, in some
ways, Ainvestor members participants@ are similar to limited partners in a limited
partnership. It seeks to provide an
alternative which accounts for cooperative principles to a greater
extent, with less room for design abuse than can be engineered in a
combination of entities. Nonetheless,
though some features of the cooperative association are very similar to the
features of other entities and descriptive analogies to other entities may be
helpful, it is imperative to understand that the cooperative association is a
unique entity with important distinctions from each of the other entities to
which it is often compared.
The
Committee=s scope was originally limited to AAgriculture and Agriculture Related@ purposes. In
effect, neither the Iowa nor Minnesota Acts are limited to agriculture.
An
overarching question raised by this project, and discussed at the Drafting
Committee meetings, is what it means to be a cooperative. Older traditional statutes have found meaning
and form by finding the definition of a cooperative in other law or by stating
that the cooperative must be operated pursuant to a Acooperative plan,@ a
term that is undefined and without fixed meaning even within the industry. As a practical matter, perhaps, the most
important definition of Acooperative@ appears under the guise of the definition of
operating on a Acooperative basis@ found
in federal income tax law. A brief
illustrative discussion of some of those definitions is contained in the next
part of this preliminary note (ACooperatives: Background Information@).
The
definitions of these terms have had a modicum of Aevolvability@ over time, at least on the margin (and concerning
select issues). For example, the Service
threw in the towel on the issue 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. (Rev. Rul.
93-21, 1993-1 C.B. 188, stating that the 50 percent threshold is not
necessary). Further a frequently quoted
passage from a dissent written by Justice Brandeis (and joined by
Holmes) 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), 2788 U.S. 515
(1929) (Brandeis, J., dissenting, Westlaw p. 14).
Brandeis,
as of 1929, also 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.
The
genesis of the project was the enactment of the AWyoming
Processing Cooperative Law@ in 2001 and the AMinnesota
Cooperative Associations Act@ in 2003. The
Province of Saskatchewan enacted an Act for similar purposes that predated the
Wyoming law but that act took a significantly different approach. Tennessee, Iowa and Wisconsin have enacted
statues based on the Minnesota Act.
Similar legislation was introduced in Vermont and Missouri but not
passed. Nebraska has been studying an
act and it may be introduced in 2007.
The
Committee=s scope was originally limited to AAgriculture and Agriculture Related@ purposes. In
effect, neither the Iowa nor Minnesota Acts are limited to agriculture.
(b) Cooperative Values
The
Committee has carefully considered traditional cooperative values and has made
every reasonable attempt to integrate them into this draft as either mandates
or default rules. This represents a more
explicit design than current state cooperative law. The attention to cooperative values was
necessary because the project expressly contemplates the addition of investor
members (beyond nonvoting preferred stock as has long been available to
cooperatives under existing state law).
The
addition of investor members, however, is one of extent and not kind. As explained later in this preliminary note,
one cooperative value is democratic member control. This, at base, means that those using
the cooperative control it. Member
control remains an important part of this draft even though it allows for
investor members. There has long been,
however; even if ignored, an economic trade-off in cooperatives between equity
and control and this act and those state laws on which it is based attempts to
recognize and quantify this trade-off.
All
businesses, including cooperatives, continually monitor and balance equity
structure; which unavoidably includes both long-term debt and equity. Creditors, too, exert control over decisions. Express covenants and Adeemed insecure@
clauses represent control by the creditor, no matter of the identity of the
creditor (e.g., secondary market standards and requirements in some co-op
sectors). Further, even under
Capper-Volstead, preferred equity capital may demand a high fixed rate of return
as long as all patron members have Aone vote.@ This act is an attempt to reduce fixed costs
associated with debt and preferred equity for purposes of economic development.
There
are several formulations of Acooperative principles.@ As a matter
of general consensus they 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. This draft contains
specific provisions that contemplate these values.
One
of the fulcrums regarding cooperative values in this draft is Section 104,
captioned ANature of Limited Cooperative Association.@ It addresses
the values of voluntary membership, member economic participation, and autonomy
and independence. Again, autonomy must
be placed within the practical context of long-term debt and equity. Voluntary membership remains voluntary in the
sense that this act requires consent.
Open membership has been compromised under similar existing law and
remains so here in order to allow (but not require) the formation of Aclosed@ cooperatives.
Closed cooperative structure is necessary for patron members to share
the increased value of their equity and to provide member liquidity. These features make a business formed in
general conformance with other cooperative values more attractive.
Section
904, captioned AAllocations of Profits and Losses,@ expressly provides for the values of member
economic participation; education, training and information; and cooperation
among cooperatives. One of the trade-off
concerns Ademocratic member control.@ Sections
411(a), 412, 414, 704 and 716(a) all concern this trade-off.
AConcern for community@ is directly addressed in Section 720 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.
In
sum, this draft expressly considers the important traditional cooperative
values and provides reasoned departures from those values only where
economically necessary. Its intention
is to expand the use of entities recognizing cooperative principles.
Finally,
this draft is flexible enough to form a limited cooperative which operates like
a traditional cooperative. It is the
Committee=s understanding that several such cooperatives have
formed under the Minnesota act, one of this act=s predecessors.
(3) Cooperatives:
General Background Information
Traditionally,
cooperatives have been organized as corporations under State laws specifically
enacted to authorize the creation of businesses operated on a cooperative
basis. The statutes direct organizers to
follow so-called cooperative principles of user-control, user-benefit, and
user-ownership. Voting rights are only
available to patron-users of the cooperative=s
services and earnings are allocated to patrons on the basis of use, rather than
on the basis of investment.
Member-patrons are the primary source of equity, which is accumulated
over time in the form of retained earnings allocated to equity accounts of the
patrons on the basis of each patron=s pro rata share of business conducted each year
with the cooperative. No market exists
for this equity and it is usually only redeemable at face value by the
cooperative at the discretion of the cooperative=s
board of directors.
The
new cooperative acts (Wyoming, Minnesota, Tennessee, and Iowa) on which this
project is based are sometimes known as ANew Generation Cooperative@ (ANGC@) acts though that name has not gained a precise
technical meaning and one of the primary reasons for this project is to attempt
to gain a measure of uniformity between and among limited cooperative
association acts as they are adopted by the states and to provide as
well-drafted and considered an act as reasonably possible.
In
fact, a new cooperative model gained some popularity, particularly in the Upper
Midwest starting in the 1970=s. The
features that distinguish these ANew Generation@ cooperatives from traditional cooperatives include:
(1) a new equity accumulation program based on substantial upfront investments
by patron-members, (2) a tie-in between equity investment and the right and
obligation to deliver a fixed quantity of product to the cooperative each year,
and (3) a right of patron-members to transfer their equity to another person
eligible to become a patron-member at whatever price is acceptable to both
parties. While traditional cooperatives
usually seek to maximize membership, New Generation cooperatives are Aclosed-end@ with a limited number of members.
While
New Generation cooperatives involve some significant departures from
traditional cooperative structure, they have been organized under traditional
cooperative statutes. Thus they have
limited voting rights to patron-users and allocated earnings to users based on
use.
The
new cooperative acts on which this project is based are sometimes known as ALLC-Cooperative@ laws though that name has not gained a precise
technical meaning. The forerunners to
this project differ in several important ways from traditional cooperative
laws. First, the entities created are
unincorporated associations. Thus they
have the option, under the Internal Revenue Service check-the-box regulations,
to be taxed as partnerships rather than as cooperative associations. Second, up to 85 percent of the voting rights
can be vested in non-patron investor members.
And third, up to 85 percent of the earnings can be directed to non-patron
investor members on the basis of investment.
The stated purpose of those laws, as well as this project, is to provide
a vehicle for economic development (especially, though by no means exclusively
in rural areas).
The
new cooperative acts are more flexible than traditional cooperative acts and
such flexibility moves away from fail-safe statutory drafting for purposes of
qualifying as a Acooperative@ under other federal and state laws and
regulations. The primary Aother laws@ are anti-trust law, taxation, securities law, and
access to special cooperative loan provisions and institutions like the Farm
Credit System.
An
example of how other laws relate to the law of cooperatives is the
Capper-Volstead Act of 1922. Without the
Capper-Volstead Act, the Sherman Act of 1890 would apply to make most farmer
marketing contracts with cooperatives per se illegal restraints of trade
because the contracts fix prices. That
is, when farmers market products through cooperatives they agree on prices they
will charge and may agree to sell exclusively to the cooperative. The Capper-Volstead Act provides limited, but
important protection from the Sherman Act.
In order for a cooperative to qualify for the protection: (1) only
agricultural producers may be voting members; (2) the cooperative must be
operated for the mutual benefit of members as producers; (3) no member may have
more than one vote or dividends on stock may not exceed 8% per year; and
(4) the value of products marketed for members must be greater than the value
of products marketed for nonmembers.
Many traditional state agricultural (and general purpose) cooperative
statutes Ahard-wire@ compliance with Capper-Volstead by, for example,
mandating the 8% dividend limit on equity.
The LLC-Cooperative statutes, on the other hand, follow the general
trend in unincorporated statutes by allowing a cooperative to decide
whether to qualify for the antitrust protection provided by the Capper-Volstead
Act. Thus, the 8% dividend limitation is
not mandated by the LLC-Cooperative statutes.
Similarly,
the federal income tax law as of 2006 2005 delineates
requirements that associations must meet to qualify for taxation under
Subchapter T of the Internal Revenue Code (patronage refunds not taxable at the
cooperative level). The Code further
delineates more requirements to qualify for tax treatment under Section 521
(for farmer cooperatives with additional tax benefits) as of 2006
2005. Qualification for
cooperative taxation, however, is inconsistent with tax treatment as a
partnership. Thus, the LLC-Cooperative
model allows flexibility for the organization to be taxed as a partnership or
as a cooperative as the organization itself chooses. The LLC-Cooperative statutes enacted to date
are an option to, not a replacement for, existing cooperative laws.
The
Drafting Committee was established by the Conference at the 2003 Annual Meeting
pursuant to a Study Report and met for the first time December 12-14,
2003. It has met each Spring and Fall
since then. The first meeting of the
Drafting Committee discussed substantive and general drafting and formatting
issues, including the level of detail appropriate for the act and used the AWyoming Processing Cooperative Law@ as a model.
The Committee determined that a higher level of detail than that found
in the Wyoming law, following the general Alook and feel@ of general and traditional cooperative acts, was
appropriate. Discussion at subsequent
Drafting Committee meetings focused on substantive issues within the context of
a draft closely following the Minnesota Cooperative Associations Act which
integrated some of the substantive discussion from the first meeting.
The
Drafting Committee was originally asked to prepare a AUniform Agricultural and Agricultural Related
Cooperatives Act.@ However, at
the 2006 2005 NCCUSL Annual Meeting, the charge was amended to
draft a AUniform Limited Cooperative Association
Associations Act.@ Thus the
scope of the project was arguably expanded from a law targeted at agricultural
cooperatives to one available to a wide range of enterprises. The reason for the change in scope sounded in
both technical drafting issues and policy.
First, the Conference struggled for nearly two years to devise a
definition of AAgricultural and Agricultural Related@ that was precise yet not both over and under
inclusive. From that limited perspective
the change in scope can be seen as a change in Ainclusive/permissive@ to Aexclusive/prohibited@ or,
stated another way, from a positive to a negative definition. The foregoing change in approach was to
remove ambiguity from the draft. Second,
it was difficult to articulate a reasoned policy statement concerning why the
project should be limited to Aagricultural,@ no matter how defined. Finally, the leading cooperative association
laws as they currently exist were not limited to Aagricultural@ uses even though some notion of Aagricultural@ remains included in their names. Thus, attempting to limit the application of
the project to Aagricultural@ was inconsistent with existing acts and cast doubt
about whether NCCUSL ULC could succeed its overarching
organizational mission encouraging uniformity in state laws.
The
current draft is the result of efforts by the Committee to move in this
direction. The Committee has had only
limited opportunity to discuss the specific language of this draft and
continues to discuss the appropriateness of exclusions, if any from the draft.
(4) Further
Background on Flexibility and Current Non-Law Constraints
In
numerous discussions of the Committee, it has been observed that it is
important for Limited Cooperative Associations that would be created
under the Uniform Limited Cooperative Association Associations
Act (the AAct@) to maintain qualification or exemption status
available to traditional cooperative organizations. This discussion is intended to focus those
issues without being an in-depth research report regarding any of them. It will identify some of the relevant federal
statutes and pose an issue under each of them and will provide, as an example,
more discussion of the application of Subchapter T of the Internal Revenue Code
as a prototypical analytical approach undertaken under other federal statutes.
Despite
a desire on the part of some people to try to preserve qualification or
exemption requirements for purposes of other law (non-state) for Limited
Cooperative Associations under the Act, some have suggested that is not likely
to happen with organizations organized under the Act. A bit of research suggests there are reasons
to believe there exists (to some degree) mitigating conditions that narrow the
concerns that associations formed under the Act will be unable to meet the
qualification requirements for co-ops under other law.
This
part of the Preliminary Note focuses, for illustration, on the question of
whether an entity will qualify for a qualification or exemption under statutes
based on the quantity of business done by the entity with members and
patrons. It does not look at other
requirements for qualification or exemption, such as whether the entity is
required to allocate and distribute patronage refunds, whether the entity has
one member-one vote, whether the entity must be involved in agriculture and its
members be agricultural producers, whether patron members are the only ones
allowed to vote or whether an entity must be a corporation.
The
following five (5) statutes have a quantitative requirement:
(1)
7 U.S.C. ' 291 (quantitative requirement in definition of
cooperative in Capper-Volstead federal antitrust exemption);
(2)
12 U.S.C. ' 1141j(a) (quantitative requirement in definition of
cooperative for farm credit purposes);
(3)
12 U.S.C. ' 2129 (quantitative requirement in definition of
cooperative for borrowing from bank for cooperatives);
(4)
49 U.S.C. ' 303(b) (quantitative requirement in definition of
cooperative for ICC exemption); and
(5)
12 U.S.C. ' 3015 ('105 (a), Pub.L. 95-351, 92 Stat. 499, 506 (August
20, 1978)) (quantitative requirement in definition of cooperative in National
Consumer Cooperative Bank Act).
(Taken from Conway
County Farmers Association v. U.S., 588 F.2d 592, 1978 U.S. App. LEXIS
7273, 78-2 U.S. Tax Cas. (CCH) P9840, 42 A.F.T.R. 2d (RIA) 6323.)
Generally,
each of the listed statutes require the association to conduct a specified
quantity of business (usually more than 50%) with members and/or patrons than
with non-members to be a Acooperative@ for purposes of the statute.
Thus,
if a Limited Cooperative Association were structured and operated to
meet the required quantitative amount of business with members/patrons, it
would meet the qualification. For
this purpose only, outside investment in the entity is not relevant
although such investment may be relevant for voting requirements or other
requirements.
From
a federal income tax standpoint, the Internal Revenue Service took the position
that to be Aa corporation operating on a cooperative basis@ under Subchapter T ('1381(a)(2))
required the corporation to conduct more business with members and patrons than
with non-members. Rev. Rul. 72-602,
1972-2 Cum. Bull. 511. The Service did
not prevail on this requirement in three cases: Conway County Farmers Ass=n v. U.S.,
588 F.2d 592 (8th Cir. 1978); Columbus Food & Veg. Coop v.
U.S., 7 Claims Ct. 561 (1985); Geauga Landmark, Inc. v. U.S.,
#81-942 (Nor. Dist. Ohio 1985).
As
a result, the Service dropped this requirement and has said the Amember/patron@ portion of a cooperative corporation=s business (and patronage refunds resulting from it)
could receive patronage refund treatment under Subchapter T but the net
profits/losses from the non-member/patron business would be taxable in the same
manner as a non-cooperative corporation.
AWhether a nonexempt cooperative is entitled to the
benefits of Subchapter T depends upon the finding that it is >operating on a cooperative basis= under 26 U.S.C. ' 1381
(a)(2).@ Geauga
Landmark, Inc., supra.
This determination obviously needs to be made on a case by case factual
basis.
The
point of this is the Cooperative Association Associations Act could
hardwire results for certain other law but in doing so it could eliminate the
flexibility of the statute. It is likely
the ultimate results under other will need to be left to practitioners and
users of the Act to craft structures that will obtain the benefits of various
other statutes as desired. This may
require knowledge and skill and leave a trap for the unwary, but to accomplish
one of the primary goals of the Act, this may be necessary. It may ultimately require administrative
determinations and rulings for final guidance in specific instances.
(5) Overview of this
Draft
This
draft draws from other organizational law including the Uniform Limited
Partnership Act (2001), limited liability company acts, the Minnesota
Cooperative Associations Act, several modern Atraditional@ cooperative acts (specifically including without
limitation: Colorado, Ohio, Oregon and Wisconsin), and the Model Business
Corporation Act.
Even
though the draft relies, in part, on general organizational law outside
cooperatives, it makes every reasonable attempt to acknowledge the fact that
cooperatives are a different kind of organization legally, historically, and
functionally and that limited cooperative associations, in turn, add a
dimension to traditional cooperatives. Thus, for example, this draft has a strong
participant/member focus.
Illustratively, the bylaws must be amended by members and not the board
of directors which is somewhat unusual even in cooperative law. The specific size and purpose of the
cooperatives contemplated by this act, however, support the member focus. Moreover, unlike the trend in corporate law,
this draft generally requires supermajority voting of members on fundamental
matters.
On
the other hand, this draft provides more flexibility for attracting capital
from outside the community of users and gives cooperatives the authority to
erode producer capital lock-in in its organic rules. Thus, it allows wide latitude for both patron
members/participants (e.g. producers/users of the cooperative) and
investor member/participants, within limitations, to provide for the sharing of
net proceeds, surplus, or profit and governance participation between patron
and investor member/participants. The
constraints on investor member participant participation in this
draft are tighter than those found in most, if not all, the Anew generation@ cooperative statutes. This clearly distinguishes this cooperative
draft from limited liability company statutes in an attempt to maintain the Aco-op brand.@ Over the evolutionary
course of this project the default rules have probably moved closer to the look
and feel of mid-twentieth century corporate-like cooperatives.
The
2006 Annual Meeting Draft contains substantial and numerous revisions from the
2005 Annual Meeting Draft reflecting Committee decisions at its Fall 2005 and
Spring 2006 meetings.
The
drafting decisions made and directed at the Spring 2006 meeting are reflected
in this Draft and include, most substantially, a revision of the member participant
voting provisions, derivative actions, and board of director organization. Other significant decisions made at the
Spring meeting concerned the financial rights of members participants.
The
February 2006 Draft reflected a number of noteworthy Committee directions. For example the nomenclature changed from Amember@ to Aparticipant@; from Anonpatron member@ to Ainvestor participant@; the
term Aassociation@ was inserted behind the word Acooperative@ wherever appropriate to avoid interpretive
confusion and to emphasize that this is a different type of cooperative within
the umbrella term; the February 2006 draft also changed the method of voting
for purposes of Committee discussion in response to questions raised on the
floor of the 2005 Annual Meeting such that fundamental changes require approval
of both Aclasses@ of participants; Aconversions@ were added; another approach to integrate the term Aconsolidation@ has been attempted by the reporters; and, for the
first time, the article on Asale of assets@ was included; the definitions were completely
reworked in light of the substantive changes made by the Committee in its
on-going discussion the inconsistent treatment of proxy has been remedied (no
proxies are allowed); the AReporters= Notes@ on participant actions (derivative actions) and
under selected other sections now reflect research conducted by the reporters
as requested by the Committee over the past two meetings; and, the Afilings@ were given substantial attention and editing though
they may need continued attention.
The
entire draft has twice undergone a heavy Style Committee edit five
times since the 2005 Annual Meeting.
This
is a work still in process. There remain
both technical drafting issues and substantive policy ones that may need to be
revisited and confirmed. For example this draft repeats the mantra Aunless otherwise provided in the organic rules@ almost endlessly instead of centralizing Anonwaivable@
provisions by reference in a single section as do RUPA, ULPA, and
ULLCA. The repetition may be helpful to
identify nonwaivable provisions for later centralization. The reporters are cognizant that the
repetition is troublesome and started to coalesce those references into a list. That effort was jettisoned, only for now,
until the shape of the act continues to evolve.
That remains a Athing to do@
but is beyond discussing the use in each section as the Committee does its
work; the overarching task remains unripe though it will quickly ripen. There, too, are probable errors in
cross-referencing as the section numbers continue to change though it is hoped
less appear in this draft than previous drafts.
Nonetheless substantial progress has been made by the Committee since
the 2005 Annual Meeting. Finally, the Reporters= Notes (now relegated to the blackline version of
the March 2007 Committee Draft) contain more, rather than fewer questions,
as the draft matures to address finer grained issues. These questions should be viewed as evidence
of progress and maturity and not a lack of either. Moreover, many of the some
questions are retained in the Notes for historical future
reference in drafting official Comments even though the Committee has
resolved them.
Please
note that James B. Dean joined the project as a new AAssociate Reporter@ in Fall 2005 and, as noted in the Committee
memorandum for the October 2005 meeting, John Stieff is the Committee=s new liaison to the AStyle Committee.@
UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT
[ARTICLE]
1
GENERAL
PROVISIONS
SECTION 101.
SHORT TITLE. This [act] may be cited as the Uniform Limited Cooperative
Association Act.
Reporters=
Note
The
name of the act and the association under it is intended to differentiate them
from other types of cooperative statutes and entities. This is the second time the name has changed
for these purposes and is new to this Spring 2007 Draft. As of this writing it has not yet been
approved by the NCCUSL Executive Committee.
The first was the The
addition of Aassociation@ which was hoped to mitigate mitigates,
to some extent, concerns that the Act be confused with corporate based
statutes. It did little to mitigate
continuing concerns about co-op Abranding.@ Include
explanation of name. Drop in name memo: add mixed, hybrid,
unincorporated, expanded.
SECTION 102.
DEFINITIONS. In this [act]:
(1) AArticles of organization@ means initial, amended, or restated articles of
organization of a limited cooperative association which contain containing
the information required or permitted in Section 302. In the case of a foreign cooperative, the
term includes all records that:
(A) have a
function similar to articles of organization under this [act]; and
(B) are
required to be filed in the office of the [Secretary of State] or other
official having custody of articles of organization in the state or country
under whose law the foreign cooperative is organized.
(2) ABylaws@ means initial, amended, or restated bylaws of a limited
cooperative association as provided in Section 304.
(3) AContribution@ means a benefit that a person provides to a limited
cooperative association in order to become a member participant
or in the person=s capacity as a member participant.
(4) ACooperative@ means a limited cooperative association or
an entity organized under any cooperative law of any jurisdiction.
(5) ACooperative association@ means an association organized under this [act].
(6) ADebtor in bankruptcy@ means a person that is the subject of:
(A) an order
for relief under Article 11 of the United States Code or comparable order under
a successor statute of general application; or
(B)
comparable relief under federal, state, or foreign law governing
insolvency.
(57)
ADesignated office@ means:
(A) with respect to a limited cooperative association or a
foreign cooperative, the office that it is required to designate and
maintain under Section 116(a)(1).; or
(B) with respect to a foreign cooperative its
principal office.
(68)
ADistribution@ means a transfer of money or other property from a limited
cooperative association to a member participant because of the member=s participant=s
financial rights or to a transferee of a member=s participant=s
financial rights.
(79)
ADomestic entity@ means an entity organized under the laws of this
state.
(810)
AEntity@ means a person other than an individual, whether
domestic or foreign.
(911)
AFinancial rights@ means
the right to participate in allocations and distributions as provided in
under [Articles] 9 and 11 but does not include rights or obligations
under a marketing contract governed by [Article] 6.
(1012)
AForeign cooperative@ means
an entity organized in a jurisdiction other than this state under a law similar
to this [act].
(1113)
AForeign entity@ means an entity that is organized under the laws of
a jurisdiction other than this state.
(1214)
AGovernance rights@ means
the right to participate in governance of a limited cooperative
association as provided in under [Article] 4.
(1315)
AInvestor member participant@ means a person admitted as a member that participant
who is not required by the organic rules to conduct patronage business with
a the limited cooperative association in order to receive
financial rights.
(14) ALimited cooperative association@ means an association organized under this [act].
(15) AMember@ means a person that is a patron member or investor
member in a limited cooperative association.
The term does not include a person that has dissociated as a member.
(16) AMember=s interest@
means the interest of a patron member or investor member under Section 501.
(17) AMembers= meeting@ means an annual or special members= meeting.
(1816)
AOrganic law@ means the statute providing for the creation of an
entity or principally governing its internal affairs.
(1917)
AOrganic rules@ means the articles of organization and bylaws of a limited
cooperative association.
(20) AOrganizer@
means an individual who signs the articles of organization.
(18) AParticipant@
means a person that is a patron participant or an investor participant in a
cooperative association. The term does
not include a person that has dissociated as a participant.
(19) AParticipant=s
interest@ means the interest of a patron participant or an
investor participant under Section 501.
(20) AParticipants=
meeting@ means an annual or special participants= meeting.
(21) APatron@ means a person that conducts economic activity with
a limited cooperative association which entitles the person to receive
financial rights based on patronage.
(22) APatron member participant@ means a person admitted as a member participant
that is permitted or required to conduct patronage with the limited
cooperative association in order to receive financial rights.
(23) APatronage@ means business transactions between a limited
cooperative association and a person which entitle that entitle
the person to receive financial rights based on the value or quantity of
business done between the association and with the person.
(24) APerson@ means an individual, corporation, business trust, cooperative,
estate, trust, partnership, limited partnership, limited liability
company, limited cooperative, association, joint venture, association,
public corporation, or government or governmental subdivision, agency,
or instrumentality, or any other legal or commercial entity.
(25) APrincipal office@ means
the office, whether or not in this state, where the principal executive
office of a limited cooperative association or a foreign
cooperative, whether or not in this state. is located.
(26) ARecord@, 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) ARequired information@ means
the information a limited cooperative association is required to
maintain under Section 113.
(28) ASign@ means, with the present intent to authenticate a
record:
(A) to
execute or adopt a tangible symbol; or
(B) to attach
to or logically associate with an electronic symbol, sound, or
process to or with a record.
(29) AState@ 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) ATransfer@ includes an assignment, conveyance, deed, bill of
sale, lease, mortgage, security interest, encumbrance, gift, and transfer by
operation of law.
(31) AVoting 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 meeting of shareholders.
(3231)
AVoting member participant@ means a member participant that,
under the organic law or organic rules of a cooperative association, has
a right to vote on matters subject to vote by members under the organic law
or organic rules. participants.
(33) AVoting power@
means the total current power of members to vote on a particular matter for
which a vote may or is to be taken.
Reporters=
Note
The
2007 February 2006 draft has undergone extensive changes. The balance of the Note is for historical
purposes.
As
discussed in greater detail in the Reporters= Note
to Section 404, the definitions need tuning.
In particular, Apatron@, Apatron member@ and Anonpatron member@ are
currently under reconsideration by the Drafting Committee. AFinancial Interest@ is
used extensively in Article 4 but not defined.
The term Afinancial interest@, as
noted in the Reporters= Note, is also being reconsidered. It performs the same function as Atransferable interest@ in
ULLCA, ULPA (2001), and UPA (1997).
Below are two rough definitional suggestions from the Reporters Reporters= for discussion purposes:
$
APatron membership interest@ means the membership interest providing a patron
rights in governance and a transferable interest [financial interest] of the
cooperative as a member as established by the [Act]; and
$
ATransferable interest@ means
the right to receive distributions to members but does not include the right to
receive payments based on a separate marketing contract, if any, between the
member and the cooperative.
Note that distributions are distinct from
allocations in virtually all organizational statutes. Distributions are actual payments of money or
money=s worthwhile allocations are accounting concepts, e.g.,
the capital accounts of partners in a partnership.
An observer has suggested that the definition of Apatronage@ (subsection 21) be revised to read as follows:
APatronage@ means business transactions between a cooperative
and a person which entitle the person to receive financial rights,
distributions, or payment from the cooperative based on the value or quantity
of such business, done with such person under a pre-existing legal obligation
to receive the amount paid, which is determined by reference to the net
earnings of the cooperative from all business done with or for such persons.
All references to Acooperative
plan@ have been deleted consistent with prior and
continuing committee discussion.
The definition of Adomestic
cooperative@ expressly includes cooperatives formed outside this
Act. See, e.g., subsection
109(d). Is it necessary to define Adesignated office@ for
purposes of the service of process provision?
The definition of Bylaws must be read in light of
section 305.
AFinancial Rights@:
allocation and distribution includes the rights to distributions in
liquidation, rights to receive dividends if dividends are a method used to
distribute funds, rights to receive patronage allocations and dividends,
redemption of retained patronage allocations or per unit retains; rights to
receive partnership allocations and distributions. It does not include amounts to which a patron
participant would be entitled under a marketing contract.
AGovernance Rights@
include the right to vote, the right to receive notices of participant
meetings, the right to participate in meetings of a district or other
subdivision of participants, and the right to be represented by delegates from
a district or other subdivision of participants.
Section 102 (3): The comment should include
reference to the Stafford case, include examples, and, state that some
states may limit the definition of AContribution@ by Constitutional provision.
There was discussion at the last meeting about
whether Aorganic rules@ should be expanded.
No modification was made here but see Article 5.
Is Afinancial rights@ used
appropriately in subsections (21) and (23)?
Section 102(5): See Section 103.
Reporters= Note on Notice
At the direction of the Committee prior Section 103
(AKnowledge and Notice@) is
deleted in this draft. It is governed by
other law.
Source: Derived from ULPA (2001). The LLC Act Drafting Committee has spent much
time reworking and redrafting this Section.
During that discussion, as in past meetings of this Drafting Committee,
the necessity of including this provision was questioned. This section varies from ULPA (2001) because
it does not need to deal with the unique statements under limited partnership
law. Therefore it is approximately
one-third shorter than its limited partnership analogue.
The LLC Act Drafting Committee included the
following in a recent draft:
SECTION 103.
KNOWLEDGE AND NOTICE.
(a) A person knows a fact when any of the following
apply:
(1) the person is an individual who is consciously
aware of the fact;
(2) the person is deemed to know the fact under
subsection (b) or (e) or other law.
(b) A person that is not a member is deemed to know
of a limitation on authority to transfer real property as provided in Section
302(4).
(c) A person has notice of a fact when any of the
following apply:
(1) the person has reason to know the fact from all
of the facts known to the person at the time in question;
(2) the person is deemed to have notice of it under
subsection (d) or (e);
(d) A person not a member has notice of:
(1) another person=s
dissociation as a member of a member-managed limited liability company, 90 days
after a Section 604 statement of dissociation pertaining to the other person
becomes effective;
(2) another person=s
ceasing to be a manager of a manager-managed limited liability company, 90 days
after a Section 412 statement of manager cessation pertaining to the other person
becomes effective;
(3) a limited liability company=s dissolution, 90 days after a Section 710(1)
statement of dissolution becomes effective;
(4) a limited liability company=s termination, 90 days after a Section 710(2)
statement of termination becomes effective; and
(5) a limited liability company=s merger, conversion, or domestications, 90 days
after an [article 10] statement of merger, conversion, or domestication becomes
effective.
(e) A limited liability company is deemed to know or
have notice of a fact relating to the limited liability company both as
provided by other law and when either of the following apply:
(1) in a member-managed limited liability company, a
member knows or has notice of the fact, except in the case of a fraud on the
limited liability company committed by or with the consent of the member;
(2) in a manager-managed limited liability company,
a manager knows or has notice of the fact, except in the case of a fraud on the
limited liability company committed by or with the consent of the manager.
(f) In a manager-managed limited liability company,
a member=s knowledge or notice of a fact relating to the
limited liability company is not knowledge of or notice to the limited
liability company, except as provided:
(1) in subsection (e)(2);
(2) in Section 302 (statement of authority); and
(3) by law other than this [act].
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].
Reporters= Note
Apparently some states have constitutional
provisions concerning this reservation for corporations (at least). Does this section, therefore, need a
legislative note?
Tenn. Code. Annot. Section 43-38-102 states: AThe general assembly has the power to amend or
repeal all or part of this chapter at any time and all domestic cooperatives
subject to this chapter shall be governed by such amendment in Appeal. See Minn. Stat. Annot.
Section 308B.101.
The revised
language is taken from UPA (1997) and the MBCA. is present in ULLCA,
ULLCA II, ULPA (2001). Its purpose
is to avoid Constitutional Contract Clause issues like those raised in
Trustees of Dartmouth College v. Woodward, 17 U.S. (Wheat.) 518 (1819). See, e.g., Starkey v. Alaska
Airlines, Inc., 68 Wash.2d 318, 413 P.2d 352 (1966). The Committee specifically voted on leaving
this in the draft on reconsideration.
SECTION 104.
NATURE, PURPOSE, AND DURATION OF LIMITED COOPERATIVE
ASSOCIATION.
(a) The nature of a A limited cooperative association organized
under this [act] Act is to be an autonomous unincorporated
association of persons united voluntarily to meet their mutual interests
economic, social and cultural needs and aspirations at a practicable rate
of cost through a jointly owned enterprise primarily and
democratically controlled by those persons which enterprise that
permits combining:
(1) ownership, financing, control and receipt
of benefits by the members for whose interests the association is formed;
and based on use by the persons using the association; with
(2) separate investments in the association by members
persons who may receive returns on their investments and a share of
control.
(b) A
cooperative association is an entity distinct from its participants.
(c) A
cooperative association may be organized under this [act] for any lawful
purpose, regardless of whether or not for profit except [designate prohibited
purposes].
(d) Unless
the articles of organization state a term for a cooperative association=s existence, the cooperative association has a
perpetual duration.
Reporters= Note
Subsection (a) is new and the balance of the section
is unchanged save renumbering.
This section Subsection (a) answers the question that has been repeatedly
raised by individual observers, Committee members and Commissioners at the
annual meetings in each of the past three years. Its general substance is a nonexclusive
amalgamation from this act=s provisions, the Michigan Cooperative Act of 1865
(which a secondary source states is prototypical) and the International
Co-operative Alliance Statement of Cooperative Identity (1995). It is also generally informed by Committee
discussions; Hagen Henry, Guidelines for Cooperative Legislation (2d rev. 2005)
(International Labor Organizations); and, various publicly available statements
of cooperative principals (and values) from NCBA. This, of course, is not the exclusive place
that determines the nature of the entity.
For example see Section 501 (especially subsections (b) and (c) which
are new to the Fall 2006 draft).
The Comments to this section should contain examples
of cooperative principles and values as well as general types of
secondary sources that describe them. The
Committee also suggested the Comments might address Aformed by users, primary benefit to user@; similarly situated members treated substantially
the same@, cooperatives treat people Aequitably@
not Aequally@. This
section reflects the act=s intention to reflect the fundamental cooperative
principles including voluntary membership, control by users, members= economic participation, and autonomy and
independence. Note, the principles of
cooperation among cooperatives, and training and education, are reflected in
Section 904(c)(2) and concern for community is reflected in Section 721.
