Sample Legal Documents for Cooperatives

sample legal documents templates and sample of authorization letter legal documents
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Dr.KiaraSimpson,United States,Researcher
Published Date:05-07-2017
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Sample Legal Documents for Cooperatives Donald A. Frederick, Attorney-Adviser One of the axioms of business planning is that a strong foundation is essential if an organization is to have a strong structure. An important component of a strong cooperative foundation is a set of basic legal documents that conforms to Federal, State, and local law and facilitates conducting the busi- ness affairs of the association to enhance the mutual well-being of the members. This report explains the role each document plays in build- ing the organization and the various issues treated in each docu- ment. It discusses options available to members in handling many of the issues. It also presents sample language as an aid in preparing initial documents, or in revising existing ones, to make sure they promote the objectives of the cooperative ven- ture. Most of the sample language in this report is suitable for virtually any type of cooperative. Where the language must be tailored to reflect specific functions of the association, wording appropriate for an agricultural marketing cooperative is used. Counsel can help make the necessary modifications to cover supply and related service organizations and nonagricultural activities. One point cannot be stressed too much Cooperative orga- nizers, advisers, and leaders should not just sit down and copy these, or any other set, of legal documents and declare them as their own. These foundation documents should only be adopted after review by a competent attorney, one who understands the unique characteristics of cooperatives and the industry in which the association does business. This will maximize the likelihood that the documents will conform to applicable law and meet the specific needs of the association and its members. One problem in drafting organizational papers is they can be thorough or simple, but not both. This report contains many “compromises” between these two objectives. This only rein- forces the need for cooperative founders and leaders, and their professional advisers, to avoid adopting any sample set of docu- ments verbatim and to review existing documents on a regular basis. 1The idea of forming a cooperative is usually conceived and nurtured by a few individuals who foresee coordinated group action as a solution to a problem confronting themselves and similarly situated persons. This organizing group often has to formulate a development plan, arrange for or provide seed money, and contribute sweat equity to get the association up and running. The organization period involves considerable discussion and data collection. While these efforts provide a good forecast for the level of support the cooperative is likely to attract, before launching the venture it is a good idea to have those persons who say they want the services of the cooperative formally com- mit to use those services. The organization agreement secures both a patronage and a financial commitment from prospective members. It is also a vehicle for educating prospective members about the coopera- tive form of business and the objectives of the proposed associa- tion. Statement of Purposes This first provision in a typical organization agreement sets out the services the proposed organization will perform. The services can be described in broad terms, such as to “process” and “market” certain farm commodities and “furnish” certain farm supplies. The language should refer only to services the cooperative will provide from its inception. This minimizes member pres- sure to expand the scope of operations too rapidly. For example, it is usually best not to mention furnishing supplies in the orga- nizational agreement if the new organization will limit its initial activity to marketing fresh vegetables. The undersigned, a producer of agricultur- al products, hereinafter referred to as “Producer,” together with other signers of agreements similar hereto, propose to organize a cooperative association 2 1.under the laws of the State of for the purpose of . Organization Committee Although the association has not yet been incorporated, a decision making process should be formalized. The organizers will usually appoint some or all of their group to an official organization committee that will serve as the initial policy body for the association. This provision lists the committee members and sets out the committee’s authority. 2. (a) The association shall be organized with suitable articles of incorporation and bylaws as determined by an organizational committee consist- ing of the following persons: Name Address (b) This committee may, by vote of a majori- 2. ty of its members, increase its membership, fill any vacancy therein, and appoint any subcommittees deemed necessary to conduct its affairs. The com- mittee, or any subcommittee designated by it, may prescribe an organization fee to be paid by each per- son signing an organization agreement and may incur necessary obligations, make necessary expen- ditures, and take any such action as may, in its dis- cretion, be deemed advisable to further the organiza- tion of the association. 