Preface

A cooperative is a business. As such, it must operate in

a manner compatible with all the laws that apply to a business,

with cooperative principles, and with the needs and desires of

its member-patrons in mind.

To comply with each of these limitations on its operations, a cooperative must have a set of organizational documents

that is uniquely crafted to its particular situation. Drafting new,

and updating old, legal documents of cooperatives takes both

time and expertise. This report is intended to assist persons

organizing new cooperatives, managers and directors of existing

cooperatives, and their professional advisers to develop and

update the important legal documents of cooperatives. It

explains issues to be considered and options that are available.

It provides sample language to be used as a starting point; the

wording is not to be copied without review and thought.

To help distinguish sample document language from

explanatory text, a straight black line has been drawn along the

left-hand margin of the sample document language.
Contents

ORGANIZATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Statement of Purposes ...................................................... 2

Organization Committee ................................................... 3

Patronage Commitment ..................................................... 3

Financial Commitment ...................................................... 4

Calling of Membership Meeting ....................................... 6

Accounting .......................................................................... 7

SELECTING THE PROPER STATE

INCORPORATION STATUTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLES OF INCORPORATION ..*...................,..*.*.............t. 11

Heading ............................................................................ 1 1

Name ................................................................................. 1 2

Principal Place of Business ............................................. 12

Purposes ............................................................................ 1 2

Powers ............................................................................... 13

Duration ............................................................................ 15

Directors ........................................................................... 15

Capital Structure ............................................................... 16

Amendment ..................................................................... 20

Signatures ......................................................................... 20

BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Membership ...................................................................... 21

Meetings of Members ...................................................... 24

Directors and Officers ....................................................... 26

Duties of Directors ........................................................... 32

ii
Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Operation at Cost and Members’ Capital . . . . . . . . . . . . . . . . . . . . . . . . . 36

Equity Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..I....... 39

Consent . . . . . . . . . ..f................................................................ 4 0

Nonmember Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Nonpatronage Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2

Handling of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Dissolution . . . . . . . . ..f............................................................ 4 5

Indemnification . . . . . . . . . ..I....................................I.............. 45

Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

MARKETING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*................. 4 7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . ..I...........................................4 6

Sales Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..I...........................4 9

Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Termination and Renewal ..****...*.**.*.........................*...... 55

Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

MEMBERSHIP APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

DIRECTOR HANDBOOK . . . . . . ..a.. a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

APPENDIX A. ELECTION OF DIRECTORS

BY DISTRICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

APPENDIX B. ALTERNATIVE EQUITY

REDEMPTION BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

APPENDIX C. BASE CAPITAL PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

. . . 111
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 business affairs of the association to enhance the mutual well-being

of the members.

This report explains the role each document plays in building the organization and the various issues treated in each document. It discusses options available to members in handling

many of the issues. It also presents sample language as an aid in

preparing initial documents, or in revising existing ones, to

make sure they promote the objectives of the cooperative venture.

Most of the sample language in this report is suitable for

virtually any type of cooperative. Where the language must be

tailored to reflect specific functions of the association, wording

appropriate for an agricultural marketing cooperative is used.

Counsel can help make the necessary modifications to cover

supply and related service organizations and nonagricultural

activities.

One point cannot be stressed too much! Cooperative organizers, advisers, and leaders should not just sit down and copy

these, or any other set, of legal documents and declare them as

their own. These foundation documents should only be adopted

after review by a competent attorney, one who understands the

unique characteristics of cooperatives and the industry in which

the association does business. This will maximize the likelihood

that the documents will conform to applicable law and meet the

specific needs of the association and its members.

One problem in drafting organizational papers is they can

be thorough or simple, but not both. This report contains many

“compromises” between these two objectives. This only reinforces the need for cooperative founders and leaders, and their

professional advisers, to avoid adopting any sample set of documents verbatim and to review existing documents on a regular

basis.

1
The idea of forming a cooperative is usually conceived and

nurtured by a few individuals who foresee coordinated group

action as a solution to a problem confronting themselves and

similarly situated persons. This organizing group often has to

formulate a development plan, arrange for or provide seed

money, and contribute sweat equity to get the association up and

running.

The organization period involves considerable discussion

and data collection. While these efforts provide a good forecast

for the level of support the cooperative is likely to attract, before

launching the venture it is a good idea to have those persons

who say they want the services of the cooperative formally commit to use those services.

The organization agreement secures both a patronage and a

financial commitment from prospective members. It is also a

vehicle for educating prospective members about the cooperative form of business and the objectives of the proposed association.

Statement of Purposes

This first provision in a typical organization agreement sets

out the services the proposed organization will perform. The

services can be described in broad terms, such as to “process”

and “market” certain farm commodities and “furnish” certain

farm supplies.

The language should refer only to services the cooperative

will provide from its inception. This minimizes member pressure to expand the scope of operations too rapidly. For example,

it is usually best not to mention furnishing supplies in the organizational agreement if the new organization will limit its initial

activity to marketing fresh vegetables.

1. The undersigned, a producer of agricultural products, hereinafter referred to as “Producer,”

together with other signers of agreements similar

hereto, propose to organize a cooperative association

2
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 consisting of the following persons:

Name Address

2. (b) This committee may, by vote of a majority of its members, increase its membership, fill any

vacancy therein, and appoint any subcommittees

deemed necessary to conduct its affairs. The committee, or any subcommittee designated by it, may

prescribe an organization fee to be paid by each person signing an organization agreement and may

incur necessary obligations, make necessary expenditures, and take any such action as may, in its discretion, be deemed advisable to further the organization of the association.

3
Patronage 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’ commitment: usually all production, a defined volume of product,. or

production from a set number of acres. If either all production

or production from a set number of acres is used, a projection of

likely volume delivered should also be secured. Sample language is provided for each type of commitment:

Full Production.

3. Producer agrees to sign a marketing agreement committing all (product) produced by

Producer, on land owned or leased by Producer, to

the cooperative for direct marketing, processing, or

other disposition as the cooperative sees fit.

Producer estimates such production will total

(units) in (year). ***********

Defined Volume.

3. Producer agrees to sign a marketing agreement to commit (units) of (product), produced by Producer, to the cooperative for

direct marketing, processing, or other disposition as

the cooperative sees fit.

***********

Set Acreage.

3. Producer agrees to sign a marketing agreement to commit all (product) produced by

Producer on acres of land, owned or leased by

Producer, to the cooperative for direct marketing,

processing, or other disposition as the cooperative

sees fit. Producer estimates such production will

total -(units) in _ (year).

4
If the cooperative is likely to have a minimum quality standard that must be met before product will be accepted, that standard should also be explained and the person or entity judging

quality should be named.

Financial Commitment

Every new business must have equity capital. In a cooperative, the members supply that capital. In this provision the

prospective member agrees to provide initial financial support

for the cooperative.

Each prospective member should commit to purchase one

share of common voting stock (or, in a nonstock cooperative, pay

a membership fee) for a fixed dollar amount, perhaps $1,000.

This investment gives the member the right to vote on issues

submitted to the membership.

Often the initial investment tied to membership status does

not raise enough equity to fund the association. Additional capital is needed. Usually the organizers have substantial leeway in

collecting and recognizing this investment. Each prospective

member may be asked to make an equal contribution, or the

level can vary with anticipated patronage. While this investment is classified as preferred stock in this report, it can also be

structured as equity credits, revolving fund credits, or any similar term satisfactory to the organizers.

Organizers should avoid using any term usually associated

with debt capital, such as “note” or “bond,” and should also

avoid creating a second class of common stock, which is sure to

be confused with regular voting common stock.

The agreement should expressly state that this financial

commitment is irrevocable unless the organization effort is terminated. Initial development of the cooperative is totally

dependent on promised financial support being forthcoming.

Leaders must have the tools to force compliance with this commitment, by legal action if necessary.

I

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

5
incorporate the association.

Producer further agrees to purchase

shares of nonvoting preferred stock of the association, par value $ each, and agrees to pay for

same as follows:

S- cash on demand following incorporation of the association,

g-on or before . 19 -9

and,

$--- on or before ,19_.

Producer expressly understands that this stock

subscription agreement is an irrevocable legally binding obligation which will be relied upon by the association, other producers who subscribe to its stock,

and lending institutions from which the association

will seek financing to implement its cooperative purposes.

If a cooperative is organized as a nonstock corporation, the

sample language might be altered to call for payment of a membership fee, rather than purchase of a share of common stock,

and payment of an additional sum into an equity account, rather

than purchase of nonvoting preferred stock.

Calling of Membership Meeting

One of the principal responsibilities of the organization committee is to determine if enough firm interest exists to justify forming the cooperative. It is advisable to put a time limit on member

solicitation. An open-ended solicitation period may exceed the

patience of early signees to get started or abort the effort.

If the committee decides there is enough interest, the agreement usually calls for a meeting of the signees to make the final

decision to complete formation and begin operation of the cooperative. While the typical agreement provides that the affirmative vote of a simple majority of signees approves formation, the

committee should move cautiously if substantial resistance

6
develops. Few associations overcome internal strife during the

formation period to become useful and viable cooperative enterprises.