Subsections (b) and (d) seem well settled as does
most of Subsection (c). Indeed, much of
Subsection (c) has been long accepted by the Committee (see below).
Subsection (c) states Aany lawful purpose@ which is consistent with the unincorporated acts
promulgated by the Conference. It is
also consistent with the general laws of cooperatives which in some states
reference or are included in not-for-profit acts. Finally, it is consistent with the historical
roots of cooperatives as mutual aid societies.
Subsection (bc) also reflects the
decision by the Uniform Law Commission at the 2005 Annual Meeting to delete any
reference to Aagricultural or agricultural related@ and, instead, list specific purposes for which
cooperatives may not be used. The Aexcept@ language is similar to the language in Section 3 of
RULPA 1976/1985. The Committee may
desire to consider inserting Asubject to any law of this state governing or
regulating business@ which is included in ULLCA 1996 (after the words Aany lawful purpose@). See Section 1702.
The Minnesota Cooperative Association Act
states:
A[F]or any other purposes that cooperatives are
authorized to perform by law,@ Minn. Stat. Ann. ' 308B.
201(3).
Minnesota=s general cooperative law has the following purpose:
A[F]or the purposes of conducting an agricultural,
dairy, marketing, transportation, warehousing, commission, mechanical,
mercantile, electrical, heat, light, or power business, or for any other lawful
purpose.@ Minn. Stat.
Ann. ' 308A.101(1).
Even though it appears the general Minnesota Cooperative
Act reflects a modern trend; at least some states, maintain different
cooperative statutes for different types of cooperatives.
South Dakota=s general cooperative statute (which was enacted in
1939 and amended in 1968 and 1978 states:
ACooperatives may be organized under this chapter for
any lawful purpose except banking and insurance.@ SDCL ' 47-15-2.
The Awhether or not for profit@ language comes from other unincorporated entity law
to avoid problems associated with the word Abusiness@ in general partnership law (primarily because of
the question whether a not-for-profit or governmental entity was authorized to
conduct business and, secondarily, because of questions by estate and family
business planners about whether Abusiness@ allowed the mere holding of property). Traditional cooperatives may, in many states,
organize under not-for-profit or Abusiness@ (for-profit general); corporation acts. Cooperative values, however, are probably
attuned to a Athird-way@ that is neither for-profit or Anot-for-profit@ (mutual benefit of their members). Perhaps perhaps that is
the meaning of operating at cost under statements of cooperative principles or
operating on a Acooperative plan@ under
statutes using that phrase without further definition.
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 under this [act] 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 a perpetual
duration.
Reporters= Note
Subsections (a) and (c) seem well settled as does
most of Subsection (b). Indeed, much of
Subsection (b) has been long accepted by the Committee (see below).
Subsection (b) states Aany lawful purpose@ which is consistent with the unincorporated acts
promulgated by the Conference. It is
also consistent with the general laws of cooperatives which in some states
reference or are included in not-for-profit acts. Finally, it is consistent with the historical
roots of cooperatives as mutual aid societies.
SECTION 105 106. POWERS. A limited cooperative association has
the capacity to sue and be sued in its own name and power to do all
things necessary or convenient to carry on its activities. An association may, including the
power to:
(1) sue and
be sued;
(2) defend an
action in its own name; and
(3) maintain an action against a member participant
for harm caused to the cooperative association by a violation of a duty
to the association or the organic law or organic rules. of the
association.
Reporters= Note
The formulation of powers in this draft is based
upon unincorporated law models as opposed to a more detailed listing of powers
contained in corporate law. The
Committee has discussed this approach for powers only briefly and it is
consistent with a general direction to draft as efficiently as possible. Most cooperative acts tend to follow the more
detailed (and older) corporate model.
There was discussion at the October 2005 meeting
focusing on two specific instances concerning the remedy of specific
performance:
(1) agricultural marketing contracts; and
(2) utility co-ops and easements.
The first item is resolved in the draft=s provisions concerning marketing contracts (Article
6). The second item is not resolved by
this draft following the sense of the Committee=s
discussion. ULPA (2001) and the current
draft of the ULLCA Revision Project have simply stated, e.g., AA limited liability company has the capacity to sue
and be sued in its own name and the power to do all things necessary or
convenient to carry on its activities.@
SECTION 106 107. GOVERNING LAW. The law of this state governs:
(1) the
internal affairs of a limited cooperative association; and
(2) the
relations among the members participants of the an
association and between the members participants and the
association.
SECTION 107 108. SUPPLEMENTAL PRINCIPLES OF LAW. Unless displaced by particular provisions of
this [act], the principles of law and equity supplement this [act].
Reporters= Note
Source: ULLCA II ' 107.
The Committee on Style, consistent with previous
Committee discussion but not Committee resolution, recommends deleting this
subsection. For purposes of this draft
(b) was deleted but Aold@ (a) remains because of the distinctive approaches
to related issues in other unincorporated law (e.g. Delaware and others pure
contract approach to LLCs and LPs).
SECTION 108 109. NAME.
(a) In this
section, Aavailable@ means distinguishable upon 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 or registered under Section 110 109 or 110; and
(3) a
fictitious or assumed name approved for a foreign cooperative authorized
to transact business in this state.
(b) The name
of a limited cooperative association must contain the words Alimited cooperative association@ or Alimited cooperative@ or the abbreviation AL.C.A.@ or ALCA@. ALimited@ may be abbreviated as ALtd.@. ACooperative@
may be abbreviated as ACo-op@ or ACoop@. AAssociation@
may be abbreviated as AAssoc.@ or AAssn.@. word
Aassociation@
or its abbreviation and may contain the word Acooperative@
or its abbreviation.
(c) Except as
authorized by subsection (d), the name of a limited cooperative
association must be available.
(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 applied for if:
(1) the name
is reserved or registered under Section 110 109 or 110 and the
user, registrant, or owner of the name consents in a record to the use and applies
submits an undertaking in a form satisfactory to the [Secretary of
State] to change the reserved or registered name 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 the name applied for.
Reporters= Note
This Section has been modified by the Reporters
Reporters= consistent with extensive comments from the Style
Committee.
The ULLCA draft has the equivalent of (a) and
replaces the balance of the language under this draft with the following:
SECTION 108.
NAME.
(a) The name of a limited liability company must
contain Alimited liability company@ or Alimited company@ or the abbreviation AL.L.C.@, ALLC@, AL.C.@, or ALC@. ALimited@ may be abbreviated as ALtd.@, and Acompany@ may be abbreviated as ACo.@.
[(b) Unless authorized by subsection (c), the name
of a limited liability company must be distinguishable in the records of the
[Secretary of State] from:
(1) the name of each person, other than an
individual, incorporated, organized, or authorized to transact business in this
state; and
(2) each name reserved under Section 109 [or other
state laws allowing the reservation or registration of business names,
including fictitious name statutes].
(c) A limited liability company may apply to the
[Secretary of State] for authorization to use a name that does not comply with
subsection (b). The [Secretary of State]
shall authorize use of the name applied for if, as to each conflicting name:
(1) the present user, registrant, or owner of the
conflicting name consents in a signed record to the use and submits an
undertaking in a form satisfactory to the [Secretary of State] to change the
conflicting name to a name that complies with subsection (b) and is
distinguishable in 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 of competent
jurisdiction establishing the applicant=s right to use in this state the name applied for.
(d) Subject to Section 805, this section applies to
any foreign limited liability company transacting business in this state,
having a certificate of authority to transact business in this state, or
applying for a certificate of authority.]
Should this Act create a new abbreviation ACA or C.A.@ It does look
like the postal abbreviation for California.
Is there another short-hand that isn=t an Aabbreviation@ covered by the existing language?
The use of the word Acooperative@ under this draft is voluntary but may not be used
by organizations that are not cooperatives under Section 111 which has been
modified. An issue raised by the prior
version of this section and its analogues under existing law was that there is no
required designation or abbreviation to indicate the entity is a limited
liability entity. For this reason the
April 2005 draft now requires the use of Aassociation@ or its abbreviation. The required use of Aassociation@ also distinguishes this unincorporated agricultural
cooperative from cooperatives governed by other state law.
SECTION 109 110. 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 109 108, 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 109, the name 108, it
must be reserved for the applicant=s exclusive use for a nonrenewable period of 120
days 60-day period.
(b) The owner
of a name reserved 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 owner of a reserved name is an
organizer of an 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 owner of the reserved name to the
association.
Reporters= Note
The current
ULLCA II draft has adopted a 120-day period which is the same as ULPA and
RMBCA ('4.02). As a
result the Spring 2007 draft was conformed to be consistent. rather than a 60-day period.
AStyle@ questioned whether Afictitious name@
is clear.
SECTION 110.
REGISTERED NAME OF FOREIGN COOPERATIVE.
(a) A foreign
cooperative may register its name pursuant to Section 109 if the name is
available under Section 108.
(b) A foreign
cooperative may register its name, or its name with any addition required by
Section 1305, by delivering to the [Secretary of State] for filing an
application:
(1) setting
forth its name, or its alternative name required by Section 1305, the state or
country and date of its organization, and a brief description of the nature of
the affairs in which it is engaged; and
(2)
accompanied by a certificate of good standing, or a similar record, from
the state or country of organization.
(c) A foreign
cooperative whose name is registered under subsection (a) may qualify as a
foreign cooperative under its name or consent in a record to the use of its
name by a cooperative association later organized under this [act] or by a
foreign cooperative later authorized to transact business in this state. The registration of the name terminates when
the foreign cooperative qualifies, the cooperative association is organized, or
consent is given to use of the name by the foreign cooperative later authorized
to transact business in this state.
Reporters= Note to Former Section 110
Former Section 110 relating to name registration by
a foreign cooperative has been deleted as unnecessary.
The 2007 Annual Meeting Draft has been conformed
with the Style Committee=s comments by the Reporters.
The February 2006 draft changes (c) based on a query
from the Style Committee suggesting the Aname@ doesn=t terminate but; rather, the registration
terminates.
[SECTION
111. USE OF THE TERM ACOOPERATIVE@.
[(a) Use of the term Acooperative@ 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].]
[(b)] A limited cooperative association or
and a member participant may enforce the restrictions on
the use of the term Acooperative@ under this [act] [and [insert
cross-reference to other laws of this state].
Reporters= Note
This Section Subsection (a) has been bracketed because not all states have
this provision in other laws.
This draft attempts to coordinate the name
restrictions contained in other cooperative law in the state, if any, with this
Act without granting restrictions or rights not found elsewhere in State law.
Cooperative statutes do include name protection
provisions unique among organizational law.
A The prior draft of this Section was is
typical of those provisions. Many such
provisions also contain bond and attorney=s fees provisions but those provisions are not
typically contained in other organizational law.
This draft attempts to coordinate the name
restrictions contained in other cooperative law in the state, if any, with this
Act without granting restrictions or rights not found elsewhere in State law.
SECTION 112.
EFFECT OF ORGANIC RULES.
(a) This
[act] and (a) Except as otherwise provided in subsection
(b), the organic rules govern relations among and between a limited
cooperative association the participants, the association=s members, and the association=s board
of directors, and the cooperative association.
(b) Provisions of this [act] not modified by the
phrase Aunless the organic rules otherwise provide@ or the phrase Aunless
the articles of organization otherwise provide@ is mandatory and may not be varied by the organic
rules, except as otherwise expressly permitted in a specific provision. Matters not addressed by this [act] are
subject to the organic rules. The
organic rules may govern any other matters. Organic rules may not:
(1) vary a
cooperative association=s power under Section 105 to sue, be sued, and
defend in its own name;
(2) vary the
law applicable to an association under Section 106;
(3) vary the
requirements of Section [yet to be determined by Committee];
(4) vary the
information required to be kept under Section 113 or unreasonably restrict the
right to information under Section 405 or 721, but the organic rules may impose
reasonable restrictions on the availability and use of information obtained
under those sections and may define appropriate remedies, including liquidated
damages, for a breach of any reasonable restriction on use;
(5) vary the
power of a person to dissociate as a participant under Section 1001 except to
require that the notice under paragraph 1001(b)(1) be in a record;
(6) vary the
power of a court to decree dissolution in the circumstances specified in
Section 1103;
(7) vary the
requirement to wind up an association=s
business pursuant to Sections 1106 and 1107;
(8)
unreasonably restrict the right to maintain an action under [Article]
12;
(9) restrict
the right of a participant under Article 15 to approve a conversion or merger;
or
(10) restrict
rights under this [act] of a person other than a participant, holder of
financial rights, or board of directors participant.
Reporters= Note
This Section is almost completely revised for the
2007 Spring Meeting. It no longer
follows ULPA or ULLCA in attempting to identify mandatory sections and list
them in a single place because there are more Arequired sections@ in this act.
Source: ULPA (2001).
This section provides a framework in which to place nonwaivable
(mandatory provisions) as this draft evolves.
Provisions concerning voting and distributions obviously need to be
included as nonwaivable. The Reporters
humbly suggest this Section is not ripe for further discussion or revision at
the 2006 Annual Meeting and that floor time could be better spent on other
provisions. There is tension in the Fall
2006 draft between this section and the use of Aunless otherwise provided@ but it is more a drafting than a policy matter.
Style Committee suggests that Areduce@ be replaced with Alimit@ in Subsection (b)(6).
Subsection (a) was criticized by both the Style
Committee (as ambiguous) and by an observer since the April 2005 meeting. Thus, it has been reworked. As reworked the Reporters have a sense that
it places even more emphasis on subsection (b) though the previous formulation
was, at least, inartful. It may be time
to form a subcommittee to assist the Reporters in a careful review of, and for,
subsection (b)=s exceptions.
The Style Committee suggests Areduce@ in (b)(6) may not be the best word choice but it is
retained in this draft because the language has been approved in other
conference products.
For historical purposes to inform discussion a
portion of a former Note follows:
An observer has suggested that identifying mandatory
provisions and attempting to place them in subsection (b) seems to be Alegislative quicksand@ and
suggested replacing (b) with a Acouple of succinct sentences@ about conflicts between the organic documents and
the act stating the law trumps. This, of
course, would mean the final draft would retain myriad Aunless otherwise provided in the organic documents.@ This and the
former drafts have used those phrases merely in an attempt to begin to
identify sections to place in (b). To a
great extent, this is Aonly@ a matter of drafting extent, this is Aonly@ a matter of drafting style and reflects what is referred to in some CLEs
on broader organizational law as the unincorporated (or uniform laws) approach
versus the uncorporated (or Delaware) approach.
On the other hand, to keep this draft Amoving@ a decision needs to be made as soon as possible.
In any event subsections (b)(3), (5), (6), and (7)
need to be conformed to this Act.
SECTION 113.
REQUIRED INFORMATION.
(a) A limited cooperative association
shall maintain in a record at its principal office the following information:
(1) a current
list showing the full name and last known street address, mailing address, and
term of office of each current director and officer;
(2) a copy of
the initial articles of organization and all amendments to and restatements of
the articles, together with a signed copy copies of any
powers of attorney under which any articles, amendments, or restatements
have restatement has been signed;
(3) a copy of
the initial bylaws and all amendments to and restatements any
restatement of the bylaws;
(4) a copy of
all any filed articles of consolidation or merger;
(5) a copy of
any financial statement of the association for the six most recent years;
(6) a copy of
the six most recent annual reports delivered by the association to the
[Secretary of State];
(7) a copy of the minutes of meetings of members
for the three most recent years;
participants and
(8) records of all actions taken by members
participants without a meeting for the three most recent years;
(98)
a current list showing the full name and last known street and
mailing addresses of each current member participant, separately
identifying the patron members participants, in alphabetical
order, and the investor members participants, in alphabetical
order;
(109)
a copy of the federal, state, and local income tax returns and reports
of the association, if any, for the six most recent years;
(1110)
accounting records maintained by the association in the ordinary course
of its operations for the six most recent years;
(1211) a copy of the minutes of directors= meetings for the three most recent
years; and
(13)
records of all actions taken by directors without a meeting for the three most
recent years;
(1412)
a record stating:
(A) the
amount of money cash contributed and agreed to be contributed by
each member participant;
(B) a
description and statement of the agreed value of other benefits contributed and
agreed to be contributed by each member participant; and
(C) the times
at which, or events on the happening of which, any additional contribution
agreed to be made by each member participant is to be made; and
(15D) for each member, a
description and statement of the member=s
interest or interests or information from which the description and statement
can be derived; and a person
that is a patron participant or an investor participant, a specification of the
interest the person owns; and
(E) for a
person that is both a patron participant and investor participant, a
specification of the interest the person owns in each capacity.
(1613)
a copy of all communications made in a record to all members, participants
as a group or to all members in a any class of members,
participants as a group for the three most recent years.
(b) If a limited cooperative association has been in
existence for a period of less than the time required for the maintenance of
records under subsection (a) the time for which records are to be kept shall be
the period of the association=s existence.
Reporters= Note
APower of attorney@ needs to be distinguished from proxy in the Comment
to this Section.
This section was completely reorganized for the
February 2006 Drafting Committee meeting in order to make the cause/no
cause distinction later in the draft easier to understand. The only substantive change appears as (10)
which replaces part of (7) in the prior draft.
Prior (7) was bifurcated into (5) and (7). This shall not be subject to restriction by
agreement. The Committee also requested
the Reporters to compare (13) (in this draft) with the Revised Model Nonprofit
Act. It is consistent. Section 16.01(e)(b) states: Aall written communications to members generally
within the last three years...@.
The Comment should place this in the context of the
act and information rights of members.
Obviously best practices would suggest the association would keep more
records for a longer time period.
SECTION 114.
BUSINESS TRANSACTIONS OF MEMBER PARTICIPANT WITH LIMITED
COOPERATIVE ASSOCIATION. Subject to the organic rules or a specific
contract relating to a the transaction, a member participant
may lend money to and transact other business with a limited the
cooperative association and has the same rights and obligations with respect to
the loan or other transaction as a person that is not a member participant.
Reporters= Note
Would this be better placed in Article 4 or 5?
Is the language following Asubject to@
necessary. Style suggests deletion.
This language is consistent with the language used
in ULPA (2001). The Comment to this
Section may include a statement concerning the uniqueness of the cooperative
relationship. The language beginning with Asubject to@
is added for Committee discussion to the February 2006 draft to make clear that
it is not intended to apply to, e.g., marketing contracts which
implicate article and bylaw provisions governing participation (membership).
SECTION 115.
DUAL CAPACITY. A person may be both a patron member participant
and an investor member participant. A person that is both a patron member participant
and an investor member participant has the rights, powers,
duties, and obligations provided by this [act] and the organic law in each of
those capacities. When the person acts
as a patron member participant, the person is subject to the
obligations, duties, and restrictions under this [act] and the organic rules
governing patron members participants. When the person acts as an investor member
participant, the person is subject to the obligations, duties,
and restrictions under this [act] and the organic rules governing investor members
participants.
Reporters= Note
Would this be better placed in Article 4 or 5?
SECTION 116.
DESIGNATED OFFICE AND AGENT FOR SERVICE OF PROCESS.
(a) A limited
cooperative association, and a foreign cooperative that has a certificate of
authority under Section 1304, shall designate and continuously
maintain in this state:
(1) an
office, which need not be a place of the association=s its
activity in this state; and
(2) an agent
for service of process at that office.
(b) A foreign
cooperative that has a certificate of authority under Section 1304 shall
designate and continuously maintain in this state an agent for service of
process.
(bc)
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 other person authorized to do
business in this state and has with an office in this
state.
Legislative Note: If the
adopting state has adopted, or is concurrently adopting, the Model Registered
Agent Act (2006), it should conform this section and those following it through
the end of the article in a manner similar to the conforming amendments that
accompany the Model Registered Agent Act for ULPA (2001).
Reporters=
Note
Cross reference: Section 1302.
Source: Slightly revised from Section 113 ULLCA
(2006).
Reporters= Note
The Comment might make clear the assumption,
ubiquitous in entity law, that a domestic entity is Aauthorized@ to do business in its state of formation.
The filing of the information is provided under
Sections 1304 and 302(a)(3).
There is a question of nomenclature. This draft uses the vetted NCCUSL language Adesignated@ even though traditional cooperative law and
corporate formulation is registered.
They Amean@ the same thing, functionally. Note that principal office is where the
required information must be kept and Aprincipal@ and Adesignated@ offices are separate concepts though they may be
the same location. Both are defined
terms.
SECTION 117.
CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS.
(a) Except as
otherwise provided in Section 207(e), to change its designated office, or
its agent for service of process, or the street address or, if
different, the mailing address of its principal office agent for
service of process, a limited cooperative association or a
foreign cooperative shall deliver to the [Secretary of State] for filing a
statement of change containing:
(1) the name
of the limited cooperative association or foreign cooperative;
(2) the
street and mailing addresses of its current designated office;
(3) if the current
designated office is to be changed, the street and mailing addresses of the new
designated office;
(4) the name and
street and mailing addresses of its current agent for service of
process; and
(5) if the current
agent for service of process or an address of the agent is to be
changed, the name of the new agent information.
(b) Except as otherwise provided in Section 207(e),
to change its agent for service of process, the address of its agent for
service of process, or the street or 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 and street and mailing addresses of its
current agent for service of process;
(3) if the current agent for service of process or
an address of the agent is to be changed, the new information;
(4) the street and mailing addresses of its
principal office; and
(5) if the street or mailing address of its
principal office is to be changed, the street and mailing addresses of the new
principal office.
(cb)
Except as otherwise provided in Section 204, a statement of change is
effective when filed by the [Secretary of State].
Reporters= Note
The source of Subsection (b) is ULPA (2001).
The following comment was made at the 2005 Annual
Meeting. ADo you need or desire an electronic mailing
address? Some states are moving to
electronic filing. Even if not, the
email address would save state money by sending routine notices by electronic
mail.@ This is a
good point. Perhaps a definition of
address needs to be considered. The
Style Committee raised the same point in conjunction with Section 118. The Committee has discussed this matter but
is awaiting further information from the secretaries of state.
SECTION 118.
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 cooperative
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 deposit
a copy for delivery by the United States Postal Service to the principal
designated office. of the cooperative association or foreign
cooperative and, if the address of the principal office appears in the records
of the [Secretary of State] and is different from the address of the designated
office, a copy to the principal office.
(c) An agency
for service of a limited cooperative association or foreign cooperative
process terminates pursuant to this section on the earlier of:
(1) the 31st day 30 days after the [Secretary of State] files a the
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 cooperative and becomes effective.
SECTION 119.
SERVICE OF PROCESS.
(a) An agent
for service of process appointed by a limited cooperative association or
foreign cooperative is an agent of the cooperative association or
foreign cooperative for service of process, notice, or a demand required
or permitted by law to be served upon the cooperative 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 agent=s address on file with the [Secretary of State],
the [Secretary of State] is an agent of the cooperative association or
foreign cooperative upon which whom 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. If process, notice, or demand is served on
the [Secretary of State], the The [Secretary of State] shall forward
one of the copies by registered or certified mail, return receipt requested, to
the cooperative association or foreign cooperative at its principal
designated 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 a demand;
(2) the date
shown on the return receipt, if signed on behalf of the cooperative
association or foreign cooperative; or
(3) five days
after the process, notice, or a demand is deposited for delivery by the
United States Postal Service, if mailed postpaid and correctly addressed.
(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.
Reporters= Note
Source: ULLCA (2006) Section 116; ULPA
(2001). Is the term Amail@ in section 120 (c) and (d)(3) ambiguous? The Style Committee suggested the change to Awith the United States Postal Service@ in (c) and (d)(3).
Subsection(d) is contained in the other NCCUSL
products and, therefore, appears here.
In at least some states issues of when service is effective are in the
law or rules governing procedure. There
is a joint NCCUSL-ABA Study Committee on an Omnibus Business Code and it is
anticipated that this kind of issue will be within the scope of any project
that results from that Study. Thus, it
is arguable that change to the existing language in this draft act is beyond
the scope of the Uniform Cooperative Association Act Drafting Committee. Finally, there may be a distinction in policy
in the operation of Subsection (d) as applied to foreign versus domestic
cooperative associations.
[ARTICLE] 2
FILING AND
ANNUAL REPORTS
SECTION 201.
SIGNING OF RECORDS TO BE DELIVERED FOR FILING TO THE [SECRETARY OF
STATE].
(a) Records
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
two organizers.
(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 1106 or a person appointed under Section
1106 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.
Reporters= Note
The Reporters, in an earlier draft have revised the
section to make it more comprehensive and more closely track the ULLCA II.
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) the delivery of the unsigned record to
the [Secretary of State] for filing to file the record unsigned.
(b) If an
aggrieved person under subsection (a) is not the limited cooperative
association or foreign cooperative to which the record pertains, the aggrieved
person shall make the cooperative association or foreign cooperative a
party to the action brought to obtain the order in subsection (a).
(c) An
unsigned record filed pursuant to this section is effective.
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 under this [act] must be captioned to describe the
record=s purpose, be in a medium permitted by the
[Secretary of State], and be delivered to the [Secretary of State]. If the filing fees have been paid, unless the
[Secretary of State] determines determined that a 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) Upon
request and payment of the requisite fee, the [Secretary of State] shall send
to the requester a certified copy of any record filed by the [Secretary of
State] under this [act].
(c) Except as
otherwise provided in Sections 117 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 117 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.
Reporters= Note
AStyle@ suggested that Aa
delayed@ be deleted wherever it appears and that the flush
language of (c) include the phrase Alater than the date of filing.@ Adoption of
the suggestion would add an inconsistency with ULLCA II.
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 cooperative 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 false or erroneous 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 has contain
an attached a copy of the record as filed;
(2) specify
the incorrect information and the reason it is incorrect or the manner in which
the signing was defective; and
(3) correct
the incorrect information or defective signature.
(c) When
filed by the [Secretary of State], a statement of correction is effective
retroactively as of the effective date of the record the statement corrects. However, but the statement is
effective when filed as to persons relying on the false or erroneous
information or defective signature before its correction and adversely affected
by the correction.
Reporters= Note
See, e.g.,
Section 117(b).
SECTION 205.
LIABILITY FOR FALSE 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 false information, a person that suffers 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 false.
Reporters= Note
The February 2006 draft deleted a significant amount
of this section consistent with the Committee=s
direction. Note particularly that the
language concerning Aperjury@ no longer appears in this statute.
SECTION 206.
CERTIFICATE OF GOOD STANDING OR AUTHORIZATION.
(a) The
[Secretary of State], upon application and payment of the required fee, shall
furnish 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 articles of organization, that and
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 application and payment of the required fee, shall
furnish a certificate of authorization for a foreign cooperative if the records
filed in the [office of the Secretary of State] show that the [Secretary of
State] has filed a certificate of authority, has not revoked the certificate of
authority, and has not filed a notice of cancellation pursuant to Section 1307.
(c) Subject
to any qualification stated in the certificate, a certificate of good standing
or authorization 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.
Reporters= Note
As of close of the 2006 Annual Meeting, this
provision is now inconsistent with final ULLCA II which is the latest
pronouncement by the conference on this matter.
See below.
At the Committee=s
direction:
(1) The name of the Acertificate
of existence@ in the prior draft has been changed to Acertificate of good standing@; and, Subsections (a)(1) through (a)(8) and (b)(1)
through (b)(6) have been deleted. The
prior draft tracked the current ULLCA Revision Draft and ULPA (2001) to a
lesser extent, ULLCA (1995) and the RMBCA.
Is this a place for a legislative note?
At least one junction box statute confines (c) to the facts stated in
the certificate. The Committee adopted
this change Asubject to future revision@. Finally,
the Reporters, on their own motion, replaced Arequest@ with Aapplication@.
(2) The Reporters respectfully request information
concerning that for which a Acertificate of good standing@ attests among the various states.
See Sections 1111 and 1115.
SECTION 207.
ANNUAL REPORT FOR [SECRETARY OF STATE].
(a) A limited
cooperative association or a 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 limited cooperative association or foreign cooperative;
(2) the
street and mailing addresses of the association=s or
cooperative=s designated office and the name and street and
mailing addresses of its agent for service of process in this state;
(3) in the
case of a cooperative association, the street and mailing addresses of its
principal office if different from its designated 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
1305.
(b)
Information in an annual report must be current as of the date the
annual 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 was formed or the foreign cooperative was 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 in
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 in subsection (a) and
delivered to the [Secretary of State] within 30 days after the effective
date of the notice from the [Secretary of State], it is timely delivered.
(e) If a
filed annual report contains an address of the a designated
office, or the name or address of the an
agent for service of process, or the 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 under Section 117.
(f) If a limited
cooperative association fails to deliver file an annual report
under this section, the [Secretary of State] may proceed under Section 1111 to
administratively dissolve the association.
(g) If a
foreign cooperative fails to deliver file an annual report under
this section, the [Secretary of State] may proceed under Section 1306 to revoke
the certificate of authority of the cooperative.
Reporters= Note
There was discussion at the October 2005 meeting
concerning whether Aif different@ should be inserted between street and mailing
address. If that is done, should it be a
global change?
Is subsection (d) clear? This Draft leaves the determination of the
deemed effective date of notice here, and elsewhere, to other law.
Would (f) and (g) be better placed in sections 1111
and 1306, respectively?
SECTION 208.
FILING FEES; RULES AND REGULATIONS; ANNUAL REPORTS. The filing fee for records filed under this [article
Article] by with the [Secretary of State] is governed by [insert
appropriate citation to this state=s the
general business corporation act,] [the limited liability company
act, or] [the general cooperative act] of this state.
Legislative Note: If the
adopting state has a centralized statute providing a unified fee structure the
bracketed language should be deleted delegated and replaced with
a cross-reference to the appropriate unified schedule.
Reporters= Note
Consideration should be given to bracketing this
section. Three bracketed references are
suggested as a source of fees. There are
others, e.g., the limited partnership act, not-for-profit corporation
act, etc.
The base source for much of this Article as
originally drafted was ULPA (2001) which is the latest pronouncement of the
Conference on these matters.
[ARTICLE] 3
FORMATION AND
ARTICLES OF ORGANIZATION
Reporters= Note
Article 2 of the 2005 Annual Meeting Draft has been
bifurcated into Art. 2A AFormation and Articles of Organization@ and Art. 2.
Article 2A is now Article 3.
AOld@ Section 203 AAmendment
or Restatement of Articles of Organization@
has been moved to Art. 13 as Anew@ Section 1309.
SECTION 301.
ORGANIZERS. A limited
cooperative association must be organized by one two or more
organizers who are individuals.
Reporters= Note
This section needs to be read in conjunction with
Section 401 which requires the existence of participants before the association
may conduct business. ULLCA (2006)
resolved this dilemma in a different manner.
The issues raised in Section 301 have been discussed
at length by the Committee and it was decided at the Fall 2006 meeting to
require only one organizer. The balance
of this Note is for historical purposes only.
The Committee directed the Reporters to delete
subsection (b) in the prior draft that required the organizers to Aintend@ in Agood faith@ to become members (now participants) in the
cooperative.
The Committee also directed that this draft should
provide that only one organizer was necessary for a wholly-owned subsidiary of
an existing cooperative. Several
unexplored issues arose when the Reporters attempted to draft the language to
effectuate that purpose. First:
At what point is Awholly-owned@ measured? At
the moment of formation? Is it an
ongoing requirement? Second: Was
the Committee direction really intended to address the minimum number of
participants rather than the minimum number of organizers? For these and other reasons the Reporters
retained the two organizer requirement.
Another issue raised in conjunction with this
Section is whether the formation of Ashelf@ cooperatives should be allowed. AShelf@ entities are those entities formed by promoters, or
others, for possible future use without a specific current need for the entity.
The tentative conclusion of the Committee was not to allow for shelf
cooperatives because they are inconsistent with the member focus of
cooperatives. For the same reason, two
organizers are required under this draft.
The Committee recognizes that the execution of that
tentative conclusion is difficult and raises other issues including the number
of members necessary to avoid dissolution.
This draft requires only a single member for the latter purposes, in
part, because of the current use of wholly owned subsidiaries of cooperatives
which are themselves cooperatives and because requiring more than a single
member increases the risk of inadvertent dissolution. On the other hand, like under partnership
law, it is difficult to conceive of a Acooperative@ without more than one member.
The Minnesota Cooperative Associations Act allows
for Aone or more organizers... [who] need not be members.@ The Colorado
Cooperative Act too, allows for one or more Aincorporators.@
SECTION 302.
FORMATION OF LIMITED COOPERATIVE ASSOCIATION; ARTICLES OF
ORGANIZATION.
(a) To form a
limited cooperative association, the organizers 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 and mailing addresses of the association=s
initial designated office and the name and street and mailing addresses of the
association=s initial agent for service of process;
(4) the name
and street and mailing addresses of each organizer; and
(5) the term
for which the association is to exist if other than perpetual.
(b) Subject to Section 112(b), articles Articles
of organization may contain any other provisions information in
addition to those that required by subsection (a).
(c) A limited
cooperative association is formed after on the date when 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).:
(1) the
[Secretary of State] files the articles of organization; or
(2) if the
filed articles of organization state a delayed effective date, the arrival of
the delayed effective date.
(d) If the
articles state a delayed effective date, a limited cooperative
association is not formed if, before the articles take effect, an one
organizer who signed the initial articles of organization signs and delivers to
the [Secretary of State] for filing a statement of cancellation.
Reporters= Note
Paragraph (a)(6) has been removed because it
provided that the number and manner of electing the BOD could be relegated to
the bylaws which changed the voting quantum necessary for amendment and was
therefore Acut.@ There was a
question from the floor at the 2006 Annual Meeting about it.
The December 2006 draft modified the sections to
which the following was germane. The
Committee on Style suggested deletion of Afor filing@ in subsection (a).
It has been retained because of a need to direct the Secretary of State
as to what to do with the delivered document.
That Committee also suggested deletion of Ainitial@ in paragraph (a)(3). It was left in to avoid any implication that,
despite other provisions in the act, that any change in the designated office
would require an amendment to the articles of organization.
SECTION 303.
ORGANIZATION OF LIMITED COOPERATIVE ASSOCIATION.
(a) After the
effective date of the articles of organization of a limited
cooperative association is formed under Section 302:
(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 brought before the directors at the meeting; 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) Initial directors need not be members participants.
(c) An initial director serves until a successor is
elected and qualified at a special or annual members= meeting of participants or the director is
removed, resigns, is declared incompetent by a court with jurisdiction,
or dies.
Reporters= Note
The Comment needs to explain that the failure to
adopt bylaws does not necessarily negatively affect the organization or
existence of the LCA if the necessary records are otherwise in existence.
Subsection (b) is new. It solves a chicken and egg problem. See Section 707.
The February 2006 draft attempts to avoid the
classic circularity problem concerning which comes first: participants or the limited
cooperative association. This same issue
has been discussed in the context of limited liability companies. There (probably) is no nice theoretical
solution to this very practical problem.
The following suggestion was made in the context of
the LLC project by two advisors:
(1) A limited liability company is formed when a
certificate of organization is filed and it has at least one member.
