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The Law of Cooperative Corporations. University of Arkansas LLM Program, Agricultural Law, 2007 Fayetteville, Arkansas April, 2007 James R. Baarda. Finance. 1. 2. Techniques and sources . 3. Patronage based equity. 4. Revolving fund system. 5. Base capital plans. Equity redemption.

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The Law of Cooperative Corporations

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The law of cooperative corporations l.jpg

The Law of Cooperative Corporations

University of Arkansas

LLM Program, Agricultural Law, 2007

Fayetteville, Arkansas

April, 2007

James R. Baarda

Finance


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1.

2.

Techniques and sources

3.

Patronage based equity

4.

Revolving fund system

5.

Base capital plans

Equity redemption

Finance

Syllabus: Finance


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1.

2.

“New generation” cooperatives

3.

Limited liability companies

4.

Strategic alliances, subsidiaries

5.

Globalization issues

Non-member equity

Innovations


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Investment

Operations

Finance

Purchases

Short-term

Liabilities

Current Assets

Administrative Expenses

Physical Assets

Long-term

Liabilities

Investments

Financing Expenses

Plant,

Property

Equipment

Equity

Sales

NetMargins


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Legal Foundations

  • Implementation

  • - Statutes

  • - Articles of incorporation

  • - Bylaws

  • - Certificates

  • - Policies and practices

Syllabus: Finance, pp. 13 - 20


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Common statutory provisions

[Persons] may form a non-profit, cooperative association, with or without capital stock, under the provisions of this Act.

No association shall issue stock to a member until it has been fully paid for.

Any association organized with stock under this act may issue preferred stock, with or without the right to vote.

Syllabus: Finance, pp. 1,2


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1.

Techniques and sources

Syllabus: Finance, pp. 1,2


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Debt Capitalization

  • Short-term liabilities

  • - Secured interests

  • - Transaction based

  • Long-term debt

  • - Loan agreements

  • - Membership indebtedness

  • - Bonds

Syllabus: Finance, pp. 1,2


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Equity Capitalization

  • Membership equity

  • Patronage-based equity

  • Hybrids

  • “Outside” equity

  • Off balance sheet financing

Syllabus: Finance, pp. 1,2


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Cooperative Principles

1.The User-Owner Principle: Those who own and finance the cooperative are those who use the cooperative.

Syllabus: Introduction, p. 23


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Principles and Finance

  • Cooperative objectives

  • Obligation to finance

  • Ownership and control

  • Burden of finance

  • Objectives, burdens, benefits

Syllabus: Finance, pp. 1 - 3


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User-Control+++-+---

User-Ownership+ +- + - + - -

User-Benefit+-++--+-


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User-Control+++-+---

User-Ownership+ +- + - + - -

User-Benefit+-++--+-


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2.

Patronage based equity

Syllabus: Finance, pp. 4 - 18


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Patronage Refunds

Syllabus: Operations, p. 62


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“Retained” Patronage Refunds

Syllabus: Finance, p. 8


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Patronage Refunds Paid in Cash

Syllabus: Finance, p. 8


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Per-Unit Retains

Syllabus: Finance, p. 9


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Per-Unit Retains

A bylaw provision

Each member also agrees to provide capital in such amounts as determined by the board of directors based on physical units of product marketed through the association. Such per-unit retains shall be allocated to the member’s capital credit account.

Syllabus: Finance, pp. 1,2


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Distribution


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Distribution

Cash

Non-cash

Unallocated

Dividends

Taxes


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Revolving Fund System

  • Equity contribution

  • Member equity totals

  • Current equity needs

  • Excess equity capital

  • Redemption of excess

Syllabus: Finance, pp. 9 - 11


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Syllabus: Finance, p. 10


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Syllabus: Finance, p. 10


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Revolving Fund System

Syllabus: Finance, p. 11


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Revolving Fund System

A bylaw provision

If at any time the board of directors determines that the financial condition of the association will not be impaired thereby, capital credited to members’ accounts may be redeemed in full or in part. Any such redemption of capital shall be made in order of priority according to the year in which the capital was furnished and credited, the capital first received being the first redeemed.

Syllabus: Finance, pp. 1,2


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Base Capital Plan

  • Equity contribution

  • Member equity totals

  • Current equity needs

  • Member share

Syllabus: Finance, pp. 11 - 13


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Base Capital Plan

Syllabus: Finance, p.12


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Current Assets

Administrative Expenses

Investments

Plant,

Property

Equipment

Investment

Operations

Finance

Purchases

Purchases

Short-term

Liabilities

Physical Assets

Long-term

Liabilities

Financing Expenses

Member

Equity

Sales

NetMargins


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Current Assets

Administrative Expenses

Investments

Plant,

Property

Equipment

Investment

Operations

Finance

Purchases

Purchases

Short-term

Liabilities

Member

Equity

Patron A -- $3,205

Patron B -- $1,518

Patron C -- $4,993

Patron D -- $2,090

Patron E -- $1,364

Physical Assets

Long-term

Liabilities

Financing Expenses

Sales

NetMargins


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Net Worth as Percentage of Total Assets