3Patronage Commitment Most cooperatives, especially those involved in marketing agricultural commodities, need a minimum level of product to be successful and the best possible projections of anticipated volumes to plan effectively. Their organization agreements should spell out the extent of the prospective members’ commit- ment: usually all production, a defined volume of product,. or production from a set number of acres. If either all production or production from a set number of acres is used, a projection of likely volume delivered should also be secured. Sample lan- guage is provided for each type of commitment: Full Production. Producer agrees to sign a marketing agree- ment committing all(product) produced by Producer, on land owned or leased by Producer, to the cooperative for direct marketing, processing, or other disposition as the cooperative sees fit. Producer estimates such production will total (units) in Defined Volume. Producer agrees to sign a marketing agree- ment to commit(units) of uct), produced by Producer, to the cooperative for direct marketing, processing, or other disposition as the cooperative sees fit. Acreage. 3. Producer agrees to sign a marketing agree- ment to commit all(product) produced by Producer on acres of land, owned or leased by Producer, to the cooperative for direct marketing, processing, or other disposition as the cooperative sees fit. Producer estimates such production will total in _ 4 (year). -(units) Set (prod- 3. (year). 3.If the cooperative is likely to have a minimum quality stan- dard that must be met before product will be accepted, that stan- dard should also be explained and the person or entity judging quality should be named. Financial Commitment Every new business must have equity capital. In a coopera- tive, the members supply that capital. In this provision the prospective member agrees to provide initial financial support for the cooperative. Each prospective member should commit to purchase one share of common voting stock (or, in a cooperative, pay a membership fee) for a fixed dollar amount, perhaps 1,000. This investment gives the member the right to vote on issues submitted to the membership. Often the initial investment tied to membership status does not raise enough equity to fund the association. Additional cap- ital is needed. Usually the organizers have substantial leeway in collecting and recognizing this investment. Each prospective member may be asked to make an equal contribution, or the level can vary with anticipated patronage. While this invest- ment is classified as preferred stock in this report, it can also be structured as equity credits, revolving fund credits, or any simi- lar term satisfactory to the organizers. Organizers should avoid using any term usually associated with debt capital, such as “note” or “bond,” and should also avoid creating a second class of common stock, which is sure to be confused with regular voting common stock. The agreement should expressly state that this financial commitment is irrevocable unless the organization effort is ter- minated. Initial development of the cooperative is totally dependent on promised financial support being forthcoming. Leaders must have the tools to force compliance with this com- mitment, by legal action if necessary. 4. Producer agrees to purchase one share of voting common stock of the association, par value payable on demand following a favorable vozihe signees of agreements similar hereto to I 5 nonstockincorporate the association. Producer further agrees to purchase shares of nonvoting preferred stock of the associa- tion, par value each, and agrees to pay for same as follows: cash on demand following incorpora- tion of the association, on or before . g- and, on or before ,19_. Producer expressly understands that this stock subscription agreement is an irrevocable legally bind- ing obligation which will be relied upon by the asso- ciation, other producers who subscribe to its stock, and lending institutions from which the association will seek financing to implement its cooperative pur- If a cooperative is organized as a corporation, the sample language might be altered to call for payment of a mem- bership fee, rather than purchase of a share of common stock, and payment of an additional sum into an equity account, rather than purchase of nonvoting preferred stock. Calling of Membership Meeting One of the principal responsibilities of the organization com- mittee is to determine if enough firm interest exists to justify form- ing the cooperative. It is advisable to put a time limit on member solicitation. An open-ended solicitation period may exceed the patience of early signees to get started or abort the effort. If the committee decides there is enough interest, the agree- ment usually calls for a meeting of the signees to make the final decision to complete formation and begin operation of the coop- erative. While the typical agreement provides that the affirma- tive vote of a simple majority of signees approves formation, the committee should move cautiously if substantial resistance 6 nonstock poses. - -9 19 S-develops. Few associations overcome internal strife during the formation