(2) If a person becomes a member and files a
membership acknowledgment (see parenthetical in (3) below) within 60 days from
the filing of the certificate of organization the LLC shall be conclusively
presumed to have been formed upon the date of the filing of the certificate of
organization [or, stated another way, the membership acknowledgment relates
back to the date of the filing of the LLC certificate].
(3) If a certificate of organization does not name
(or state the existence of) an initial member and a membership acknowledgment
is not filed within 60 days of the date of its filing the certificate of
organization lapses and becomes void.
Note #1 - This is not meant to be the draft or to be
comprehensive (e.g. it does not deal with delayed effective date,
etc.). It is concept only.
Note #2 - In an odd sort of way this concept is
similar to the security agreement/financing statement dichotomy in UCC Article
9.
Note #3 - This is not a perfect nor a particularly
elegant solution but it may be a solution.
The advisors made the suggestion because they were
apprehensive about unintended consequences of the shelf LLC and the continuing
trend line that, over time, makes an LLC less distinguishable from a
corporation.
From their perspective, convergence between some
features of LLCs and corporations is inevitable and on balance very
beneficial. Nonetheless, they raised
concern about the possible long-term confounding effect and possible erosion of
the perceived contractual nature of the LLC by the shelf provisions in
ULLCA. The contractual basis for the LLC
viewed, by these advisors is important in the real estate and estate planning
areas and is the underlying rationale for many benefits available for those and
other purposes under both LLC and other law.
The Co-op Association Drafting Committee might want
to consider returning to this issue dependent upon the final formulation of the
ULLCA project at the 2006 Annual Meeting.
SECTION 304.
BYLAWS.
(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
groups, classes, or other types of member participant interests
and relative rights, preferences, and restrictions granted to or imposed upon
each group, class, or other type of member participant interest;
and
(B) the
rights to share in profits or distributions of the association;
(2) a statement of the method for admission of
members to admit participants;
(3) a
statement designating voting and other governance rights, including
which members participants have voting power and any restriction
on the voting power under Sections 411 through 413;
(4) a
statement that member participant interests held by a member
participant are not transferable or, if transferable, a statement
of the conditions upon which they may be transferred with the approval of
the association=s board of directors;
(5) a
statement concerning the manner in which profits and losses are allocated
apportioned and distributions are made among patron members participants
and, if investor members participants are authorized,
the manner in which profits and losses are allocated apportioned
and how distributions are made as between patron members participants
and investor members participants; and
(6) a statement of the number and terms of directors
or the method by which the number and terms are determined.
(b) Subject to Section 112(b) and the articles of
organization, bylaws Bylaws may contain any other provision
for managing and regulating the affairs of the association. which is
not inconsistent with organic law or the articles of organization.
(c) In
addition to amendments permitted under [Article] 14, the initial board of
directors of a limited cooperative association may amend the bylaws by a
majority vote of the directors at any time before the admission of members
participants.
Reporters= Note
If there are no formal bylaws or the bylaws do not
contain certain provisions, the act will supply many of the material terms and
other governing rules.
Section 304 goes beyond what is typically considered
capital structure in the corporate setting.
The Drafting Committee considered alternatives but because this Act is
membership based; because the articles and bylaws together constitute the
agreement in traditional cooperative and in other unincorporated entities; and,
on the other hand, because it desired the greater formality typical in
cooperatives, this draft includes greater detail.
Subsection (c) has been added at the direction of
the Committee. It could also be added to
the amendment provisions in Article 14 but was placed here as part of the
organizational process.
[ARTICLE] 4
MEMBERS PARTICIPANTS
SECTION 401. MEMBERS
PARTICIPANTS. To begin business, a limited cooperative
association must have at least [two] or more patron members
participants unless the sole member participant is a
cooperative.
Reporters= Note
Other law or the organic rules govern such things as
whether husband and wife or tenants in common are counted as one or multiple
members.
There was Committee discussion as to whether it
should be made clear that this section is not intended to preclude common
ownership of a patron participant and the Committee requested the Reporters to
consider the matter. Because the Act
does not preclude common ownership the Reporters recommend this question be
left to the organic rules. Other law,
including community property law, may affect the operation of this
Section. Moreover, it is not the
intention of this Section to affect effect provisions of tax
laws.
SECTION 402.
BECOMING A MEMBER PARTICIPANT. A person becomes a member participant:
(1) as
provided in the organic rules;
(2) as the
result of merger or consolidation under [Article] 15; or
(3) with the
consent of all the members participants.
Reporters= Note
This section has engendered a great deal of
discussion. The Reporters were directed
to delete the provision admitting participants after the dissociation of the
last remaining participant and this draft reflects that direction. The Reporters were also directed either to
delete Awith the consent of all remaining members@ or to add thereto Aif the
organic rules are silent@. Upon
further review the Reporters have done neither pending further direction of the
Committee because: (1) this act requires the admission of participants to be in
a record and Aif silence@ raises both circularity issues and sleeping
theoretical issues and (2) all the participants almost certainly have the right
to amend the organic rules to admit anyone they want. This approach is consistent with
unincorporated law and vests ultimate authority in the participants which seems
inherently consistent with cooperative principles. It is exactly the same language that
appears in Section 401 of ULLCA II, Sections 401 and 501 of ULPA (2001). See Minnesota Cooperative Associations Act '308B.601 and '308B.241. The
former states that the articles or bylaws may set the terms. The latter states the board, however, may
amend the bylaws but requires notice of the change to be sent to all members. Other provisions state the bylaws may also be
amended by the members.
SECTION 403.
NO RIGHT OR POWER AS MEMBER PARTICIPANT TO BIND LIMITED
COOPERATIVE ASSOCIATION. A member participant does not
have the right or power as a member participant to act for or
bind the limited cooperative association.
Reporters= Note
Source: ULPA
(2001).
SECTION 404.
NO LIABILITY AS MEMBER PARTICIPANT FOR LIMITED
COOPERATIVE ASSOCIATION OBLIGATIONS. Unless the articles of organization otherwise
provide:,
(a) an obligation of a limited cooperative
association, whether arising in contract, tort, or otherwise, is not the
obligation of a member; and participant. A
(b) a member participant is not personally liable, by way of contribution or
otherwise, for an obligation of the association solely by reason of being a member
participant.
Reporters= Note
Source: ULPA
(2001). There has been some discussion
about modifying the ULPA (2001) language to include the word Apersonal@ in an attempt to make the provision clearer but it
is not certain it does so and there is a cost associated with changing the
language from one Act to another if the intent is the same. The phrase directly or indirectly has been
deleted in accordance with Committee direction.
The same issue arose in the context of ULLCA (2006).
The Comment to this Section needs to explain it does
not apply to contractual guarantees and unfulfilled contribution
obligation. Those are separate personal
obligations apart from an obligation of a cooperative.
SECTION 405.
RIGHT OF MEMBER PARTICIPANT AND FORMER MEMBER PARTICIPANT
TO INFORMATION.
(a) Within 10
business days of receipt by a limited cooperative association of a
demand made in a record, the association shall permit a member participant
to may obtain, inspect, and copy required information under
Section 113(1) through (87) during regular business hours in the
association=s principal office.
A member participant need not have any particular purpose
for seeking the information. The
association is shall not be required to provide the same
information under Section 113(2) through (87) to the same member
participant more than once during a six-month period.
(b) On demand
made in a record received by the limited cooperative association, a member
participant may obtain, inspect, and copy required information under
Section 113(9), (10), (12), (13), and (16) (8) through (13) if:
(1) the member
participant seeks the information in good faith and for a proper
purpose reasonably related to the member=s participant=s
interest as a member participant;
(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 participant=s
purpose; and
(4) the
demand is just and reasonable.
(c) Within 10
business days after receiving a demand pursuant to subsection (b), the limited
cooperative association shall inform in a record the member participant
that made the demand:
(1) if the
association agrees to provide the demanded information:
(A) the 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 any demanded information, the association=s reasons for declining.
(d) Subject
to subsection (f), a person dissociated as a member participant
may obtain, inspect, and copy any required information under subsection
(a) or (b) Section 113:
(1) by delivering a demand in a record to the limited
cooperative association in the same manner and subject to the same conditions
applicable to as required of a member participant
under subsection (b);
(2) if the information pertains to the period
during which the person was a member participant in the
association; and
(3) if 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 same manner as provided in subsection (c).
(f) Within 10 business days of 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 113(15).
(gf)
If a member participant dies or is adjudged incompetent,
Section 1003 applies.
(hg)
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.
(ih)
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.
(ji)
A person who may obtain information under this Section may obtain the
information participant or person dissociated as a participant may
exercise the rights under this section through an attorney or other
agent. A restriction imposed on the
person under subsection (hg) or by the organic rules on a
participant or person dissociated as a participant also applies to the
attorney or other agent.
(kj)
The rights stated in this section do not extend to a person as
transferee. but may be exercised by the legal representative of an
individual under legal disability who is a participant or person dissociated as
a participant.
(l) 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 information
pursuant to this subsection.
Reporters= Note
Subsection (k) needs a comment to make clear that a
transferee who becomes a member is a member and no longer a transferee.
The Comments will also include an explanation for
subsection (a) that the Asame information@ does not include new information about the same
subject. Nonetheless the subsection
assumes an obligation of good faith for both the member requesting the
information and the association. Thus,
if the nature of the requested information changes daily this Section should
not be read to mean the daily changes rise to the level of new information.
The Comments will also reflect that the Section is
not intended to require, produce or maintain information not required and
maintained in a format consistent with Section 113 (the LCA does not require
the Acreation@ of information).
This section was substantially redrafted for the
February 2006 draft. It picks up the
cause/no cause concept and references the redrafted Section 114. It is generally consistent with the RMBCA and
The Model Nonprofit Corporation Act.
This draft does not, however, include any Aright to go to court@. Neither, however, does the Minnesota
Cooperative Associations Act nor ULPA (2001).
Likewise the Reporters have not been able to find such a provision in
either ULLCA (1995) or in the current revision for ULLCA. On the other hand, the Tennessee Act, the
Model Nonprofit Corporation Act, and the MBCA all contain court-ordered
provisions. The Tennessee Act provides
as follows:
43-38-532.
Enforcement of right to inspect and copy records.
(a) If a cooperative does not allow a member who
complies with ' 43-38-530(a) to inspect and copy any records
required by that subsection to be available for inspection, a court in the
county where the cooperative=s principal executive office, or, if none in this
state, its registered office, is located may summarily order inspection and
copying of the records demanded at the cooperative=s expense upon application of the member.
(b) If the court orders inspection and copying of the
records demanded, it shall also order the cooperative to pay the member=s costs, including reasonable counsel fees, incurred
to obtain the order, if the member proves that the cooperative refused
inspection without a reasonable basis for doubt about the right of the member
to inspect the records demanded.
The Nonprofit Corporation Act section states:
Section 16.04.
Court-Ordered Inspection.
(a) If a corporation does not allow a member who
complies with section 16.02(a) to inspect and copy any records required by that
subsection to be available for inspection, the [name or describe court] in the
county where the corporation=s principal office (or, if none in this state, its
registered office) is located may summarily order inspection and copying of the
records demanded at the corporation=s expense upon application of the member.
(b) If a corporation does not within a reasonable
time allow a member to inspect and copy any other record, the member who
complies with subsections 16.02(b) and (c) may apply to the [name or describe
court] in the county where the corporation=s principal office (or, if none in this state, its
registered office) is located for an order to permit inspection and copying of
the records demanded. The court shall
dispose of an application under this subsection on an expedited basis.
(c) If the court orders inspection and copying of
the records demanded, it shall also order the corporation to pay the member=s costs (including reasonable counsel fees) incurred
to obtain the order unless the corporation proves that it refused inspection in
good faith because it had a reasonable basis for doubt about the right of the
member to inspect the records demanded.
(d) If the court orders inspection and copying of
the records demanded, it may impose reasonable restrictions on the use or
distribution of the records by the demanding member.
Section 16.05.
Limitations on Use of Membership List
Without consent of the board, a membership list or
any part thereof may not be obtained or used by any person for any purpose
unrelated to a member=s interest as a member. Without limiting the generality of the
foregoing, without the consent of the board a membership list or any part
thereof may not be:
(1) used to solicit money or property unless such
money or property will be used solely to solicit the votes of the members in an
election to be held by the corporation;
(2) used for any commercial purpose; or
(3) sold to or purchased by any person.
The Comments will include a discussion of
nondisclosure. Finally, this section
cannot be reduced or eliminated by the organic rules. See Section 112.
(B) Committee may wish to revisit the issue of a AStatement of Interest.@ The Minnesota Cooperative Associations Act
mandates each member is entitled a AStatement of Membership Interest.@
308B.611.
Nature of a membership interest and statement of interest owned
***
Subd. 2.
Statement of membership interest.
At the request of any member, the cooperative shall state in writing the
particular membership interest owned by that member as of the date the
cooperative makes the statement. The
statement must describe the member=s rights to vote, if any, to share in profits and
losses, and to share in distributions, restrictions on assignments of financial
rights under section 308B.605, subdivision 3, or voting rights under section
308B.555 then in effect, as well as any assignment of member=s rights then in effect other than a security
interest.
SECTION 406.
ANNUAL MEMBERS= PARTICIPANTS= MEETINGS.
(a) Members The participants of a
cooperative association shall meet annually as provided in the organic
rules or at the direction of the limited cooperative association=s board of directors not inconsistent with the organic
rules.
(b) Annual members= participants= meetings may be held inside or outside of
this state at the place stated in the organic rules or by the limited
cooperative association=s board of directors not inconsistent with the
organic rules.
(c) Unless the The organic rules otherwise
may provide, members may for participants to attend meetings
or conduct annual members= participants= meetings through the use of any means of
communication if all members participants attending the meeting
can communicate with each other during the meeting.
(d) A limited
cooperative association=s board of directors shall report, or cause to be
reported, at the association=s annual members= participants= 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, a limited cooperative association=s board of directors shall designate the presiding
officer of the association=s annual members= participants= meeting.
(f) Failure to hold an annual meeting pursuant to
subsection (a) does not affect the validity of any limited cooperative
association action.
Reporters= Note
Subsection (f) is new in the December 2006
draft. It was added by the Reporters and
follows RMBCA ' 7.01.
This act follows cooperative law and corporate law
in providing an annual meeting. This
provision should not be variable by the organic rules.
This section expands the MBCA provision to address
issues, e.g. meeting chair and financial reports, typically addressed in
general cooperative law. Note that there
is no time period following the close of the fiscal year in which the meeting
must necessarily be held. Annual
meetings are not required under general partnership law (e.g. UPA
(1997)), limited partnership law (e.g. ULPA (2001)) or limited liability
company law (e.g. ULLCA). Best
practice would be to coordinate the dates of the meetings in the organic rules.
Although in the MBCA, could subsection (a) be
deleted without harm?
Finally, this section mandates annual meetings. Should there be a provision for Aregular@ non-annual meetings that do not need to comply with
the special meeting notice provisions.
SECTION 407.
SPECIAL MEMBERS= PARTICIPANTS= MEETINGS.
(a) Special members= participants= meetings must be called:
(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 participants holding at least 20
10 percent of the votes of any class or group entitled to be cast on the
matter that is the purpose of the meeting stated in the demand; or
(4) by demand
in a record signed by members participants holding at least 10 percent
of all votes entitled to be cast on the matter that is the purpose of the
meeting stated in the demand.
(b) Any
voting member may withdraw its demand under subsection (a)(3) or (a)(4) before
receipt by the limited cooperative association of demands sufficient to
require a special members= participants= meeting.
(c) A special
members= participants= meeting may be held inside or outside this state at
the place stated in the organic rules or by the limited cooperative
association=s board of directors in accordance with the organic
rules.
(d) Unless the The organic rules otherwise
may provide, members may for participants to attend meetings
or conduct special members= participants= meetings through the use of any means of
communication if all members participants attending the meeting
can communicate with each other during the meeting.
(e) Only
affairs within the purpose or purposes stated pursuant to the notice of a
special members= meeting
Section 408(c) may be conducted at the a special participants= meeting.
(f) Unless
the organic rules otherwise provide, the presiding officer of a special members= participants= meeting shall be designated by the limited
cooperative association=s board of directors.
Reporters= Note
Discussion at the February 2006 meeting reached a
consensus that this Section is not subject to variation by the organic rules
and answered the issues in the following paragraph to this note.
To the Reporters=
knowledge, the only current question that needs to be addressed is
whether subsections (a)(2)-(4) can be varied organically. For what it=s its
worth the Reporters would generally suggest Ayes@ except one Reporter would require (a)(4) be
mandatory; (d) Ashould@ (!?) be mandatory.
The MBCA allows the 10 percent minimum for demand to
be varied upward to 25 percent if provided in the articles of incorporation.
Old section 308 (which followed this section has
been deleted as redundant). The matter
was discussed by the Committee and it seemed ambivalent. Thus, the Reporters believed they had
Committee permission to use their discretion.
Neither this draft nor the general cooperative
statutes consulted provide for any type of Afiduciary
duties@ for representatives of districts even though agency
principles could apply. The Committee has
not yet discussed this issue though it has discussed whether members,
generally, have fiduciary duties. There
exists strong sentiment on the Committee that members, solely by reason of
being members, should not have fiduciary duties. A finer issue is whether members owe (or
should owe) the cooperative or other members a duty of good faith or fair
dealing.
For the notice required of district meetings see
Section 408(d).
SECTION 408.
NOTICE OF MEMBERS= PARTICIPANTS= MEETINGS.
(a) A limited
cooperative association shall notify each member participant of
the time, date, and place of a members= any
annual or special participants= meeting [at least not less than 15 and
not nor more than 60] days before the meeting.
(b) Unless
the articles of organization otherwise provide, notice of an annual members= participants= meeting need not include [a description of ]
the purpose or purposes of the meeting.
(c) Notice of
a special members= participants= meeting must include [a description of] the
purpose or purposes of the meeting as contained in the demand under Section
407(a)(3) or (a)(4) or as voted upon by the limited cooperative
association=s board of directors under Section 407(a)(2).
Reporters= Note
This section is mandatory except (b). Is this correct? The Aunless provided by this [act]@ has been removed the only possible place that might
be relevant is in mergers and in that context it should be revisited. A question was raised at the 2005 Annual
Meeting about the Adescription@ language.
The Committee needs to decide whether (or not) to leave it in.
The Committee has discussed the bracketed 15 day
notice and the long-end has been added for discussion purposes. It is tentative.
Old subsection (d) has been moved.
SECTION 409.
WAIVER OF MEMBERS= PARTICIPANTS= MEETING NOTICE.
(a) A member
participant may waive notice of a members= participants= meeting before, during, or after the meeting.
(b) A member=s participant=s
participation in a members= participants= meeting is a waiver of notice of that meeting
unless the member participant objects to the meeting at the
beginning of the meeting or promptly upon the member=s its
arrival at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
SECTION 410.
QUORUM OF MEMBERS PARTICIPANTS. Unless the organic rules otherwise provide,
the voting power of those members participants present at a
members= an annual or special participants= meeting constitutes a quorum.
Reporters= Note
The Comment will explain what Avote for@ means in section 409 (b) (See Tennessee
Processing Cooperative Act).
This section states a default rule.
The interaction of Sections 409 and 410 means that a
member objecting to a meeting under Section 409 is present for purposes of the
quorum under 410. The quorum is
low. The quorum requirement could, of
course, be bifurcated by the number of the cooperative=s members. Is
Avoting power@ a confusing term?
SECTION 411.
VOTING BY PATRON MEMBERS PARTICIPANTS.
(a) Unless
the organic rules otherwise provide for a greater quantum, each
patron member participant has one vote. The organic rules may allocate voting power
among patron members participants as provided in Section 412.
(b) The
organic rules may provide for the allocation of patron member participant
voting power by districts, class, or classes or any combination of them district
or class.
Reporters= Note
See definition of Avoting group.@
Old subsections (b) and (c) have been moved
(consolidated) in another section dealing with delegate voting.
This section needs to be revisited and discussed
within the matrix of rights and powers.
As drafted the equity investors have fewer rights and less initial
negotiating power than do lenders who regularly require veto authority over a
variety of matters. This goes to the
heart of the ability of this organization to reduce its cost of capital by
seeking such investors. One solution
present in current cooperative association acts is permitting the patrons to
have a minority position.
As drafted, this act is the worst of both worlds for
investors and patron members attempting to reduce their cost of capital and
formulate a viable economic organization.
The Committee needs to return to the idea of (a) reducing the patron
majority block (making the organization have the look and feel of an LLC); or,
probably more viably, (b) at least providing for true class voting providing
the investors the ability to block/veto (like lenders) but not dominate
affirmative action. If the voting scheme
more closely followed corporate-like class voting it would also, at least
conceptually, make the investors and this act look more like limited partners
in a limited partnership. The place
within the act to place any such provisions would be in subsection (b). It might also be drafted as an alternative
though that compromise is probably less than satisfying to the Committee. The class voting was suggested by a
Commissioner on the floor of the 2005 Annual Meeting.
Subsection (b) has been reformulated and
redrafted. The general meeting notice
provisions should be equally applicable to (b)(2).
The quantum of voting reserved to patron members
under subsection (b) is controversial because it is a departure from the
general law of cooperatives. It has been
controversial in Committee discussion.
It is also one of the primary changes that allows for greater
flexibility for capital formation. Other
Anew generation@ cooperative laws are far less restrictive than this
draft. For example, Minnesota
substitutes fifteen (15) percent for the two bracketed alternatives and the Amajority@ floor.
This section is mandatory.
SECTION 412.
DETERMINATION OF VOTING POWER OF PATRON MEMBER PARTICIPANT. The organic
rules may allocate voting power among patron members participants
on the basis of one or a combination of:
(1) one member, one vote actual,
estimated, or potential patronage or any combination thereof;
(2) use or patronage; equity allocated or
held by a patron participant in the cooperative association; [or]
(3) equity; or
(4) if a patron member is a cooperative, the number
of its patron members.
[(3) if the
patron participant is a cooperative, the number of patron participants of the
participant cooperative; or]
[(3)] [(4)]
any combination of paragraphs (1)[,] [and] (2)[, and (3)].]
Reporters= Note
This Section is meant to be permissive rather than
restrictive.
Old subsection (b) has been consolidated to the new
delegate section (412).
A question has been raised concerning (a)(2). It was suggested that Aequity investments by patron members must reflect an
established patronage obligation@. The
definition of patron participant in the 2006 Annual Meeting Draft (Subsection
102(22)) addresses this question and assures that the financial rights of all
patron participants are based on patronage.
Thus, the financial allocation provisions assure that patron
participants have a patronage obligation.
However, voting allocated under subsection two will
or may reflect, in some way, cumulative patronage not restricted to patronage
on a current basis. It also provides a
measure of flexibility.
SECTION 413.
VOTING BY INVESTOR MEMBERS PARTICIPANTS. If the organic
rules provide for investor members participants, each investor member
participant has one vote, unless except as otherwise provided
by the organic rules otherwise provide. The organic rules may provide for the
allocation of investor member voting power by class, or classes,
or any combination of classes.
SECTION 414.
VOTING REQUIREMENTS FOR MEMBERS PARTICIPANTS. If a limited
cooperative association has both patron and investor members participants:
(a)
(1) the total aggregate
voting power of all patron members participants may not be less
than two-thirds of the entire voting power entitled to vote; and
(2) action on any matter is approved only:
(A) upon the
affirmative vote of at least a majority of all members participants
voting at the meeting unless more than a majority is required by [Articles] 14
through 16 or in the organic rules; and
(B) at least one-half of the votes cast by patron members
participants are in the affirmative, but the organic rules may require
provide for a larger affirmative vote by patron members; and participants.
(b) the organic rules may provide for the quantum of
the affirmative vote that must be cast by investor members to approve the
matter voted on.
Reporters= Note
Old subsection (b) stated: A(b) The collective voting power of nonpatron members
is subject to section 312(c).@ The
cross-reference is now 411(b). It is
deleted here as surplusage.
SECTION 415.
MANNER OF VOTING.
(a) At a members= participants= meeting:
(1) proxy voting by members participants
is prohibited.; and
(b) Delegate (2) delegate voting
based on geographical district, or class, or classes
is not voting by proxy under this section.
(cb)
The organic rules may provide for voting on some, none, or all questions
by secret ballot delivered by mail or voting by other means on some or all
questions that are subject to vote by members participants.
Reporters= Note
Subsection (b) is new to the 2006 Annual Meeting
Draft. The Committee expressly assumed
the availability of electronic voting when deciding that proxy voting is
prohibited and this subsection is broad enough to allow it.
The Committee changed USPS to Amail@. The
Reporters added Aor other means@ consistent with Committee discussion concerning
voting by facsimile, etc.
The Committee needs to decide whether this is
mandatory or default. The Reporters
believe it should be default.
In some states proxy voting is not available and in
others it is allowed. Perhaps most
traditionally, cooperative law often provides for mail ballots.
Corporate
law generally provides for proxy voting.
The Uniform Limited Partnership Act (2001) provides for proxy voting
(section 118). Any voting by proxy,
however, seems to dilute the deliberative function of a required meeting and is
at odds with traditional co-op values even though currently allowed by a
significant number of states.
This issue was raised directly on the floor of the
2005 Annual Meeting: (a) a strong opinion was expressed that no proxies be
allowed for patron participants but the same Commissioner was ambivalent as to
investor participants; (b) the issue was obfuscated by the question of whether
an agent exercising the vote of an entity was a Aproxy@. The
Reporters agreed to look at the question and informally report to the Drafting
Committee in 2006.
SECTION 416.
ACTION WITHOUT A MEETING.
(a) Unless
the organic rules require that action be taken only at a members= participants= meeting, any action that may be taken by the members
participants may be taken without a meeting if each member participant
entitled to vote on the action consents in a record to the action in
a record.
(b) A member may withdraw in a record consent
Consent under subsection (a) may be withdrawn by a participant in a
record at any time before the limited cooperative association
receives a consent from each member participant entitled to vote.
(c) The
consent record of any action may specify the effective date or time of the
action.
Reporters= Note
This Section is not subject to modification by the
organic rules. Thus unanimity is
required.
The Colorado LLC Act and the Delaware for
profit corporation act, for example, allow action without a meeting to
be taken without unanimous consent.
This Section states the general rule of
unincorporated law and at least some traditional co-op statutes and has been
discussed by the Committee.
SECTION 417.
DISTRICTS AND DELEGATES; CLASSES OF MEMBERS PARTICIPANTS.
(a) (1) The organic rules may provide for the
formation of geographic districts of patron members participants
and may provide:
(1A) for the conduct of patron member
participant meetings by districts and the election of directors at the
meetings; or
(2B) that districts may elect district
delegates to represent and vote for the district in members= participants= meetings.
(b2)
A delegate elected under subsection (a)(2) has one vote unless voting
power is otherwise allocated under Section 412 411.
(cb)
(1) The organic rules may provide for the establishment of
classes of members, participants and: (A) the preferences,
rights, and limitations of the classes,; and:
(1B) (i) the conduct of members= participants= meetings by classes and the election of directors
at the meetings; or
(2ii)
that classes may elect class delegates to represent and vote for the class in members= participants= meetings.
(d2) A delegate elected under
subsection (c)(23) has one vote unless the organic rules provide
for aggregate or representative voting based on the member participant
voting under the provisions of Sections 411 through Section
411 or 413.
Reporters= Note
As a matter of drafting this draft attempts to pull
together Adelegate voting@ all in one place.
The substance of the section is derived from old sections 308(d), 411(b)
and (c), and 414(b). A more detailed
effort is set forth below:
(a) The organic rules may provide:
(1) for the formation of districts, units, groups,
or classes of participants;
(2) that districts, units, groups, or classes of
participants may elect district, unit, group or class delegates to represent
and vote for the district, unit, group or class in annual and special meetings
of participants and elect directors;
(3) that the delegates may vote on matters at the
participants= meetings in the same manner as a participant.
(b) Delegates may only exercise the voting rights on
a basis and with the number of votes as prescribed in the organic rules.
(c) If the approval of a certain portion of the
participants is required for adoption of amendments, dissolution, merger,
consolidation, or the sale of assets, the votes of delegates shall be counted
as votes by the participants represented by the delegate.
(d) Except as provided in this Section or in the
organic rules, a delegate selected under subsection (a) has one vote subject to
subsection (c).
(e) The organic rules may provide additional voting
power be allocated to each district, group, or class or delegate for the
aggregate of the number of patron participants in each district, group, or
class as provided under Section 414.
(f) If the cooperative association has formed
districts, units, groups, or classes of participants that elect delegates, then
all provisions of this [Article] relating to meetings of participants shall be
construed to apply to the delegates and not to the participants except those
provisions shall remain applicable to participants with respect to participants
at meetings of the districts, units, groups, or classes of participants.
[ARTICLE] 5
MEMBER PARTICIPANT INTEREST
SECTION 501. MEMBER
PARTICIPANT INTEREST.
(a) A member=s participant=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.
(b) A
participant=s interest is a contractual relationship with the
cooperative association. Subject to
organic law and the organic rules, the contract includes:
(1) the
articles of organization;
(2) the
bylaws;
(3) the
participant agreement, if any, by which a participant becomes a participant;
and
(4) any other
agreements in a record defining a part of the relationship of a participant to
the association.
(c) If appropriate under the circumstances, the
contractual relationship may include marketing contracts and other agreements.
Reporters=
Note
This Section needs a strong comment ... might look
to the Uniform Business Trust Act that is the subject of another current
drafting committee.
2006 Annual Meeting Draft:
Subsection (b) is new and reflects Committee comment
at the February 2006 meeting. There is a
body of cooperative common law that establishes that the basis of the
relationship between a cooperative and its members (and in that context, but
not as drafted, between members). This
is an attempt to codify existing cooperative law. Speculatively this would seem to support the
cooperative principle that a cooperative is for the mutual benefit of its
members and may well reflect that the anthropological roots of cooperative law
pre-date modern corporate law (as well as the idea from Economics that all
organizations can be reduced to a nexus of contracts). The Drafting Committee has not yet reviewed
this language. Subsection (b)(5) is
intended to include, e.g., proprietary leases in a housing cooperative.
The Comment to this section needs to distinguish the
participant agreement from a control agreement.
Prior Drafts:
The first sentence of this Section was deleted at
direction of the Committee. The
Committee instructed the Reporters to attempt to provide more clarity
concerning the bundle of rights a member possessed not only in this Section but
throughout this Article. The balance of
the changes in this Section are an attempt to provide such clarity.
The purpose of this Section is to identify the
universe of rights of a participant as contemplated under the Act. Note that these rights may not be exclusive
to a participant, even though the participant has them. For example, a nonparticipant may have the
ability (Aright@) to pull up to a co-op gas pump and purchase gas
(thus, do business with the cooperative association). On the other hand, some cooperative
associations contemplated by this act may restrict the use of co-op services
only to participants (e.g. grocery purchasing cooperatives). Further, some cooperative associations may
obligate members to deliver a specified volume of production. This Section does not address the rights of non-participants.
Confusion, if any, results from starting Abackwards@. Some
cooperative associations deem Amembership@ automatically if you use their services (e.g.
telephones). The latter is more
appropriately viewed as a membership qualification and admission provision
rather than as the rights of a member.
That is, once a member (participant), the individual has some
combination of the rights delineated in Subsection (a)(b) or (c).
Another related issue, that is probably a
confounding variable but very important, is the (using normative nomenclature) Anon-member patron@. This Section does not govern
non-members. At base, non-member patrons
are a species of third-party contracts whose contract rights may be delineated
in the organic rules. Does there need to
be something addressing this species of users in the organic rule article?
SECTION 502.
PATRON AND INVESTOR MEMBER INTERESTS PARTICIPANT INTEREST. Unless the organic rules establish investor member
participant interests, member participant interests must
be patron member participant interests.
Reporters= Note
The February 2006 Draft deleted a substantial amount
of language from this Section as surplusage given the provisions found
elsewhere, including new definitions under Article 1. The 2006 Annual Meeting Draft reflects the
comments from the Style Committee.
Previous Note:
Note that the draft gives give the
organic rules broad flexibility to vest power in the board. One of the hallmarks of the act is
flexibility but is this Atoo much@? Suggestions
on how to make the language in (a) and (b) more parallel would be appreciated.
The draft of this section is conceptually consistent
with the Minnesota Cooperative Associations Act. It differs, however, in that the Minnesota
Act contains subsections governing the form of the board of resolution and a
subsection detailing, without limitation, the kinds of rights and preferences
different classes might possess (e.g. cumulative distributions,
distribution preferences, and voting rights).
If an agricultural cooperative governed by this
draft had not provided for nonpatron interests, but after formation decided to
do so, it would be required to amend either its articles or bylaws to so
provide. This draft requires a
two-thirds member vote for bylaw amendments dealing with members= relative rights and preferences and all article
amendments require two-thirds vote (of those votes present at the members
meeting).
In order to understand Article 4 it is necessary to
reference Article 8 (AContributions, Allocations and Distributions@). It may be
necessary to add a definition (Section 102) for financial rights to clarify the
intent of Articles 4 and 8. See, Section
404, Reporters= Note.
SECTION 503.
TRANSFERABILITY OF MEMBER PARTICIPANT INTEREST.
(a) Unless
the organic rules otherwise provide, member participant interests
other than financial rights are not transferable. The terms of the restriction on
transferability must be:
(1) set forth
in the organic rules and the member participant records of the
association; and
(2)
conspicuously noted on any certificates evidencing a member=s participant=s interest.
(b) Unless
the transfer is restricted or prohibited by the organic rules, a member participant
may transfer its financial rights in the limited cooperative
association.
(c) A
transferee of a member=s participant=s
financial rights, to the extent transferred, has the right to share in the
allocation of profits or losses and to receive the distributions to the member
participant transferring the interest.
(d) A
transferee of a member=s participant=s
financial rights does not become a member participant upon
transfer of the rights unless the transferee is admitted as a member participant
by the limited cooperative association.
(e) A limited
cooperative association need not give effect to a transfer under this section
until the association has notice of the transfer.
(f) A
transfer of a member=s participant's
financial rights in violation of a restriction or prohibition on transfer
contained in the organic rules is void.
Reporters= Note
2006 Annual Meeting Draft:
Subsection (e) has been much discussed by the
Committee and a decision was made (without reaching consensus) to retain (e) in
the draft. The Comments will reflect
that Anotice@ under (e) is determined by other law (including
common law).
Prior Draft:
Prior subsection (d) repeated a concept dealt with
in another Section in the draft but stated it in different terms. It=s deletion avoids interpretive mischief.
This Section (and article) is based on
unincorporated organizational law. For
purposes of the 2005 Annual Meeting it remains unchanged; however, that should
not be interpreted as a Drafting Committee decision to confirm this
language. There was much concern
expressed about the intent, operation, and drafting of this Article. As stated in the Reporter=s Notes to other sections the confusion is
definitionally rooted. At least to some
extent, any ambiguity in the current draft reflects overlapping use of the
terms in the industry.