5. If, on or before 9 19-t the organization committee is of the opinion that sufficient

signup has been obtained to enable the association to

operate efficiently, the committee shall set a time

and place for a meeting of those persons who have

signed this agreement to determine, by majority vote,

whether to proceed with the formation and operation of the association, and to consider such other

business as may be deemed appropriate.

Not less than ten days before the meeting,

notice of the time and place of the meeting shall be

sent to all signees by first-class mail, and an appropriate notice shall be published in one or more

newspapers of general circulation in the area in

which those who signed agreements like this one

reside.

,

Sometimes the agreement will set minimum levels of support that must be committed before the prospective members

will vote to begin the venture, If the organizers decide to adopt

that option, the first paragraph of this provision might begin:

5. If, on or before 9 19-t bona fide

producers of agricultural products otherwise eligible

to become members in the association agree to execute marketing agreements covering (units)

of (product) and subscribe to provide equity to the association equal to the sum of at least

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
appropriate disposition of any funds remaining after the vote on

formation of the cooperative is conducted.

6. The organization committee shall keep

detailed, accurate accounts of all receipts and of all

expenditures of every kind. It shall have such accounts

audited and render a written report thereof to the

board of directors of the association when organized.

And it shall thereupon turn over to the association any

balance remaining in its hands free of obligation. If

the association is not organized, such unexpended balance shall be prorated among, and returned to, those

who contributed to the organization fund.

The agreement should conclude with spaces for the

prospective member to sign the agreement, and provide his or

her address, and for the chairperson of the organizing committee

to sign the agreement as 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 development of a successful cooperative is selection of the proper statutory foundation for the association.

To operate effectively in today’s business world, a cooperative must be a unique legal entity, separate from its members.

The best way to create this unique entity is to form a cooperative

corporation.

A cooperative becomes a corporation when its organizers

follow the steps set out in a law authorizing the formation of

corporations. There is no Federal incorporation statute.

Cooperatives incorporate under an appropriate State law.

Incorporation offers several advantages over alternative

structures, such as partnerships and unincorporated associations:

l Incorporation facilitates the orderly succession of ownership. The entity has a perpetual life. As some members resign and
new people join, redemption and issuance of a share of common

stock or a membership certificate is a relatively simple means of

clarifying each person’s status and rights in the association.

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

person. It can do many things natural persons can, such as sign

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 agricultural cooperative law says only agricultural producers can

vote in farmer cooperative affairs, no one else has the right to

participate in policy decisions made by the membership.

l The cooperative must obey business laws. Since managers and directors make the decisions for the corporation, they

have an obligation to know and make sure the association follows all applicable laws.

Persons who organize a cooperative have several incorporation statutes to choose from:

l All States have special cooperative incorporation

statutes. Some are broad, permitting the incorporation of virtually any business as a cooperative. Other are limited in scope.

Many States have an Agricultural Cooperative Associations Act

specially written to authorize incorporation of associations of

producers of agricultural products.

9
l 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 organized under the laws of a different State.

.

It is usually best to organize under a cooperative incorporation statute of the State where the association’s headquarters is

located. But it’s very important that the statute authorizing the

cooperative permits a structure that meets the needs and desires

of the members. The General Business Corporation Act and outof-State incorporation laws should be considered if the applicable cooperative law doesn’t permit the necessary organizational

structure.

A few so-called cooperatives are organized under a general

not-for-profit corporation statute. Usually this is done to make it

easier to obtain grant money. There are some potential adverse

legal consequences of this type of incorporation that should be

reviewed before following this path:

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 trouble than cooperative corporations enforcing marketing agreements with their members. Cooperative statutes frequently provide specific authority for enforcement of marketing agreements.

Not-for-profit acts have no such provision.

If the leadership determines a cooperative is not organized

10
under the appropriate State statute, it is usually possible to reincorporate without seriously disrupting the ongoing business of

the association. This will ordinarily involve redrafting the organization papers to conform to the new law and paying a modest

fee to the appropriate State agency.

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

below.

The statute will also require that before the articles are official they must be recorded in the office of a designated State

officer. Failure to properly file the articles makes any business

activity vulnerable to legal challenge.

It is usually permissible to include information in the articles beyond that required by the incorporation statute.

However, this is ordinarily not done because it is frequently

more difficult to amend the articles than it is with other documents that may contain the same information.

The articles are not a piece of paper to be prepared and

then forgotten. The articles are routinely given the same respect

by the courts as a statute. Therefore, the articles are binding on

the directors, officers, and manager of a cooperative. Conduct

beyond that authorized in the articles can subject the cooperative and its leaders to potential legal liability.

The following are the elements common to most cooperative articles of incorporation.

Heading

The heading sets out the title of the document, the name of

the cooperative, and the title of the authorization statute.

1 1
ARTICLES OF INCORPORATION

(Name of Cooperative)

We, the undersigned, all of whom are engaged in the

production of agricultural products, do hereby voluntarily associate ourselves together for the purpose

of forming a cooperative association, with (or without) capital stock, under the provisions of the

Act of the State of

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 ’ .

Purposes

The purposes for which the cooperative is being organized

are specifically set out. While the purposes clause of the organizational agreement is limited to immediate objectives, the pur12
poses are usually stated as broadly as possible in the articles of

incorporation. Any service the cooperative may someday provide is frequently authorized, at least in a general way. This

reduces the likelihood the articles will have to be amended

whenever the association is asked by the members to provide

additional services.

Powers

ARTICLE III. PURPOSES

The association is formed for the following

purposes: To market for its members and other producers any and all agricultural products or any products derived therefrom: to engage in any activity in

connection with the picking, gathering, harvesting,

receiving, assembling, handling, grading, cleaning,

shelling, standardizing, packing, preserving, drying,

processing, transporting, storing, financing, advertising, selling, marketing, or distribution of any such

agricultural products or any products derived therefrom: to purchase for its members and others farm

supplies and equipment: to manufacture, process,

sell, store, handle, ship, distribute, furnish, supply,

and procure any and all such farm supplies and

equipment; and to exercise all such powers in any

capacity and on any cooperative basis that may be

agreed upon.

The State statute authorizing formation of a cooperative

will set out in detail the activities the cooperative may engage

in. As a general rule, the statutory language is copied virtually

verbatim into the articles. The following is an example of a typical statutory provision restated as an article of incorporation:

ARTICLE IV. POWERS

I

This association shall have the following powers:

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 producers.

(b) To act as the agent or representative of any

member or members in any of the activities mentioned in Article III hereof.

(cl To buy, lease, hold, and exercise all privileges of ownership over such real or personal property as may be necessary or convenient for the conduct and operation of the business of the association,

or incidental thereto.

(d) To draw, make, accept, endorse, guarantee, execute, and issue promissory notes, bills of

exchange, drafts, warrants, certificates, and all kinds

of obligations and negotiable or transferable instruments for any purpose that is deemed to further the

objects for which this association is formed, and to

give a lien on any of its property as security therefor.

(e) To acquire, own, and develop any interest

in patents, trademarks, and copyrights connected

with, or incidental to, the business of the association.

(fl To cooperate with other similar associations in creating central, regional, or national cooperative agencies, for any of the purposes for which

this association is formed, and to become a member

or stockholder of such agencies as now are or hereinafter may be in existence.

(g) To have and exercise, in addition to the

foregoing, all powers, privileges, and rights conferred on ordinary corporations and cooperative

14
marketing associations by the laws of this State and

all powers and rights incidental or conducive to carrying out the purpose for which this association is

formed, except such as are inconsistent with the

express provisions of the act under which this association is incorporated, and to do any such thing

anywhere; and the enumeration of the foregoing

powers shall not be held to limit or restrict in any

manner the general powers which may by law be

possessed by this association, all of which are hereby expressly claimed.

Duration

The articles will say how long the cooperative is authorized to exist. Virtually all modern laws permit perpetual existence. Some laws in effect at the time longstanding cooperatives

were organized limited the permissible life of a cooperative to a

set period of time, such as 50 years. Associations that have been

active for several decades should check to make sure their duration clause provides for perpetual operation.

I

ARTICLE V. PERIOD OF DURATION

This association shall have perpetual existence.

Directors

Most statutes require the articles to name the initial policymakers of the cooperative. A majority of the incorporation

statutes ask for the number of directors and names and addresses of the initial board. The articles often require “at least” the

minimum number of directors required by statute: the precise

number is set in the bylaws. Some statutes ask for the names

and addresses of incorporators, in which case the appropriate

title and references to incorporators would be substituted for

“directors” in the example. If the law asks for both. then this

draft provision is essentially inserted a second time and appro15
priately worded in each instance.

ARTICLE VI. DIRECTORS

This association shall have at least_ directors.

The names and addresses of those who are to

serve as the initial 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.

Sample language for both a stock and a nonstock association is

provided below.