period to become useful and viable cooperative enter- prises. the organi- 5. If, on or before 9 19-t zation committee is of the opinion that sufficient signup has been obtained to enable the association to operate efficiently, the committee shall set a time and place for a meeting of those persons who have signed this agreement to determine, by majority vote, whether to proceed with the formation and opera- tion of the association, and to consider such other business as may be deemed appropriate. Not less than ten days before the meeting, notice of the time and place of the meeting shall be, sent to all signees by first-class mail, and an appro- priate notice shall be published in one or more newspapers of general circulation in the area in which those who signed agreements like this one reside. Sometimes the agreement will set minimum levels of sup- port that must be committed before the prospective members will vote to begin the venture, If the organizers decide to adopt that option, the first paragraph of this provision might begin: 5. If, on or before bona fide 9 producers of agricultural products otherwise eligible to become members in the association agree to exe- cute marketing agreements covering (units) of (product) and subscribe to provide equi- ty to the association equal to the sum of at least I dollars, ( ), the organization committee shall set a time and place for a meeting . . . (continue as above). Accounting There should be a clearly stated obligation placed on the organization committee to keep good records and make the 7 19-tappropriate disposition of any funds remaining after the vote on formation of the cooperative is conducted. 6. The organization committee shall keep detailed, accurate accounts of all receipts and of all expenditures of every kind. It shall have such accounts audited and render a written report thereof to the board of directors of the association when organized. And it shall thereupon turn over to the association any balance remaining in its hands of obligation. If the association is not organized, such unexpended bal- ance shall be prorated among, and returned to, those who contributed to the organization fund. The agreement should conclude with spaces for the prospective member to sign the agreement, and provide his or her address, and for the chairperson of the organizing committee to sign the agreement as an acceptance. SELECTING THE PROPER STATE INCORPORATION STATUTE While no drafting is involved, and thus no sample language is provided in this section, an important step in the develop- ment of a successful cooperative is selection of the proper statu- tory foundation for the association. To operate effectively in today’s business world, a coopera- tive must be a unique legal entity, separate from its members. The best way to create this unique entity is to form a cooperative corporation. A cooperative becomes a corporation when its organizers follow the steps set out in a law authorizing the formation of corporations. There is no Federal incorporation statute. Cooperatives incorporate under an appropriate State law. Incorporation offers several advantages over alternative structures, such as partnerships and unincorporated associations: l Incorporation facilitates the orderly succession of owner- ship. The entity has a perpetual life. As some members resign and freenew people join, redemption and issuance of a share of common stock or a membership certificate is a relatively simple means of clarifying each person’s status and rights in the association. l A corporation conveys to members and outsiders the image of a solid, longlasting venture. l If a cooperative is incorporated, the personal liability of each individual member, for losses suffered by the cooperative, is limited to the member’s equity in the cooperative. The organization of a cooperative as a business corporation has some important implications for how it conducts its affairs: l A corporation derives all of its legal authority from the State. It is a “person” in the eyes of the law, just like a natural contracts, borrow money, own property, and sue and be sued. l While its powers are broad, those powers are limited to the ones granted by the State. For example, when the State agri- cultural cooperative law says only agricultural producers can vote in farmer cooperative affairs, no one else has the right to participate in policy decisions made by the membership. l The cooperative must obey business laws. Since man- agers and directors make the decisions for the corporation, they have an obligation to know and make sure the association fol- lows all applicable laws. Persons who organize a cooperative have several incorpora- tion statutes to choose from: l All States have special cooperative incorporation statutes. Some are broad, permitting the incorporation of virtual- ly any business as a cooperative. Other are limited in scope. Many States have an Agricultural Cooperative Associations Act specially written to authorize incorporation of associations of producers of agricultural products. 