Most broadly the solution rests in the following
concepts: value given, allocated, or paid based on:
(i) the use of the cooperative (e.g., in a
supply co-op the amount paid by a person for petroleum products during the
year) relative to the financial performance of the cooperative;
(ii) the delivery of products sold to (e.g.,
marketing cooperatives) or services rendered (e.g., worker cooperatives)
to or on behalf of the cooperative;
(iii) an allocation and/or distribution based on
membership or investment in the cooperative.
Even under existing traditional law there is a great
deal of flexibility given cooperatives to fashion these payments. For example: entering into a marketing
contract (direct payment) with a producer might require that producer to be a
member of the cooperative (and membership may require an investment B nominal or otherwise) and that any member may
receive a year-end allocation based on the value of product delivered under the
contract (and any other additional product accepted outside the contract)
relative to the performance of the cooperative.
Further, under current corporate based statutes, Ainvestors@ might purchase preferred stock and, subject to
legal capital constraints, be guaranteed a return.
On the other hand, the cooperative may not require
membership for entering into to a marketing contract but under
its contractual terms promise participation in a defined financial pool based
on the value of the product at time of delivery.
Given these scenarios, a reasonable interpretation
is that there can be patron members (the producer with the marketing
contract requiring membership); nonpatron members (analogous to the
preferred shareholder); and, nonmember patrons (the producer with the
marketing contract that does not require membership but whom receives a contractual
payment based on Abusiness done@).
Under the current draft Amembership@ is not transferable. Thus the member cannot transfer her/his
voting rights. If a marketing contract requires
membership as a condition precedent then, as a practical matter the contract
could not be assigned. (Note, however,
that payments on account of the contract would be subject to other
law). If, however, the marketing
contract does not require membership; the assignability of the contract
or the delegation of its performance would be governed by contract law outside
this draft (personal contract?, anti-assignment clauses?, etc.).
Of course, the contract itself could state it is
assignable with or without consent of the cooperative. Likewise, the articles could allow transfer
of the membership interest with or without consent of the cooperative.
So the financial interest of the membership is
highly contextual on the organic documents and the Adeal@.
Nonetheless, there is a dichotomy between the membership interest and
the marketing contract and it seems in the typical the financial interest of
the member would not include right to payment under the marketing
contract because that would be governed by contract law.
The right of a member as a member to receive
an allocation based on patronage (or otherwise) under the default rule, however,
would be a financial right.
Other uniform unincorporated acts use the term Atransferable interest@ which
might cause less confusion.
SECTION 504.
SECURITY INTEREST AND SET-OFF.
(a) Subject
to subsection (b), a member participant or transferee may grant a
security interest only in financial rights in a limited cooperative
association. The granting of a security
interest in financial rights is not a transfer for purposes of Section
503. The limitation contained in this
subsection does not apply to a member=s participant=s interest that may be transferred in its entirety
under the organic rules.
(b) The
organic rules may restrict or eliminate the granting of a security interest in
financial rights and may permit a security interest to be granted in governance
rights. The limitation of subsection
(a) this section to financial rights does not apply in the case of a
member=s participant=s
interest that is not subject to a restriction or prohibition on transfer under
the organic rules.
(c) A limited
cooperative association has a continued perfected security interest in the
financial rights of a member participant to secure payment of any
indebtedness or other obligation of the member participant to the
association. Notwithstanding [Sections
[308 and 309 of UCC Article 9], the security interest has priority over
all other perfected security interests.
The association may enforce its security interest by set-off against the
member=s financial rights in any distributions from the association. Unless the organic rules otherwise provide, a
member participant may not compel the an
association to offset financial rights against any indebtedness or obligation
owed to the association.
Reporters= Note
The Comment should note that Section 504(c) does not
prevent subordination agreements or assignments of proceeds.
The 2006 Annual Meeting Draft reflects the general
direction and intent of the Drafting Committee but the Drafting Committee has
not yet vetted the language.
The Committee discussed, among other issues, two
questions: (1) May the organic rules legally limit the effect of granting a
security interest under other law; (2) May the organic rules legally limit a
participant from granting a security interest under other law.
SECTION 505.
CHARGING ORDERS FOR A JUDGMENT CREDITOR OF MEMBER PARTICIPANT
OR TRANSFEREE.
(a) On
application by a judgment creditor of a member participant 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 (a) constitutes a lien on the judgment debtor=s financial rights and requires the limited
cooperative association to pay over to the creditor person to which
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
the 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 in respect of 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 participant,
and is subject to Section 503.
(d) At any time before a sale pursuant to a
foreclosure, a member the participant or transferee whose
financial rights are subject to a the 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 foreclosure, the limited
cooperative association or one or more members participants whose
financial rights are not subject to the charging order may pay to the judgment
creditor the full amount due under the judgment and thereby succeed to the
rights of the judgment creditor, including the charging order. Unless the organic rules otherwise provide,
the cooperative association may act under this subsection subdivision
only with the consent of all members participants whose financial
rights are not subject to the charging order.
(f) This
[act] does not deprive any member participant or transferee of
the benefit of any exemption laws applicable to the member=s participant=s or
transferee=s financial rights.
(g) This
section provides the exclusive remedy by which persons seeking to enforce a
judgment against a member participant or transferee, may,
in the capacity of judgment creditor, satisfy the judgment out of the judgment
debtor=s financial rights.
(h) The
limitations of this section to financial rights do not apply to the extent that
the organic rules provide for the transfer of the member=s participant=s
interest in addition to financial rights.
Reporters= Note
This Section, except for subsection (h) is from
ULLCA II (slight revision in (d)... added the Asale@ language)
and reflects the final changes adopted to it by the Conference. It is the best treatment of the rights of
judgment creditors that has been found by the Reporters.
The original Section was derived with minor
modification from ULPA (2001). The charging order provision was the subject of
much discussion in conjunction with the Conference=s ULLCA drafting project. There is an ever growing body of literature
(but only a few cases) addressing charging orders of member=s interests when the member is in bankruptcy. The Reporters will be happy to discuss those
cases if so requested.
The distinction between participants= financial interest and contractual rights under a
marketing contract (in those marketing cooperatives which choose to have market
contracts) is made in the definition of financial rights.
At the risk of being more confusing than
helpful: The case where membership is
required in order to enter into a marketing contract is probably the most
difficult case. If the cooperative
chooses to make membership transferable (a derivation from the default rule) it
needs to carefully define the Aentitlement@. For
example, it might desire a consent right for the transfer of the membership
interest based on proven ability to produce; its articles might more clearly
delimit that membership is a necessary but not sufficient precondition for
actually entering the contract.
Nonetheless: If the membership interest entitles
the member to enter into a contract and the membership interest and the
underlying contract are freely transferable; THEN those rights and the value of
those rights would be subject to sale at foreclosure. Payments made under an existing contract,
however, would be contract rights not financial rights not subject to this
Section and would be governed by that law.
Any other amounts allocated to a member as a
member or any return of contributed capital would also be subject to this
Section (when paid in a charging order without foreclosure).
The assumption in the foregoing illustration:
(i) will occur only in marketing cooperatives that
enter into marketing contracts; and
(ii) will occur only where the cooperative has made
a decision to deviate from the default rule of nontransferability of membership
interests (caveat: the bankruptcy courts are currently struggling with this
issue as a matter of LLC law).
In sum, it is highly contextual and most confusion
will not be caused by the act under the default rules because the cooperative
has the ability to formulate the rules that frame the context.
[ARTICLE] 6
AGRICULTURAL MARKETING CONTRACTS
SECTION 601.
AUTHORITY. In this [article], Amarketing contract@ means
a contract between a limited cooperative association and another person,
that need not be a patron member: participant,
(1) requiring the other person to sell, or
deliver for sale or marketing on the person=s
behalf, a specified part of the person=s products, commodities, or goods agricultural
product or specified commodity exclusively to or through the association or
any facilities furnished by the association; or
(2) authorizing authorize the association to act for the person in any manner
with respect to the products, commodities, or goods. product or
commodity.
Reporters= Note
This language is adapted from Or. Rev. Stat. ' 62.355 (ag & procurement). See, West=s Ann. Cal. Food & Agric. Code '' 54261-266; 17 Ohio Rev. Code '1729.67.
Historically, the language of this article has been
confined to agricultural marketing contracts.
In prior drafts the language of this Section expanded the concept to all
kinds of marketing contracts and added supply (procurement) cooperatives to the
provisions of the article. In this draft the language has been returned to the
more traditional confined form because the remainder of the section needs to be
reworked if this section is expanded.
Before that is done questions the Committee should address are: (1)
Should the types of contracts envisioned by this Section be available to all
kinds of cooperatives organized under this statute? (2) If so, in connection with discussion of
the breadth of the act, consideration should be given to whether the language
is broad enough to cover the activities of housing cooperatives or worker owned
cooperatives?
SECTION 602.
MARKETING CONTRACTS.
(a) If a
marketing contract provides for the sale of products, commodities, or
goods an agricultural product or commodity to a limited
cooperative association, the sale transfers title absolutely to the
association upon delivery or at any other specific time expressly provided
by the contract. , the sale transfers title absolutely to the
association at that time.
(b) A
marketing contract may:
(1) authorize
a limited the cooperative association to grant a security
interest in the products, commodities, or goods product or commodity
delivered; and
(2) allow the
association to sell the products, commodities, or goods product or
commodity delivered, and pay or distribute the sales price on a pooled or
other basis to the other person after deducting:
(A) selling costs, processing costs, overhead, and
other costs and expenses, and other charges as provided by agreement.
; and
(B) reserves
for the purposes set forth in Section 904(c).
Reporters= Note
Limited Cooperative Associations have the power to
contract like any other person. The ABA
advisor suggested that issues like contract warranties for, e.g., the
purity of commodities have become increasingly important. The association obviously has the power and
right to demand such warranties consistent with its business needs. The Comments to this Section should probably
explain the point that no express statutory Aauthorization@
to contractually require such warranties is necessary.
The permissive language Amay@ in subsection (a) is important as described in the
following notes.
The topics covered in this Section are common to all
statutes but the language is novel based upon discussion at the last Committee
meeting. It is important because
cooperatives need to clearly ascertain whether the contract is a Abuy-sell@ or Aagency@ contract not only as a matter of state law but also
because of issues raised by pending federal income taxation litigation under
the taxation of cooperatives. The tax
issues become more complex if a cooperative under this draft is taxed as a
partnership. Moreover, there is at least
one financial accounting issue which turns on the type of contract.
Many of the current statutes stress Atitle@ which in other contexts has been ceded to UCC law
so, at least arguably, language in the older statutes may be anachronistic
though Committee discussion observed the importance of Ainsurable title@ to the cooperative.
The Committee has not vetted this particular language and the Reporters
have little confidence that this language is yet Adialed-in@ appropriately.
If the act authorizes contracts for purposes other than marketing,
additional provisions or a separate section dealing with the other types of
contracts may be advisable and should be discussed.
The Committee on Style suggested the deletion of the
last clause in subsection (a). In doing
so is there a question left as to the time when title passes? Believing the last clause was not germane to
the section, the Reporters have removed it.
SECTION 603.
DURATION OF MARKETING CONTRACT. The initial duration of a marketing contract
may not exceed 10 years, but the contract may be made
self-renewing for additional periods not exceeding five years each. Unless the contract otherwise provides
for another manner or time for termination, either party may terminate
the contract by giving notice in a record at least 90 days before the end of
the current term.
Reporters= Note
The substance of this Section is common to many
cooperative statutes. The Style
Committee has requested the Drafting Committee to vett this section at its Fall
2006 meeting. The last sentence was
added in response to comments from the Style Committee.
SECTION 604.
REMEDIES FOR BREACH OF CONTRACT.
(a) A
marketing contract or the organic rules may establish the right to
injunctive relief, specific performance, and liquidated damages and shall be
enforceable in accordance with the terms of the contract or the organic rules.
a specific or readily calculable sum of money as liquidated damages to be
paid to the cooperative association by the other contracting person upon a
breach of the contract. The damages may
be a percentage of the value of a specified amount per unit of the product,
commodity, goods, or services involved in the breach or another amount that is
fixed or readily calculable under the contract.
(b) The remedies in subsection (a) shall not be
construed as penalties and are in addition to any other available remedies.
A cooperative association shall be entitled to an injunction to prevent a
threatened or continuing breach of a marketing contract or other contract
described in this [article] and a judgment for specific performance of the
contract. Pending adjudication of the
action, the association may seek a temporary restraining order and a
preliminary injunction.
Reporters= Note
Source: See generally Minnesota Cooperatives
Associations Act, Oregon Cooperative Corporations Act.
Spring 2007: This Section was discussed at length
and drafted at the December 2006 meeting.
A number of State statutes provide significantly
more detail regarding the possible remedies available for a breach of contract
and clearly specify that recovery of attorneys fees is to be obtained if the
cooperative is successful in pursuing the breach of contract claim.
SECTION 605.
INDUCING BREACH OF MARKETING OR PURCHASE CONTRACTS. The remedies provided by [citation to the
applicable statutory provisions] apply to cooperative associations.
Reporters= Note
In any event this section will need a legislative
note and need, probably, to be bracketed though the general topic of the
section is common.
A former section 505 was entitled AContract Interference and False Reports.@ A version of
section 505 that now appears as section 605 in this draft had appeared at
section 1803 of the February 2006 draft for ease of its discussion with related
provisions. Dependent on the resolution
of the policy (and legislative enactment) discussion the Committee is invited
to decide exactly where this provision should appear in the act.
[ARTICLE] 7
DIRECTORS AND
OFFICERS
SECTION 701.
EXISTENCE AND POWERS OF BOARD OF DIRECTORS.
(a) Unless
the number of members participants is fewer than three, a limited
cooperative association must have a board of directors consisting of three or
more individuals. If there are fewer
than three members participants, the number of directors may not
be less than the number of members participants.
(b) The
affairs of a limited the cooperative association must be managed
by, or under the direction of, the association=s
board of directors and the board may adopt policies and procedures not in
conflict with the organic rules or this [act].
(c) An
individual does not have agency authority on behalf of a limited
cooperative association solely by being a director.
Reporters= Note
The language used in subsection 701(a) is modeled on
section 62.280(2) of the Oregon Cooperative Corporation Act. Some statutes, for example, the California
Nonprofit Association Act, require requires a minimum of three
directors. This subsection allows the
articles to establish the number of directors at a number greater than three in
all cases. The subsection does not limit
the number of directors to the number of participants where there are fewer
than three participants .
The flexibility afforded to deviate below three
directors recognizes the industry practice of having wholly owned cooperative
subsidiaries of a cooperative. In those
circumstances the Committee saw little necessity of having more than one
director. Further, if there are two
participants the Committee decided that it would be ill-advised to require a
minimum of three directors. Thus,
subsection 701(a) provides the participants great flexibility, but not
unfettered flexibility, in organizing their own board governance structure.
SECTION 702.
NO LIABILITY AS DIRECTOR FOR LIMITED COOPERATIVE ASSOCIATION=S OBLIGATIONS. An obligation of a limited cooperative
association, whether arising in contract, tort, or otherwise, is not the
obligation of a director. An individual
is not personally liable, directly or indirectly, by way of contribution or
otherwise, for an obligation of the association solely by reason of being a
director.
Reporters=
Note
Source: Derived from ULPA (2001). ANew@ to the law of cooperatives as a positive statement
of law but not as a statement of principle.
SECTION 703.
QUALIFICATIONS OF DIRECTORS AND COMPOSITION OF BOARD.
(a) A
director of a limited cooperative association must be an individual.
(b) Subject
to this section, the organic rules may provide for qualifications qualification
of directors.
(c) Unless
the organic rules otherwise provide and subject to Section 303 and subsections
(d) and (e), each director of a limited cooperative association must be
a member participant of the association or an individual
designated by a member participant that is not an individual.
(d) Unless
the organic rules otherwise provide, a director may be an officer or employee
of the limited cooperative association.
(e) Unless
the organic rules otherwise provide, if a limited cooperative
association has nonmember nonparticipant directors, the number of
nonmember nonparticipant directors may not exceed:
(1) one
director if there are two, three, or four directors; or and
(2) one-fifth
of the total number of directors if there are five or more directors.
Reporters= Note
Subsection (c) reflects the consensus of the
Committee. The phrase Aunless otherwise...@ in
subsection (e) was added by the Reporters before the Fall 2006 meeting. The word Arepresentative@ in a prior draft has been replaced by the word Adesignee@ in an attempt to cause less confusion concerning to
whom the director owes allegiance under this Act. There was no prohibition that officers may
not serve as directors and subject to discussion at the November 2004 meeting
subsection (d) [formerly(c)] has been added.
Note that the number of nonmember directors is severely restricted and
reflects a cooperative policy that is different than corporate policy and at
odds with the general thrust of federal securities laws for publicly traded
corporations.
An observer has suggested that the Committee should
discuss the advisability of being more explicit (perhaps by using separate
Sections) about how directors may be elected solely by patron participants if
there are only patron participants and about how directors are elected if the
cooperative has both patron and investor participants utilizing classification
of directors and giving similar consideration to removal in section 707.
SECTION 704.
ELECTION OF DIRECTORS.
(a) Unless the organic rules require a greater
number, a majority At least two-thirds of the board of directors of
a limited cooperative association must be elected exclusively by patron members
participants.
(b) If a limited cooperative association has
investor members, and unless the organic rules otherwise provide, the investor
members shall elect the directors who are not exclusively elected by patron
members under subsection (a).
(cb)
Subject to subsection (a), the organic rules articles of
organization may provide for the election of all or a specified number of
directors by one or more districts or classes of members participants.
(dc) Subject to subsection (a), the
The organic rules may provide for the nomination or election of
directors by districts or classes, directly or by district delegates.
(e) If a class of members consists of a single
member, the organic rules may provide for the member to appoint a director or
directors.
(fd) Unless the organic rules
otherwise provide provided in the articles of organization,
cumulative voting for directors of a limited cooperative association is
prohibited.
(ge)
Except as otherwise provided by the organic rules, subsection (e),
or in Sections 417 and 709, member participant directors
of a limited cooperative association must be elected at an annual members= participants= meeting.
(f) Unless
the organic rules provide for a different method of selection, nonparticipant
directors of a cooperative association must be elected in the same manner as
participant directors.
Reporters= Note
The Comments need to explain that classes is
intended to be broader than the patron-investor member distinction but includes
the patron-investor distinction.
Subsection (c) was new in the April 2005 draft and
has been revised pursuant to discussions discussion at that
meeting. Corporate statutes typically no
longer define Acumulative voting.@ The Minnesota Cooperative Associations
Association Act allows the organic rules to provide for cumulative
voting.
Subsection (d) may be prohibited by state
constitution in some states. The
Comments will illustrate both the advantages and disadvantages of cumulative
voting.
Observers to the Drafting Committee suggested that
the act specifically acknowledge the use of an appointment process for
nonparticipant directors. These
directors are used to provide special expertise on cooperative boards. The Comments will make clear that it is
intended that subsection (f) includes such selection and appointment schemes.
SECTION 705.
TERM OF DIRECTOR.
(a) Unless
the organic rules otherwise provide, and, in the case of initial
directors, subject to Section 303(c), the term of a director of a limited
cooperative association expires at the annual members= participants= meeting following the director's election or
appointment. The term of a director
may not exceed three years.
(b) Unless
the organic rules otherwise provide, a director may be reelected for subsequent
terms.
(c) A
director continues to serve until a successor director is elected or
appointed and qualified or the director is removed, resigns, ceases to
qualify as a director under the organic rules, is declared incompetent by a
court with jurisdiction, or dies.
Reporters=
Note
Cross-reference: Section 704(c).
This Section is intended to be broad enough to allow
the organic rules to provide for staggered terms.
If a successor is not elected upon the expiration
of his or her term (e.g., the annual meeting is not held), the
director previously in the position would continue to serve under the operation
of this section. This section
coordinates with section 709 (AVacancy on Board@).
SECTION 706.
RESIGNATION OF DIRECTOR.
(a) A
director may resign at any time by giving notice in a record to the limited
cooperative association.
(b) Unless
the notice states a later effective date, a resignation is effective when
notice is received by the limited cooperative association.
Reporters= Note
A distinction between the Apower@ to resign and the Aright@ to resign contained in prior drafts has been
removed as causing more substantive confusion than is necessary despite the
concept being consistent with ULLCA. AMay@ consistent with style has been utilized
instead.
SECTION 707.
REMOVAL OF DIRECTOR. Unless the organic rules otherwise
provide:
(1a) members may remove one or more
directors with or without cause. Unless the organic rules otherwise
provide for removal without cause, a director may be removed only for cause.
(2b)
A member participant or members participants
holding at least 10 percent of the total aggregate voting
power entitled to be voted in the election of the director of a
cooperative association, or one-third or more of the board of directors of the
association, may petition the board of directors for the removal of a
director by a signed record submitted to the officer of the limited
cooperative association charged with keeping its records. Unless the organic rules provide for
removal without cause, the record must state the alleged cause for removal.
(3c)
Upon receipt of a petition for removal of a director:
(A) ,
a limited cooperative association=s board of directors shall call a special members= board meeting to be held within 90 days
after receipt of the petition by the association; and determine whether
the director should be removed.
(B) the board of directors shall mail or otherwise
transmit or deliver in a record to the members entitled to vote on the removal
notice of the meeting that complies with Section 408.
(4d)
A director against whom a petition has been submitted: (1) must
be informed in a record of the petition within a reasonable time before the members= board meeting at which the members
consider board considers the petition. ; and
(2) is
entitled to an opportunity at the meeting to be heard in person or by
representation and to present witnesses.
(e) A participant
who signs a petition for removal of a director is entitled to an opportunity at
the hearing on the petition to be heard in person or by representation and
to present witnesses in the same manner as provided the director in subsection
(d)(2).
(5f)
A director is may be removed if the votes in favor of
removal is equal to or greater than the votes required to elect the director.
by a majority vote of the directors who are not the subject of the removal
petition.
(g) If all or
a majority of the directors are the subject of removal petitions, the removal
for cause must be determined:
(1) by a
nonparticipant director appointed pursuant to the organic rules; or
(2) if the
organic rules do not provide for the appointment of a nonparticipant director,
by a committee appointed under Section 717 composed of individuals who are not
directors or by independent legal counsel retained by the cooperative
association.
(h) By
submitting a signed record to the cooperative association requesting
reinstatement, a director removed for cause under subsection (g) may require a
special participants= meeting to be called by the remaining directors to
determine whether the director requesting reinstatement should be reinstated as
director. The director requesting
reinstatement and any participant who signed the petition for removal must have
the same opportunities to be heard and present witnesses at the special
participants= meeting as are provided in subsections (d) and
(e). The director may be reinstated only
by the same affirmative vote required for and in the same manner as the
director=s election.
Reporters= Note
This Section has been redrafted to reflect the
decision of the Committee at the Fall 2006 meeting. Prior to this draft there was removal for
cause only. The Comment will explain
that the organic rules have maximum latitude concerning removal.
Subsections (a) through (h) have been revised. They generally follow the procedure
established in West=s California Code Annot. section 54150 (it is
unclear whether California requires Afor
cause@ removal only because its statute uses the term Acharge@ rather than petition) and Colorado Revised Statute
section 7-56-404 (Colorado includes that the meeting must be held within 90
days of receipt of the petition). The
Comment will explain that the with/without cause is not a binary choice but
that the organic rules may define cause or state the reason for removal. The Comments should also cross-reference 709
and indicate there can be an appointment to fill the vacancy and that
reinstatement may be at a special meeting.
ACause@ is not defined in the act but is a well-worn, if
somewhat imprecise, idea.
SECTION 708.
SUSPENSION OF DIRECTOR BY BOARD.
(a) A limited
cooperative association=s board of directors may suspend a director of the
association if, considering the director=s course of conduct and the inadequacy of other
available remedies, immediate suspension is necessary for the best interests of
the association and the director is engaging, or has engaged, in:
(1)
fraudulent conduct with respect to the association or its members
participants;
(2) gross
abuse of the position of the director; or
(3)
intentional or reckless infliction of harm on the association; or
.
(4) any other behavior, act or omission as provided
by the organic rules.
(b) After
suspension, a director may be removed pursuant to Section 707.
(bc)
A suspension is effective for 30 thirty days unless the
board of directors calls a special meeting for removal of the director pursuant
to Section 707(3), (4), and (5) a petition for removal is submitted
before the end of the 30-day 30 day period pursuant to Section
707(b). The organic rules may not
vary those requirements.
Reporters= Note
Subsection (b) has been revised to reflect the
changes in Section 707.
The Reporters were requested at the November 2004
meeting to draft different judicial removal of director alternative that would
be the equivalent of Achanging the locks@ on
cooperative management and were instructed at the April 2005 meeting to delete
judicial removal. The absence of
judicial removal is inconsistent with other cooperative statutes, ULLCA, and
RULPA. The reason for the deletion of
judicial removal is to avoid the time and expense of going to court which is
consistent with the values of cooperatives but not necessarily the
cooperative statutes. Below is an
example of a very short judicial removal proceeding provision. For purposes of discussion: (i) There is room
for Acontrol group@ (oligarchy) abuse and majoritarian tyranny if
judicial removal is not allowed; but, (ii) because of possible abuse through
minority threat if it is allowed in the organic rules (assuming it is not
statutorily allowed or required), would a court find a way to nonetheless
remove a director. Should the act do
something more affirmative?
REMOVAL OF DIRECTORS BY JUDICIAL PROCEEDING.
(a) On application by the cooperative the
[appropriate court] may remove a director if considering the director=s course of conduct and the inadequacy of other
available remedies removal is in the best interest of the cooperative and the
director engaged in:
(1) fraudulent conduct with respect to the
cooperative or its participants ;
(2) gross abuse of the position of director; or
(3) intentional infliction of harm on the
cooperative.
(b) This section does not limit the equitable powers
of the court to order other relief.
An observer has requested the Committee consider
adding a new subsection (a)(4) addressing Aconviction of a felony.@ The
Committee consensus seemed to be that the activity had to be somehow related to
the board and the association. The
Reporters identified possible mischief with the way it is drafted and with
blanket felony language, however, believe the addition of the word Areckless@ in (Ax@) solves the issue.
SECTION 709.
VACANCY ON BOARD.
(a) Unless
the organic rules otherwise provide, a vacancy on the board of directors of a limited
cooperative association must be filled within a reasonable time:
(1) by
majority vote of the remaining directors until the next annual members= participants= meeting or a special members= participants= meeting called to fill the vacancy for
that purpose; and
(2) for the
unexpired term by members participants at the next annual members= participants= meeting or a special members= participants= meeting called to fill the vacancy for
that purpose.
(b) Unless otherwise provided in the organic rules,
if the vacating director was elected or appointed by a class of members
participants or a district:
(1) the
appointed director must be of that class or district; and
(2) the
election of the director for the unexpired term must be conducted in the same
manner as would the election for that position without a vacancy.
(c) If a member appointed a vacating director under
Section 704(e), the organic rules may provide for that member to appoint a
director to fill the vacancy.
SECTION 710.
COMPENSATION OF DIRECTORS. Unless the organic rules otherwise provide,
the board of directors of a limited cooperative association may fix the
remuneration of directors and of nondirector committee members participants
appointed under Section 717(a).
Reporters= Note
Source: MBCA section 8.11. In effect this is an Aopt-out@ statute, i.e., unless the organic rules
prohibit. It could also be drafted as an
opt-in, i.e., the organic rules would need to allow the directors to set
their own remuneration. One question concerns
whether the term Aremuneration@ is the best word choice. It is intended to be a broad term including
both director=s fees and expenses.
Obviously this has become an important topic in publicly traded
corporations. The fiduciary duties
applicable to other board decisions are generally applicable here, too. Unlike many corporate acts this act does not
give express power to make loans to insiders.
An example of an alternative provision discussed by the Committee is
found in Or. Rev. Stat. Section 62.300 and is set forth below:
62.300 Compensation and benefits to directors,
officers and employees. (1) Unless the
bylaws provide otherwise, only the members of the cooperative may establish
compensation or other benefits for a director, not available generally to
officers and employees, for services as a director.
(2) Unless the bylaws provide otherwise, no director
shall hold
during the term as director any position in the
cooperative on
regular salary.
(3) Unless the bylaws provide otherwise, the board
may provide,
for prior or future services of any officer or
employee, reasonable
compensation, pension or other benefits to such
officer or employee
and pension or other benefits to a member of the
family of the officer
or employee.
No officer or employee who is a director may take part
in any vote on the compensation of the officer or
employee for
services rendered or to be rendered the cooperative.
SECTION 711.
MEETINGS.
(a) The board
of directors of a limited cooperative association shall meet at least
annually and may hold meetings inside or outside this state.
(b) Unless
the organic rules otherwise provide, a limited cooperative association=s board of directors may permit directors to attend board
meetings or conduct board meetings through the use of any means of
communication, if all directors attending the meeting can communicate with each
other during the meeting.
Reporters= Note
The purpose of this section is to provide maximum
meeting flexibility. Deletion of
simultaneously was to remove the implication that everyone needed to be
permitted to speak and hear each other at the same time as opposed to being
able to speak and hear one person at a time.
SECTION 712.
ACTION WITHOUT MEETING.
(a) Unless
prohibited by the organic rules, any action that may be taken by the board of
directors of a limited cooperative association may be taken without a
meeting if each director consents in a record to the action.
(b) Consent
under subsection (a) may be withdrawn by a director in a record at any time
before the limited cooperative association receives records of consent
from all directors.
(c) A record
of consent for any action under subsection (a) may specify the effective date
or time of the action.
Reporters= Note
The definition of record is in Section 102 and
includes electronic media.
SECTION 713.
MEETINGS AND NOTICE.
(a) Unless
the organic rules otherwise provide, a limited cooperative association=s board of directors may establish a time, date, and
place for regular board meetings and notice of the time, date, place, or
purpose of those meetings is not required.
(b) Unless
the organic rules otherwise provide, notice of the time, date, and place of a
special meeting of a limited cooperative association=s board of directors must be given to all directors
at least three days before the meeting.
The notice must contain a statement of the purpose of the special
meeting, and the meeting is limited to the matters contained in the statement.
Reporters= Note
Subsection (b) was more closely conformed to RMBCA
Section 8.22 (b). At its April (2005)
drafting meeting, however, the Committee decided to require the notice to state
the purpose of the meeting.
Best practices might suggest that at least some
reminder of a regular meeting and a proposed agenda be given directors prior to
the meeting. This draft does not require
any such notice because (I) any additional requirements subvert certainty of
action taken at meetings; and, (ii) it conforms to the purpose of this act to
provide a flexible entity to meet the unique needs of different groups
organized under it.
Section 714(a) requires a waiver for the notice in
713(b) to be in a record. This is new
following the April (2005) drafting meeting.
How well does this work if the meeting is by telephone or other
nontraditional means?
The Reporters were directed at the February 2004
Committee meeting to move the following subsection to a Reporters= Note as a matter of economy.
(d) A director who is present at a meeting of the
board of directors when action is taken shall be deemed to have assented to the
action taken unless:
(1) the director objects at the beginning of the
meeting or promptly upon the directors arrival at the meeting and does not
thereafter vote for or assent to action taken at the meeting;
(2) the directors assent or abstention from the
action is made in a record
(A) in the minutes of the meeting; or
(B) the director
(i) does not vote for or assent to the action taken
at the meeting; and
(ii) delivers notice in a record to the presiding
officer of the meeting before adjournment or to the cooperative immediately
after adjournment of the meeting.
SECTION 714.
WAIVER OF NOTICE OF MEETING.
(a) Unless
the organic rules otherwise provide, a director of a limited cooperative
association may waive any required notice of a meeting of the association=s board of directors in a record before, during, or
after the meeting.
(b) Unless
the organic rules otherwise provide, a director=s
participation in a meeting is a waiver of notice of that meeting unless:
(1) the director objects to the meeting at the
beginning of the meeting or promptly upon the director=s arrival at the meeting and does not thereafter
vote in favor of the action or otherwise assent assents to
the action taken at the meeting; or
(2) the director promptly objects upon the
introduction of any matter for which proper notice has not been given and does
not thereafter vote in favor of the action or otherwise assent to the
action taken on the matter.
Reporters= Note
This Section is typical of corporate-like
statutes. There has been strong minority
dissent in the Committee concerning Aand does not thereafter vote for or...@. The
confusion caused by Avote for@ had been addressed by the Reporters before the Fall
2006 meeting by changing the language to follow the MBCA. Subsection (b)(2) is also new.
On the floor a question was presented about what
happens if a director attends a special meeting, thereby waiving notice, and a
matter is brought up that was not included in the notice. Has the director waived the right to object
to the consideration of that matter at the meeting? It was represented to the floor that the
Committee would look at the issue. An
additional question from the floor was whether the language made it more
beneficial for a member to attend and vote against a proposition rather than
object to the meeting and remain silent.
Finally, what should be the effect on the quorum of
a director attending the meeting without waiving notice affirmatively? See Reporters= Note to ' 715.
SECTION 715.
QUORUM.
(a) Unless
the articles of organization otherwise provide, a majority of the fixed number
of directors on a limited cooperative association=s board of directors constitutes a quorum for the
management of the affairs of the association.
(b) If a
quorum of the board of directors of a limited cooperative association is
present at the beginning of a meeting, any action taken by the directors
present is valid even if withdrawal of directors originally present results in
the number of directors being less than the number required for a quorum.
(c) A director present at a meeting but objecting to
notice under Section 714(b)(1) or (2) shall not be counted toward a
quorum.
Reporters= Note
Fall 2006: Subsection (c) is new and addresses a
long-standing issue within the Committee.
SECTION 716.
VOTING.
(a) Each
director of a limited cooperative association has one vote for purposes
of decisions made by the board of directors of the association.
(b) Unless the organic rules otherwise provide and
subject to Sections 715, 1402(1)(A), 1503(a)(1), 1508(a), and 1603(1),
the affirmative vote of the majority of directors present at a meeting is the
act of the board of directors.
Reporters= Note
The sense of the drafting committee is that
one-director/one-vote is mandatory and cannot be varied by the organic
rules. A prior draft allowed weighted
voting and would have moved a cooperative under this act closer to a
manager-managed LLC in form. Such
flexibility, however, creates both drafting and conceptual operational concerns
concerning the voting restrictions protecting patron participants. It is also inconsistent with traditional
cooperative law and may be seen as a tool to abuse traditional cooperative
values.
SECTION 717.
COMMITTEES.
(a) Unless
the organic rules otherwise provide, a limited cooperative association=s board of directors may create one or more
committees and appoint one or more individuals to serve on a committee.
(b) Unless
the organic rules otherwise provide, an individual appointed to serve on a
committee of a limited cooperative association need not be a director or
member participant of the association. A non-director serving on a committee has the
same rights, duties, and obligations as a director serving on a committee.