The capital stock example provides for both voting common and nonvoting preferred stock. Nonvoting preferred stock

is a useful way to account for additional nonpatronage investments by members. It has also been used as a way of raising

equity from nonmembers, such as other members of the community interested in supporting the cooperative. If any interest in

the cooperative is being sold to nonmembers, counsel must be

retained to advise the association on applicable securities law

requirements.

The sample language also assumes that the organization

16
limits each member to one vote. If proportional voting based on

patronage is utilized, counsel will have to prepare a description

of how votes will be accumulated and any limit on the number

of votes any one member can amass.

All of the information in the example below is important

and should be included somewhere in the organizational documents. However, not all incorporation laws require that all of it

be in the articles. It may be possible to place some of these provisions in the bylaws.

ARTICLE VII. CAPITAL STOCK (stock cooperative)

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 meeting of the stockholders upon each matter submitted

to vote at a meeting of the stockholders.

In the event the board of directors of the association shall find, following a hearing, that any of

17
the common stock of this association has come into

the hands of any person who is not eligible for membership, or that the holder thereof has ceased to be

an eligible member, such holder shall have no rights

or privileges on account of such stock, or vote or

voice in the management or affairs of the association

other than the right to participate in accordance with

law in case of dissolution, The association shall

repurchase such stock for par value. If such holder

fails to deliver any certificate evidencing the stock,

the association may cancel such certificate on its

books and records, and the certificate is thereby null

and void.

The common stock of this association may be

transferred only with the consent of the board of

directors of the association and on the books of the

association, and then only to persons eligible to hold

it. No purported assignment or transfer of common

stock shall pass to any person not eligible to hold it,

nor the rights or privileges on account of such stock,

nor a vote or voice in the management of the affairs

of the association.

This association shall have a lien .on all of its

issued common stock for all indebtedness of the

holders thereof to the association.

No dividends shall be paid on the common

stock.

Section 3. Preferred Stock. The preferred

stock of this association may be issued to any person, association, partnership, or corporation.

Preferred stock shall carry no voting rights.

Noncumulative dividends not to exceed

percent (_%) per year may be paid on preferred

stock at the absolute discretion of the board of directors.

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 certificate evidencing such stock, the association may

cancel the stock on its books.

This association shall have a lien on all of its

issued preferred stock for all indebtedness of the

holders thereof to the association.

Upon dissolution or distribution of the assets

of the association, the holders of all preferred stock

shall be entitled to receive the par value of their

stock, plus any dividend declared and unpaid, before

any distribution is made on the common stock.

*ii*********

ARTICLE VII. MENBERSHIP

(nonstock cooperative)

The association shall not have capital stock

but shall admit applicants to membership in the

association upon such uniform conditions as may be

prescribed in its bylaws. This association shall be

operated on a cooperative basis for the mutual benefit of its members as producers. Membership in the

association shall be restricted to producers and associations of producers who shall patronize the association,

The voting rights of the members of the association shall be equal, and no member shall have

more than one vote upon each matter submitted to a

vote at a meeting of the members.

The property rights and interests of each

member in the association shall be unequal and shall

be determined and fixed on a patronage basis, and

the net proceeds from the business of the association

shall be allocated to member-patrons in the proportion that the patronage of each member bears to the

total patronage of all the members of the association.

19
Amendment

The articles may be changed whenever the appropriate percentage of the membership (and, if required by statute, the directors), as set out in the incorporation statute, votes to amend

them. While the percentage is established by law, it is a good

idea to include that requirement in the articles to remind people

that the articles can be changed and to eliminate doubt as to the

supp,ort required when the issue of possible amendment arises.

While a majority of the statutes set the requirement at a

simple or two-thirds majority of the members voting, several

statutes require approval of a majority of the total membership.

If turnout for member meetings is light, this poses a serious

obstacle to changing the articles.

ARTICLE VIII. Amendment

These articles may be amended upon the affirmative vote of two-thirds of the members actually

voting on the proposed amendment.

Signatures

Those persons who ask the State to authorize the cooperative, often called incorporators, complete the document by signing it.

Signed this day of ,19__, by the

undersigned incorporators, all of whom are engaged

in agriculture as bona fide producers of agricultural

products.

I

20
BYLAWS

Shortly after the cooperative is incorporated, the members

adopt a set of bylaws. Bylaws provide a detailed description of

the structure and method of operation of the cooperative.

Bylaws are a working plan for how the association should function.

Most incorporation laws give members flexibility to structure their cooperative as they see fit. Most references to bylaws

are permissive, giving members the authority to write their own

rules on how to handle a particular issue.

Bylaws normally are not filed with the State. But like the

articles, they are treated in a manner similar to statutes by the

courts. Failure of the leadership to follow the bylaws can also

lead to legal liability.

Numerous provisions are usually found in cooperative

bylaws. Some are similar to those included in bylaws of forprofit corporations, others are unique to cooperation. The most

common provisions are discussed in this report. But a cooperative is free to place virtually any rule on the conduct of its affairs

in the bylaws, provided the provision doesn’t conflict with an

applicable law or the articles of incorporation.

While almost any activity can be covered by a bylaw, only

broad issues of long-term significance to members should be the

subject of a bylaw. Operating decisions should not be covered in

the bylaws, but rather in board policy resolutions. Board policies are directives to the management, issued by the board in its

role as policymaker for the cooperative, that can be changed to

reflect changing conditions at any time by the board. For example, whether the cooperative will do business with nonmembers

is a general, long-term decision that should be covered in the

bylaws. How nonmembers will be charged to insure that they

pay their fair share of cooperative expenses is a short-term decision requiring the flexibility possible under a policy statement.

Membership

The first bylaw usually states the qualifications to be a

member of the cooperative. Membership should be limited to

21
persons who will patronize the cooperative. For an agricultural

cooperative, this means membership should be limited to producers of agricultural products and other farmer cooperative

associations. Limiting the membership to producers and producer cooperatives is essential if the association wants to qualify

for the limited antitrust protection of the Capper-Volstead Act,

or for tax treatment under section 521 of the Internal Revenue

Code, or if the cooperative is incorporated under a State law that

requires that members be agricultural producers.

This bylaw may also include other reasonable prerequisites

to membership, such as agreeing to purchase a share of stock,

sign a marketing agreement, and patronize the association on a

regular basis.

This bylaw should also provide for the orderly termination

of a membership. This can be particularly important for an agricultural cooperative. The significant legal privileges listed

above are only available to associations of producers. This

requirement is only met if the membership of anyone who stops

farming is revoked.

When a membership is terminated, it is a good practice to

return the purchase price of the voting share of common stock,

or the membership fee in a nonstock cooperative (but not necessarily the retained patronage investments). This makes it clear

to the former member that the termination was more than a symbolic gesture and that he or she no longer has the right to participate in the policymaking of the association.

This sample language is written for a stock cooperative. In

a nonstock cooperative, appropriate references to membership

certificates and fees would be substituted for the terms common

stock and purchase price.

I

ARTICLE I. MEMBERSHIP

Section 1. Qualifications. Any person, firm,

partnership, corporation or association, including

both landlord and tenant in share tenancies, who is a

bona fide producer of agricultural products in the

territory in which the association is engaged in business, and who agrees to be a patron of the associa22
tion, signs a marketing agreement with the association, purchases one share of common stock, and

meets such other conditions as may be prescribed by

the board of directors, may become a member of the

association.

All applications for membership must be

approved by the board of directors. Member status

is effective as of the time the board approves the

application for membership.

Section 2. Suspension or Termination. In the

event the board of directors of the association shall

find, following a hearing, that any of the common

stock of this association has come into the hands of

any person who is not eligible for membership, or

that the holder thereof has ceased to be an eligible

member, or that such holder has not marketed

through the association the products covered by a

marketing agreement with the association, or not

otherwise patronized the association for a period of

(_) year(s), or otherwise violated the articles of incorporation, bylaws, or other agreements made with the

association, the association may suspend such holder’s rights as a member and terminate the membership.

When a membership is terminated, the association shall repurchase the member’s share of common stock for par value. The holder shall return to

the association the certificate evidencing the holder’s

share of stock. If such holder fails to deliver the certificate, the association may cancel such certificate

on its books and records, and the certificate is then

null and void.

A suspended or terminated member shall

have no rights or privileges on account of any stock

held, nor vote or voice in the management or affairs

of the association other than the right to participate

in accordance with law in case of dissolution.

23
Meetings of Members

A cooperative is owned and controlled by its members. A

bylaw sets out the ground rules for convening the members to

exercise their control function.

An annual meeting is held each year to elect directors,

review past performance and future plans, and conduct other

business as needed.

It is often a good idea to set the time of the annual meeting

as promptly as possible after the end of the fiscal year. This

encourages management to close the books for the year in a

timely fashion and the auditor to review financial results and

issue the audit report without delay. Also, the members are still

focusing on last year’s performance. If the annual meeting is

delayed too long, the members are often into another production

cycle and not able to properly exercise their control over the

cooperative.

This bylaw should also authorize special member meetings

to handle any business that can’t wait until the next annual

meeting.