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Current Assets

Administrative Expenses

Investments

Plant,

Property

Equipment

Member

Equity

Investment

Operations

Finance

Purchases

Purchases

Short-term

Liabilities

Physical Assets

Long-term

Liabilities

Financing Expenses

Sales

NetMargins


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Current Assets

Administrative Expenses

Investments

Plant,

Property

Equipment

Member

Equity

Investment

Operations

Finance

Current

Assets

51.4%

-----

Fixed

Assets

30.8%

-----

Other

Assets

17.7%

Purchases

Purchases

Current

Liabilities

39.1%

-----

Long-term

Debt

20.8%

-----

Equity

Capital

40.9%

Short-term

Liabilities

Physical Assets

Long-term

Liabilities

Financing Expenses

Sales

NetMargins


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Current Assets

Administrative Expenses

Investments

Plant,

Property

Equipment

Member

Equity

Investment

Operations

Finance

Current

Assets

51.4%

-----

Fixed

Assets

30.8%

-----

Other

Assets

17.7%

Purchases

Purchases

Equity

Capital

==========

Allocated

Equity

76.5%

-----

Unallocated

Equity

23.5%

Short-term

Liabilities

Physical Assets

Long-term

Liabilities

Financing Expenses

Sales

NetMargins


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Equity Redemption

  • Regular or special

  • Conflicts

  • Establishing rights, obligations

  • Description of the system

  • Board of directors’ role

Syllabus: Finance, pp. 13 - 20


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Equity Redemption

  • Debt or equity

    • - Significance

    • - Balance sheet

    • - Set-off

    • - Atchinson County

  • Convertibles, redemption

Syllabus: Finance, pp. 19 - 42


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Equity Redemption

  • Legal issues

  • - Contract

    • - Course of conduct

    • - Liens on equity

    • - Setoff

    • - Valuation

Syllabus: Finance, pp. 19 - 42


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Equity Redemption

  • Degree of obligation

  • - Fiduciary relationships

  • - Sources of obligation

  • - HAJMM v. House of Raeford

  • Importance of clarity

  • Flexibility v. certainty

Syllabus: Finance, pp. 19 - 61


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Equity Redemption

  • Triggering events

    • - Membership change

    • - Patronage change

    • - Passage of time

  • Lambert v. Fishermen’s Dock

  • Accounting and “convergence”

Syllabus: Finance, pp. 61 - 75


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1.

2.

Techniques and sources

3.

Patronage based equity

4.

Revolving fund system

5.

Base capital plans

Equity redemption

Finance

Syllabus: Finance


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1.

2.

“New generation” cooperatives

3.

Limited liability companies

4.

Strategic alliances, subsidiaries

5.

Globalization issues

Non-member equity

Innovations


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Cooperative Challenges –

External

  • Globalization

  • Concentration

  • Industrialization

  • Size and complexity

  • General and specific


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Cooperative Challenges –

Internal

  • Meeting the “competition”

  • Member expectations

  • Diminished commitment

  • Finding good people

  • Management ambitions


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Inherent Cooperative Limitations

  • Homogeneity

  • Horizon

  • Scope

  • Membership

  • Governance

  • Equity

  • Competitive yardstick

  • Markets and growth


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1.

“New generation” cooperatives

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– Capital

  • Capital requirements

  • - Total capital

  • - Capital and product

  • Up-front contribution

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– Delivery

  • Unit measures

  • Capital and delivery basis

  • Right and requirement

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– “Closed” membership

  • Total production needs

  • Equity investment

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– Tradable Equity Interests

  • Producer to producer

  • “Market” price

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– Market Orientation

  • What can be marketed

  • What can be produced

  • Commodity acceptance based on market forces

Syllabus: Finance, pp. 76 - 78


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Conditions for “New Generation” Cooperatives

  • Capture value-added benefits

  • High capital requirements

  • Efficient processing system

  • Response to market signals

  • Product differentiation

Syllabus: Finance, pp. 76 - 78


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“New Generation” Cooperatives

– What’s new, what isn’t?

Syllabus: Finance, pp. 76 - 78


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2.

Limited liability companies


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Limited Liability Company

  • As cooperative organization

  • As joint venture


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3.

Strategic alliances, subsidiaries


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Alternatives

  • Cooperative “plus”

  • - Subsidiaries

  • - Joint ventures

  • - Strategic alliances


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Cooperative

Cooperative Members

Independent Business

Product

Delivery

Product

Delivery

Coordinating

Mechanism

Dividends

Product Payment

Final Product

Marketing


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Cooperative

Cooperative Members

Independent Business

Investment

Product

Delivery

Dividends

Co-owned Entity

Dividends

Product Payment

Final Product

Marketing


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Preferred Cash Returns

Guaranteed Redemption

Tax Credits

Cooperative Members

Accredited Investors

Cooperative

Joint Venture

New Markets, LLC

Operating LLC


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Cooperative

Cooperative Members

Accredited Investors

Investment,

Dividends

Investment,

Dividends

Product

Delivery

Public Funding Sources

Operating LLC

Development

Assistance

Final Product

Marketing

Nonprofit

University, Government Assistance


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4.