(c) Unless
the organic rules otherwise provide, each committee of a limited
cooperative association may exercise the powers delegated by the association=s board of directors, but a committee may not:
(1) approve
allocations or distributions except according to a formula or method prescribed
by the board of directors;
(2) approve
or propose to members participants action requiring approval of members
participants; or
(3) fill
vacancies on the board of directors or any of its committees.
Reporters= Note
Special litigation committee, audit committee;
Minnesota allows non-directors to be members of a committee. This draft allows nonparticipants to serve on
committees. See section
707(g). This is an important policy
decision.
This draft does not expressly allow executive
committees but many cooperative statutes do so.
Nothing herein intentionally prohibits establishing an executive
committee. Because this draft does not
expressly contain reference to an executive committee it does not put a
prohibition on nondirectors serving thereon.
Subsection (c)(1): The Reporters were directed by
the Committee to replace the word Adistribution@ with Aallocation@. For
discussion purposes both terms remain in this draft. It seems the approval of distributions would
be the kind of decision that should be made by the entire board just as the
allocation is such a decision.
There was an interesting discussion concerning
cooperative practice and tradition as it relates to nondirector members [now
participants] observing board meetings.
The comments to this section will reference that issue. In part it appears both the historical roots
of some cooperatives in the nonprofit sector and, perhaps, other regulatory law
for cooperatives performing regulated functions might be the source of this
tradition. This draft implicitly allows
the board to Aclose@ board meetings and other law (e.g.
employment law) might, in effect, require the board to do so.
SECTION 718.
STANDARDS OF CONDUCT AND LIABILITY. Except as provided in Section 720:
(1) the
discharge of the duties of a director or member participant of a
committee of the board of directors of a limited cooperative
association is governed by the law applicable to directors of entities
organized under the [insert cross-reference to this State=s State
Cooperative Corporation Act] [insert cross-reference to this State=s State
Nonprofit Cooperative Act] [insert cross-reference to this State=s
General Business Corporation Act of this State] [insert
cross-reference to this State=s
Nonprofit Corporation Act]; and
(2) the
liability of a director or member participant of a committee of
the board of directors is governed by the law applicable to directors of entities
organized under the [insert cross-reference to this State=s State
Cooperative Corporation Act] [insert cross-reference to this State=s State
Nonprofit Cooperative Act] [insert cross-reference to this State=s
General Business Corporation Act of this State] [insert
cross-reference to this State=s
Nonprofit Corporation Act].
Legislative Note: Adopting
states should choose only one of the bracketed alternative statutes to govern
what has traditionally been called the Afiduciary
duties@ of directors. While the listed laws are generally similar
they do not contain the same formulation either between the laws in a given
state or between laws governing even the same type of entity among the various
states. Thus the choice of the bracketed
law has policy implications for cooperative associations organized under this
act.
Finally, if the adopting state desires to add
statutory cross-references to the text of the referenced act it should be very
careful to pick up citations to sections in the referenced act that provide
flexibility for the entity to vary the applicable standards. For example, the RMBCA allows its standard of
care to be modified within limits set forth in its articles article
of incorporation provisions. Without
such cross-references it is intended that this act includes all such sections
in the referenced act through this section.
Reporters= Note
The substance of Sections 718 (AStandards of Conduct and Liability@), 719 (AConflict of Interest@) and
722 (AOther Considerations of Directors@) has been discussed extensively by the
Committee. Together these sections form
the core of fiduciary duties in this entity.
The approach taken to Sections 718 and 719
recognizes that (1) states take fundamentally different approaches to fiduciary
duties within unincorporated organizations of the same kind; (2) there is
variety among the states in their approach within corporate statutes; and (3)
there is variety among the states in their approach in cooperative laws. The existing cooperative statutes appear to
most closely follow corporate fiduciary duty formulations. The range of enactment dates of existing
traditional cooperative statutes, however, makes it difficult to assess whether
the lack of uniformity is a matter of current policy or a matter of lack of
recent review.
The Minnesota Cooperatives Associations Act (a
non-corporate cooperative act) cleaves closely to the corporate model. This draft act, too, establishes an
unincorporated cooperative. Although an
unincorporated entity, the board of directors function more analogously to the
corporate board than the managers in a manager-managed LLC or general partners
in a limited partnership (and, indeed, the flexibility of the LLC allows the
operating agreement to establish a corporate-like board). Finally, the Committee considered the
traditional operation of a cooperative, member expectation, and advice that the
insurance industry was comfortable with the standards, liability and
indemnification provided by the current formulation of the standards in
existing cooperative law.
Unfortunately, the wide variety among the states
makes uniformity difficult to achieve and creates adoption difficulty. For these reasons the Committee has adopted a
Ajunction box@ approach similar to the type adopted in META. These sections need a legislative note but
that note has not yet been drafted pending further discussion on the approach
taken.
This approach makes the draft significantly shorter
than including detailed provisions.
Moreover, it allows the fiduciary duty of cooperatives to keep pace with
statutory changes made in the law that applies to existing cooperatives.
The Minnesota Act=s Aconduct@ section uses the phrase, Aordinarily prudent person in a like position would
exercise under similar circumstances@ without including the MBCA=s modification Awould reasonably believe appropriate.@
SECTION 719.
CONFLICT OF INTEREST. The law applicable to conflicts of interest
between a director of an entity organized under the [insert
cross-reference to this State=s State
Cooperative Corporation Act] [insert cross-reference to this State=s State
Nonprofit Corporation Act of this State] [insert cross-reference to
this State=s Nonprofit Cooperative Act] [insert cross-reference to this State=s
General Business Corporation Act of this State] governs conflicts of
interest between a limited cooperative association and a director or member
participant of a committee of the board of directors of a cooperative
association and the association.
Legislative Note: See the
legislative note following Section 718.
Reporters= Note
See the Reporters= Note
to Section 718.
A comment was made on the floor that as drafted
there is no guidance which could result in mischief in the enactment process
especially in states that do not have provisions in other laws to which
reference could be made.
SECTION 720.
OTHER CONSIDERATIONS OF DIRECTORS. Unless the articles of organization otherwise
provide, in considering the best interests of a limited the
cooperative association, a director of the association in discharging
the duties of director, in conjunction with considering the long and short term
interest of the association and its patron members, participants
may considers:
(1) consider
the interest of employees, customers, and suppliers of the association;
(2) ,
the interest of the community in which the association operates; and
(3)
other cooperative principles and values that can appropriately can
be applied in the context of the decision.
Reporters= Note
The Minnesota Cooperative Associations Act, like
this draft, does not limit this provision to mergers; but Oregon=s Cooperative Corporation Act does. The Tennessee Processing Cooperative Law does
not contain this provision. The language
suggests that the original source of this provision is from corporate Aanti-takeover acts@ in
various states (e.g. Pennsylvania).
The Committee also noted that this is consistent with traditional cooperative
values. It may be another, though
incomplete, way of communicating the idea of a Acooperative
plan@ which is used in state law largely without
definition in traditional cooperative statutes (the term Acooperative plan@ is
not used in this draft).
SECTION 721.
RIGHT OF DIRECTOR OR COMMITTEE MEMBER TO INFORMATION. A director of a limited cooperative
association or a member of a committee appointed under Section 717 may obtain,
inspect, and copy all information regarding the state of activities and
financial condition of the association and other information regarding the
activities of the association reasonably related to the performance of the
director=s duties as director or the committee member=s duties as a member of the committee, but not for any other purpose or in any manner that
would violate any duty to the association.
Reporters= Note
Should this Aright@ be extended to non-board committee members under
717?
Similar provisions are found in most entity
laws. It limits the use of the
information, as well as a director=s directors access, to the director acting as
director. Duties would include
confidentiality, professional privilege, etc.
SECTION 722.
APPOINTMENT AND AUTHORITY OF OFFICERS.
(a) A limited
cooperative association has the officers: offices
(1) provided
in the organic rules; or
(2) if not provided in the organic rules,
established by the association=s board of directors consistent with the organic
rules.
(b) The
organic rules may designate or, if the rules do not designate, the board of
directors of the limited cooperative association shall designate, one of
the association=s officers for preparing all records required by
Section 113 and for the authentication of records.
(c) Unless otherwise provided by the organic
rules otherwise provide, the board of directors shall appoint the
officers of the limited cooperative association.
(d) Officers
of a limited cooperative association have the authority and obligation
to perform the duties the organic rules prescribe or as the association=s board of directors determines is consistent with
the organic rules.
(e) The
election or appointment of an officer of a limited cooperative
association does not of itself create a contract between the association and
the officer.
(f) Unless
the organic rules otherwise provide, an individual may simultaneously hold more
than one office in a limited the cooperative association.
Reporters= Note
As drafted this act allows the organic rules to
provide that participants elect officers.
However, Section 723 gives the authority to remove those officers.
Almost all current cooperative acts follow pre-1984
business corporation law either requiring or expressly permitting named
offices. This draft does not do so. Rather, it is consistent with the flexibility
of the law of unincorporated organizations and provides the flexibility present
in many cooperative statutes in a more (word) efficient way. Thus it is closer to post-1984 business
corporation law than the existing cooperative statutes based on pre-1984
corporate law. It also follows unincorporated
law in the flexibility it provides.
Nonetheless, because directors are not agents because of director
status, the cooperative (through its board) will be required to have
agents. The language of this draft
requires at least one of these agents to be designated an officer under
subsection (b).
SECTION 723.
RESIGNATION AND REMOVAL OF OFFICERS.
(a) The board
of directors of a limited cooperative association may remove an officer
at any time with or without cause.
(b) An
officer of a limited cooperative association may resign at any time by
giving notice in a record to the association.
Unless the notice specifies a later time, the resignation is effective
when the notice is given.
Reporters= Note
Note that this draft contains no provision directly
addressing the standard of conduct of officers.
This is, at the least, not unusual in the world of general cooperative
statutes. Thus, this draft leaves much
of the law governing officers to contract and agency principles.
There is a distinction between the power to remove
an officer and the right to do so. This
section is intended to give complete discretion to the board of directors to
remove officers (the power). The
exercise of that power; however, may very well lead to a damage claim by the
officer if, for example, the officer has a separate employment contract. The exercise of the power could also violate
other law (e.g. Title VII of the Civil Rights Act).
There was Apower@ language in Subsection (a) in a prior draft which
raised the power-right dichotomy similar to the one raised in Section 706. As a matter of style, it has been urged to
delete such language and replace it with the word Amay@. The
suggestion was heeded here but not elsewhere.
[ARTICLE] 8
INDEMNIFICATION
SECTION 801.
INDEMNIFICATION.
(a)
Indemnification of any individual who has incurred liability or is a
party, or is threatened to be made a party, to litigation because of the
performance of a duty to, or activity on behalf of, a limited
cooperative association is governed by [insert cross-reference to this State=s State
Cooperative Corporation Act] [insert cross-reference to this State=s State
Nonprofit Cooperative Act] [insert cross-reference to this State=s
General Business Corporation Act of this State].
(b) A limited cooperative association may
purchase and maintain insurance on behalf of any individual against liability
asserted against or incurred by the individual to the same extent and subject
to the same conditions as provided by [insert cross-reference to this State=s State
Cooperative Corporation Act] [insert cross-reference to this State=s State
Nonprofit Cooperative Act] [insert cross-reference to this State=s
General Business Corporation Act of this State].
Reporters= Note
Subsection (b) is new to the Fall 2006 draft.
The topic of indemnification has been discussed at
length by the Committee and it compared corporate, unincorporated, and
cooperative statutes as well as agency law.
It concluded that any formulation not referencing other law in adopting
states would lead to lack of uniformity not only in substance but also as a
matter of style. Moreover, because
states have an existing body of law reflecting unique policy decisions there
was strong opinion that any other formulation might inhibit enactability. Finally, every other alternative added pages
to the text of the Draft.
Note, however, the comment from the floor in the
Reporters= Note to Section 719.
[ARTICLE] 9
CONTRIBUTIONS,
ALLOCATIONS, AND DISTRIBUTIONS
SECTION 901. MEMBERS= PARTICIPANTS= CONTRIBUTIONS. The organic rules may establish the amount,
manner, or method of determining any member participant
contribution requirements for members participants or may
authorize the board of directors of a limited cooperative association to
establish the manner and terms of any contributions by members for
participants.
Reporters= Note
A prior draft expressly contained a provision
requiring the organic rules to set forth Aaccounting procedures@. The Committee directed it be taken out (and
therefore made permissive) because of possible confusion. The comment to this section needs to point
out that using a corporate-like structure without Achecking-the-box@ to be
taxed as a corporation under the current tax scheme may cause unintended
consequences and is a relatively sophisticated technique that is already
bedeviling under LLC law.
This draft contemplates but does not mandate capital
accounts based on decisions made by the Conference and individual states in
other unincorporated acts.
This draft does not expressly provide for
stock or use the corporate capital accounting model which allows the board of
directors, for example, to establish par value.
This draft follows unincorporated law which is far more general, and
less detailed than corporate law. The
draft does contemplate that the organic rules may establish a more corporate-like
capital structure. See Section
304(a)(1). Thus, this draft more closely
follows the unincorporated organizational model and is, therefore, more
contractually or agreement based. This
hasn=t seemed to cause any reported problems in the use
of LLCs. Paradoxically, the entity
contemplated by this draft is more flexible upon formation but gives the board
of directors less power to establish new classes or voting interests than in a
business corporation. This mix is
consistent with stronger member control.
Does a comment to this section need to discuss
equity certificates and, if so, suggestions?
SECTION 902.
FORMS OF CONTRIBUTION AND VALUATION.
(a) Unless
the organic rules otherwise provide, the contributions of a member participant
to a limited cooperative association may consist of tangible or
intangible property or other benefit to the association, including money,
services performed or to be performed, promissory notes, other agreements to
contribute cash or property, and contracts to be performed.
(b) The
receipt and acceptance of contributions and the valuation of contributions must
be reflected in the limited cooperative association=s records required under Section 113.
(c) Unless
the organic rules otherwise provide, the board of directors of a limited
cooperative association shall determine the value of a member=s participant=s
contributions received or to be received.
The determination by the board of directors of valuation is conclusive
for purposes of determining whether the members participant=s
contribution obligation has been fully met paid.
Reporters= Note
The Minnesota Cooperative Associations Act contains
detailed provisions requiring the restatement of the value of contributions
under certain circumstances. Those
provisions affect both liquidating distributions and federal partnership income
tax consequences (the so-called Abook-up@). This draft
follows the Conference=s general treatment of such matters in its other
unincorporated entity acts by leaving them to agreement among the members in an
organic rule. Even a default rule could
cause unintended consequences though a book-up would generally seem
admissible given the purpose of the draft.
The Comment (or is it more appropriate in a
legislative note) needs to note that some state constitutions may place
restrictions on the types of property that may be contributed. The Reporters need guidance on whether, and
if so, how, a legislative note needs to be prepared on this issue.
SECTION 903.
CONTRIBUTION AGREEMENTS.
(a) An
agreement by a person to make a contribution to a limited cooperative
association entered into before formation of the association is irrevocable for
six months unless all parties to the agreement consent to the revocation.
(b) A person=s obligation to make a contribution under subsection
(a) is not excused by the person=s death, disability, or other inability to perform
personally.
(c) If a person
does not make a required contribution to the a limited
cooperative association under an the agreement described
in subsection (a):
(1) the
person is obligated, at the option of the association, once formed, to
contribute money equal to the value of that part of the contribution that has
not been made, and the obligation may be enforced as a debt to the association;
or
(2) the
association, once formed, may rescind the agreement if the debt remains unpaid
more than 20 days after the association demands payment from the person, and
upon recision the person shall have no further rights or obligations with
respect to the association.
(d) An The agreement to make a
contribution may vary the requirements of this section.
Reporters=
Note
Subsections (b) and (c) are new to the 2006 Annual
Meeting Draft. It is an amalgamation of
various entity laws.
Query: Should the contribution agreement be able to
vary the terms of this Section?
Source: Oregon Cooperative Corporation Act;
conceptually similar to the Minnesota Cooperative Associations Act, the MBCA
and ULPA (2001).
SECTION 904.
ALLOCATIONS OF PROFITS AND LOSSES.
(a) The organic rules must provide that
profits of a the limited cooperative association be
allocated among members participants and, if the organic rules
permit, to an unallocated account.
Unless the organic rules otherwise provide, losses of the association
must be allocated in the same proportion as profits.
(b) Unless
the organic rules otherwise provide, all the profits and losses must be
allocated to patron members participants.
(c) If the a limited cooperative
association has investor members participants, the organic rules
may not reduce the allocation percentage of profits allocated to
patron members participants to less than 50 percent of profits except:
from patronage.
(1) sums paid or due on contracts for the delivery
to the association by patron members of products, goods, or services, if any,
are not considered amounts allocated to patron members under this subsection;
and
(2) sums paid, due, or allocated to investor members
as a stated fixed return on equity are not considered amounts allocated to
investor members for purposes of this subsection.
(dc)
Unless the organic rules otherwise provide, in determining order
to determine the amount of profits of a limited cooperative
association, the association=s board of directors may deduct and set aside
a part of the revenue, whether or not allocated to members participants,
after accounting for other expenses to create or accumulate:
(1) create
or accumulate a capital reserve; and
(2) create
or accumulate reserves for specific purposes, including expansion and
replacement of capital assets, education, training, and information concerning
principles of cooperation, community responsibility, and development.
(ed)
Subject to subsection (fe) and the organic rules, the
board of directors of a limited cooperative association shall further
allocate the amounts determined pursuant to subsections (a), and
(b), and (c):
(1) to the
patron members participants in the ratio of each member=s participant=s
patronage to the total patronage of all patron members participants
during the period; and
(2) to the
investor members participants, if any, in the ratio of each
investor member=s participant=s
contributions to the total contributions of all investor members participants.
(fe)
For purposes of allocation of profits and losses of a limited
cooperative association to members patron participants, the
organic rules may establish allocation units or methods based on separate
classes of members, or for patron members on class, function, division,
district, department, allocation units, pooling arrangements, members= participants= contributions, or other equitable methods.
Reporters=
Note
The language in subsection (c) is new as directed at
the Spring 2006 meeting. The Comments to
this Section should make clear that Adue@ in subsections (c)(1) and (2) means and is intended
to require for these purposes only, an imputation of price. The Comments also need to make clear that the
new language in (f) specifically authorizes classes of members beyond the
investor-patron dichotomy.
After February 2006 meeting:
This Section was discussed at length at the February
2006 Drafting Meeting and the Reporters were directed to attempt to revise the
Section in accordance with their sense of the Committee. The only two revisions on which there was
little or no direct discussion are adding the language following Acapital assets@
in subsection (c)(2) and deleting Ainitial@ in subsection (d)(2). Language similar to that found in the added
language in (c)(2) is common in cooperative statutes. The addition is meant to be aspirational and
is wholly consistent with many comments at the February 2006 meeting.
Subsection (a): This act adds a concept of
allocations based on a measurement of patron profits that is not present in
existing new generation (aka LLC-Cooperative) statutes. It does so to add flexibility for payments
and closely cleaves to the cooperative value of Aservice
or products at cost.@ See ' 905 which does not mandate tests for distributions
based on the patron participant/investor participant distinction.
This act is designed to be flexible in operation
giving cooperative associations the ability to design a cooperative
organizational structure most appropriate to achieve the entity=s goals.
Thus, the act contemplates that organizations under this act could be
designed to simulate in operative structures other entities organized under
existing corporate, unincorporated, or unique cooperative acts.
Under general regulatory, accounting, and tax law in
existence at the promulgation of this act there are at least five allocative
models [C corp; C corp with S or T (and or ' 521)
(with the additional options of qualified and nonqualified written notices of
allocation); partnership].
The term Aallocation@ is frequently associated with unincorporated
accounting and taxation but, as used in this state organizational law, is not
constrained to such use. For example, an
entity organized under this act that desires pure corporate accounting would Aallocate@ profit or loss to either patron participant Acorporate stock@ capital accounts or investor Acorporate stock@ capital accounts in accordance with its provisions.
[Think Aelectric.@]
Subsection (b) is technical and must be read closely
with the definitions. It is meant to
require separate netting on the patronage and nonpatronage sides if there are
investor participants. Note there are
other ways that participants may receive money from a cooperative (just like in
other organizations: leases, loans, services for pay, etc.). The Comment will include illustrations
discussed at the February 2006 meeting.
Preliminary Illustrations
The following illustrations are no longer completely
correct given the changes to subsection (b) in December 2006. They continue, however, to be generally
instructive. The Comments will contain
simple illustrations, but not these illustrations.
Introduction. The suggested change in the
language from Anet proceeds, savings, margins and profits@ to Aprofits and losses@ is
more than just wordsmithing. It dances
around a fundamental substantive issue
and suggests another issue in need of discussion. The Comment needs to explain that the term is
not intended to imply the association is Afor profit@ or to mandate the terminology used for purposes
other than state law.
Substantive Issue. The substantive issue has been
described in previous Committee meetings as Aagency
v. sale@ arrangements.
ANet proceeds@ draws attention to this distinction and the
distinction has importance for measuring the A50
percent@ floor for allocations to investor participants in
this section.
Ex 1. Assume a Atypical@ producer cooperative. The members deliver product to the co-op and
get paid a market price. There is a
product sale. At the end of the year the
books are closed and the price paid to producers for product is subtracted (as Acost of goods sold@ in
the books of the cooperative association) to help determine Aprofit.@
Thus, if gross revenue were $1,600 and the only Aexpenses@ were the costs of the product to the co-op
association (assume $1,000) and administrative expenses of $100; the Aprofit@ would be $500.
If the organic documents allocate 50% to patron participants and 50% to
investor participants each group would receive $250. The patron participants therefore received
the market price for the product $1,000 plus a profit allocation of $250 for a
total of $1250. The investor
participants would be allocated $250.
This is the Asale@ method.
Ex 2. Now assume an agency method (according to
AICPA Audit Guidelines 2002, this method is used most frequently for specialty
produce). Here, there is no market price
contract between the co-op association and the producer. Rather the association acts as an agent for
the producer. The association sells the
product (gross revenue) for $1,600 (as in Ex. 1). However, there is no Acost of goods sold@
because the co-op association did not contract for the product with the
producer. Thus the only expense was an
administrative expense of $100. Assuming
the same 50-50 split as in Ex. 1 the investor participants and the patron
participants would be allocated $750.
Ex 3. A value added pasta production facility will
cost $2,000,000 to construct. To become
a patron participant requires a 5 year delivery contract and an investment of
$10,000 under the organic rules. Forty
producers become patron members (and their aggregate investment, therefore, is
$400,000 or 20% of the necessary investment).
A commercial pasta maker agrees to contribute $600,000 (30% of the
necessary investment) and supply manufacturing management for 5 years. In order to get the remaining $1,000,000 from
traditional lending sources the pasta maker agrees to execute a $300,000
stand-by letter of credit.
(a) One A50-50@ allocation split of a first year Aprofit@ of $100,000 (after
paying
the producers $200,000 for under their delivery contracts)
would be $50,000 to investor participants and $50,000 to patron
participants. The patron
participants also receive $200,000 under
contract for a total of $250,000.
(b) In what
category is the $400,000 patron Ainvestment@? Maybe each patron
participant is in dual capacity.
Thus, the $400,000 investment could be
categorized as each patron participant also being an investor
participant to the
extent of
the up-front investment. If so the
results:
(1) Patron
participants as patron participants contribute $50,000 (on patronage basis).
(2) Patron
participants own 40% of the investor participant interests so
they
receive $20,000 in that capacity.
(3) Patron
participants receive $200,000 under their contracts.
(4) As a
result participants whom are patrons receive $270,000.
(5) Nonpatron
investor participants receive $30,000.
Ex 4. Assume the same facts as in Example 3, (a)
except it is an agency (net proceeds) arrangement. This means the patron participants will not
receive the $200,000 under the delivery contract. Thus, Aprofit@ is $100,000 plus $200,000. This $300,000 would be allocated 50-50. Investor participants and patron participants
would be allocated $150,000 each (assuming patron Ainvestment@ is not investor participation, see Es. 3(b)).
Ex 5. Assume the same facts as in example 4 except
pasta maker contracts to manage the manufacturing plant for $200,000
annually. So XYZ again has $100,000
profit split 50-50 but the pasta maker receives $200,000 under the management
contract (rather than the producers receiving that amount for their product as
in example 3(a)). Patron participants
would be allocated $50,000. Investor
participants would be allocated $50,000 but also receive a $200,000 management
fee for a total of $250,000 (but see Ex. 3(b)).
The results in examples 3 through 5 would meet the
50-50 test provided by the organic rules but the results vary as follows:
- Ex. 3(a): Investor participants (IP) $50,000;
patron participants (PP) $250,000.
- Ex. 3(b): Non dual capacity IPs, $30,000; PP (but
including their dual IP-PP capacity),
$270,000.
- Ex. 4:
IP, $150,000; PP, $150,000.
- Ex. 5:
IP, $250,000; PP, $50,000.
The range for IPs is from $30,000 to $250,000; for
PPs from $50,000 to $270,000 even though each variation meets the hypothetical
50-50 split. Please note that the
numbers are Aout of thin air.@ They can easily be manipulated (using the Asale@ method) to illustrate situations where almost all
the risk of loss, and little upside gain, accrues to investor
participants. Now compare another
variation as set forth in Example 6, below.
Ex. 6. Same facts as in example 5, but the $200,000
value on the management contract is categorized as patronage service. AProfit@ is $300,000.
Assuming the $400,000 patron participation contribution is not IP and,
further, Aagency@ accounting: the PPs would receive 50% of the $300,000
profit which is $150,000.
However, both IPs as service PPs ($200,000 of Aworker@ product) would share the $150,000 equally on a
patronage basis. So IPs (as PPs) would
be allocated $75,000 and PPs would be allocated $75,000. The other $150,000 would be allocated to IPs
as IPs. Thus IPs in their dual role
would receive $225,000 and Aproducer@ PPs would be allocated $75,000 (even though the Avalue@ of the product on a Acontract@ basis is $200,000).
This is flexible but not without boundary. It is also an issue that does not seem to
have been focused on in the existing Acts.
SECTION 905.
DISTRIBUTIONS.
(a) Unless
the organic rules otherwise provide and subject to Section 907, the board of
directors may authorize, and the association may make, distributions to members
participants.
(b) Unless
the organic rules otherwise provide, distributions to members participants
may be made in the form of cash, capital credits, allocated patronage equities,
revolving fund certificates, the limited cooperative association=s own or other securities, or any other form.
Reporters=
Note
A Commissioner, not on this Committee, has very
serious reservations about subsection (b).
He suggests that the act is certainly flexible enough to allow these
items but, if listed in the text, they must be defined. Note that the MBCA also contains undefined
terms. Listing without definition makes
the terms Aevolvable@ and, paradoxically, may make the act more user
friendly.
This section Aworks@ because of the existence of Section 904.
SECTION 906.
REDEMPTION OF EQUITY. Subject to Section 907 and unless Unless
the organic rules articles of organization otherwise provide and
subject to Section 907, a limited cooperative association:
(1) may
redeem a patron member=s participant=s
equity; and
(2) may not
redeem an investor member=s participant=s
equity.
Reporters=
Note
How is the redemption price determined? This draft is silent and does not address the
value of good will or appreciating assets: a significant gap. At least two Commissioners raised this and
the related Abook-up@ idea at the 2005 annual meeting. As a result, is a valuation procedure
advisable? Is equity too broad a
term? Would it be better to add
according Ato a plan@ and have the comment specifically address revolving
equity?
This Section may be needless repetition of other
authority for distributions under this draft but, on the other hand, it may
make the draft more user-friendly for those cooperatives which contemplate Astock@ or certificated interests. It is important to note that this Section is
permissive at the discretion of the cooperative and does not give any member a
put right.
SECTION 907.
LIMITATIONS ON DISTRIBUTIONS.
(a) A limited
cooperative association may not make a distribution if, after the distribution:
(1) the
association would not be able to pay its debts as they become due in the
ordinary course of the association=s activities; or
(2) the
association=s assets would be less than the sum of its total
liabilities.
(b) A limited
cooperative association may base a determination that a distribution is not
prohibited under subsection (a) on financial statements prepared on the basis
of accounting practices and principles that are reasonable in the circumstances
or on a fair valuation or other methods method that are is
reasonable in the circumstances.
(c) Except as
otherwise provided in subsection (d), the effect of a distribution allowed
under subsection (b) is measured:
(1) in the
case of distribution by purchase, redemption, or other acquisitions of
financial rights in the limited cooperative association, as of the date
money or other property is transferred or debt is incurred by the association;
and
(2) in all
other cases, as of the date:
(A) the
distribution is authorized, if the payment occurs within 120 days after that
date; or
(B) the
payment is made, if payment occurs more than 120 days after the distribution is
authorized.
(d) If
indebtedness is issued as a distribution, each payment of principal or interest
on the indebtedness is treated as a distribution, the effect of which is
measured on the date the payment is made.
Reporters=
Note
Source: ULPA (2001).
Cross-reference Section 906.
This Section also raises another issue specific to
this draft: Who is liable? Under typical
unincorporated law it is possible to require members to return a proportionate
amount of an unlawful distribution. It
is one of the few bright-line areas for director liability under corporate law.
An accounting question about subsection (a)(2) was
raised at the 2005 Annual meeting. The
basic premise was: AI thought assets by accounting convention always
equaled liabilities; therefore, what does (a)(2) mean?@ It was
promised an answer would be provided, at least, in the Final Comments. The quick answer is that the basic accounting
equation is Aassets equals liabilities plus owners equity.@ Even though
owners equity is a liability upon liquidation it is not a fixed amount because
owners are the residual claimants. The
subsection basically means that no distributions are allowed if a negative
owners= equity account is necessary to balance the books.
A question was also raised at the 2005 Annual
meeting about subsection (d). The
Reporters= have discussed the matter and suggest that the
Committee determine whether this matter should be revisited.
The interrelationship with Aredemption@ is an important one to note.
[SECTION 908.
RELATION RELATIONSHIP TO STATE THE UNIFORM
SECURITIES LAW ACT]. Patron
member interests in the limited cooperative association that are based on
patronage are entitled to the same exemption as provided for substantially
similar interests in cooperatives under [citation to appropriate provision in
other laws].] A cooperative association may be a nonprofit membership
cooperative for purposes of the exemption in [[Section 201(8) of the Uniform
Securities Act]] if the association=s purpose under Section 104(c) and its organic rules
are the same in material respects to cooperatives described in [[Section 201(8)
of the Uniform Securities Act.]]
Reporters=
Notes
The Reporters considered several of the various
non-uniform variations as solutions to the state securities regulation issue
and attempted several internal drafts of this section (see below). None of the existing provisions or those
internal drafts proved satisfactory in the context of this act. By way of background the following additional
points are informative: (1) this act does not affect federal securities
regulation and only A'521@ cooperatives have an exemption and, then, only for
membership (Aparticipant@) interests; (2) the Conference has promulgated the
Uniform Securities Act under an approach that attempts to place all securities
law in a single free-standing act; (3) in analyzing securities law in the
context of an entity exemption exemptions are important only to
the extent that the interest itself falls within the definition of a security
for purposes of security law; (4) the variety of current approaches taken by
states makes adoption of a uniform provision unlikely and variation between any
proposed provisions and existing provisions could detract attention from the
primary purposes of the act.
One alternative that illustrates the difficulty in
attempting to draft beyond the Uniform Securities Act is as follows:
(a) Patron participant interests shall not be deemed
to be securities for purposes of [nonuniform state securities provision] solely
by reason of
(1) the
contribution of value to the association by the patron participant, and
(2) the possession of financial rights by the patron
participant calculated on the basis of patronage.
(b) The financial rights in paragraph (a)(2) do not
include any financial rights or additional or greater financial rights
contingent on the value of a contribution solely because of a greater or lesser
value of that contribution whether or not the financial rights are calculated
on the basis of patronage.
The securities provision in prior drafts appeared as
Section 1701 and that section has been deleted.
The prior Reporters= Note Notes follows:
The language of the statutes vary greatly by
state. Many state laws contain
exemptions from securities regulation either in the law governing cooperatives
or in their securities acts. To avoid
the necessity of each state renegotiating both the policy and nonuniform
statutory language during the adoption of this Act this draft simply applies
those existing exemptions by reference. See
generally, Reporters= Note to Section 909 of this draft.
The language has been modified from prior drafts in
response to concerns expressed on the floor at the 2005 annual meeting that the
former language could have broader implications than intended.
The Uniform Securities Act (2002) contains a limited
exemption at USA ' 201(8). It
is limited to Anonprofit membership cooperatives@ and, even there, does not apply to Aa member=s or owner=s interest, retention certificate, or like security
sold to persons other than bona fide members of the cooperative.@ Comment 8 to
Section 201 states:
AThe 1956 Act... had instead provided: >insert any desired exemption for cooperatives.= The Reporter
for the 1956 Act had found such sharp variation among the 18 states that then
had adopted a cooperative exemption that >no common pattern can be found.= Louis Loss,
Commentary on the Uniform Securities Act 118 (1976).
The Committee suggests it unlikely to achieve
further uniformity than that proposed by the USA (2002) and that states have
already made policy decisions that are unlikely to change based upon anything
stated in this limited purpose unincorporated cooperative act. A strong legislative note should be drafted.
[SECTION 909.
ALTERNATIVE DISTRIBUTION OF UNCLAIMED PROPERTY, DISTRIBUTIONS,
REDEMPTIONS, OR PAYMENTS. A limited
cooperative association may distribute unclaimed property, distributions,
redemptions, or payments under [citation to the applicable provision in the law
governing cooperatives not formed under this [act] in this state.].
Reporters=
Note
The Reporters= Note formerly included the text of the Oregon
Statute (' 62.425). The
Committee determined this is an important substantive provision for states
which already include it in their cooperative statutes and many of the leading
cooperative states have a provision dealing with a cooperative=s unclaimed property. On the other hand it is unique to cooperative
law and the provision could be a major adoption stumbling block in those states
which do not already have existing cooperative law. The Committee=s
decision considered both practical and policy concerns. As a practical matter many existing co-ops
have revolving equity that is paid upon time or dates certain and contingent on
the financial condition of the co-op.
Moreover, their membership is fluid and may include many very small
equity (capital) accounts for patron members.
If equity is not paid or cancelled it becomes practically almost
impossible, and certainly inefficient, to find those members. The policy reason for Awhere it goes@ is based on Atraditional cooperative principles.@
Interestingly, this could probably be engineered by individual
cooperative associations by organic rule and contract.
[ARTICLE] 10
DISSOCIATION
SECTION 1001.
MEMBER=S
PARTICIPANT=S
DISSOCIATION.
(a) A person has the power to dissociate as a member
participant at any time, rightfully or wrongfully, by express will.