Members should receive sufficient advance notice so they

can plan to attend meetings. Many incorporation statutes have

specific minimum notice requirements, both in terms of lead

time (often 10 days or 2 weeks) and method (direct mail, publication in local newspaper). Associations incorporated under

such a law must make sure the bylaw provides at least as much

notice as the statute requires, and that appropriate notice is actually given. Otherwise any action taken at the meeting may be

open to legal challenge.

A statement on how voting will be conducted is also appropriate in this bylaw. How many votes each member will have is

only one aspect of this issue. The draft language limits each

member to one vote. If proportional voting is used, a description of how members will qualify for multiple votes, and a limit,

if any, on the number of votes any one member can accumulate,

should be substituted in the applicable place.

Language on voting on behalf of members organized as

partnerships and corporations can avoid an embarrassing dispute right before or even during a membership meeting over

how such a member will vote on an issue. Many cooperatives

24
have members organized as partnerships or corporations designate, in writing, who will cast the member’s vote, and that person alone can vote for the member until the member provides a

valid written notice of a change in the designee.

Other topics that should be addressed include proxy voting, voting by mail, and cumulative voting. There is no “right”

way to handle these matters, although cumulative voting is usually prohibited. Sometimes the incorporation statute discusses

proxy voting and voting by mail. Many cooperatives that permit

proxy voting limit the number of proxies a member can vote,

often to only one. If voting by mail is allowed, it is often limited

to issues discussed in the meeting notice.

Finally, the minimum number of members that need be

present to conduct business, called a quorum, should be specified. If the statute permits, quorum requirements are frequently

set low (e.g., 10 members or 10 percent of the membership,

whichever is greater) so meetings will not have to be adjourned

for lack of a quorum. While this exposes the association to control by an active minority, it is sometimes necessary in order to

make sure that any business is conducted at all.

ARTICLE II. MEETINGS OF MEMBERS

Section 1. Annual Meeting. The annual meeting of the members of this association shall be held

in the State of , during the month of

-9at such time and in such place as the board of

directors shall designate.

Section 2. Special Meetings. Special meetings of the members of the association may be called

at any time by order of the board of directors and

shall be called upon written request of at least

members, or at least _ percent (__%) of the membership, whichever is a greater number.

Section 3. Notice of Meetings. Written notice of

every regular and special meeting of members shall

be prepared and mailed to the last known post office

25
address of each member not less than -0 days

before such meeting. Such notice shall state the

nature of the business expected to be conducted and

the time and place of the meeting. No business shall

be transacted at any special meeting other than that

referred to in the notice.

Section 4. Voting. Unless otherwise stated in

the articles of incorporation, or these bylaws, or

required by applicable law, all questions shall be

decided by a vote of a majority of the members voting thereon.

Each member shall be entitled to only one

vote, Voting by mail shall not be permitted. Proxy

voting shall be allowed. Each proxy shall be in writing, and no member shall vote more than one proxy.

Cumulative voting is not permitted.

If a membership is held by a partnership, corporation, or other legal entity, the member shall designate in writing the person who shall vote on behalf

of the member. That designation shall remain in

effect until written notice of a properly authorized

change in the designated voter shall be received by

the association.

Section 5. Quorum.( members or

percent I%) of the membership, whichever is a

larger number, shall constitute a quorum at any

properly called annual or special membership meeting.

Directors and Officers

While the members own and control the cooperative, the

responsibility for continuous supervision of the association is

usually delegated to a small group of democratically elected

leaders referred to as the board of directors, who in turn select

officers to carry out specific leadership duties. Many cooperative experts consider the selection of directors as the most

important governance decision made by the membership.

26
This bylaw covers the administrative rules for the selection

of directors and officers and for the conduct of their meetings.

Many important issues are discussed in this provision.

Number and Qualification of Directors. The specific number and qualifications of directors must be established. The

incorporation law will usually prescribe a minimum number of

directors. There is no legal maximum on the size of a board, but

experience suggests that if more than about nine people are on a

local cooperative board, efficiency is reduced substantially.

Many State statutes require that all directors be members of

the cooperative. Some permit, or even require, one or more outside directors. The sample bylaw requires directors to be association members. If outside directors are to be authorized, the

number and manner of selection should be included in the

bylaw.

Directors have access to pricing and other marketing plans

that could be used by a competitor to take business from the

cooperative. Thus, many cooperatives bar persons affiliated

with competitors of the association from being directors.

Cooperatives usually do not, however, bar such persons from

membership. For example, a farmer who sells produce directly

to a grocery chain may belong to and market some produce

through a cooperative that also sells wholesale, but that farmer

is frequently denied access to a seat on the cooperative board.

A few cooperatives guarantee board turnover by limiting

the number of consecutive terms a director can serve.

Director and Officer Selection. The rules for election of

directors by the members, and officers by the directors, are set

out in the bylaws. In many cooperatives the directors are elected for three-year terms on a staggered basis. While directors are

usually elected from the membership at large, some cooperatives

elect directors on the basis of geographic regions, usually called

districts. Sample language authorizing the election of directors

by districts is set out in Appendix A.

Officers are usually elected for one-year terms. Even many

statutes that require all directors to be association members permit some officers, notably the secretary and treasurer, to be nonmembers of the association. This allows staff employees who

normally keep association records and books to have both the

appropriate title and attendant responsibilities.

27
Sometimes directors and officers are not able to serve their

full term. The bylaws should provide for a method to fill vacant

director and officer positions, Usually the remaining directors

select an interim director to fill a board vacancy until the next

membership meeting. Directors can usually select a replacement officer at any properly called board meeting.

Meetings. The bylaws frequently provide much of the

same information for director meetings as for member meetings

-

regular and special meetings are authorized, notice and quorum requirements are set out.

Compensation . Another issue that should be addressed is

director compensation. Many directors spend innumerable

hours each year overseeing and promoting the cooperative. It

seems reasonable for the association to at least cover out-ofpocket expenses incurred on behalf of the association.

Some cooperatives also pay a modest fee for each meeting

directors attend, or time they spend on cooperative affairs.

While reimbursement of reasonable expenses is usually covered

with a blanket authorization, fees should be handled more delicately. Directors should not have the right to set their own compensation. Both the decision to pay any fee, and the level of any

fee authorized, should be made by the members.

Nepotism. Many cooperatives also have a bylaw provision

preventing directors and members of their immediate families

from holding salaried positions with the cooperative. This

antinepotism language eliminates the chance some members

might view the awarding of the position as the result of undue

influence of the director, rather than selection on the basis of

merit.

Removal of Directors. Finally, it may be necessary at some

time to remove a director from that position. Sometimes termination is automatic, e.g., failure to maintain member status or

missing too many board meetings. The ultimate authority in a

cooperative is vested in the members, and they should be able to

remove a director at will.

As this is often a severe and divisive undertaking, it is best

to provide a procedure in the bylaws that affords due process for

the director under attack and conforms closely to any procedural

requirements set out in the incorporation statute.

28
ARTICLE III. DIRECTORS

AND OFFICERS

Section 1. Number and Qualification of

Directors. The association shall have a board of

directors of _(_) members. Each director elected

shall be a member of this association in good standing.

No person shall be eligible to be a director if

that person is in competition with, or is affiliated

with any enterprise that is in competition with, the

association. If a majority of the board of directors of

the association finds at any time following a hearing

that any director is so engaged or affiliated that person shall thereupon cease to be a director.

No director after having served for I ) consecutive full term(s) shall be eligible to succeed himself or herself, but after a lapse of _ I_) yed4 d-d

again be eligible.

Section 2. Election of Directors. At the first

annual meeting of the members of this association,

directors shall be elected to succeed the incorporating directors. _ director(s) shall be elected for one

(1) year: _ directors for two (2) years and _directors for three (3) years. At each annual meeting

thereafter, new directors shall be elected, for a term

of three (3) years each, to succeed those directors

whose terms are expiring.

All directors shall be elected by secret ballot,

and the nominee(s) receiving the greatest number of

votes shall be elected.

Section 3. Election of Officers. The board of

directors shall meet within seven (7) days after the

first election and within seven (7) days after each

annual election and shall elect by ballot a president,

vice president, secretary, and treasurer, each of

whom shall hold office until the election and qualifi29
cation of a successor, unless earlier removed., by

death, resignation, or for cause.

The president and vice president shall be

members of the board of directors. The secretary

and treasurer need not be directors or members of

the association.

Section 4. Vacancies. Whenever a vacancy

occurs in the board of directors, other than from the

expiration of a term of office, the remaining directors

shall appoint a member to fill the vacancy until the

next regular meeting of the members. If the term of

the vacating director does not expire at that regular

member meeting, a special election shall be held to

select a director to fill the year or years remaining in

that term.

If one or more officer positions become

vacant, such offices shall be filled by the board of

directors, through election by ballot, at either a regular or special meeting of the board.

Section 5. Regular Board Meetings. In addition to the meetings mentioned above, regular meetings of the board of directors shall be held monthly,

or at such other times and at such places as the

board may determine.