9 person. It can do many things natural persons can, such as signl Every State has a general business corporation statute. A cooperative can be incorporated under this law and have its cooperative character established through proper drafting of the articles of incorporation and bylaws. l While most cooperatives are incorporated under a law of. the State where the principle office is located, a few are orga- nized under the laws of a different State. It is usually best to organize under a cooperative incorpora- tion statute of the State where the association’s headquarters is located. But it’s very important that the statute authorizing the cooperative permits a structure that meets the needs and desires of the members. The General Business Corporation Act and of-State incorporation laws should be considered if the applica- ble cooperative law doesn’t permit the necessary organizational structure. A few so-called cooperatives are organized under a general not-for-profit corporation statute. Usually this is done to make it easier to obtain grant money. There are some potential adverse legal consequences of this type of incorporation that should be reviewed before following this path: l Most not-for-profit corporation laws expressly forbid the distribution of any earnings to members, trustees, officers, or other private persons. This means an association organized under such a statute can’t pay patronage refunds, one of the main reasons for operating a business as a cooperative. 0 In many States, if a nonprofit corporation goes out of business, members are prohibited from sharing in any assets left after the debts are paid. l Nonprofit corporations sometimes have had more trou- ble than cooperative corporations enforcing marketing agree- ments with their members. Cooperative statutes frequently pro- vide specific authority for enforcement of marketing agreements. Not-for-profit acts have no such provision. If the leadership determines a cooperative is not organized 10 out-under the appropriate State statute, it is usually possible to rein- corporate without seriously disrupting the ongoing business of the association. This will ordinarily involve redrafting the orga- nization papers to conform to the new law and paying a modest fee to the appropriate State agency. ARTICLES OF INCORPORATION Once the leadership has determined the statute to use as the legal authority for a cooperative, the first document prepared is the articles of incorporation (articles). It is the acceptance of the articles by the State that establishes the cooperative as a unique “person” under the law. Most incorporation laws require a fairly common set of provisions to be included in the articles. These are discussed The statute will also require that before the articles are they must be recorded in the office of a designated State officer. Failure to properly file the articles makes any business activity vulnerable to legal challenge. It is usually permissible to include information in the arti- cles beyond that required by the incorporation statute. However, this is ordinarily not done because it is frequently more difficult to amend the articles than it is with other docu- ments that may contain the same information. The articles are not a piece of paper to be prepared and then forgotten. The articles are routinely given the same respect by the courts as a statute. Therefore, the articles are binding on the directors, officers, and manager of a cooperative. Conduct beyond that authorized in the articles can subject the coopera- tive and its leaders to potential legal liability. The following are the elements common to most coopera- tive articles of incorporation. Heading The heading sets out the title of the document, the name of the cooperative, and the title of the authorization statute. 11 cial offi- below.ARTICLES OF INCORPORATION (Name of Cooperative) We, the undersigned, all of whom are engaged in the production of agricultural products, do hereby vol- untarily associate ourselves together for the purpose of forming a cooperative association, with (or with- out) capital stock, under the provisions of the Act of the State of Name The official name of the cooperative must be stated in the body of the articles and is usually the first provision: ARTICLE I. NAME The name of the association shall be Principal Place of Business This is a simple statement of the general location of the cooperative’s office: ARTICLE II. PRINCIPAL PLACE OF BUSINESS The association shall have its principal place of business in the city of County of, Stateof ’ . The purposes for which the cooperative is being organized are specifically set out. While the purposes clause of the organi- zational agreement is limited to immediate objectives, the pur- 12 Purposesposes are usually stated as broadly as possible in the articles of incorporation. Any service the cooperative may someday pro- vide is frequently authorized, at least in a general way. This reduces the likelihood the articles will have to be amended whenever the association is asked by the members to provide additional services. ARTICLE III. PURPOSES The association is formed for the following purposes: To market for its members and other pro- ducers any and all agricultural products or any prod- ucts derived therefrom: to engage in any activity in connection with the picking, gathering, harvesting, receiving, assembling, handling, grading, cleaning, shelling, standardizing, packing, preserving, drying, processing, transporting, storing, financing, advertis- ing, selling, marketing, or