(b) Unless the organic rules otherwise provide, a member=s person=s
dissociation from a limited cooperative association is wrongful only if the
dissociation:
(1) breaches it is in breach of an
express provision of the organic rules; or
(2) it occurs before the termination of the limited
cooperative association and:
(A) the person withdraws as a participant by express
will; or
(AB) the person is expelled as a member
participant under subsection paragraph (db)(3)
or (b)(4);
(BC) in the case of a person that is
not an individual, trust other than a business trust, or estate, the person is
expelled or otherwise dissociated as a member participant because
it willfully dissolved or terminated.
(c) Unless the organic rules otherwise provide, a
person that wrongfully dissociates as a member participant is
liable to the limited cooperative association for damages caused by
the dissociation. The liability is in
addition to any other debt, obligation, or liability of the member participant
to the cooperative association.
(d) Unless
the organic rules otherwise provide, a member participant is
dissociated from the limited a
association as a member when participant upon the occurrence of
any of the following occurs:
(1) the association=s receipt of association receives notice in a record of the member=s participant=s
express will to dissociate as a member participant, except that,
if the member specifies in the notice person specified a
withdrawal date later than the date the association had notice and the
notice contains a later date, on that later date;
(2) an event
stated in the organic rules as causing the member=s participant=s
dissociation as a member participant;
(3) the member=s expulsion
participant is expelled as a member participant pursuant
to the organic rules;
(4) the member=s participant=s
expulsion as a member participant by the association=s board of directors if:
(A) it is
unlawful to carry on the association=s activities with the member participant
as a member participant;
(B) there has
been a transfer of all the member=s participant=s financial rights in the association, other than:
(i) a creation or perfection for security purposes;
or
(ii) a charging order in effect under Section 505
which has not been foreclosed;
(C) the
participant is a corporation or cooperative, and, within 90 days after the
association notifies the corporation or cooperative that it will be expelled as
a member because the person has filed a certificate of dissolution or the
equivalent, its charter has been revoked, or its right to conduct business has
been suspended by the jurisdiction of formation, the certificate of dissolution
has not been revoked or its charter reinstated or its right to conduct business
in the state has been reinstated;
(CD)
the member participant is a limited liability
company, association, or partnership and it has been dissolved and its business
is being wound up;
(D) the member is a corporation or cooperative and:
(i) the:
(1) member has filed a certificate of dissolution or
the equivalent; or
(2) jurisdiction of formation has revoked the
association=s charter or right to conduct business;
(ii) the association notifies the member that it
will be expelled as a member for a reason described in subparagraph (i); and
(iii) within 90 days after the date of the notice
under subparagraph (B):
(1) the member does not revoked its certificate of
dissolution or the equivalent; or
(2) the jurisdiction of formation does not reinstate
the association=s charter or right to conduct business;
(5) in the
case of a member participant who is an individual:
(A) the individual=s death individual
dies;
(B) the appointment of a guardian or general
conservator for the individual is appointed; or
(C) there is a judicial determination that
the individual has otherwise become incapable of performing the individual=s duties as a participant under this [act] or the
organic rules;
(6) in the
case of a member participant that is a trust or is acting as a
member by virtue of being a trustee of a trust, distribution of the trust=s entire financial rights in the association, but
not solely by reason of the substitution of a successor trustee;
(7) in the
case of a member participant that is an estate, distribution of
the estate=s entire financial interest in the association, but
not merely by the substitution of a successor personal representative;
(8)
termination of a member participant that is not an
individual, partnership, limited liability company, cooperative corporation,
trust, or estate; or
(9) the
association=s participation in a consolidation or merger,
if, under the plan of merger as approved under [Article] 15, the member
participant ceases to be a member participant.
Reporters=
Note
Planners should carefully consider whether all these
events would trigger any equity redemption.
Section 1001(a) through (c) is new. It is taken from ULLCA II (' 601) and helps resolve a longstanding criticism of
old section 1001(a).
(The Comment needs to explain large versus small
group dynamics; partnerships include all kinds of partnerships. Note: ANotice@ is governed by other law under this draft (see
subsection (d)(1).) The Comments to
(d)(5) should cross-reference section _____.
Source: Closely derived from ULPA (2001) ' 601.
Subsection (d)(5) follows ULPA in that it does not state incompetency as
an event of dissociation but see Section 1003 which can be read
inconsistently. The Comments to this
Section need to explain the difference between subsection (d)(5) and
(d)(7). An individual is dissociated
upon death under (d)(5) and her estate has the powers conferred by Section
1003. Subsection (d)(7) applies where
the (an) estate is carrying on business and becomes a participant by
admission. Example: An individual who
was not a participant of the cooperative association dies. Her estate anticipates carrying on farming
business for three years before it closes.
The estate could become a member of the cooperative association pursuant
to the organic rules of the cooperative association for admission of participants. The issue raised by incompetency needs yet to
be vetted. See section 1003 which as
currently drafted is inconsistent with subsection (d)(8). Subsection (d)(4)(C) has been revised and the
language is now different than ULPA (2001).
Subsection 1001(d)(4)(B) has been changed to refer
to subsection 505 which is the security interest exception for transfers.
Section 1001(d) contemplates expulsion by the
organic rules but there is no default rule for expulsion. Former subsection (b)(5) read:
(5) on application by the cooperative, the person=s expulsion as a member by judicial order because:
(A) the person engaged in wrongful conduct that
adversely and materially affected the cooperative=s
activities;
(B) the person willfully or persistently committed a
material breach of the organic rules or [this act]; or
(C) the person engaged in conduct relating to the
cooperative=s activities which makes it not reasonably
practicable to carry on the activities with the person as member.
This Article was discussed in detail at the October
2005 Committee meeting. Changes have
been made in accordance with decisions made by the Committee. The Committee directed the Reporter to give
more examination to whether subsection (b)(4)(B) should be altered or removed
depending on the meaning of Afinancial rights.@ With more detail having been provided in the
definition of Afinancial rights@ in
Section 102, the Reporters respectfully request to revisit this subsection.
The Reporters also suggest the Committee should
revisit this Article in conjunction with further examination of the composition
and election of the Board and the division of financial results among
participants. The Reporters believe
these three areas are what can differentiate a cooperative association under this
act from all other types of organizations.
Various observers have raised questions and have made suggestions and
requests in these three areas. These
areas are the ones in which conflicts between traditional cooperative
associations with a focus on member service and investor capital with a focus
on financial returns from investment need to be balanced. Questions that have been raised regularly for
consideration are: (i) Should there be different rules in the act for small
versus large cooperative associations in these areas? (ii) Should there be different rules in the
act for investor participants and patron participants? (iii) Is it sufficient to leave these areas
to the organic rules or should the act provide some guidance by default rules
or otherwise? At the February 2006
meeting the Committee directed the Reporters to address these issues in the
Comments.
The Comments to this Section will make clear that
the term Apartnership@ includes general partnership, limited partnership,
or limited liability partnership.
SECTION 1002.
EFFECT OF DISSOCIATION AS MEMBER PARTICIPANT.
(a) Upon a member=s person=s
dissociation as a participant:
(1) subject
to Section 1003, the person has no further rights as a member participant;
and
(2) subject
to Section 1003 and [Article] 15, any financial rights owned by the person in
the person=s capacity as a member participant
immediately before dissociation are owned by the person as a transferee who is
not admitted as a member participant after dissociation.
(b) A person=s dissociation as a member participant
does not of itself discharge the person from any debt, obligation, or
liability to the limited cooperative association which the person
incurred under the organic rules, by contract or by other means while a member
participant.
Reporters=
Note
Source: ULPA (2001) '
602. The ULPA (2001) counterpart
includes a subsection that refers only to specifically cross-referenced
obligations of good faith and fair dealing and that subsection has been deleted
under this draft. A[O]r other members@ was
also deleted in (b), which is consistent, because under this act there is no
specific participant to participant duty (similar to the basic resolution of
duties to limited partners but in ULPA there is a sliding scale where a limited
partner undertakes management obligations).
The Comment to this section will include both reference and discussion
of the four possible sources of financial return of a participant: (1) under a
production (or other) contract; (2) patronage distributions; (3) patronage
retains; (4) return on invested capital.
Subsection (b) is important in the context of obligations under a
marketing contract.
The Committee has suggested that dissociation needs
to be explained in the context of a marketing agreement, at least in the
Comments.
At the October 2005 Committee meeting it was
determined that so long as it is permitted by other state law, a person acting
under a durable power of attorney could continue to act for a participant
without a change to this act.
The Comments will provide illustrations for
subsection (b).
SECTION 1003.
POWER OF ESTATE OF MEMBER PARTICIPANT. Unless the organic rules otherwise provide, if a member
participant dies or is adjudged incompetent, the member=s participant=s
personal representative or other legal representative may exercise the rights
of a transferee and the member=s participant=s
financial rights as provided in Section 503 and, for purposes of settling the
estate of the deceased member participant, may exercise the
informational rights of a current member participant under
Section 405.
Reporters=
Note
Source: ULPA (2001) '
704. See Reporters= Note to section 1001 concerning the absence of
incompetency as a cause of dissociation by a participant. The Committee suggests that the guardian of
an incompetent will be treated for all purposes the same as an estate through
the law of guardianship but that issue should be left to other law. Other law will also channel obligations
between those that must be personally performed and those that may be Aassigned@. It might be
advisable for the Comment to suggest this issue (and a related one concerning
nonadjudicated durable powers) be contemplated by the organic rules and the
terms of the marketing contract, if any.
Whether incompetency effects the contract will depend, in some
instances, on the classification of the contractual duty as delegable.
Note: This does not prevent an estate from becoming
a member.
The estate itself, however, may be admitted as a
participant. The case of an inter
vivos trust is left to other law and is dependent on whether the
participant=s interest is held under that other law to be
transferred.
[ARTICLE]
11
DISSOLUTION
SECTION 1101.
DISSOLUTION. A limited cooperative
association may be dissolved:
(1)
nonjudicially under Section 1102;
(2)
judicially under Section 1103; or
(3) administratively
under Section 1111.
SECTION 1102.
NONJUDICIAL DISSOLUTION. Except as otherwise provided in Sections Section
1103 and 1111, a limited cooperative association is dissolved and
its activities must be wound up only upon:
(1) the occurrence
happening of an event or the coming of a time specified in the articles
of organization;
(2) the
action of the association=s organizers, board of directors, or member
participants under Section 1104 or 1105;
(3) the
passage of 90 days after the dissociation of a member participant,
resulting in the association having fewer than two members participants,
at least one of whom is a patron member participant, unless the
association:
(A) has a sole member participant that
is a cooperative; or
(B) before
the end of the 90 days, admits at least one member participant in
accordance with the association=s
organic rules and has at least two members, at least one of which is a
patron member. one patron participant and at least two participants.
Reporters=
Note
Source: ULPA (2001) '
801. It has been modified because
cooperatives do not bifurcate membership between general and limited partners
even though under this draft patron and nonpatron participants are authorized. Subsection (3) of this Section has been
modified pursuant to action taken by the Committee. The third phrase in (3) was removed as
duplicating what is now (3)(A). There is
a bit of a trapdoor here. Except in this
section, this draft does not provide there must be two participants except to
begin business under Section 401.
Comments to previous Sections may need to make it clear that, except for
a cooperative association that is a wholly owned subsidiary of a cooperative, a
cooperative must have two members. This
Section errs on the side of continuity of life.
SECTION 1103.
JUDICIAL DISSOLUTION. The [appropriate court] may dissolve a limited
cooperative association or order any action that under the circumstances is
appropriate and equitable:
(1) in a
proceeding initiated by the [Attorney General], if it is established that:
(A) the
association obtained its articles of organization through fraud; or
(B) the
association has continued to exceed or abuse the authority conferred upon it by
law;
(2) in a
proceeding initiated by a member participant, if it is
established that:
(A) the
directors are deadlocked in the management of the association=s affairs, the members participants
are unable to break the deadlock, and irreparable injury to the association is
occurring or is threatened because of the deadlock;
(B) the
directors or those in control of the association have acted, are acting, or
most likely will act in a manner that is illegal, oppressive, or fraudulent;
(C) the members
participants are deadlocked in voting power and have failed to elect
successors to directors whose terms have expired for two consecutive periods
during which annual members= participants= meetings were held or were to be held; or
(D) the
assets of the association are being misapplied or wasted.
Reporters=
Note
Before the Fall 2006 meeting the Reporters deleted
subsection (3) as duplicative of subsection 1106(c).
As emphasized by the following paragraph, mere
holders of financial rights have no standing to attempt to dissolve the
entity. That is important under both
unincorporated law (see ULPA) and corporate law.
This section on judicial dissolution is derived from
the MBCA but conceptually tracks the current LLC draft being considered by the
Conference. Substantively, note: (1)
Subsection (2) no longer authorizes transferees to bring an action to dissolve
the cooperative (in addition to members); (2) Subsection (2)(A) does not
include the MBCA phrase, Aor the business and affairs of the [cooperative] can
no longer be conducted to the advantage of the ... [members] generally@ (but is consistent with the directors ability to
consider other constituencies under Article 6); and, (3) the MBCA provides for
an action for dissolution by a creditor of the corporation (here the
cooperative) if the claim has been reduced to judgment and the entity is
insolvent (perhaps that is best left to bankruptcy law).
After discussion at the April 2005 Committee meeting
Aor a transferee of a member@ was deleted from Section 1003(2). It was pointed out that it gave transferees
greater power than they have under almost all unincorporated law, that there
was no similar provision in traditional cooperative law, and that it gave
transferees the power to unreasonably interfere with the operation of the
cooperative by filing suit.
Arguably the broadest provisions in the entire draft
for individual participant rights are subsections (2)(B) and (2)(D). The language has the same effect as provided
by Section 801(6) (ii) of UPA (1997) for at-will partnerships. ULPA Section 802 is much shorter and more
restrictive:
On application by a partner the [appropriate court]
may order a dissolution of a limited partnership if it is not reasonably
practicable to carry on the activities of the limited partnership in conformity
with the partnership agreement.
This section also adds the phrase Aor order any action which under the circumstances is
appropriate and equitable@ to the flush language thereby expressly authorizing
the court to, illustratively, appoint provisional directors or force a buy-out
of interests. This follows what appears
to be a trend in both statutory and case law of corporations.
Subsection (2)(B) states a different (and lower)
standard for judicial dissolution than for the removal of a director under
Section 707 which includes Agrossly abusive@ and Aintentionally harmful.@
SECTION 1104.
VOLUNTARY DISSOLUTION BEFORE COMMENCEMENT OF ACTIVITY. A majority of the organizers or initial
directors of a limited cooperative association that has not yet
begun business activity or the conduct of its affairs may dissolve
the cooperative association.
Reporters= Note
This Section subscribes to the initial approach of
avoiding the term Abusiness.@ Other provisions now use that term and the
Committee has discussed the issue elsewhere.
As an aside, should Abusiness@ be a defined term?
SECTION 1105.
VOLUNTARY DISSOLUTION BY THE BOARD AND MEMBERS. PARTICIPANTS.
(a) Except as provided in Section 1104, in In
order for a limited cooperative association to voluntarily dissolve:
(1) a
resolution to dissolve must be approved by a majority vote of the board of
directors unless a greater vote is required by the organic rules;
(2) the board
of directors must call a special members= participants= meeting to consider the resolution, to be
held within 90 days after adoption of the resolution required by paragraph
(1); and
(3) the board
of directors must mail or otherwise transmit or deliver to each member participant
in a record that complies with Section 408:
(A) the
resolution required by paragraph (1);
(B) a
recommendation that the members participants vote in favor of the
resolution or, if the board determines that because of conflict of interest or
other special circumstances, that it should not make such a
favorable recommendation, the basis of that determination; and
(C) notice of
the members= participants= meeting, in the same manner as notice of a special members= participants= meeting is given.
(b4) Unless the organic rules
otherwise provide, a resolution to dissolve must be approved by at least a two-thirds
vote of all the participants voting power of all members
present at a special member=s the
meeting.
(5)
If However, if the limited cooperative association has there are
investor members, participants at least one-half of the affirmative
votes cast by patron members participants must be in the
affirmative, but the organic rules may require provide for
a larger affirmative vote by patron members participants.
Reporters=
Note
This Section is new to the February 2006 draft
having been formerly reserved. It
follows logically from the articles concerning amendments to organic rules and
conversion, merger or consolidation.
When drafting subsection (b) the Reporters encountered several voting
scenarios not yet considered by the Committee and adjusted the language as they
deemed appropriate. It is imperative the
Committee review the voting requirements here and elsewhere.
SECTION 1106.
WINDING UP.
(a) A limited
cooperative association continues after dissolution only for purposes of
winding up its activities.
(b) In
winding up a limited cooperative association=s its
activities, the board of directors shall cause the a cooperative
association to:
(1) discharge
its liabilities, settle and close its activities, and marshal and distribute
its assets;
(2) preserve
the cooperative association or its property as a going concern for no
more than a reasonable time;
(3) prosecute
and defend actions and proceedings;
(4) transfer
association property;
(5) settle
disputes by mediation or arbitration; and
(6) perform
other necessary acts.
(c) Upon
application of a limited cooperative association, any member participant,
or a holder of financial rights, the [appropriate court] may order judicial
supervision of the winding up of the association, including the appointment of
a person to wind up the dissolved association=s
activities, if:
(1) after a
reasonable time, the association has not executed winding up; or
(2) the
applicant establishes other good cause.
(d) A limited cooperative association shall promptly
deliver to the [Secretary of State] for filing an amendment to the articles of
organization to reflect the appointment of a person to wind up the association=s activities.
Reporters=
Note
Before the Fall 2006 meeting old (b)(2) dealing with
filing a statement of dissolution was deleted because the rest of the list is
mandatory. Comments need to
cross-reference 1114 and 1115.
Should creditors have standing to seek judicial
supervision?
Consider adding Comment explaining board remains in
control of the association and has the duty to wind-up through appointments of
agents (etc) and that (c) is the safety valve.
Compare UPA (1997).
SECTION 1107.
DISTRIBUTION OF ASSETS IN WINDING UP LIMITED COOPERATIVE
ASSOCIATION.
(a) In
winding up a limited cooperative association=s business, the association must apply its assets to
discharge its obligations to creditors, including members participants
who are creditors. Any remaining assets
must be applied to pay in money the net amount distributable to members participants
in accordance with their right to distributions under subsection (b).
(b) Unless the organic rules otherwise provide, each
member participant is entitled to a distribution from the limited
cooperative association of any remaining assets in the proportion of the member=s participant=s
financial interests to the total financial interests of the members participants
of the association after all other obligations are satisfied. For purposes of this subsection (b),
unless the organic rules otherwise provide, Afinancial
interests@ means the amounts recorded in the names of members
participants in the records of the association cooperative
at the time the distribution is made, including amounts paid to become a
member participant, amounts allocated but not distributed to members
participants, and amounts of distributions authorized but not yet paid
to members participants.
Reporters=
Note
Best practice would provide detail in the organic
rules. The Comment should include (AIn winding up, if any of the cooperative association=s assets are insubstantial in value and cannot be
readily converted to cash, those assets may be abandoned or donated to a
charitable organization selected by the persons supervising the winding up.@)
The Committee tentatively decided to delete the
phrase Aunless otherwise provided by the organic rules@ in subsection (b).
The import of that deletion should be revisited. The Reporters did not delete the phrase
because it is at odds with the ubiquitous practice of giving liquidation
preferences to preferred stock under traditional cooperative law; is necessary
if there are to be any special allocations under the economic realities test
for purposes of partnership income taxation, and; is clearly allowed in
corporate law.
The Minnesota Cooperative Associations Act is silent
as to liquidating distributions in its dissolution provisions. Section 308B.721 of the Minnesota law,
however, generally governs distributions and allocations and it states: AThe bylaws shall prescribe...@.
ULPA (2001) ' 812 states:
(a) In winding up a limited partnership=s activities, the assets of the limited partnership,
including the contributions required by this Section, must be applied to
satisfy the limited partnerships obligations to creditors, including, to the
extent permitted by law, partners that are creditors.
(b) Any surplus remaining after the limited
partnership complies with subsection (a) must be paid in cash as a
distribution.
***
In turn, ULPA Section 503 states:
A distribution by a limited partnership must be
shared among partners on the basis of the value, as stated in the required
records when the limited partnership decides to make the distribution, of the
contributions the limited partnership has received from each partner.
At the October 2005 Committee meeting it was
mentioned that subsection (b) would be limited to a seven year look-back rule
in electric cooperative law. The
Comments might suggest that this kind of provision is contemplated by the
phrase, Aunless the organic rules otherwise provide.@ The
Reporters would like a bit more guidance on how to use this information.
SECTION 1108.
KNOWN CLAIMS AGAINST DISSOLVED LIMITED COOPERATIVE ASSOCIATION.
(a) Subject
to subsection (d), a dissolved limited cooperative association may
dispose of the known claims against it by following the procedure in subsection
(b).
(b) A
dissolved limited cooperative association may notify its known claimants
of the dissolution in a record. The notice must:
(1) specify
the information required to be included in a claim;
(2) provide an
address to which the claim must be sent;
(3) state the
deadline for receipt of the claim, which may not be less than 120 days after
the date the notice is received by the claimant; and
(4) state
that the claim will be barred if not received by the deadline.
(c) A claim
against a dissolved limited cooperative association is barred if the
requirements of subsection (b) are met, and:
(1) the
association is not notified of the claimant=s
claim, in a record, by the specified deadline; or
(2) in the
case of a claim that is timely received but rejected by the dissolved
association, the claimant does not commence an action to enforce the claim
against the association within 90 days after receipt of the notice of the
rejection; or
(3) in the case of a claim that is timely received
but is neither accepted nor rejected by the association within 120 days after
the deadline for receipt of claims, the claimant does not commence an action to
enforce the claim against the association within 90 days after the 120 day period.
(d) This
section does not apply to a claim based on an event occurring after the date of
dissolution or a liability that is contingent on that date.
Reporters=
Note
Subsection (c)(3) is new to the 2006 Fall
draft. It fills a hole.
The substance of this section and that of the
remainder of this article is contained in both corporate and LLC law. The base model for the drafting of these
provisions was ULLCA (2006).
Subsection (c)(1) has been revised pursuant to
Committee direction in the October 2005 meeting. A suggestion/question concerning the flush
language of (b) was also made at that meeting but no revision has yet been made
because it raises the deletion of the article about notice and notification.
SECTION 1109.
OTHER CLAIMS AGAINST DISSOLVED LIMITED COOPERATIVE ASSOCIATION.
(a) A
dissolved limited cooperative association may publish notice of its
dissolution and request persons having claims against the cooperative
association to present them in accordance with the notice.
(b) A notice
under subsection (a) must:
(1) be
published at least once in a newspaper of general circulation in the [county]
in which the dissolved limited cooperative association=s principal office is located or, if the
association does not have a principal office it has none in this
state, in the [county] in which the cooperative association=s designated office is or was last located;
(2) describe
the information required to be contained in a claim and provide an address to
which the claim is to be sent; and
(3) state
that a claim against the association is barred unless an action to enforce the
claim is commenced within three years after publication of the notice.
(c) If a dissolved
limited cooperative association publishes a notice in accordance with
subsection (b), the claim of each of the following claimants is barred unless
the claimant commences an action to enforce the claim against the dissolved
association within three years after the publication date of the notice:
(1) a
claimant that is entitled to but did not receive notice in a record under
Section 1108; and
(2) a
claimant whose claim is contingent or based on an event occurring after the
effective date of dissolution.
(d) A claim
not barred under this section may be enforced:
(1) against
the dissolved limited cooperative association, to the extent of its
undistributed assets; or
(2) if the
association=s assets have been distributed in connection with
winding up the association=s activities, against a member participant
or holder of financial rights to the extent of that person=s proportionate share of the claim or the
association=s assets distributed to the person participant
or holder of financial rights in connection with the winding up, whichever
is less, to the extent the person=s total liability for all claims under this
subsection does not exceed the total amount of assets distributed to the person
as part of the winding up of the association.
Reporters=
Note
This Section is based on ULPA (2001) ' 807 and ULLCA ' 808. It is
similar to MBCA ' 14.07 and Re-ULLCA ' 704.
Former paragraph (c)(2) was removed because the
situation is now covered in new subsection 1108(c) which provides for the
validity of the claim if not acted on by the association.
SECTION 1110.
COURT PROCEEDING.
(a) A
dissolved limited cooperative association that has published a notice
under Section 1109 may file an application with the court in the [county] where
the association=s
principal office is located for a determination of the amount and form of
security to be provided for payment of claims that are contingent or have not
been made known to the dissolved association or that are based on an event
occurring after the effective date of dissolution but that, based on the facts
known to the dissolved association, are reasonably estimated to arise
after the effective date of dissolution.
(b) Within 10
days after filing an application pursuant to subsection (a), a dissolved limited
cooperative association shall give notice of the proceeding to each known
claimant holding a contingent claim.
(c) The court
may appoint a representative in any proceeding brought under this section to
represent all claimants whose identities are unknown. The reasonable fees and expenses of the
representative, including all reasonable expert witness fees, shall be paid by
the dissolved limited cooperative association.
(d) Provision
by the dissolved limited cooperative association for security in the
amount and the form ordered by the court satisfies the dissolved
association=s obligations with respect to claims that are
contingent, have not been made known to the dissolved association, or
are based on an event occurring after the effective date of dissolution, and
such claims may not be enforced against a member participant who
received a distribution.
Reporters=
Note
This Section is new to the February 2006 draft. It was discussed at the October 2005
meeting. Is Arepresentative@ the correct word choice in subsection (c)? The Associate Reporter spent an inordinate
amount of time looking at this issue. AGuardian ad litem@ is
not correct but there seems to be no general known term that fits.
SECTION 1111.
ADMINISTRATIVE DISSOLUTION.
(a) The
[Secretary of State] may dissolve a limited cooperative association
administratively if the association does not:
(1) within 60
days after the due date pay any fee, tax, or penalty due to the [Secretary of
State] under this [act] or other law; or
(2) deliver
its annual report to the [Secretary of State] as required by Section 207.
(b) If the
[Secretary of State] determines that a ground exists for administratively
dissolving a limited cooperative association, the [Secretary of State]
shall file a record of the determination and serve the association with a copy
of the record.
(c) If,
within 60 days after service of a copy of the [Secretary of State=s] determination that a ground exists for dissolving
a limited cooperative association, the association does not correct each
ground for dissolution or demonstrate to the reasonable satisfaction of the
[Secretary of State] that each uncorrected ground determined by the [Secretary
of State] does not exist, the [Secretary of State] shall administratively
dissolve the association by preparing, signing, and filing a declaration of
dissolution that states the grounds for dissolution. The [Secretary of State]
shall serve the association with a copy of the declaration.
(d) A limited
cooperative association administratively dissolved continues its existence but
may carry on only activities necessary to wind up its activities and liquidate
its assets under Section 1106 and to give the notice to claimants under
provided in Sections 1108 and 1109.
(e) The
administrative dissolution of a limited cooperative association does not
terminate the authority of its agent for service of process.
Reporters=
Note
Source: ULLCA (2006); ULPA (2001).
The 60 day
period mirrors RMBCA section 14.20 and ULLCA (2006) Section 705 . This section combines ULPA (2001) sections
809 and 810.
Style Committee suggested changing Aserve@ to Amail.@ The effect
of Aserve@ is to mail under the service of process provisions and
Aserve@ is consistent with ULLCA (2006).
SECTION 1112.
REINSTATEMENT FOLLOWING ADMINISTRATIVE DISSOLUTION.
(a) A limited
cooperative association that has been administratively dissolved may apply to
the [Secretary of State] for reinstatement within two years after the effective
date of dissolution. The application
must be delivered to the [Secretary of State] for filing and state:
(1) the name
of the association and the effective date of its administrative dissolution;
(2) that the
grounds for dissolution either did not exist or have been eliminated; and
(3) that the
association=s name satisfies the requirements of Section 109
108.
(b) If the
[Secretary of State] determines that an application contains the information
required by subsection (a) and that the information is correct, the [Secretary
of State] shall:
(1) prepare a
declaration of reinstatement that states this determination;
(2) sign and
file the original of the declaration of reinstatement; and
(3) serve the
limited cooperative association with a copy of the declaration.
(c) When
reinstatement under this section becomes effective, it relates back to and
takes effect as of the effective date of the administrative dissolution, and
the limited cooperative association may resume or continue its
activities as if the administrative dissolution had never occurred.
Reporters=
Note
Source: ULPA, ULLCA, generally follows the
MBCA.
The Comments
need to explain the effect on third parties.
It is intended, in that regard, to be completely consistent with
corporate and unincorporated law.
Subsection (d) was deleted in the Fall 2006 Draft
because it repealed, word for word, Section 1113(a) and is better placed there.
SECTION 1113.
DENIAL OF REINSTATEMENT; APPEAL.
(a) If the
[Secretary of State] denies a limited cooperative association=s application for reinstatement following
administrative dissolution, the [Secretary of State] shall prepare, sign, and
file a notice that explains the reason or reasons for denial and serve the
association with a copy of the notice.
(b) Within 30
days after service of a notice of denial of reinstatement by the [Secretary of
State] under subsection (a) Section 1112, a limited
cooperative association may appeal the denial by petitioning the [appropriate
court] to set aside the dissolution. The
petition must be served on the [Secretary of State] and contain a copy of the
[Secretary of State=s] declaration of dissolution, the cooperative
association=s application for reinstatement, and the [Secretary
of State=s] notice of denial.
(c) Upon
receipt of a petition under subsection (a), the The court may summarily
order the [Secretary of State] to reinstate the dissolved cooperative
association or may take other action the court considers appropriate.
Reporters=
Note
The 30 days in subsection (b) is the same as ULLCA
(2006) Section 707(b). It is also
consistent with MBCA Section 14.23.
SECTION 1114.
STATEMENT OF DISSOLUTION.
(a) A limited
cooperative association that has dissolved or is about to dissolve may deliver
to the [Secretary of State] for filing a statement of dissolution that states:
(1) the name
of the association;
(2) the date
the association dissolved or will dissolve; and
(3) any other
information the association considers deems relevant.
(b) A person
has notice of a limited cooperative association=s dissolution on the later of:
(1) 90 days after a statement of dissolution is
filed; or
(2) the effective date stated in the statement of
dissolution., whichever is later.
Reporters=
Note
Source: ULLCA, RUPA.
This Section and this Note, should be read in
conjunction with Section 1115 and its Note.
The Reporters added this Section on their own motion for discussion at
the February 2006 meeting because the prior draft and note were inconsistent
and, worse, affirmatively confusing. The
discussion at the meeting reached an unenthusiastic consensus to adopt it for
the draft. Both this Section and Section
1115 are elective filings. ULPA (2001)
has an elective statement of termination but not of dissolution.
Under modern corporate law (e.g., MBCA) the
articles of dissolution are mandatory in that the articles are Athe only filing required for voluntary dissolution.@ Official
Comment, MBCA '14.03. ARequired,@ however, is misleading because if a corporation
were voluntarily dissolved but articles were not filed the secretary of state
would (eventually) administratively dissolve the corporation.
Further, the comments to that Section state:
The act of filing the articles of dissolution makes
the decision to dissolve the corporation a matter of public record and
establishes the time when the corporation must begin the process of winding up
and cease carrying on its business except to the extent necessary to wind up.
The limited partnership scheme is different because
the certificate of limited partnership is not a governing document but purely a
notice one (like the articles of organization in most LLC Acts). As such, the appropriate way to give notice
is in an amendment to the certificate itself.
Such an amendment is required under ULPA when a third party is appointed
to wind-up the partnership. Where a
third party is not appointed, a fair reading of Section 202, at least allows an
amendment upon dissolution. Section 202
states:
(c) A general partner that knows that any
information in a filed certificate of limited partnership was false when the
certificate was filed or has become false due to changed circumstances shall
promptly:
(1) cause the certificate to be amended; or
(2) if appropriate, deliver to the [Secretary of
State] for filing a statement of change pursuant to Section 115 or a statement
of correction pursuant to Section 207.
The problem is this: the certificate is not required
to state that it is Anot dissolved.@ Thus, it is
not required to file a notice document upon dissolution under ULPA though a
certificate Amay also contain any other matters...@.
SECTION 1115.
STATEMENT OF TERMINATION.
(a) A
dissolved limited cooperative association that has completed winding up
may deliver to the [Secretary of State] for filing a statement of termination
that states:
(1) the name
of the association; and
(2) the date
of filing of its initial articles of organization; and .
(3) the
association is terminated.
(b) The
filing of a statement of termination does not itself terminate the limited
cooperative association.
Reporters=
Note
This is consistent with the MBCA but in the MBCA the
statement of dissolution is required. In
ULPA (2001), there is no statement of dissolution, rather the certificate is
amended. Under ULPA (2001) these are
basically notice filings. There is a
very real question concerning the legal effect of the statement of termination.
This Section was formerly numbered Section 207. Subsection (b) is new to the February 2006
draft.
There was discussion at the 2004 annual meeting
suggesting that the statement of termination was a throwback to older versions
of the MBCA and that this Act should follow the current MBCA provisions for
filing the articles of dissolution.
Because this is an unincorporated entity, however, it (now at least)
follows ULPA (2001). No filing is
required under this provision nor in this article requiring a filing for
dissolution or winding-up. This statement
is simply an elective statement that may be filed. The November 2004 draft more closely followed
ULLCA (1996).
Termination is a very different creature than
dissolution. Upon termination the
entity, and its liability shield, ends.
Several questions should be addressed by the
Committee:
(1) a prior draft included a third item in the list
providing for the addition of any other information;
(2) the placement of this Section (and Section 1114)
here rather than in Article 2; and, most importantly
(3) the effect of filing such a statement. For example, ULPA (2001) expressly provides
(Section 103) for the effect of its filing (e.g., constructive
notice? ULPA says it is after it has
been filed for 90 days). See Section
1114. The latter is an issue in at least
two practical contexts. The first is
opinion letter drafting and the experience with statements of authority under
RUPA. The second is whether its filing
would have any bearing on the Acertificate of good standing@ and require the secretary of state to search its
records.
[ARTICLE]
12]
ACTIONS BY MEMBERS PARTICIPANTS
Reporters=
Preliminary Note to Article 12
This entire article is bracketed and a legislative
note is to be added advising adopting jurisdictions that the substantive topic
of this article, as well as direct actions, are contained in some states= civil procedure law.
(1) Placement of Derivative Sections. The Reporters were requested to conduct
preliminary research regarding the comparative placement of derivative action
within state statutory schemes. According to a secondary source approximately
eleven states place rules on derivative proceedings in their rules of civil
procedure. In corporate law about 30
states place their derivative Arules@ in the corporate statute (16 of those states
adopted the MBCA provisions). Maryland
does not, apparently, deal with derivative actions by statute. The balance, according to the source, have
some combination or expressly cross-reference the civil procedure rules.
(2) Additional Background-Direct v. Derivative. Case law about the distinction is almost
entirely from corporate law though some law is now developing under LLC
statutes. Professor Kleinberger gave a
CLE presentation about derivative actions in the context of LLCs at the Spring
2005 meeting of the ABA Business Section.