Section 6. Special Board Meetings. A special

meeting of the board of directors shall be held whenever called by the president or by a majority of the

directors. Only the business specified in the written

notice shall be transacted at a special meeting. Each

call for a special meeting shall be in writing, shall be

I signed by the person or persons calling the meeting,

shall be addressed and delivered to the secretary,

and shall state the time and place of such meeting.

Section 7. Notice of Board Meetings. Oral or

written notice of each meeting of the board of directors shall be given each director by, or under the

30
supervision of, the secretary of the association not

less than _ hours prior to the time of meeting. But

such notice may be waived by all the directors, and

their appearance at a meeting shall constitute a

waiver of notice.

Section 8. Quorum. A majority of the board

of directors shall constitute a quorum at any meeting

of the board.

Section 9 . Reimbursement and

Compensation. The association shall reimburse

directors for all reasonable expenses incurred in carrying out their duties and responsibilities.

The compensation, if any, of the members of

the board of directors shall be determined by the

members of the association at any annual or special

meeting of the association.

No member of the board of directors, or member of the immediate family of any board member,

shall occupy any position in the association on regular salary.

Section 10. Removal of Directors. Whenever

any director shall fail to meet the qualifications as

described in Section I of this Article, or fails to

attend three (3) consecutive board meetings, either

regular or special, without just cause and provided

that notice of such meetings has been given in accordance with these bylaws, then it shall be the duty of

the board to remove said director and to fill the

vacancy in accordance with Section 4 of this Article.

Members, through petition noting the charges

and signed by at least _(J members or _ percent (_%) of the membership, whichever is a greater

number, may request the removal of any member of

the board. Such director shall be notified in writing

of the charges and given an opportunity to be heard

at a membership meeting of the association.

Removal of a director shall require a vote of of

31
I

members voting. Any vacancy resulting from such

action shall be filled by nomination and vote of

members at such meeting.

Duties of Directors

The directors are responsible for the ongoing operations of

the cooperative. They set policy and oversee the staff operations

that implement that policy. Cooperative bylaws often contain

language placing a legally binding obligation on the directors to

carry out their most important duties.

This bylaw often establishes the general relationship

between the directors and the manager. An important responsibility of the board is to hire and supervise the manager. The

board sets manager compensation and benefits. The manager,

not the board, runs the day-to-day business operations of the

cooperative. This includes hiring and firing other employees. If

the board is dissatisfied with the way the cooperative is conducting its affairs, it should exercise its authority to replace the

manager, but it should not take on the manager’s responsibilities.

The bylaw should also recognize another important board

responsibility-protecting member assets-by providing for

appropriate bonds and insurance, an accounting and auditing

system, and board control of association funds.

Finally, the board should have the authority to appoint

committees so its work load can be handled efficiently.

Sometimes specific reference is made to an executive committee. An executive committee with broad powers can be useful,

especially when the membership is spread over a large geographic area and some directors have to travel some distance to

attend meetings. But the other directors must be careful not to

abdicate all board responsibility to the executive committee.

ARTI&E IV. DUTIES OF DIRECTORS

Section 1. Management of Business. The

board of directors shall have general supervision and

control of the business and the affairs of the associa32
tion and shall make all rules and regulations not

inconsistent with law, the articles of incorporation,

or bylaws for the management of the business and

the guidance of the members, officers, employees, I

and agents of the association.

Section 2. Employment of Manager. The

board of directors shall have power to employ,

define duties, fix compensation, and dismiss a manager with or without cause at any time. The board

shall authorize the employment of such other

employees, agents, and counsel as it from time to

time deems necessary or advisable in the interest of

the association. The manager shall have charge of

the business of the association under the direction of

the board of directors.

Section 3. Bonds and Insurance. The board

of directors shall require the manager and all other

officers, agents, and employees charged by the association with responsibility for the custody of any of

its funds or negotiable instruments to give adequate

bonds. Such bonds, unless cash security is given,

shall be furnished by a responsible bonding company and approved by the board of directors, and the

cost thereof shall be paid by the association.

The board of directors shall provide for the

adequate insurance of the property of the association, or property which may be in the possession of

the association, or stored by it, and not otherwise

adequately insured, and, in addition, adequate insurance covering liability for accidents to all employees

and the public.

Section 4. Accounting System and Audits.

The board of directors shall have installed an

accounting system which shall be adequate to meet

the requirements of the business and shall require

proper records to be kept of all business transactions.

33
Duti

34

At least once in each year the board of directors shall secure the services of a competent and disinterested public auditor or accountant, who shall

make a careful audit of the books and accounts of the

association and render a report in writing thereon,

which report shall be submitted to the directors and

the manager of the association and made available to

the members of the association.

This report shall include at least a balance

sheet showing the true assets and liabilities of the

association, and an operating statement for the fiscal

period under review.

Section 5. Depository. The board of directors

shall select one or more banks to act as depositories

of the funds of the association and determine the

manner of receiving, depositing, and disbursing the

funds of the association and the form of checks and

the person or persons by whom they shall be signed,

with the power to change such banks and the person

or persons signing such checks and the form thereof

at will.

Section 6. Committees. The board may, at its

discretion, appoint from its own membership an

executive committee of _members, and determine

their tenure of office and their powers and duties.

The board may delegate to the executive committee

all or any stated portion of the functions and powers

of the board, subject to the general direction,

approval, and control of the board. Copies of the

minutes of any meeting of the executive committee

shall be mailed to all directors within seven (7) days

following such meeting.

The board of directors may, at its discretion,

appoint such other committees as it deems appropriate.

5 of Officers

Nhile the tasks that go with each major office of a corpora-
tion are generally well understood, it is still important to have

those duties spelled out in the bylaws. This will minimize any

uncertainty over the roles each plays in leading the association.

ARTICLE V. DUTIES OF OFFICERS

Section 1. Duties of President. The president

shall (1) preside over all meetings of the association

and of the board of directors: (2) call special meetings of the board of directors; (3) appoint such committees as the board of directors may deem advisable

for the proper conduct of the cooperative: and (4)

perform all acts and duties usually performed by a

presiding officer.

Section 2. Duties of Vice President. In the

absence or disability of the president, the vice president shall perform the duties of the president, provided, however, that in case of death, resignation, or

disability of the president, the board of directors

may declare the office vacant and elect any eligible

person president.

Section 3. Duties of Secretary. The secretary

shall keep a complete record of all meetings of the

association and of the board of directors and shall

have general charge and supervision of the books

and records of the association. The secretary shall

sign papers pertaining to the association as authorized or directed by the board of directors. The secretary shall serve all notices required by law and by

these bylaws and shall make a full report of all matters and business pertaining to the office to the members at the annual meeting. The secretary shall keep

the corporate seal and all books of blank certificates,

complete and countersign all certificates issued, and

affix the corporate seal to all papers requiring a seal:

shall keep complete stock ownership records: shall

make all reports required by law: and shall perform

35
such other duties as may be required by the association or the board of directors. Upon the election of a

successor, the secretary shall turn over all books and

other property belonging to the association.

Section 4. Duties of Treasurer. The treasurer

shah be responsible for the keeping and disbursing

of all monies of the association, and shall keep accurate books of accounts of all transactions of the association. The treasurer shall perform such duties

with respect to the finances of the association as may

be prescribed by the board of directors. At the expiration of his term of office, the treasurer shall

promptly turn over to his successor all monies, property, books, records, and documents pertaining to his

office or belonging to the association.

Operation at Cost and Members’ Capital

Many of the unique aspects of the bylaws of a cooperative

pertain to the association’s financial affairs. Tax law plays an

important part in structuring these provisions. This report does

not attempt to explain cooperative taxation but only makes passing references to tax terms when explaining the importance of

certain bylaw provisions.

Since the overall objective of a cooperative is to maximize

the income of its members, leaders must have flexibility to

acquire capital and minimize taxes. The next several provisions, up to and including dissolution, authorize business and

tax planning options compatible with doing business on a cooperative basis.

This section often starts with a straightforward statement

that the association will operate on a service-at-cost basis for the

mutual benefit of the members as patrons and then covers specific issues to implement that statement.

Language is usually included to allocate margins on a

patronage basis. Allocation can be based on the volume or the

value of business conducted on a patronage basis. Cooperatives

dealing in one commodity, or in similar commodities, usually

use the volume method. Those that handle several products

3s
with divergent values often use the dollar-value-of-business

method. The sample language assumes that the association is a

marketing cooperative using the volume method. Appropriate

wording for supply cooperatives and those using the value

method is provided in parentheses.

Marketing cooperatives have an alternative method of raising equity capital, the collection of per-unit retains. Language

authorizing this option should be included in their bylaws.

The term “capital credits” is used in the sample language

to distinguish the retained margins and per-unit retains from

direct member investments in stock. This distinction simplifies

establishing an equity redemption program for patronage-based

investments apart from any redemption of direct investments.

The bylaw should specify whether dividends will be paid

on this patronage capital.

Since the completeness and accuracy of each patron’s

account is vital to assigning financial obligations and benefits in

the appropriate manner, a provision obligating the association to

keep the required records is an important protection for the

members.