distribution of any such agricultural products or any products derived there- from: to purchase for its members and others farm supplies and equipment: to manufacture, process, sell, store, handle, ship, distribute, furnish, supply, and procure any and all such farm supplies and equipment; and to exercise all such powers in any capacity and on any cooperative basis that may be agreed upon. Powers The State statute authorizing formation of a cooperative will set out in detail the activities the cooperative may engage in. As a general rule, the statutory language is copied virtually verbatim into the articles. The following is an example of a typi- cal statutory provision restated as an article of incorporation: ARTICLE IV. POWERS This association shall have the following pow- ers: I 13(a) To borrow money without limitation as to amount of corporate indebtedness or liability: to give a lien on any of its property as security therefore in any manner permitted by law: and to make advance payments and advances to members and other pro- ducers. To act as the agent or representative of any member or members in any of the activities men- tioned in Article III hereof. To buy, lease, hold, and exercise all privi- leges of ownership over such real or personal prop- erty as may be necessary or convenient for the con- duct and operation of the business of the association, or incidental thereto. To draw, make, accept, endorse, guaran- tee, execute, and issue promissory notes, bills of exchange, drafts, warrants, certificates, and all kinds of obligations and negotiable or transferable instru- ments for any purpose that is deemed to further the objects for which this association is formed, and to give a lien on any of its property as security therefor. To acquire, own, and develop any interest in patents, trademarks, and copyrights connected with, or incidental to, the business of the associa- tion. To cooperate with other similar associa- tions in creating central, regional, or national coop- erative agencies, for any of the purposes for which this association is formed, and to become a member or stockholder of such agencies as now are or here- inafter may be in existence. To have and exercise, in addition to the foregoing, all powers, privileges, and rights con- ferred on ordinary corporations and cooperative 14 (g) (fl (e) (d) (cl (b)marketing associations by the laws of this State and all powers and rights incidental or conducive to car- rying out the purpose for which this association is formed, except such as are inconsistent with the express provisions of the act under which this asso- ciation is incorporated, and to do any such thing anywhere; and the enumeration of the foregoing powers shall not be held to limit or restrict in any manner the general powers which may by law be possessed by this association, all of which are here- by expressly claimed. The articles will say how long the cooperative is autho- rized to exist. Virtually all modern laws permit perpetual exis- tence. Some laws in effect at the time longstanding cooperatives were organized limited the permissible life of a cooperative to a set period of time, such as 50 years. Associations that have been active for several decades should check to make sure their dura- tion clause provides for perpetual operation. ARTICLE V. PERIOD OF DURATION This association shall have perpetual exis- tence. I Directors Most statutes require the articles to name the initial policy- makers of the cooperative. A majority of the incorporation statutes ask for the number of directors and names and address- es of the initial board. The articles often require “at least” the minimum number of directors required by statute: the precise number is set in the bylaws. Some statutes ask for the names and addresses of incorporators, in which case the appropriate title and references to incorporators would be substituted for “directors” in the example. If the law asks for both. then this draft provision is essentially inserted a second time and appro- 15 Durationpriately worded in each instance. ARTICLE VI. DIRECTORS This association shall have at least _ direc- tors. The names and addresses of those who are to serve as the initial directors are: NAME ADDRESS Capital Structure The articles usually contain a description of the capital structure of the cooperative.If stock is issued, the number of shares authorized and the par value of each share of each class of stock (common, preferred) are set forth. The rights granted owners of each class of stock, the restrictions on owners of each class, and the dividends to which each class is entitled are also explained. If stock is not issued, a description must be included of how the rights and interests of the members will be determined. association is provided below. The capital stock example provides for both voting com- mon and nonvoting preferred stock. Nonvoting preferred stock is a useful way to account for additional nonpatronage invest- It has also been used as a way of raising equity from nonmembers, such as other members of the commu- nity interested in supporting the cooperative. If any interest in the cooperative is being sold to nonmembers, counsel must be retained to advise the association on applicable securities law