Therein he provided several observations that apply to this project:
(a) Analysis of the operation of the rules must take
into account the closely-held versus public ownership distinction;
(b) Courts follow three general approaches (Adirect harm,@ Aspecial injury,@ Aduty owed/rights infringed@); and,
(c) The ALI Principles of Corporate governance
suggest there be no distinction between direct and derivative actions in
closely-held corporations.
In the LLC context he suggested that courts follow
the Adirect harm@ approach supplemental by a Apurpose and effect@
exception in closely-held LLCs where the majority is using the entity to abuse
a particular minority owner. Both ULPA
(2001) and ARe-ULLCA@ adopt the Adirect harm@ approach.
(3) Court Approval for Discontinuance. The Reporters were also requested to conduct
preliminary research concerning court approval of discontinuance or settlement
of derivative proceedings. The MBCA and
the Federal Rules of Civil Procedure require such approval. Section 7.45 of the RMBCA reads as follows:
A derivative proceeding may not be discontinued or
settled without the court=s approval.
If the court determines that a proposed discontinuance or settlement
will substantially affect the interests of the corporation=s shareholders or a class of shareholders, the court
shall direct that notice be given to the shareholders affected.
The Conference products do not address court
supervision of settlement (ULLCA, Re-ULLCA current draft, ULPA, UPA). It was decided by the Committee at its Spring
2006 meeting to include court approval of settlements. See Section 1205.
(4) It is anticipated that much of this Article will
be bracketed and/or the subject of a legislative note because several states= provisions on derivative proceedings, generally,
are contained in the statute or rules governing civil procedure. For example, a secondary source lists the
following states as including derivative proceedings in the state=s rules of civil procedure: Alabama, District of
Columbia, Kansas, Louisiana, Minnesota, Missouri, Nevada, Ohio, Oklahoma, South
Dakota, and South Carolina. According to
the same secondary source, other states= states
corporate acts sometimes reference their rules of civil procedure, see,
e.g., California, New York, Illinois.
SECTION 1201.
DIRECT ACTION BY PARTICIPANT.
(a) Subject
to subsection (b), a participant may maintain a direct action against a
cooperative association, an officer, or a director, to enforce the rights and
otherwise protect the interests of the participant, including rights and
interests under the organic rules or organic law.
(b) A participant maintaining a direct action under
this section, must plead and prove an injury or threatened injury that is not
solely the result of an injury suffered or threatened to be suffered by the
cooperative association.
Reporters= Note
Source: ' 1001 ULPA (2001) (modified) and ARe-ULLCA@ (May 15, 2005, Draft). The February 2006 Draft deleted a subsection
(c) that dealt with an accounting action.
The deletion more closely follows LLC and traditional cooperative law
than partnership law. The reference to
accounting was ripe for deletion because no Committee discussion suggested an
accounting action should be expressed as a statutory matter. Does this Draft=s ASupplemental Principles@ adequately cover this? A prior draft included a direct right to sue
another member based on unincorporated entity law (in former section
1101). Directors are included under this
section to raise the issue of Aprimary@ shareholder litigation in the corporate context and
to better reflect the operation of the provision under ULPA. Query whether this merely reflects current
law; or causes or alleviates confusion.
Finally, query whether the provision on direct action is necessary. Current corporate and cooperative acts do not
make this statutory distinction.
Unincorporated laws, however, include this because, historically, the
individual partner could not sue directly outside an accounting action. The direct-derivative distinction is
currently in the ULLCA draft being discussed by another committee of the
Conference.
SECTION 1201 1202. DERIVATIVE ACTION. A member participant may
maintain a derivative action to enforce a right of a limited cooperative
association if:
(1) the member
participant adequately represents the interests of the association;
(2) the member
participant demands that the association bring an action to enforce the
right; and
(3) any of
the of following occur:
(A) the
association does not, agree to bring the action under paragraph (2)
within 90 days after the member participant makes the demand
under paragraph (2), agree to bring the action;
(B) the
association notifies the member participant that it has rejected
the demand;
(C)
irreparable injury to the association would result by waiting 90 days
after the member participant makes the demand under paragraph
(2); or
(D) if
the association agreed to bring an action demanded under paragraph
(2) and subparagraph (3)(A), the association fails to bring the
action within a reasonable time.
Reporters=
Note
This Section has been revised pursuant to Committee
direction for the 2006 Annual Meeting.
Source: ' 1002 ULPA (2001).
Section 1102 modifies the ULPA (2001) formulation by adding the
requirement that the member adequately represents the interests of the
cooperative; by adding a 90 day time period after demand before suit may be
commenced; and by deleting excused demand because of futility. The 90 day period may be excused if the
waiting period would result in irreparable harm to the cooperative under
subsection 1202(2). These modifications
generally follow the law of the Model Business Corporations Act.
Is 90 days too long?; but see the Reporters= Note following section 1204. Oregon uses 20 days. See section
1104. This draft does not contain a
futility exception. Subsection (1)
formerly required a writing, the Committee discussed replacing it with record,
this draft goes back to the language in ULPA (2001). For purposes of comparison, a recent draft in
the ARe-ULLCA@ project includes Afutility@ (as does ULPA) and is silent as to the time
limit. Neither does it include Aadequately represents the interests@ in the flush language.
The Committee has discussed (briefly) the inclusion
of a provision about special litigation committees. To date the Committee is satisfied that the
flexibility for Committees and other appointments elsewhere in the draft
adequately address the issue. The
Minnesota Cooperative Association Act has a specific provision on the topic as
does the RMBCA. A recent draft of ARe-ULLCA@ included such a provision for discussion purposes
only. The discussion draft follows the
corporate formulation but note that it specifically addresses the standard to
be used for the Committee=s business judgment:
Section 905.
SPECIAL LITIGATION COMMITTEE.
(a) When a limited liability company is named as a
party in a derivative proceeding, the limited liability company may appoint a
special litigation committee to investigate claims asserted in the proceeding
and determine whether pursuing the proceeding is in the best interests of the
limited liability company. If the
limited liability company appoints a special litigation committee, on motion by
the committee, made in the name of the limited liability company, the court
shall stay discovery for the amount of time reasonably necessary to permit the
committee to make its investigation.
(b) A special litigation committee may be composed
of one or more persons, who may, but need not be, members. A special litigation committee may be
appointed:
(1) in a member-managed limited liability company,
by the consent of a majority of those members who are not named as defendants
in the proceeding and, if there are none, by a majority of members; and
(2) in a manager-managed limited liability company,
by:
(A) a majority of those managers that are not named
as defendants in the proceeding; and
(B) if there are none, by a majority of members that
are not named as defendants in the proceeding; and
(C) if there are none, by a majority of the
managers.
(c) After appropriate investigation, a special
litigation committee may determine that it is in the best interests of the
limited liability company that the proceeding:
(1) continue under the control of the plaintiff;
(2) continue under the control of the special
litigation committee;
(3) be settled on terms determined by the special
litigation committee; or
(4) be dismissed.
(d) After making a determination under subsection
(c), the special litigation shall file with the court a statement of its
determination and its report supporting its determination, giving notice to the
plaintiff. The court shall determine
whether the special litigation committee conducted its investigation and made
its recommendation in good faith and with reasonable care, with the special
litigation committee having the burden of proof. If the court finds that the special
litigation committee acted in good faith and with reasonable care, the court
shall adopt and enforce the determination of the special litigation committee.
At the direction of the Committee the Reporters
referenced the Revised Model Nonprofit Corporation Act: it contains no
reference to time periods except the complainant must notify the attorney
general within ten days of filing the complaint if it Ainvolves a public benefit corporation or assets held
in a charitable trust by a mutual benefit corporation.@ Moreover,
the Model Nonprofit Act deals with the demand as follows:
A complaint in a proceeding brought in the right of
a corporation must be verified and alleged with particularity the demand made,
if any, to obtain action by the directors and either why the complainants could
not obtain the action or why they did not make the demand. If a demand for action was made and the
corporation=s investigation of the demand is in progress when
the proceeding is filed, the court may stay the suit until the investigation is
completed.
MNCA '6.30(c).
The Nonprofit Corporation Act also provides a
threshold standing requirement of the lesser of Afive percent or more of the voting power or by fifty
members.@ Any director
also has standing ('6.30(a)).
SECTION 1202 1203. PROPER PLAINTIFF.
(a) A
derivative action to enforce a right of a limited cooperative
association may be maintained only by a person that is a member participant
at the time the action is commenced, and:
(1) was a member
participant when the conduct giving rise to the action occurred; or
(2) whose
status as a member participant or transferee of a member participant devolved
upon the person by operation of law from a person that was a member participant
at the time of the conduct.
(b) If the sole plaintiff in a derivative action
dies while the action is pending, the court may permit another member participant
to be substituted as plaintiff.
Reporters=
Note
Subsection (b) is new to the Fall 2006 draft and
follows ULLCA II as approved by the Conference Summer 2006.
Source: ' 1003 ULPA (2001).
Query whether the requirement that the person bringing a suit be a
member at the time of commencement is advisable or necessary. Most corporate statutes so provide. It is consistent with other conference
products. A Comment or Legislative Note
should direct states to determine the placement of derivative actions within
their own codes. South Dakota=s derivative procedures, for example, appear in it=s code of civil procedure. The South Dakota provision and, some other
corporate codes, require that the plaintiff Afairly
represents@ the interest of the corporation. This draft does as well.
The words Aor transferee of a participant@ were added by the Reporters without express
direction by the Committee for purposes of discussion only. The status of Aparticipant@ does not devolve upon a person by operation of law
under the default rules of the 2006 Annual Meeting Draft.
The Committee requested alternative suggestions for
the occurrence and concurrent ownership requirements. The ALI Principles of Corporate Governance
provide more specific guidelines.
Section ' 7.02(a) (particularly subsection (1)) states:
(a) A holder [' 1.22] of an equity security [' 1.20] has standing to commence and maintain a
derivative action if the holder:
(1) Acquired the entity security either (A) before
the material facts relating to the alleged wrong were publicly disclosed or
were known by, or specifically communicated to, the holder, or (B) by
devolution of law, directly or indirectly, from a prior holder who acquired the
security as described in the preceding Clause (A);
(2) Continues to hold the equity security until the
time of judgment, unless the failure to do so is the result of corporate action
in which the holder did not acquiesce, and either (A) the derivative action was
commenced prior to the corporate action terminating the holder=s status, or (B) the court finds that the holder is
better able to represent the interests of the shareholders than any other
holder who has brought suit;
(3) Has complied with the demand requirement of ' 7.03 (Exhaustion of Intracorporate Remedies: The
Demand Rule) or was excused by its terms; and
(4) Is able to represent fairly and adequately the
interests of the shareholders.
The California Corporate Code is somewhat similar
but adds more Aprocedure.@ Section
800(b)(1) specifically addresses the issue as follows:
(b) No action may be instituted or maintained in
right of any domestic or foreign corporation by any holder of shares of voting
trust certificates of the corporation unless both of the following conditions
exist:
(1) The plaintiff alleges in the complaint that
plaintiff was a shareholder, of record or beneficially, or the holder of voting
trust certificates at the time of the transaction or any part thereof of which
plaintiff complains or that plaintiff=s shares or voting trust certificates thereafter
devolved upon plaintiff by operation of law from a holder who was a holder at
the time of the transaction or any part thereof complained of; provided, that
any shareholder who does not meet these requirements may nevertheless be
allowed in the discretion of the court to maintain the action on a preliminary
showing to and determination by the court, by motion and after a hearing, at
which the court shall consider such evidence, by affidavit or testimony, as it
deems material, that (i) there is a strong prima facie case in favor of the
claim asserted on behalf of the corporation, (ii) no other similar action has
been or is likely to be instituted, (iii) the plaintiff acquired the shares
before there was disclosure to the public or to the plaintiff of the wrongdoing
of which plaintiff complains, (iv) unless the action can be maintained the
defendant may retain a gain derived from defendant=s willful breach of a fiduciary duty, and (v) the
requested relief will not result in unjust enrichment of the corporation or any
shareholder of the corporation; and...
SECTION 1203 1204. PLEADING. In a derivative action, the complaint must state
with particularity:
(1) the date
and content of the plaintiff=s demand and the limited cooperative
association=s response to the demand;
(2) if 90
days have not expired since the demand, how irreparable injury to the
association would result by waiting for the expiration of 90 days; or
(3) if the
association agreed to bring an action demanded under Section 1202(2)
1202(3)(a), that the action has not been brought within a reasonable time.
SECTION 1204 1205. COURT APPROVAL FOR DISCONTINUANCE OR
SETTLEMENT. A derivative
action to enforce a right of a limited cooperative association may not
be discontinued or settled without the [appropriate court=s] approval.
Reporters=
Note
Source: RMBCA ' 7.45.
The RMBCA provision also requires notice be given
shareholders under certain circumstances.
See Preliminary Note to Article 12, supra. The additional corporate language is thought
unnecessary.
SECTION 1205 1206. PROCEEDS AND EXPENSES.
(a) Except as
otherwise provided in subsection (b):
(1) any
proceeds or other benefits of a derivative action to enforce a right of a limited
cooperative association, whether by judgment, compromise, or settlement, belong
to the association and not to the plaintiff; and
(2) if the
derivative plaintiff receives any proceeds, the plaintiff shall immediately
remit them to the association.
(b) If a
derivative action to enforce a right of limited cooperative
association is successful in whole or in part, the court may award the
plaintiff reasonable expenses, including reasonable attorney=s fees, from the recovery of the association.]
[Reporters= Note
[Source:
' 1005 ULPA (2001); see ' 906 Re-ULLCA (February 2006 Draft).]
[ARTICLE] 13
FOREIGN COOPERATIVES
SECTION 1301.
GOVERNING LAW.
(a) The law
of the state or other jurisdiction under which a foreign cooperative is
organized governs relations among the members participants of the
foreign cooperative and between the members participants and the
foreign cooperative.
(b) A foreign
cooperative may not be denied a certificate of authority by reason of any
difference between the laws of the jurisdiction under which the foreign
cooperative is organized and the law of this state.
(c) A
certificate of authority does not authorize a foreign cooperative to engage in any
activity or exercise any power that a limited cooperative association
may not engage in or exercise in this state.
Reporters=
Note
Style has questioned the Ain a like manner@
phrase. It is consistent with both ULLCA
II and RULPA (2001). The Reporters also
engaged in an interim Adiscussion@ about use of the term Abusiness@ (as opposed to, e.g., Aactivities@). The
Revised Model Nonprofit Corp Act uses Abusiness@ and Baarda uses Abusiness@ in his treatise (circa 1985) on cooperatives. So do the cooperative acts, e.g., of
South Dakota and Colorado. A concern is
unintended consequences. Thus, no change
appears in this draft.
This article needs examination by the Committee with
respect to whether any type of cooperative organization organized in another
state should be permitted to obtain a certificate of authority under this
act. AForeign
cooperative@ is defined in this draft as a Aforeign entity [not a domestic entity] organized
under a law similar to this [act] in another jurisdiction@ [emphasis supplied]. How Asimilar@ is Asimilar@? A number of
states have specialized cooperative statutes, e.g., cooperatives for
agriculture, cooperatives for rural power, cooperatives for housing, but do not
have a general cooperative statute. If a
traditional cooperative formed in a state that permits cooperatives to be
organized for many purposes seeks to qualify in a state with only specialized
statutes, the cooperative will need to qualify as a for profit or non-profit
corporation that does not fit the cooperative Amold.@ Should this
act offer an alternative? A traditional
cooperative could be organized under this act for any purpose except that will
be specifically excluded. In this draft,
the Reporters have assumed Asimilar@ means a cooperative association of a type formed
under a statute that would clearly be seen as Asimilar@ to this act meaning the same kind of statute. This article would currently have limited use
by cooperative organizations organized in other states unless organized under
an act which is essentially the same as this one, currently Wyoming, Minnesota,
Iowa, Tennessee and Wisconsin.
In keeping with the change of terminology from Amember@ to Aparticipant@
throughout this draft, the terminology has been changed in this article. Is that appropriate in this article? If another state uses Amember@ could it have an adverse effect on attempting to
qualify under this act?
SECTION 1302.
APPLICATION FOR CERTIFICATE OF AUTHORITY.
(a) A foreign
cooperative may apply for a certificate of authority to transact business in
this state by delivering an application to the [Secretary of State] for
filing. The application must state:
(1) the name
of the foreign cooperative and, if the name does not comply with Section 109
108, an alternative name adopted pursuant to Section 1305;
(2) the name
of the state or other jurisdiction under whose law the foreign
cooperative is organized;
(3) the
street and mailing addresses of the principal cooperative=s designated office and, if the laws of the jurisdiction under which the foreign
cooperative is organized require the foreign cooperative to maintain another
an other office in that jurisdiction, the street and mailing addresses
of the required office;
(4) the name
and street and mailing addresses of the foreign cooperative=s initial agent for service of process in
this state; and
(5) the street and mailing addresses of a designated
office in this state which may be the addresses of the agent for service of
process in this state; and
(65)
the name and street and mailing addresses of each of the foreign
cooperative=s current directors and officers.
(b) A foreign
cooperative shall deliver with a completed application under subsection (a) a
certificate of good standing [or existence] or a similar record signed by the
[Secretary of State] or other official having custody of the cooperative=s publicly filed records in the state or other
jurisdiction under whose law the foreign cooperative is organized.
SECTION 1303.
ACTIVITIES NOT CONSTITUTING TRANSACTING BUSINESS.
(a)
Activities of a foreign cooperative which do not constitute transacting
business in this state under this [article] include:
(1)
maintaining, defending, and settling an action or proceeding;
(2) holding
meetings of the foreign cooperative=s
members its participants or
carrying on any other activity concerning its internal affairs;
(3)
maintaining accounts in financial institutions;
(4)
maintaining offices or agencies for the transfer, exchange, and
registration of the foreign cooperative=s own
securities or maintaining trustees or depositories with respect to those
securities;
(5) selling
through independent contractors;
(6)
soliciting or obtaining orders, whether by mail or electronic means,
through employees, agents, or otherwise, if the orders require acceptance
outside this state before they become contracts;
(7) creating
or acquiring indebtedness, mortgages, or security interests in real or personal
property;
(8) securing
or collecting debts or enforcing mortgages or other security interests in
property securing the debts, and holding, protecting, and maintaining property
so acquired;
(9)
conducting an isolated transaction that is completed within 30 days and
is not one in the course of similar transactions of a like manner; and
(10)
transacting business in interstate commerce.
(b) For
purposes of this [article], the ownership in this state of income-producing
real property or tangible personal property, other than property excluded under
subsection (a), constitutes transacting business in this state.
(c) This
section does not apply in determining the contacts or activities that may
subject a foreign cooperative to service of process, taxation, or regulation
under any law of this state, other than this [act].
Reporters=
Note
Source: ULPA (2001) '
903. The Style Committee has asked
whether Aof a like manner@ in
subsection (a)(9) is surplusage.
SECTION 1304.
FILING OF CERTIFICATE OF AUTHORITY. Unless the [Secretary of State] determines
that an application for a certificate of authority does not comply with the
filing requirements of this [act], the [Secretary of State], upon payment of
all filing fees, shall file the application, prepare, sign, and file a
certificate of authority to transact business in this state, and send a copy of
the filed certificate, together with a receipt for the fees, to the foreign
cooperative or its representative.
Reporters=
Note
Source: ULPA (2001) '
904. ASend@ is in other NCCUSL products.
SECTION 1305.
NONCOMPLYING NAME OF FOREIGN COOPERATIVE.
(a) A foreign
cooperative whose name does not comply with Section 109 108 may
not obtain a certificate of authority until it adopts, for the purpose of
transacting business in this state, an alternative name that complies with
Section 109 110. A foreign
cooperative that adopts an alternative name under this subsection and then
obtains a certificate of authority with that name need not comply with
[fictitious or assumed name statute].
After obtaining a certificate of authority with an alternative name, a
foreign cooperative=s business in this state must be transacted under
that name unless the foreign cooperative is authorized under [fictitious
name statute] to transact business in this state under another name.
(b) If a
foreign cooperative authorized to transact business in this state changes its
name to one that does not comply with Section 109 108, it may not
thereafter transact business in this state until it complies with subsection
(a) and obtains an amended certificate of authority.
Reporters=
Note
Source: ULPA (2001) ' 905.
SECTION 1306.
REVOCATION OF CERTIFICATE OF AUTHORITY.
(a) A
certificate of authority of a foreign cooperative to transact business in this
state may be revoked by the [Secretary of State] in the manner provided in subsection
subsections (b) and (c) if the foreign cooperative does
not:
(1) pay,
within 60 days after the due date, any fee, tax, or penalty due to the
[Secretary of State] under this [act] or law of this state other than this
[act];
(2) deliver,
within 60 days after the due date, its annual report required under Section
207;
(3) appoint
and maintain an agent for service of process as required by Section 116; or
(4) deliver
for filing a statement of change under Section 117 within 30 days after a
change has occurred in the name or address of the agent.
(b) To revoke
a certificate of authority of a foreign cooperative to transact business in
this state, the [Secretary of State] must prepare, sign, and file a notice of
revocation and send a copy to the foreign cooperative=s registered agent for service of process in this
state or, if the foreign cooperative does not appoint and maintain an
agent for service of process in this state, to the cooperative=s principal designated office. The notice must state:
(1) the
revocation=s effective date, which must be at least 60 days
after the date the [Secretary of State] sends the copy; and
(2) the foreign
cooperative=s noncompliance under with subsection
(a) which is the reason for the revocation.
(c) The
authority of a foreign cooperative to transact business in this state ceases on
the effective date of the notice of revocation unless before that date the foreign
cooperative cures each failure to comply under with subsection
(a) stated in the notice. If the foreign
cooperative cures the failures, the [Secretary of State] shall so indicate on
the filed notice.
Reporters=
Note
Source: ULPA (2001) ' 906.
SECTION 1307.
CANCELLATION OF CERTIFICATE OF AUTHORITY; EFFECT OF FAILURE TO HAVE
CERTIFICATE.
(a) To cancel
its certificate of authority to transact business in this state, a foreign
cooperative must deliver to the [Secretary of State] for filing a notice of
cancellation. The certificate is
canceled when the notice becomes effective under Section 203.
(b) A foreign
cooperative transacting business in this state may not maintain an action or
proceeding in this state unless it has a certificate of authority to transact
business in this state.
(c) The
failure of a foreign cooperative to have a certificate of authority to transact
business in this state does not impair the validity of a contract or act of the
foreign cooperative or prevent the foreign cooperative from defending an action
or proceeding in this state.
(d) A member
participant of a foreign cooperative is not liable for the obligations
of the foreign cooperative solely by reason of the foreign cooperative=s having transacted business in this state without a
certificate of authority.
(e) If a
foreign cooperative transacts business in this state without a certificate of
authority or cancels its certificate of authority, it appoints the [Secretary of
State] as its agent for service of process for action arising out of the
transaction of business in this state.
Reporters=
Note
Source: ULPA (2001) ' 907.
SECTION 1308.
ACTION BY [ATTORNEY GENERAL]. The [Attorney General] may maintain an action to
restrain a foreign cooperative from transacting business in this state in
violation of this [article].
Reporters=
Note
Source: ULPA (2001) ' 908.
[ARTICLE] 14
AMENDMENT OF ORGANIC RULES
Preliminary Reporters= Note to Article 14
As in other articles, this draft now attempts a
modified Aclass voting@ system. See
e.g, Section 1405.
SECTION 1401.
AUTHORITY TO AMEND ORGANIC RULES.
(a) A limited
cooperative association may amend its organic rules under this [article].
(b) Unless the organic rules otherwise provide, a
member A participant does not have a vested property right
resulting from any provision in the organic rules, including provisions
relating to management, control, capital structure, distribution,
entitlement, purpose, or duration of the limited cooperative association. This subsection does not apply to contract
rights independent of the organic rules nor to contract rights that may be
[part of] included within or evidenced by the organic rules such as those
relating to goods or services provided to, or received from the cooperative
association [in the normal course of [business]] or particular contractual
rights with respect to obligations concerning [intangibles] [intangible
property].
Reporters=
Note
Best practices under this act would probably be to
keep any marketing contracts outside the organic rules.
This article attempts to consolidate the amendment
and restatement procedures for both the articles of organization and
bylaws. This section simply grants a
general authority to amend. Subsection
(b) is in the MBCA in subsection 10.01(b) and is the analogue of the effect of
a change or amendment of underlying law provided in Section 104. See Tenn. Proc. Corp. Law '43-38-401
'43-36-401. Concerning subsection (b): Do cooperatives
sometimes have marketing contract provisions in by-laws? If so, is subsection (b) a problem? It doesn=t seem to cause a problem in corporate law even
though there may be financial contract rights set forth therein (e.g.,
preferred dividends). The Committee has
yet to address whether this is a default or mandatory provision. This issue is an important one because under
the corporate law of most states the directors alone may amend the
by-laws. This draft more closely follows
LLC law. It is also consistent with the
Oregon Cooperative Act (' 62.135).
Note, best practice is to have the marketing
contract outside your organic rules. See
section on separate voting groups specially affected by a proposed
amendment. Idea: Replace last words of
(b) with: Ato other obligations.@
SECTION 1402.
NOTICE AND ACTION ON AMENDMENT OF ARTICLES OF ORGANIZATION OR BYLAWS. To amend its organic rules:
(1) either:
(A) a
majority of the association=s board of directors, or a greater percentage if
required by the association=s
organic rules, must approve the proposed amendment; or
(B) the board
of directors must have received a petition in a record that: (i) proposes an amendment; and
(ii) is signed authenticated by at
least 10 20 percent of the patron members participants
or 10 20 percent of the investor members participants;
and
(2) the board
of directors must call a special members= meeting of participants to consider the
amendment, to be held within 90 days following approval of the proposed
amendment by the board or receipt by the board of a petition in accordance with
paragraph (1)(B), and must mail or otherwise transmit or deliver in a
record to each member participant:
(A) 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 participant;
(B) a
recommendation that the members participants approve the
amendment, or if the board determines that because of conflict of interest or
other special circumstances, that it should not make a favorable
recommendation, the basis for that determination;
(C) a
statement of any condition of the board=s
submission of the amendment to the members participants; and
(D) give
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 members= participants= meeting.
Reporters=
Note
This section is consistent with the article on
conversion, merger or consolidation.
Subsection (2)(D) has been revised because, the annual meeting does not
require detailed notice of what is to be considered.
SECTION 1403.
METHOD OF VOTING ON AMENDMENT OF ORGANIC RULES. Members Participants may vote
on a proposed amendment to the organic rules of a cooperative association
as provided in Section 415.
Reporters=
Note
This section is derived from Colorado section
7-55-110. The known inconsistency
concerning proxies in a prior draft, the Reporters believe, has been fixed in
the February 2006 draft with the possible exception of section 113(2) (Apower of attorney@). Under this draft proxies are not
allowed. That is a major policy decision
that the Committee has only tentatively made.
The Committee needs to reach resolution of this policy issue.
SECTION 1404.
CHANGE TO AMENDMENT OF ORGANIC RULES AT MEETING.
(a) A
substantive change to a proposed amendment of the organic rules may not be made
at the members= participants= meeting at which a vote on the amendment occurs.
(b) Any
change in an the amendment to the organic rules of a
cooperative association at a meeting permitted by subsection (a) need not
be separately voted upon by the board of directors.
(c) A vote to
adopt a change to a proposed amendment to the organic rules permitted by
subsection (a) must be the same vote required to pass a proposed amendment.
Reporters=
Note
At the November 2004 meeting the term Agermane@ was suggested instead of Asubstantive@ in subsection (a).
Is subsection (b) clear? This
Section received comment from the floor at the 2005 Annual Meeting. A commissioner stated that Robert=s Rules of Order should take care of this and
queried about Asubstitute amendments.@ In response to the latter comment the
February 2006 draft broadens the language slightly from Aamendment to amendment@ to Achange.@
SECTION 1405.
[RESERVED: VOTING BY
DISTRICT, OR CLASS, OR VOTING GROUP].
(a) In
addition to the approval required under Section 1406; if the organic rules
provide for voting by district, class, or if there are one ore more
identifiable voting groups that a proposed amendment would affect differently
from other members with respect to matters identified in Section 1406(c)(1)
through (5), approval of the amendment to the organic rules requires the same
quantum of votes of the members of that district, class, or voting group as
required in Section 1406.
(b) If members in two or more districts or classes
of members entitled to vote separately under subsection (a) and the amendment
would affect the members in the districts or classes in the same or a
substantially similar way, the districts or classes of members affected must
vote as a single voting group unless the organic rules otherwise provide for
separate voting.
Reporters= Note
The text of this section has been deleted consistent
with the operative effect of Committee direction on other provisions pending
final discussion by the Committee. The
question that must be finally decided is whether a formal district or class of
participants, or a group substantially affected in a material negative way, by
an amendment should have a veto power.
SECTION 1406.
APPROVAL OF AMENDMENT.
(a) Subject
to Section 1405:
(1) unless Unless the organic rules
otherwise provide, an amendment to the articles of organization of a
cooperative association must be approved by at least a two-thirds of
the vote of all participants voting power of all members present
at a special members= the meeting called under Section 1402;
and .
(2) if If the limited
cooperative association has investor members, participants at
least one-half of the votes cast by patron members are participants
must be in the affirmative, but the organic rules may require provide
for a larger affirmative vote by patron members participants.
(b) Subject
to Section 1405 and subsection (c):
(1) unless Unless the organic rules
otherwise provide, an amendment to the bylaws of a cooperative association
must be approved by at least a majority vote of the voting power of all members
participants voting present at a special members= the meeting called under Section 1402.
(2) If if a limited cooperative
association has there are investor members participants
at least one-half of the votes cast by patron members participants
must be in the affirmative, but the organic rules may require provide
for a larger affirmative vote by patron members participants.
(c) The vote required under subsection (a) is
required to amend bylaws if the proposed amendment modifies: An
amendment to the bylaws of a cooperative association shall be the same as
provided in subsection (a) for any amendment modifying:
(1) the equity
capital structure of the limited cooperative association, including the
rights of the association=s members to share in profits or distributions, the relative rights, preferences, and restrictions
granted to or imposed upon one or more districts, classes any
group or class voting groups of similarly situated members; of
participants, and the rights of the cooperative association=s participants to share in profits or distributions;
(2) the transferability
of members= interests;
(3) the
manner or method of allocation of profits or losses among members;
(4) the
quorum for a meeting and rights of voting and governance not including the
modification of district boundaries which may, unless otherwise provided in the
organic rules, be determined by the board of directors; or
(52) unless otherwise provided in
the organic rules, the terms for admission of new members. participants;
(3) the
quorum for a meeting and rights of voting and governance;
(4) the
transferability of participants= interests; or
(5) the
manner or method of allocation of profits or losses among participants.
(d) Articles of organization may:
(1) reduce the quantum of voting power required
under subsection (a)(1) to be voted affirmatively for amendment of the articles
of organization to not less than a majority vote of members; and
(2) delegate amendment of the bylaws in whole or in
part to the board of directors, with or without member approval, subject to
subsection (e), except for amendments concerning matters described in
subsections (c)(1) through (5).
(e) Amendments to the bylaws concerning matters
described in subsections (e)(1) through (5) must be made by members as provided
for in amendments to the articles of incorporation in subsection (a).
(f) If the articles of organization delegate
amendment of bylaws to the board of directors under subsection (d)(2), the
board must provide a description of the amendment to the members in a record
within 120 days after the amendment of the bylaws. The description may be provided at the next
annual meeting of members if the meeting is held within the 120-day period.
Reporters=
Note
The reference to voting power in subsection (a)(1)
is intended to pick up district or class voting under Sections 411 and 413.
Whether this provides a mandatory quantum floor only
or whether it is nonvariable needs to be discussed in the context of mandatory
v. flexible provisions.
This section has changed markedly since the 2005
Annual Meeting and now departs from the Minnesota statute and its progeny.
Many cooperative acts allow the board of directors
to amend the bylaws, some do not. It is
the tentative general sense of the committee to be protective of members and
this draft is consistent with that sense.
It would be possible to make (b) a default rule rather than
mandatory (See Colorado Rev.
Stat. ' 7-56-208).
The allocation of provisions between the articles of
organization and bylaws, even given the foregoing, is a unique feature of
cooperatives. In many ways it seems that
the bylaws of some cooperative serve an analogous role of the operating
agreement under LLC law, albeit far easier to amend. In order to address the real function of the
bylaws in a cooperative association this Section sets forth several actions
that require a higher vote quantum no matter whether they are in the bylaws or
articles of organization. Whether the
effect of changing of district boundaries is included in subsection (b) as drafted
needs to be considered (and the effects of gerrymandering in this context are
similar to those in other contexts).
SECTION 1407.
EMERGENCY BYLAWS.
(a) Unless
the articles of organization otherwise provide, a limited cooperative
association association=s board of directors may adopt emergency bylaws that are
effective only in the case of an emergency caused by only if a quorum of
the board of directors cannot readily be assembled because of a
catastrophic event. The emergency bylaws,
which are subject to amendment or repeal may be amended or repealed
by the members, participants and may make all provisions
necessary for managing the cooperative association during an the
emergency., including:
(1)
procedures for calling a meeting of the board of directors;
(2) quorum
requirements for the meeting; and
(3)
designation of additional or substitute directors.
(b) Bylaws which The bylaws of a
cooperative association that are consistent with the emergency
bylaws adopted pursuant to subsection (a) remain effective during the
emergency. The emergency bylaws are not
effective after the emergency ends.
(c) Action
taken by a limited cooperative association in good faith in
accordance with the emergency bylaws adopted under subsection (a):
(1) binds the
association; and
(2) may not
be used to impose liability on a director, officer, employee, or agent of the
association.
Reporters=
Note
This Section was formerly numbered Section 206.
Emergency bylaw provisions are common in cooperative
law. Similar provisions are not
typically found in unincorporated entity law.
Corporate law, however, frequently contains such provisions. Indeed, according to the annotated version of
the MBCA the corporation law of approximately 40 states contains some provision
for emergency bylaws.
The Committee thought it important, therefore, to
mirror existing cooperative law.
Subsection (d) needs to be revisited by the Committee as there is some
variety in its expression in corporate law.
SECTION 1408.
RESTATED ARTICLES OR ORGANIZATION. A limited
cooperative association, by the affirmative vote of a majority of all the members
participants 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 currently
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
1406(a). Upon filing, restated
articles supersede the existing articles and all amendments.
Reporters=
Note
This Section provides for a restatement of the
Articles of Organization without amendments.
For this reason a lower voting requirement is provided. Section 1409 provides for a restatement with
amendments.
SECTION 1409.
AMENDMENT OR RESTATEMENT OF ARTICLES OF ORGANIZATION.
(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 of organization, or restated articles of organization or articles of
conversion, merger, or consolidation pursuant to [Article] 15]
that contain one or more amendments of the articles of organization, stating:
(1) the name
of the cooperative association;
(2) the date
of filing of its initial articles of organization; and
(3) the
changes the amendment makes to the articles of organization as most
recently amended or restated.