A statement requiring the timely distribution of written

notices of allocation and per-unit retain certificate is both good

business practice and a requirement for favorable tax treatment

under the Internal Revenue Code. That statement should authorize the board to issue those notices and certificates, in either

qualified or nonqualified form, so as to maximize the tax planning alternatives available.

ARTICLE VI. OPERATION AT COST

AND MEMBERS’ CAPITAL

Section 1. Operation at Cost. The association

shall at all times be operated on a cooperative service-at-cost basis for the mutual benefit of its member patrons.

Section 2. Margin Allocation. In order to

induce patronage and to assure that this association

37
will operate on a service-at-cost basis in all its transactions with its members, the association is obligated to account on a patronage basis to all member

patrons on an annual basis for all amounts received

from business conducted with members on a patronage basis, over and above the cost of providing such

services and making reasonable additions to

reserves. Such allocation shall be on the basis on

the volume (dollar value) of product marketed

through (purchased from) the association.

The association is hereby obligated to pay all

such amounts to the patrons in cash or by credits to

a capital account of each member patron.

Section 3. Per-Unit Retains. Each member

also agrees to provide capital in such amounts as

determined by the board of directors based on physical units of product marketed through the association. Such per-unit retains shall be allocated to the

member’s capital credit account,

Section 4. Dividends. No dividends shall be

paid on any capital credits.

Section 5. Records and Documentation. The

books and records of the association shall be set up

and kept in such a manner that at the end of each fiscal year, the amount of capital, if any, so furnished

by each member is clearly reflected and credited in

an appropriate record to the capital account of each

member.

The association shall, within 8-l/2 months

after the close of each fiscal year, notify each member of the capital so credited to the member’s

account. The notice shall be in the form of a written

notice of allocation or per-unit retain certificate (as

those terms are used in Subchapter T of the Internal

Revenue Code) or other appropriate written document. The board shall have discretion to issue such

38
notices and certificates in either “qualified” or “nonqualified” form as permitted by the Internal Revenue

Code and other applicable law.

Section 6. Fiscal Year. The fiscal year of this

association shall commence on the first day of

(month) and end on the last day of

(preceding month).

Equity redemption

A bylaw authorizing redemption of patronage capital and

explaining the method to be used helps insure that, to the extent

possible, current patrons finance the cooperative.

There are three types of equity redemption plans. Most

cooperatives that have an equity redemption program use a

revolving fund plan whereby equities are redeemed in the order

in which they were allocated. The first paragraph of the sample

bylaw presents this approach.

A limited number of cooperatives redeem a percentage of

all outstanding equities each year. Sample language to implement this plan is found in section 1 of the Alternative Equity

Redemption Bylaw (Appendix B).

A few cooperatives have adopted a base capital plan.

Under a base capital plan each member is assigned responsibility for providing a pro rata share of needed capital based on proportional use of the cooperative during a base period. A sample

bylaw authorizing a Base Capital Plan is presented in Appendix

C. Associations interested in such a plan should contact a professional adviser who can draft a scheme tailored to the association’s unique needs.

Some cooperatives grant the board discretion to retire outstanding member equity “out of order” as it deems in the best

interests of the association. Sample language for implementation of the discretionary approach appears in the second paragraph of the sample bylaw below.

Other cooperatives provide a specific redemption preference for equity of the estates of deceased members and/or retired

members who have reached a certain age. An event-specific

preferences clause can be complex, particularly if it attempts to

39
deal with the special problems created by members organized as

legal entities and thus do not regularly retire or die. Sample language covering this situation is provided in section 2 of the sample bylaw in Appendix B.

New associations are not going to be in a position to redeem

equity for several years. But an early commitment to develop a

regular equity redemption program and agreement on the rules for

its implementation will strengthen an association’s cooperative

character and give early supporters some assurance that they will

get their investment back at some time in the future.

Consent

ARTICLE VII. EQUITY REDEMPTION

Section I. Regular Redemption, Revolving

Fund. If at any time the board of directors determines

that the financial condition of the association will not

be impaired thereby, capital credited to members’

accounts may be redeemed in full or in part. Any

such redemption of capital shall be made in order of

priority according to the year in which the capital was

furnished and credited, the capital first received by

the association being the first redeemed.

Section 2. Discretionary Special Redemptions.

Notwithstanding any other provision of these bylaws,

the board, at its absolute discretion, shall have the

power to retire any capital credited to members’

accounts on such terms and conditions as may be

agreed upon by the parties in any instance in which the

interests of the association and its members are deemed

to be furthered thereby and funds are determined by

the board to be available for such purposes.

If the cooperative is to deduct the face value of written

notices of allocation and per-unit retain certificates from taxable

income in the year issued, the Internal Revenue Code requires

patrons to consent to include those amounts in taxable income

40
in the year they receive a notice or certificate, even though the

cooperative retains the funds. The simplest way to obtain consent from members is to include a bylaw making consent a condition for membership. The Internal Revenue Service has published a model consent bylaw which should be adopted.

Another paragraph is inserted making it clear that the

cooperative must explain the meaning of consent to members

and prospective members: this reminds leaders that such an

explanation is also a tax law requirement.

ARTICLE VIII. CONSENT

Each person who hereafter applies for and is

accepted to membership in this association, and

each member of this association on the effective date

of this bylaw who continues as a member after such

date, shall, by such act alone, consent that the

amount of any distributions with respect to his

patronage occurring after the effective date of this

bylaw, which are made in qualified written notices

of allocation or qualified per-unit retain certificates

(as defined in 26 U.S.C. 1388), and which are

received by him from the cooperative, will be taken

into account by him at their stated dollar amounts in

the manner provided in 26 U.S.C. 1385(a) in the taxable year in which such written notices of allocation

and per-unit retain certificates are received by him.

Written notification of the adoption of this

Article, a statement of its significance, and a copy of

the provision shall be given separately to each member and prospective member before membership in

the association.

Nonmember Business

The bylaws should make it clear whether the association

may or may not do business with nonmembers. The sample

bylaw assumes that the association will want the option to conduct nonmember business.

41
If the association does nonmember business, the CapperVolstead Act and many State incorporation laws require that a

majority of the association business be done with or for members. The first three sentences of the sample bylaw are thus

found in most cooperative bylaws.

If an association wishes to qualify for tax treatment under

section 521 of the Internal Revenue Code, it may not do more

than 15 percent of its farm supply business with persons who

are neither members nor producers (business with the Federal

government can be disregarded in making this computation).

The last two sentences in the example cover this situation.

ARTICLE IX. NONMEMBER BUSINESS

This association may conduct business with

nonmembers on either a patronage or nonpatronage

basis. However, this association shall not market the

products of nonmembers in an amount the value of

which exceeds the value of the products marketed

for members. Itshall not purchase supplies and

equipment for nonmembers in an amount the value

of which exceeds the value of the supplies and

equipment purchased for members. It shall not purchase supplies and equipment for persons who are

neither members nor producers of agricultural products in an amount the value of which exceeds fifteen

percent (15%) of all its purchases. Business done for

the United States or any of its agencies shall be disregarded in determining the limitations imposed by

this section.

Nonpatronage Income

Several factors are combining to increase the proportion of

cooperatives that have taxable earnings from nonpatronage

sourced. These factors include a growing reliance on nonmember business to sustain the cooperative, more forceful positions

by IRS auditors to classify investment income as nonpatronage

sources, and less use of section 521. The bylaws should recog42
nize this as special income and provide the board discretion to

add it to a capital reserve, distribute it to members, or put it to

any other lawful use.

I ARTICLE X. NONPAlXONAGE INCOME

The nonpatronage income of the association

shall be its gross receipts derived from all sources

which under law do not qualify as patronage

income, less all expenses properly attributable to the

production of such nonpatronage sources income

and all income taxes payable on such receipts by the

association, Nonpatronage income shall be used in

behalf of the association and its members in accordance with such lawful purposes, including assignment to an unallocated reserve account and allocation in whole or in part to members, as may be

determined by the board of directors.

Handling of Losses

While cooperatives operate at cost over the long term, the

financial world operates for accounting and tax purposes in single-year segments. Sometimes cooperatives have a loss in that

relatively short framework. The bylaws should anticipate the

possibility of a loss year. They should explain how decisions

will be made to allocate the loss on an equitable basis.

The proper treatment of losses by cooperatives for tax purposes has long been a contentious issue between cooperatives

and the Internal Revenue Service. The sample bylaw reflects a

moderate position that financial results on patronage and nonpatronage business should be separated: gains and losses within

each category can be combined, or “netted,” for tax purposes;

and losses under either category can be carried back or forward

to offset earnings in other years under the applicable provisions

of the tax code for businesses in general. As the rules for handling losses are subject to change from time to time, counsel

should be asked to keep informed on this issue and advise the

association when this bylaw may need revision.

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It may also be prudent to include a prohibition on directors

voting a direct assessment on the members. This will prevent

outside interests from pressuring the directors into an action

likely to have a negative impact on member relations.