requirements. The sample language also assumes that the organization 16 ments by members. nonstockSample language for both a stock and a If proportional voting based on limits each member to one vote. patronage is utilized, counsel will have to prepare a description of how votes will be accumulated and any limit on the number of votes any one member can amass. All of the information in the example below is important and should be included somewhere in the organizational docu- ments. However, not all incorporation laws require that all of it be in the articles. It may be possible to place some of these pro- visions in the bylaws. ARTICLE VII. CAPITAL STOCK (stock cooperative) Section 1. Classes and Authorized Amounts. The capital stock of the association shall consist of shares of common stock with a par value of per share, and shares of preferred stock with a par value of per share. Section 2. Common Stock. The common stock of this association may be purchased, owned, or held only by agricultural producers who (1) patronize the association in accordance with uniform terms and conditions prescribed by it, and (2) have been approved by the board of directors. ‘Producer’ shall mean and include persons (natural or corporate) engaged in the production of (product), or other agricultural products, including tenants of land used for the production of any such product, and lessors of such land who receive as rent therefore part of any such product of such land, and cooperative associations (corporate or otherwise) of such producers. Each member shall hold only one share of common stock and each eligible holder of common stock shall be entitled to only one vote in any meet- ing of the stockholders upon each matter submitted to vote at a meeting of the stockholders. In the event the board of directors of the asso- ciation shall find, following a hearing, that any of 17the common stock of this association has come into the hands of any person who is not eligible for mem- bership, or that the holder thereof has ceased to be an eligible member, such holder shall have no rights or privileges on account of such stock, or vote or voice in the management or affairs of the association other than the right to participate in accordance with law in case of dissolution, The association shall repurchase such stock for par value. If such holder fails to deliver any certificate evidencing the stock, the association may cancel such certificate on its books and records, and the certificate is thereby null and void. The common stock of this association may be transferred only with the consent of the board of directors of the association and on the books of the association, and then only to persons eligible to hold it. No purported assignment or transfer of common stock shall pass to any person not eligible to hold it, nor the rights or privileges on account of such stock, nor a vote or voice in the management of the affairs of the association. This association shall have a lien .on all of its issued common stock for all indebtedness of the holders thereof to the association. No dividends shall be paid on the common stock. Section 3. Preferred Stock. The preferred stock of this association may be issued to any per- son, association, partnership, or corporation. Preferred stock shall carry no voting rights. Noncumulative dividends not to exceed percent (_%) per year may be paid on preferred stock at the absolute discretion of the board of direc- tors. Preferred stock may be transferred only on the books of the association. It may be redeemed in whole or in part on a pro rata basis at par, plus any dividends declared and unpaid, at any time on thirty 18(30) days’ notice by the association, provided said stock is redeemed in the same order as originally issued by years. If the owner fails to deliver any cer- tificate evidencing such stock, the association may cancel the stock on its books. This association shall have a lien on all of its issued preferred stock for all indebtedness of the holders thereof to the association. Upon dissolution or distribution of the assets of the association, the holders of all preferred stock shall be entitled to receive the par value of their stock, plus any dividend declared and unpaid, before any distribution is made on the common stock. ii ARTICLE VII. (nonstock cooperative) The association shall not have capital stock but shall admit applicants to membership in the association upon such uniform conditions as may be This association shall be prescribed in its bylaws. operated on a cooperative basis for the mutual bene- fit of its members as producers. Membership in the association shall be restricted to producers and asso- ciations of producers who shall patronize the associ- ation, The voting rights of the members of the asso- ciation shall be equal, and no member shall have more than one vote upon each matter submitted to a vote at a meeting of the members. The property rights and interests of each member in the association shall be unequal and shall be determined and fixed on a patronage basis, and the net proceeds from the business of the association shall be allocated to member-patrons in the propor- tion that the patronage of each member bears to the total patronage of all the members of the association. 19 MENBERSHIP