(b) A
cooperative association shall promptly deliver to the [Secretary of State] for
filing an amendment to the articles of organization to reflect the appointment
of a person to wind up the association=s
activities under subsection 1106(c).
(bc)
Before the commencement of the initial meeting of the board of directors
of a limited cooperative association, an organizer of the association which
that knows that any information in the filed articles of
organization of the association was false when the articles were filed
or has become false due to changed circumstances shall promptly:
(1) cause the
articles to be amended; or
(2) if
appropriate, deliver to the [Secretary of State] for filing an amendment
pursuant to Section 203.
(cd)
Articles of organization may be amended at any time for any other
proper purpose as determined by the limited cooperative association.
(de)
If restated articles of organization are adopted, the restated
articles or organization may be delivered to the [Secretary of State]
for filing in the same manner as an amendment.
(ef)
Subject to Section 203, an amendment of the articles of organization or
other record containing an amendment of the articles of organization which
that has been properly adopted by the members participants
is effective when filed by the [Secretary of State].
Reporters=
Note
In addition to an amendment to the articles of
organization itself, this Section permits amendments to the articles of
organization to be reflected by a record of action taken by the participants
that contains an amendment.
Query whether amendments should be effective inter
se even before being filed under subsection (f). Such a revision would be more consistent with
other unincorporated law whose filings, admittedly, are usually for notice
only.
[ARTICLE] 15
CONVERSION, MERGER, AND CONSOLIDATION
SECTION 1501.
DEFINITIONS. In this [article]:
(1) AConstituent limited cooperative association@ means a limited cooperative association
that is a party to a consolidation or merger.
(2) AConstituent entity organization@ means an entity organization that is
party to a consolidation or merger.
(3) AConverted entity organization@ means the entity organization into
which a converting entity organization converts pursuant to
Sections 1502 through 1505.
(4) AConverting limited cooperative
association@ means a converting entity organization
that is a limited cooperative association.
(5) AConverting entity organization@ means an entity organization that
converts into another entity organization pursuant to Sections
1502 through 1505.
(6) AOrganization@
means an entity.
(67) AOrganizational
documents@ means articles of incorporation, bylaws, articles
of organization, operating agreements, partnership agreements, or other
documents serving a similar function in the creation and governance of an entity
organization.
(78)
APersonal liability@ means
personal liability for a debt, liability, or other obligation of an entity
organization imposed, by operation of law or otherwise, by a person that
co-owns or has an interest in the entity organization:
(A) by the entity
organization=s
organic law solely by reason of the person co-owning or having an
interest in the entity organization; or
(B) by the entity=s organization=s
organizational documents under a provision of the entity=s organization=s
organic law authorizing those documents to make one or more specified persons
liable for all or specified parts of the entity=s portions
of its debts, liabilities, and other obligations of the organization
solely by reason of the person co-owning or having an interest in the entity
organization.
(9) ASurviving entity organization@ means an entity organization into
which one or more other entities organizations are merged. A
surviving entity organization may exist before the merger or be
created by the merger.
Reporters=
Note
Perhaps the best way to deal with the Model Entity Transactions
Act (META) would be to provide a legislative note to accompany this act setting
forth the necessary revisions to this act if META is in place. Such a note would also provide rough guidance
for states that have a non-model Ajunction box@ type of statute statutes. In the latter regard the final section in
this article (Anonexclusivity@) may also be helpful.
Legislative notes accompany META for suggested
amendments to plug into other acts (a.k.a. Atrailing
amendments@) when META is adopted in a state. The basic idea of META is that it will
replace the existing transactions dispersed throughout the entities as they
relate to trans-entity transactions and provide default rules for those
entities that do not contemplate a transaction allowed by META (e.g.
divisions) in their own governing law.
Nonetheless, the individual laws (e.g. this act) will govern the
cooperative association side of any transaction to the extent it addresses it (e.g.,
the vote quantum for merging a cooperative association will trump any META
default rules for the voting provision in META).
After Committee discussion of this article, perhaps
it would want to direct the Reporters to draft the AMETA@ legislative note for review at the next Committee
meeting.
As a preliminary matter this Article allows a
cooperative formed under this draft flexibility to combine with the full
panoply of other organizations whether domestic or foreign. It does not allow Ashare exchanges@ or divisions but Aconversions@ are added to the February 2006 draft. A separate article exists for the sale of
assets. This section is based largely on
ULPA (2001) section 1101. The terms Aco-owns@ and Aco-owning@ appear in ULPA.
Does this article need a definition for Aorganizational documents@? The language,
most especially in (8) needs work.
SECTION 1502.
CONVERSION.
(a) An entity
organization that is not a limited cooperative association
may convert to a limited
cooperative association and a limited cooperative association may
convert to an entity organization that is not a limited
cooperative association pursuant to this section, Sections 1503 through 1505,
and a plan of conversion, if:
(1) the other
entity=s organization=s
organic law authorizes the conversion;
(2) the
conversion is not prohibited by the law of the jurisdiction that enacted the
other entity=s organization=s
organic law; and
(3) the other
entity organization complies with its organic law in effecting
the conversion.
(b) A plan of
conversion must be in a record and must include:
(1) the name
and form of the entity organization before conversion;
(2) the name
and form of the entity organization after conversion;
(3) the terms
and conditions of the conversion, including the manner and basis for converting
interests in the converting entity organization into any
combination of money, interests in the converted entity organization,
and other consideration; and
(4) the
organizational documents of the converted entity organization.
Reporters=
Note
Source: ULPA (2001) '
1102. This Article cannot govern or
change the provisions of another statute that governs an entity into which a
cooperative association would be converted or that would be a party to a merger
or a consolidation. The term Aform@ conforms with, e.g., ULPA (2001).
SECTION 1503.
ACTION ON PLAN OF CONVERSION BY CONVERTING LIMITED COOPERATIVE
ASSOCIATION.
(a) Unless
the organic rules otherwise provide, in order for a limited
cooperative association to convert to another entity organization:
(1) a
majority of the board of directors, or a greater percentage if required by the association=s
organic rules, must approve a plan of conversion;
(2) the board
of directors must call a special members= meeting of participants to consider the plan
of conversion, hold the meeting to be held within 90 days
following approval of the plan by the board, and must mail or
otherwise transmit or deliver in a record to each member participant:
(A) the plan,
or a summary of the plan and a statement of the manner in which a copy of the
plan in a record may be reasonably obtained by a member participant;
(B) a
recommendation that the members participants approve the plan of
conversion, or if the board determines that, because of a conflict of
interest or other special circumstances, it should not make a favorable
recommendation, the basis for that determination;
(C) a
statement of any condition of the board=s submission of the plan of conversion to the members
participants; and
(D) notice of
the meeting at which the proposed plan of conversion will be considered, which
that must be given in the same manner as notice of a special members= participants= meeting; and
(3) the following apply: subject to
Sections 411, [and] 414, [and 1504]:
(A) unless Unless the organic rules
otherwise provide, a plan of conversion of an association must be
approved by at least a two-thirds vote of all members participants
voting at the meeting.
(B) If if the limited cooperative
association has there are investor members participants,
at least one-half of the affirmative votes cast by patron members
participants must be in the affirmative, but the organic rules
may require provide for a larger affirmative vote by patron members
participants.
(b) If as a result of the conversion any member
participant of the converting limited cooperative association will
have has personal liability, consent in a record of that member
participant must be delivered to the association before delivery of
articles of conversion for filing pursuant to Section 1504 1505.
(c) Subject
to subsection (b) and any contractual rights, after a conversion is approved,
and at any time before the effective date of the conversion, a converting limited
cooperative association may amend a plan of conversion or abandon the planned
conversion:
(1) as
provided in the plan; and
(2) except as
prohibited by the plan, by the same affirmative vote of the board of directors
and of the members participants as required to approve the plan.
(d) The voting requirements for districts,
classes, or voting groups under Section 1405 apply to approval of a conversion
under this [article]. Participants may vote on a proposed plan of
conversion of a cooperative association as provided in Section 415.
Reporters=
Note
This section is drafted to allow variance by organic
rule and is inconsistent with the merger provisions.
The special Aconsent@ by those being burdened by personal liability is drafted
differently in ULPA (2001). It is pulled
out into a separate section ('1110) and that section makes clear that the special
consent provisions trump any general provisions in the organic rules regarding
their amendment. The Committee should
discuss this matter.
[SECTION 1504. VOTING BY CLASS OR DISTRICT].
Reporters=
Note
See 1405. The
following language is part of the language deleted and raises the question in
the notes to Section 1405.
(a) A group,
class, or district of participants must vote as a separate group, class, or
district if the plan effects the participants of the group, class, or district:
(1) the
capital structure of the cooperative association, including the relative
rights, preferences, and restrictions granted or imposed upon any group or
class of participants, and the rights of the association=s participants to share in the profits, surplus, or
distributions;
(2) the terms
for admission of new participants;
(3) the quorum
for a meeting and rights of voting and governance;
(4) the
transferability of participants= interests; or
(5) the
manner or method of allocation of profits and losses among participants.
SECTION 1504 1505. FILINGS REQUIRED FOR CONVERSION; EFFECTIVE DATE.
(a) After a
plan of conversion is approved:
(1) a
converting limited cooperative association shall deliver to the
[Secretary of State] for filing articles of conversion, which must include:
(A) a
statement that the limited cooperative association has been converted
into another entity organization;
(B) the name
and form of the converted entity organization and the
jurisdiction of its governing statute;
(C) the date
the conversion is effective under the governing statute of the converted entity
organization;
(D) a
statement that the conversion was approved as required by this [act];
(E) a
statement that the conversion was approved as required by the governing statute
of the converted entity organization; and
(F) if the
converted entity organization is an entity organization
organized in a jurisdiction other than this state and is not authorized to
transact business in this state, the street and mailing address of an office
which the [Secretary of State] may use for purposes of Section 119 1506(c);
and
(2) if the
converting entity organization is not a converting limited
cooperative association, the converting entity organization shall
deliver to the [Secretary of State] for filing articles of organization, which
must include, in addition to the information required by Section 302:
(A) a
statement that the association was converted from another entity organization;
(B) the name
and form of the converting entity organization and the
jurisdiction of its governing statute; and
(C) a
statement that the conversion was approved in a manner that complied with the
converting entity=s organization=s
governing statute.
(b) A
conversion becomes effective:
(1) if the
converted entity organization is a limited cooperative
association, when the articles of conversion take effect; or
(2) if the
converted entity organization is not a limited cooperative
association, as provided by the governing statute of the converted entity
organization.
Reporters=
Note
Source: ULPA (2001) '1104.
Comment needs to include an explanation about the
interplay between the different entity statutes.
SECTION 1505 1506. EFFECT OF CONVERSION.
(a) An entity
organization that has been converted pursuant to this [article] is for
all purposes the same entity that existed before the conversion and is not a
new entity but, after conversion, is organized under the organic law of the
converted entity and is subject to that law and other law as it applies to the
converted entity.
(b) When a
conversion takes effect:
(1) all
property owned by the converting entity organization remains
vested in the converted entity organization;
(2) all
debts, liabilities, and other obligations of the converting entity organization
continue as obligations of the converted entity organization;
(3) an action
or proceeding pending by or against the converting entity organization
may be continued as if the conversion had not occurred;
(4) except as
prohibited by other law, all of the rights, privileges, immunities, powers, and
purposes of the converting entity organization remain vested in
the converted entity organization;
(5) except as
otherwise provided in the plan of conversion, the terms and conditions of the
plan of conversion take effect; and
(6) except as
otherwise agreed, the conversion does not dissolve a converting limited
cooperative association for purposes of [Article] 11.
(c) A
converted entity organization that is an entity organization
organized under the laws of a jurisdiction other than this state consents
to the jurisdiction of the courts of this state to enforce any obligation owed
by the converting limited cooperative association if before the
conversion the converting limited cooperative association was subject to
suit in this state on the obligation. A
converted entity organization that is an entity organization
organized under the laws of a jurisdiction other than this state and not
authorized to transact business in this state appoints the [Secretary of State]
as its agent for service of process for purposes of enforcing an obligation
under this subsection. Service on the
[Secretary of State] under this subsection is made in the same manner and with
the same consequences as in Section 119(c) and (d).
(d) This
[act] does not authorize an act prohibited by, and does not affect the
application or requirements of, law other than this [act].
Reporters=
Note
Source: ULPA (2001) '
1105. Subsection (d) is from META ' 103(b).
Note that a subsection (d) was deleted for the
Spring 2007 draft as duplicative with Section 1702 but additional language was
added to subsection (a).
Before the Fall 2006 meeting the last phrase of
subsection (a) was added in response to Committee questions. It is now no longer Aexactly@ consistent with other NCCUSL products.
At the February 2006 Committee meeting, questions
were raised about the wording of subsection (a), especially the phrase Afor all purposes the same entity that existed before
the conversion.@ This
language is consistent with other NCCUSL products. As of the Spring 2007 draft language from
META Section 406(a)(1)(B) has been added in an attempt to clarify the
point. The entire provision from META is
set forth below: META, however, approaches the effect of a conversion in
a different way that is reproduced here as an alternative approach to this
Section for the Committee=s consideration.
SECTION 406.
EFFECT OF CONVERSION.
(a) When a conversion becomes effective:
(1) the converted entity is:
(A) organized under and subject to the organic
law of the converted entity; and
(B) the same entity without interruption as the
converting entity;
(2) all property of the converting entity continues
to be
vested in the entity without assignment, reversion,
or impairment;
(3) all liabilities of the converting entity
continue as liabilities
of the
entity;
(4) except as provided by law other than this [Act]
or the plan
of conversion, all of the rights, privileges,
immunities, powers, and
purposes of the converting entity remain in the
converted entity;
(5) the name of the converted entity may be
substituted for the
name of the converting entity in any pending action
or proceeding;
(6) unless otherwise provided by the organic law of
the
converting entity, the conversion does not cause the
dissolution of the
converting entity;
(7) if a converted entity is a filing entity, its
public organic
document is effective and is binding on its interest
holders;
(8) if the converted entity is a limited liability
partnership,
its [statement of qualification] is effective
simultaneously;
(9) the private organic rules of the converted
entity that are to
be in a record, if any, approved as part of the plan
of conversion are
effective and are binding on its interest holders;
and
(10) the interests in the converting entity are
converted, and the
interest holders of the converting entity are
entitled only to the rights
provided to them under the plan of conversion [and
to any appraisal
rights they have under Section 109].
(b) Except as otherwise provided in the organic law
or organic rules of
the converting entity, the conversion does not give
rise to any rights that
an interest holder, governor, or third party would
otherwise have upon a dissolution, liquidation, or
winding-up of the converting entity.
(c) When a conversion becomes effective, a person
that did not have
interest holder liability with respect to the
converting entity and that
becomes subject to interest holder liability with
respect to a domestic
entity as a result of a conversion has interest
holder liability only to the
extent provided by the organic law of the entity and
only for those liabilities
that arise after the conversion becomes effective.
(d) When a conversion becomes effective:
(1) the conversion does not discharge any interest
holder liability
under the organic law of a domestic converting
entity to the extent the
interest holder liability arose before the
conversion became effective;
(2) a person does not have interest holder liability
under the organic
law of a domestic converting entity for any
liability that arises after the
conversion becomes effective;
(3) the organic law of a domestic converting entity
continues to apply
to the release, collection or discharge of any interest
holder
liability preserved under paragraph (1) as if the
conversion had
not occurred; and
(4) a person has whatever rights of contribution
from any
other person as are provided by the organic law or
organic rules of
domestic converting entity with respect to any
interest holder liability
preserved under paragraph (1) as if the conversion
had not occurred.
(e) When a conversion becomes effective, a foreign
entity that is the
converted entity:
(1) may be served with process in this state for the
collection
and enforcement of any of its liabilities; and
(2) appoints the [Secretary of State] as its agent
for service of
process for collecting or enforcing those
liabilities.
(f) If the converting entity is a qualified foreign
entity, the certificate
of authority or other foreign qualification of the
converting entity is
canceled when the conversion becomes effective.
SECTION 1506 1507. MERGER.
(a) One or
more limited cooperative associations may merge with one or more other entities
organizations pursuant to this [article] and a plan of merger if:
(1) the
governing statute of each of the other entities organizations
authorizes the merger;
(2) the
merger is not prohibited by the law of a jurisdiction that enacted any of those
governing statutes; and
(3) each of
the other entities organizations complies with its governing
statute in effecting the merger.
(b) A plan of
merger must be in a record and must include:
(1) the name
and form of each constituent entity organization;
(2) the name
and form of the surviving entity organization and, if the
surviving
entity organization
is to be created by the merger, a statement to that effect;
(3) the terms
and conditions of the merger, including the manner and basis for converting the
interests in each constituent entity organization into any
combination of money, interests in the surviving entity organization,
and other consideration;
(4) if the
surviving entity organization is to be created by the merger, the
surviving entity=s organization=s
organizational documents;
(5) if the
surviving entity organization is not to be created by the merger,
any amendments to be made by the merger to the surviving entity=s organization=s
organizational documents; and
(6) if a member
participant of a constituent limited cooperative association will
have personal liability with respect to a surviving entity organization,
the identity of the member participant by descriptive class or
other reasonable manner.
SECTION 1507 1508. NOTICE AND ACTION ON PLAN OF MERGER BY
CONSTITUENT LIMITED COOPERATIVE ASSOCIATION.
(a) A plan of
merger must be approved by a majority vote of the board of directors of a limited
cooperative association or a greater percentage if required by the limited
cooperative association=s organic rules.
(b) The board
of directors must call a special members= meeting of participants to consider the plan
of merger, hold the meeting to be held within 90 ninety
days following approval of the plan by the board, and must mail
or otherwise transmit or deliver in a record to each member participant:
(1) the plan
of merger, or a summary of the plan and a statement of the manner in which a
copy of the plan in a record may be reasonably obtained by a member participant;
(2) a
recommendation that the members participants approve the plan of
merger, or if the board determines that , because of conflict
conflicts of interest or other special circumstances that it
should not make a favorable recommendation, the basis for that determination
decision;
(3) a
statement of any condition of the board=s its
submission of the plan of merger to the members participants; and
(4) notice of
the meeting at which the plan of merger will be considered, which must be
given in the same manner as notice of a special members= participants= meeting.
SECTION 15081509. APPROVAL OR ABANDONMENT OF MERGER BY MEMBERS
PARTICIPANTS OF CONSTITUENT LIMITED COOPERATIVE ASSOCIATION.
(a) For members of a limited cooperative
association to approve the merger: Subject to Sections 411 and 413:
(1) unless Unless the organic rules
otherwise provide, a plan of merger must be approved by at least a two-thirds
vote of all members participants voting at a special members= the meeting called under Section 1507.
(2) If if a limited cooperative
association has there are investor members participants,
at least one-half of the affirmative votes cast by patron members participants
must be in the affirmative, but the organic rules may require provide
for a larger affirmative vote by patron members participants.
(b) If as a
result of the merger any member participant will have personal
liability for an obligation of the association, consent in a record of that member
participant must be delivered to the association before delivery of
articles of merger for filing pursuant to Section 15091510.
(c) Subject
to any contractual rights, after a merger is approved, and at any time before
the effective date of the merger, a constituent limited cooperative
association that is a party to the merger may approve an amendment to the plan
of merger or approve abandonment of the planned merger:
(1) as
provided in the plan; and
(2) except as
prohibited by the plan, with the same affirmative vote of the board of
directors and of the members participants as was required to
approve the plan.
(d) Participants may vote on a proposed merger of a
cooperative association as provided in Section 415.
(d) The voting requirements for districts, classes,
or voting groups under Section 1405 apply to approval of a merger under this
[article].
Reporters=
Note
A change has been made in (c) for the
Fall (2006) meeting concerning when the plan can be abandoned. Is Afiling@ the appropriate measuring date in subsection
(c)? Should it be the Aeffective date?@
This Section does not permit a cooperative
association to vary the voting requirements in its organic rules. It provides the same approach to voting as in
the sections dealing with amendments to its organic rules, conversions and
sales of assets. Some cooperatives
desire to reduce the member voting requirement to make mergers easier. Non-profit corporate statutes tend to permit
any voting requirement the corporation desires.
Partnership statutes generally require unanimous approval. If the merger provisions permit a lower
voting requirement than is required for amending articles of organization, a
cooperative association could avoid the higher requirements for amendments by
creating a new company with the desired amendment provisions in its governing
documents and merging the association into the new company. The Committee should consider the possible
ramifications of the possible different approaches.
This draft does not permit voting by districts,
classes or other groups as is provided for other actions. Should it do so?
[Prior Section 1509 entitled Merger of Subsidiary
has been deleted at the direction of the Committee. This Section provided for the Ashort form@ merger of a wholly owned subsidiary into a parent.]
SECTION 15091510. FILINGS REQUIRED FOR MERGER; EFFECTIVE DATE.
(a) After
each constituent entity organization has approved a merger,
articles of merger must be signed on behalf of each constituent entity organization,
by an authorized representative.
(b) The
articles of merger must include:
(1) the name
and form of each constituent entity organization and the
jurisdiction of its governing statute;
(2) the name
and form of the surviving entity organization, the jurisdiction
of its governing statute, and, if the surviving entity organization
is created by the merger, a statement to that effect;
(3) the date
the merger is effective under the governing statute of the surviving entity
organization;
(4) if the
surviving entity organization is to be created by the merger:
(A) if it
will be a limited cooperative association, the limited cooperative
association=s articles of organization; or
(B) if it
will be an entity organization other than a limited
cooperative association, the organizational document that creates the entity
organization;
(5) if the
surviving entity organization preexists the merger, any
amendments provided for in the plan of merger for the organizational documents
of document that created the entity organization;
(6) a
statement as to each constituent entity organization that the
merger was approved as required by the entity=s organization=s
governing statute;
(7) if the
surviving entity organization is a foreign entity organization
not authorized to transact business in this state, the street and mailing
addresses of an office which the [Secretary of State] may use for the purposes
of Section [119]; and
(8) any
additional information required by the governing statute of any constituent entity
organization.
(c) Each constituent
limited cooperative association shall deliver the articles of merger to
for filing in the [office of the Secretary of State] for filing.
(d) A merger
becomes effective under this [article]:
(1) if the
surviving entity organization is a limited cooperative
association, upon the later of:
(A)
compliance with subsection (c); or
(B) subject
to Section [203(c)], as specified in the articles of merger; or
(2) if the
surviving entity organization is not a limited cooperative
association, as provided by the governing statute of the surviving entity
organization.
SECTION 15101511. EFFECT OF MERGER.
(a) When a merger becomes effective:
(1) the
surviving entity organization continues or comes into existence;
(2) each
constituent entity organization that merges into the surviving entity
organization ceases to exist as a separate entity;
(3) all
property owned by each constituent entity organization that
ceases to exist vests in the surviving entity organization;
(4) all
debts, liabilities, and other obligations of each constituent entity organization
that ceases to exist continue as obligations of the surviving entity organization;
(5) an action
or proceeding pending by or against any constituent entity organization
that ceases to exist may be continued as if the merger had not occurred;
(6) except as
prohibited by other law, all rights, privileges, immunities, powers, and
purposes of each constituent entity organization that ceases to
exist vest in the surviving entity organization;
(7) except as
otherwise provided in the plan of merger, the terms and conditions of the plan
take effect;
(8) except as
otherwise provided in the plan of merger, if a constituent limited
cooperative association ceases to exist, the merger does not dissolve the limited
cooperative association for purposes of [Article] 11;
(9) if the
surviving entity organization is created by the merger:
(A) if it is
a limited cooperative association, the articles of organization become
effective; or
(B) if it is
an entity organization other than an a cooperative
association, the organizational document that creates the entity organization
becomes effective; and
(10) if the
surviving entity organization preexists before the merger,
any amendments provided for in the articles of merger for the organizational documents
of document that created the surviving entity organization
become effective.
Reporters=
Note
Source: ULPA (2001). The plan will by necessity address the
pre-merger terms of the directors and board officers.
SECTION 15111512. CONSOLIDATION.
(a) One or
more limited cooperative associations may agree call a merger a
consolidation to substitute the word Aconsolidation@
for the term Amerger@ under this [article]. if:
(1) each
organization is a cooperative association or the organic law of the constituent
organization that is not a cooperative association expressly provides for
consolidation; and
(2) the
surviving organization is a cooperative association or the organic law of the
surviving organization expressly provides for consolidation.
(b) All
provisions governing mergers or using the term merger in this [act] apply
equally to mergers that the constituent entities organizations
choose to call name consolidations under subsection (a).
Reporters=
Note
While consolidations were historically the way in
which a new entity would be formed as a result of a combination of entities,
current statutes have eliminated consolidations. Many use mergers as the means not only for not
merging one or more entities into another but also for producing a new entity
in the manner consolidations formerly did.
Consolidations are no longer included in most modern entity statutes.
This is the Reporters=
second attempt to draft Aconsolidations@ into the draft at the direction of the
Committee. The first attempt simply
defined Aconsolidation@ in Section 1501.
Unfortunately that attempt was, at best, confusing. This attempt still stops short of segregating
and repeating all of the sections governing merger.
The Reporters had told the Committee they intended
to present an alternative approach for consideration by the Committee at its
Fall 2006 meeting. After further study
and consideration, they have not done so believing the approach taken in this
section is preferable to any other approaches if consolidations are to be
addressed at all. The Committee should
again examine whether consolidations should be in the act.
SECTION 15121513. [ARTICLE] NOT EXCLUSIVE. This [article] does not preclude a limited cooperative
association from being converted, consolidated, or merged under law
other than this [act].
Reporters=
Note
Drafts prior to the February 2006 draft did not
provide for conversions. They are not
included. The merger portions of
this Article are based on the merger provisions found in Article 11, ULPA
(2001). It may be important to discuss
the conversion processes here squarely within the context of cooperatives to
identify any specific concerns caused by META.
One change incorporated in this draft is the use of
both the terms Amerger@ and Aconsolidation@. The
advisors to this act have urged that the term Aconsolidation@ be used where the surviving entity is a new
organization. The Minnesota Cooperative
Association Act deals with Aconsolidations@ by definition like a prior draft of this
[act]. That approach, at the direction
of the Committee, has been reviewed by the Reporters and a different approach
is attempted in the February 2006 draft.
See the Reporters= Note to the previous Section.
[ARTICLE] 16
DISPOSITION OF ASSETS
SECTION 1601.
DISPOSITION OF ASSETS NOT REQUIRING MEMBER PARTICIPANT
APPROVAL. Unless the
articles of organization otherwise provide, and if conducted in the usual and
regular course of business of a limited cooperative association, no member
participant approval under Section 1602 is required for the association
to:
(1) sell,
lease, exchange, license, or otherwise dispose of all or any part of the assets
of the association; or
(2) mortgage,
pledge, dedicate to the repayment of indebtedness, or encumber in any way all
or any part of the assets of the association.
Reporters=
Note
This Section is new to the February 2006 draft and
is similar to the MBCA formulation except the term Aordinary@ has replaced Ausual and regular@ to
conform to the language used in other conference products. The Model Business Corporation Act contains
two additional subsections which were not included in the text of this
draft. They are:
(3) to transfer any or all of the corporation=s assets to one or more corporations or other
entities all of the shares or interests which are owned by the corporation; or
(4) to distribute assets pro rata to the holders of
one or more classes or series of the corporation=s
shares.
Subsection (3) of the MBCA allows the transfer of
all the assets to wholly owned subsidiaries.
The Comments for subsection (4) state that it applies to traditional
spin-offs but not split-offs (Anon pro rata distribution of shares of a sub to some
or all shareholders in exchange for some of their shares@) or split-ups (which would be governed by the
dissolution provisions rather than the disposition section).
SECTION 1602.
MEMBER PARTICIPANT APPROVAL OF OTHER DISPOSITION OF
ASSETS. Subject to
Section 1601, a sale, lease, exchange, license, or other disposition of assets
requires approval of the limited cooperative association=s members participants under Sections
1603 through 1605 if the disposition leaves the association without significant
continuing business activity.
Reporters=
Note
Source: MBCA Section 12.02.
The MBCA provides greater textual detail as follows:
If a corporation retains a business activity that
represented at least 25 percent of total assets at the end of the most recently
completed fiscal year, and 25 percent of either income from continuing
operations before taxes or revenues from continuing operations for that fiscal
year, in each case of the corporation and its subsidiaries on a consolidated
basis, the corporation will conclusively be deemed to have retained a
significant continuing business activity.
Another alternative is to replace Sections 1601 and
1602 with language similar to older corporate statutes, something like:
The sale, lease, exchange, mortgage, pledge,
dedication of indebtedness or other encumbrance of substantially all of the
assets of the cooperative association not in the ordinary course of business
must be approved by the participants under Sections _____ through _____.
SECTION 1603.
NOTICE AND ACTION ON DISPOSITION OF ASSETS. For a limited
cooperative association to dispose of assets under Section 1602:
(1) a
majority of the board of directors, or a greater percentage if required by the association=s
organic rules, must approve the proposed disposition; and
(2) the board
of directors must call a special members= have a meeting of participants to
consider the proposed disposition, hold the meeting within 90 days following
approval of the proposed disposition by the board, and mail or otherwise
transmit or deliver in a record to each member participant:
(A) the terms
of the proposed disposition;
(B) a
recommendation that the members participants approve the
disposition, 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;
(C) a
statement of any condition of the board=s submission of the proposed disposition to the members
participants; and
(D) notice of
the meeting at which the proposed disposition will be considered, which
must be given in the same manner as notice of a special members= participants= meeting.
Reporters=
Note
This Section is consistent with the provisions
governing amendment of the organic rules.
Should the next draft provide that the vote shall
take place at a special participant meeting?
SECTION 1604.
METHOD OF VOTING. Participants
may vote on a proposed disposition of assets as provided in Section 415.
SECTION 16041605. ACTION ON DISPOSITION OF ASSETS. Subject
to Sections 411 and 413:
(a1) Unless the organic rules
otherwise provide, a disposition of assets under Section 1602 must be approved
by at least a two-thirds vote of all members participants voting
at a special members= the meeting called under Section 1603.
(b2) If the limited cooperative association
has there are investor members participants, at least
one-half of the votes cast by patron members participants must be
in the affirmative, but the organic rules may require provide
for a larger affirmative vote by patron members participants.
(c) The voting requirements for districts, classes,
or voting groups under Section 1405 apply to approval of a disposition of
assets under this [article].
Reporters=
Note
Do we need to include abandonment? See '
1509? (Fall 2006 Draft).
This is substantively consistent with mergers,
consolidations, and conversions though in a slightly different format. See, e.g., Section 1503(a). Note that it does not include any of the
abandonment machinery that is included in Article 15. See, e.g., Section 1503(b). This article, unlike the articles on
mergers and conversions, does not provide for abandonment. There are plausible reasons for the
distinction and the Committee has had several express opportunities to change
this treatment but has not done so.
[ARTICLE] 17
MISCELLANEOUS PROVISIONS
[SECTION
1701. RELATION TO RESTRAINT OF TRADE AND
ANTITRUST LAWS. To the extent a limited cooperative association
or activities conducted by a limited cooperative association meet meets
the material requirements, if any, for other cooperatives entitled to an
exemption from or immunity under the antitrust laws of this state or
activities conducted by the association in this state, the association and
its activities are shall be entitled to the exemption or of
immunity to which other cooperatives are entitled. Nothing in this section mays shall
be construed to create as creating any new exemption or immunity
for an association or to affect any exemption or immunity provided to a
cooperative organized under any other [act].]
Legislative Note: If a state
has a statute providing a specific exemption from or immunity under the
antitrust laws of the state, the state may prefer to amend those laws to
include an exemption from or immunity under those laws for cooperative
associations organized under this act. If
the state does not have such a statute this Section should be deleted from the
act.
Reporters=
Notes
This note and the text of the section is based in
large part on language suggested by the LTA Committee of NCFC through an
observer who is affiliated with that Committee.
The intent of this Section is to set forth two
related points: (1) cooperative associations organized under the act may be
eligible for antitrust and restraint of trade exemptions or immunities,
but only if they satisfy the requirements of the relevant statutes granting the
exemptions or immunities; the act does not affect the requirements of those
statutes; (2) the Act expressly does not create any new exemption or immunity,
and does not affect current exemptions or immunities, arising from state or
federal antitrust laws.
Certain states require a cooperative association to
be incorporated under that state=s specific cooperative statute, as a
requirement to receive the benefit of specific state-law antitrust exemptions
or immunities. A cooperative association
formed under the Act therefore might not receive the benefit of such state-law
antitrust exemptions or immunities unless it meets requirements of the specific
cooperative statute.
SECTION 1702.
REQUIREMENTS OF OTHER LAWS. Cooperative associations, and foreign
cooperatives authorized to conduct activities in this state, must comply with
the laws and regulations of this state that are otherwise applicable to the
activities conducted by them in this state.
(a) This act does not alter or amend any laws that
govern the licensing and regulation of individuals or entities in carrying on
specific businesses or professions even if those laws permit the businesses or
professions to be conducted in or by a limited cooperative association, any
foreign cooperative, or its members.
(b) A limited cooperative association may not
conduct activities that, under other laws, must be conducted in an entity that
meets specific requirements for the internal affairs of that entity unless the
organic rules of the limited cooperative association conform to those
requirements.
Reporters=
Note
See Section 108.
A slightly different formulation is in section
1506(d).
This Section may appear to be unnecessary as a given
fact. One Committee member has, however,
suggested it be included to make it clear that requirements for various
cooperative organizations and other law cooperatives, organizations engaged
in particular activities, e.g., housing cooperatives, medical
cooperatives, cannot be excluded from particular requirements contained in
other laws that relate to those activities by being organized under this
act. The Reporters believe there is
wisdom in this suggestion. This is
somewhat similar to ULLCA (1996) ' 1001.
The Comments to this Section might list examples, e.g.,
professional service firms.
SECTION 1703.
UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this uniform act,
consideration must be given to the need to promote uniformity of the law with
respect to its subject matter among states that enact it.
SECTION 1704.
RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. This [act] modifies, limits, or supersedes
the federal Electronic Signatures in Global and National Commerce Act, 15
U.S.C. Section 7001 et seq. [as amended], but this [act] does not modify,
limit, or supersede Section 101(c) of that act (15 U.S.C. Section 7001(c) as
amended) or authorize electronic delivery of any of the notices described in
Section 103(b) of that act (15 U.S.C. Section 7003(b) as amended).
SECTION 1705.
SAVINGS CLAUSE. This [act] does not affect an action or
proceeding commenced, or right accrued, before [this [act] takes effect].
SECTION 17061705. EFFECTIVE DATE. This [act] takes effect [effective date].
SECTION 1706.
SAVINGS CLAUSE. This [act] does not affect an action or
proceeding commenced, or right accrued before [this [act] takes effect].