ARTICLE XI. LOSSES

Section z . Patronage Losses. In the event the association suffers a loss during any year on business conducted with or for patrons, such loss may be apportioned among the patrons during the year of loss so

that such loss will, to the extent practicable, be

borne by the patrons of the loss year on an equitable

basis. The board shall have full authority to prescribe the basis on which capital furnished by

patrons may be reduced or such loss otherwise equitably apportioned among the patrons. In the event of

a patronage loss in one or more departments or divisions of the operation of this association, but not so

much as to cause an overall loss for the fiscal year,

such loss or losses may be prorated against each of

the remaining profitable departments on the basis of

their respective percentage of the net margins during

such fiscal year.

Section 2. Nonpatronage Losses. If in any fiscal year the association shall incur a loss other than

on patronage operations, such loss may be charged

against any reserve accumulated from nonpatronage

earnings in prior years.

Section 3. General Provisions. The board

shall have no authority to make assessments against

members.

This section shall not be construed to deprive

the association of the right to carry backward or forward losses from any source whatsoever in accordance with the Internal Revenue Code or state taxing

statutes.

44
Dissolution

Many of the rules to dissolve a cooperative are contained in

various statutes and are too complex to reproduce in the bylaws.

One issue that should be addressed is how any assets that might

remain after all liabilities are met should be distributed. In a

noncooperative corporation this is usually done on the basis of

stock ownership and, if the bylaws are silent on this issue, this

may be the rule imposed on cooperative members by a court. It

is a good idea to consider language in the bylaws of a cooperative making clear that such a distribution will be on the basis on

patronage.

I

ARTICLE XII. DISSOLUTION AND PROPERTY

INTEREST OF MEMBERS

Upon dissolution, after all debts and liabilities

of the association shall have been paid, all shares of

preferred stock and common stock redeemed, and all

capital furnished through patronage shall have been

retired without priority on a pro rata basis, the

remaining property and assets of the association

shall be distributed among the members and former

members in the proportion which the aggregate

patronage of each member bears to the total patronage of all such members insofar as practicable,

unless otherwise provided by law.

Indemnification

As the trend toward litigating to test the validity of various

decisions by corporate leaders has grown, so has the possibility

that directors, officers and employees may be found personally

liable for the adverse consequences of their decisions. This has

made some people understandably reluctant to assume leadership positions, particularly as unpaid or minimally compensated directors and officers.

State governments, recognizing the valuable role directors

and officers play in corporate affairs, have adopted a variety of

45
laws limiting liability of corporate leaders and permitting corporations to shield leaders from direct personal loss for decisions

they make on behalf of the corporation.

In many States this is a developing area of the law, and the

extent of permissible indemnification changes frequently. To

encourage members to serve as directors, and to make sure leaders don’t shy away from innovative ideas, cooperatives should

consider a bylaw accepting the maximum amount of responsibility for indemnification permitted by State law.

Prudent risk management usually includes the purchase of

liability insurance to protect against an indemnification claim

that might otherwise lead to significant exposure for the association. This coverage can seem quite expensive, so the sample

language uses the permissive term “may” rather than the mandatory term “shall.” But whenever possible, this insurance should

be obtained to avoid exposing member assets to unacceptable

risk.

I

ARTICLE XIII. INDl3MNIFICATION

The association shall indemnify its officers,

directors, employees, and agents to the fullest extent

possible under the provisions of the

(applicable State law), as it may be amended from

time to time.

The association may purchase liability insurance coverage for any person serving as an officer,

director, employee or agent to the extent permitted

by applicable State law.

Amendment

It is important for cooperative leaders to remember that

bylaws are not set in stone. They can, and should, be changed

whenever they stand as a barrier to cooperative activity desired

by the member-owners and permissible under the law.

While the incorporation statute will include language permitting amendment of the bylaws and setting out how this can

be accomplished, a bylaw on amendment is usually included to

46
remind leaders that change is possible and to call attention to

any unusual legal requirement, such as a higher than normal

positive voting requirement, that may be applicable.

ARTICLE XIV. AMEXWMENTS

If notice of the character of the amendment

proposed has been given in the notice of meeting,

these bylaws may be altered or amended at any regular or special meeting of the members by the affirmative vote of (_) of the members present or voting by proxy.

Again, these are only examples of the provisions common

to most cooperative bylaws. Virtually any other rule can be

included that is permissible under law. It is up to the leaders

and members of a cooperative to craft a set of bylaws that guides

the association to serving members’ needs.

MARKETING AGREEMENT

Cooperatives that market farm products and other goods of

their members will usually want a separate contract with each

member establishing the terms upon which they will conduct

their business transactions. This contract is commonly called a

marketing agreement.

If the members only want the cooperative to serve as a

home-of-last-resort for product that can’t be sold elsewhere, then

a marketing agreement is not necessary. But if the members

want an organization that will enhance the return they earn on

all of their production, then a marketing agreement is an important marketing tool.

The marketing agreement is a unique contract in that,

because the members own ,and control the cooperative, the

members are entering into a contract with themselves. But it is

more accurate to picture the agreement as a contract between

each individual member and the membership as a whole.

An important key to making the system work is for everyone to remember that the cooperative is democratically con47
trolled by the members. No individual member has a right to

unilaterally cancel or change the marketing agreement, and the

leadership should not insist on arrangements that are contrary to

the wishes of a majority of the membership.

The marketing agreement builds on the patronage commitment section of the organizational agreement. Each individual

member’s obligation to the organization committee is transferred

to the new cooperative entity.

While the basic content of the articles and bylaws is standardized throughout the cooperative community, the substantive

provisions of the marketing agreement are influenced by the custom and trade of the market for the commodity covered by the

agreement. Thus the sample language may need substantial

modification to meet member needs.

As with the articles and bylaws, the terms of the marketing

agreement are binding until changed, but they are not etched in

stone. The association-represented by its officers and directors-and the members are free to adopt an approach to any

issue different than the approach set out in the organization

agreement or in previously adopted marketing agreements.

Introduction

These initial provisions identify the parties to the contract,

the cooperative and the producer, and usually establish any

other requirements that the producer must meet, including any

initial equity investment obligation, to be a member of the cooperative.

I

MARKEUINGAGREEMENT

THIS AGREEMENT, made as of this _ day of

x9_, by and between , herein referred to as “Producer,” and

t an agricultural cooperative

having an office at

, herein referred to as “Association”.
RECITALS

A. Association is an agricultural cooperative

organized under the laws of the State of .

B. Producer is a member of the Association

who produces .

C. Producer has purchased one share of common voting stock and paid to Association the sum of

dollars ($), calculated at the rate of $

per -(unit) of (product) as specified in

Producer’s membership application, receipt of which

is acknowledged as an equity investment in the

Association. This entitles Producer to all the benefits of membership in the Association as long as

Producer complies with the articles of incorporation

and bylaws of the Association and the provisions of

this agreement.

In consideration of the mutual covenants and

obligations contained herein, the parties agree as follows:

sales Terms

This provision outlines how the association will sell the

products and pay the member-patrons. The first paragraph normally defines the obligation of the producer to deliver product

to the association. The same three options outlined in the

patronage commitment examples for the organization agreement-full production, defined volume, and set acreage-are

available for use in setting the delivery commitment once operation begins, The defined volume option is utilized in this example, so if another type of obligation is adopted, appropriate modification of the first paragraph should be made.

The second paragraph explains how the association will

distribute the proceeds of resale to the member. Two ways of

accounting for these proceeds are common. One is sometimes

referred to as a gross margin operation. The association agrees

49
to pay the member the going market price for the product, less

deductions for operating expenses. After the end of the fiscal

year, any margin is returned to the producers as a patronage

refund.

The other is called the pooling method. In this arrangement all proceeds above expenses are returned to the producers

on the basis of patronage. Such associations do not generate

margins, as such, and thus lack access to retained patronage

refunds to obtain equity.

Pooling cooperatives must rely on per-unit retains and

other means of raising capital. An example of draft language for

each option is set forth below.

Other terms of sale should also be included in the agreement. Sample language on several areas commonly covered are

provided: responsibilities for delivery and for inspection and

grading of the product; authorization for the association to pledge

the product and sales proceeds as collateral for loans and otherwise exercise the rights of ownership: authorization for the association to withhold fees to cover operating expenses and capital

retains from checks to growers; and an explanation of how the

parties to the contract will deal with liens against the product.

Section 1. Sale of (product).

Association agrees to buy and Producer agrees to sell

to Association (number) (units) of

(product) as defined by USDA standards and grown

by Producer. This agreement is intended by the parties to pass an absolute title to (number)

_ (units) of (product) grown by Producer

as soon as they have a potential existence but such

(product) shall be at the risk of Producer until delivery.

* * * * * * OPTION - Gross Margin Operation * * * * l l

Section 2. Payment to Producer. Association

shall market Producer’s (product) and

Producer shall accept as payment for Producer’s

(product) a price based on the current market price

in the area for (product) of like grade and

50
quality.