Globalization issues


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5.

Non-member equity

Syllabus: Finance, pp. 78 - 79


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Emerging Views Of Equity

  • Competition and markets

  • New cooperative ventures

  • Capital intensive ventures

  • Member perceptions

  • Capturing firm value


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Definition of “Outside” Equity

Not based on the patronage relationship.

Relationship is one of investor-corporation, not primarily patron-cooperative


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Examples

  • Preferred stock

  • - Unrestricted investors

  • - No voting rights

  • - Limited voting rights

  • - Full voting rights

  • - Liquidity


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Examples

  • Full “membership”

  • - No patronage requirement

  • - Limited voting rights

  • - Full voting rights

  • - Board membership

  • - Liquidity


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What might this mean?

  • Opposing objectives

  • From objectives to obligations

  • - Mandated objectives

  • - Obligations

  • - Expectations

  • A few ideas


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“The objective in corporate finance is stated, most broadly, as the maximization of firm value and, more narrowly, as the maximization of the stock price.”

Corporate Objectives

  • Corporate finance textbook


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“[A] corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.”

What might this mean?

  • American Law Institute


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“[M]ost modern courts have accepted the principle that the controlling shareholders as well as the directors and officers owe a fiduciary duty to other shareholders -- to public shareholders in a public corporation and to minority shareholders in a close corporation.”

From Objectives to Obligations


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Corporate Objectives

  • To member/patrons

    • - Multiple relationships

    • - Objective

3.The User-Benefits Principle: The cooperative's sole purpose is to provide and distribute benefits to its users on the basis of their use.


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Cooperative Objectives

  • To “outside” equity holders

    • - Single relationship

    • - Corporate-equity holder

  • Corporate obligations


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Corporate Objectives

  • Constituency issues

  • The agency problem

  • Equity holder conflicts

  • Private agreements

  • Implied obligations


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Implications

  • Selected operating strategies

  • Allocation, distribution of benefits

  • Financing practices, strategies

  • Secondary issues


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Implications

  • Selected operating strategies

  • - Pricing and profitability

  • - Entity value maximization

  • - Scope and market choices

  • - Non-patronage business


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Implications

  • Allocation, distribution of benefits

  • - Benefits allocation

  • - Relational transactions

  • - Timing, distribution

  • - Fixed or variable fund flows


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Implications

  • Financing practices, strategies

  • - Decoupling

  • - Leverage

  • - Valuation -- from member/

  • patrons to markets

  • - Benefits bias


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Implications

  • Secondary issues

  • - Local benefits

  • - “Consumption functions”

  • - Cooperative roles

  • - “Trickle down”


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Governance

  • Scope of decisions

  • - Voting power and control

  • - Levels of obligation

  • - Measuring performance

  • - Legal mandates or constraints


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Governance

  • Types of decisions

  • - The new balancing act

  • - Horizons

  • - Guidance to management/staff

  • - Professional advisors

  • - Now who makes what decisions?


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Represent Members

Inform Members

Establish Policies

Assess Performance

Engage Management

Preserve Co-operative

Oversee Assets


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Control

Finance

USE

Benefit


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To Change, or Not to Change

  • Too cautionary?

  • Avoided the “big” questions

  • - Less competitive cooperatives

  • - Less beneficial cooperatives

  • - Less innovative cooperatives

  • - Loss of cooperative presence


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Alternatives

  • Adopt/adapt – or die

  • Preserving the cooperative

  • - Understand implications

  • - Informed decisions

  • - Design accordingly


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Alternatives

  • Cooperative “plus”

  • - Subsidiaries

  • - Joint ventures

  • - Strategic alliances

  • Alternative business forms

  • - Cooperative characteristics

  • - Non-cooperative


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Policy

  • Each cooperative’s decisions

  • Redefine “cooperative”?

  • Redefine public policy?

  • - Current events

  • - Restriction v. flexibility

  • - What principles should apply?


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Alternatives

  • Who will establish policy?

  • - For each cooperative?

  • - For the country?

  • - Sectors, needs, and interests

  • - Who are the players?

  • - The importance of process


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Conclusions

  • Enormous pressures to change

  • Great range of responses

  • Significant implications

  • Preserving the cooperative idea

  • No easy solutions

  • Substantial work needed

  • Leadership needed


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1.

2.

“New generation” cooperatives

3.

Limited liability companies

4.

Strategic alliances, subsidiaries

5.

Globalization issues

Non-member equity

Innovations


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