Association shall pay the amount due

Producer, less deductions authorized in Section 6 of

this agreement, not more than _ days after delivery of [product) to Association or Association’s

prescribed buying location.

l * * l l * OPTION - Pooling Operation l l * * * *

Section 2. Payment to Producer. The

Association may at any time pool any or all

(product) of Producer with any other

(product) of a similar kind and grade. Producer shall

receive, for (product) pooled, a unit price

equal to the average net unit price obtained for the

pooled (product), less deductions authorized

in Section 6 of this agreement.

Association shall make an advance payment to

Producer of percent of the current market price in

the area for (product) of like grade and quality

not more than _ days after delivery of (product) to Association or Association’s prescribed buying

location.

Section 3. Delivery. All (product) shall

be delivered by Producer at Producer’s expense at

the earliest reasonable time after harvesting, or at

such time as called for by Association, to

Association’s principal place of business or to one of

Association’s authorized buying locations as prescribed by Association. The Association will use its

best efforts to locate buying locations within a reasonable distance from Producer’s farm.

Section 4. Inspection and Grading. Prior to

acceptance by Association, all (product) shall

be inspected and graded by the USDA in accordance

with USDA standard rules and regulations.

All purchases and/or marketings of

(product) received by Association from Producer

51
shall be based upon USDA grade, and Producer

agrees to accept the grading established by USDA.

Section 5. Loans and Security. Association

shall have the power to borrow money for any purpose on the security of the (product) delivered to Association, the products derived thereupon,

and evidence of such products or by-products, or

cash or accounts arising from the sale thereof, and to

give a lien, either legal or equitable, thereon as the

absolute owner and/or marketing agent thereof.

Association may commingle such products and byproducts with other products and by-products of like

grade and variety and shall exercise all other rights

of ownership without limitation.

Section 6. Deductions. Association agrees to

purchase from and/or market for Producer the

(product) set forth in Section 1 and to pay to

Producer for said (product) the price set forth

in Section 2, less the following deductions authorized by Producer:

a. An amount to be determined annually

by the board of directors, in the sole discretion of the board, to meet the general contingencies of the business of the Association

including operating expenses.

b.A$ . per___ (unit) capital retain

deduction by the Association on the purchase

price of each _(unit) of (product)

received from Producer.

Section 7. Liens. Producer shall notify the

Association of any lien on any (product) covered by this agreement. Producer shall obtain permission from the lien holder for Association to market such (product) and to retain any

deductions from the payments to Producer autho52
rized hereunder and under the articles of incorporation and bylaws of the Association. After any such

deductions, Producer authorizes the Association to

apply the balance of the sale proceeds, or so much

thereof as necessary, for payment of the lien.

Enforcement

As a member owned and controlled entity, one of the most

sensitive areas of management and leadership in a cooperative is

the disciplining of members who violate their agreements with

the association. But unless each member honors his or her obligations to the association, the collective strength of the venture

is weakened and the entity’s chance of success is diminished.

This is especially true where a marketing agreement is in

effect. Management has to be able to anticipate the amount of

product that will be delivered so it can plan for its processing

and resale. Disruptions in anticipated delivery by natural causes, such as drought, are usually excused under a so-called “Act

of God” clause in the cooperative’s contracts with buyers. But if

members simply do not deliver product to the association as

promised, management may be forced to buy product on the

open market to meet association commitments or even default

on its own contractual obligations.

Usually a member knowingly violates the marketing agreement because the member thinks he or she can get a better price

somewhere else.

In the short term, this may indeed be the case. No firm

always has the best price in a competitive market. But a cooperative must view itself as a long-term undertaking. If some members are allowed to forsake the cooperative for personal shortterm gain, they do so at the expense of those members who

honor their agreement. Because the marketing agreement is a

contract between each individual member and the membership

as a whole, the leadership has the responsibility to protect the

interest of the group as a whole. That means taking steps,

including legal action if necessary, to enforce the marketing

agreement.

Most State cooperative incorporation statutes permit contractual provisions to facilitate enforcement of marketing agree53
ments. One is the inclusion of language providing for liquidated

damages. In general corporate law, an injured party must prove

the extent of the loss with great specificity to be eligible for compensation. This can be very difficult to do when agricultural commodities are involved. Their value changes by the day, or even by

the minute. So in this instance, the parties can agree through contract on a specific level of damages, called liquidated damages,

that will be the penalty for violating the contract. The level must

be high enough to truly discourage breaches of the contract and to

compensate the other members for their loss. A frequently used

rule-of-thumb is 25 percent of the estimated market value of the

commodity if it had been delivered under the contract.

Marketing agreements also usually authorize the association to go to court and seek a restraining order against either

actual or anticipated breach of the contract.

The agreement may also make the offending party liable for

legal fees incurred by the association in defending the agreement.

Section 8. Liquidated Damages. The remedy

at law would be inadequate and it would be impracticable and difficult to determine the actual damages

to the Association should Producer fail to deliver the

(product] covered by this agreement. Therefore,

regardless of the cause of such failure, Producer

agrees to pay to the Association for all such

(product) delivered or disposed of by Producer, other

than in accordance with the terms of this agreement,

a sum equal to _ % of the fair market value of the

product at the close of business on the day the product should have been delivered to the Association,

as liquidated damages for the breach of this agreement.

All parties agree that this agreement is one of

a series dependent for its true value on the adherence of all the contracting parties to all of the agreements, but the cancellation of any other similar

agreement or the failure of any of the parties thereto

to comply therewith shall not affect the validity of

this agreement.

Failure to deliver the (product) commit54
ted herein due to ACTS OF GOD shall not constitute

a breach of this agreement.

Section 9. Specific Performance. Producer

agrees that in the event of a breach or threatened

breach by Producer of any provisions of this marketing agreement regarding delivery of (pmduct),

the Association shall be entitled to a preliminary

restraining order and an injunction to prevent breach

or further breach hereof and to a decree of specific

performance hereof. The parties agree that this is a

contract for the purchase and sale of personal property under special circumstances and conditions and

that the Association may, but shall not be obligated

to, go into the open markets and buy -(product)

to replace any that Producer may fail to deliver.

Section 20. Legal Costs and Expenses. If the

Association brings any action whatsoever by reason

of a breach or threatened breach of this agreement,

Producer shall pay to the Association all court costs,

costs for bonds, travel expenses and all other

expenses arising out of or caused by the litigation,

including reasonable attorney’s fees expended or

incurred by Association in such proceedings, and all

such costs and expenses shall be included in the

judgment.

Termination and Renewal

Management doesn’t want to have to get every member to

sign a new agreement each year, and the producers aren’t going

to want to be obligated to continue to patronize the cooperative

if it isn’t meeting their needs. A provision providing that the

contract automatically renews itself for another year unless

either the cooperative or the member provides notice during a

specific period of time-usually about a month during a slow

period in production and cooperative activity-that it wants to

terminate the agreement gives adequate flexibility and stability

to the relationship.

55
Section 2 1. Termination and Renewal. After

this agreement has been in effect one year from the

date of execution, either party may terminate it in

any year by notifying the other party in writing

between (date) and (date). It is mutually agreed that failure to so terminate in any year

shall constitute conclusive evidence that the parties

have renewed this agreement for another year.

Miscellaneous Provisions

Individual cooperatives have adopted numerous additional

provisions to tailor their marketing agreements to their individual needs. Examples of some of the more common, but by no

means all, of these types of provisions are provided.

Nonconforming agreements. From time to time, the association may want to alter the terms of its marketing agreement.

This may occur when numerous agreements are in effect, and it

is a good cooperative practice to treat all member equitably.

Therefore, a provision permitting nonconforming contracts, but

offering persons with ongoing agreements the option to change

to the new agreement, often called a “most favored nation

clause,” can be useful. If the association wants to bring all

agreements back to uniformity, it can do so during the next time

period for terminating existing agreements.

Section 12. Nonconforming Agreements.

Association may enter into agreements with other

growers differing in terms from those contained herein, consistent with the bylaws of the Association,

without invalidating this agreement, provided that

Producer at Producer’s request may sign a similar

agreement as a substitute for this agreement.

No contrary agreements. One of the most difficult legal situations to untangle involves the member who signs more than

one contract for the sale of the same commodity. A clause forbidding such activity helps place the responsibility for injuries

suffered by the cooperative on the member.
Section 13. No Contrary Agreements. Producer warrants that Producer has not contracted to sell, market, consign, or deliver and will not contract to sell,

market, consign, or deliver any (product) during the term of this agreement to any person, firm or

corporation, contrary to this agreement.

Forfeiture of membership. If a member is going to disregard the terms of the marketing agreement, the cooperative is

usually better off without that person as a member. A provision

giving the board authority to revoke the membership of a member who violates the agreement gives appropriate discretion to

the directors in dealing with a breach of the contract.

Section 14. Forfeiture of Membership.

Violation of this agreement in any material respect

by Producer shall be grounds for the board of directors to terminate Producer’s membership in the

Association.

Abide by articles and bylaws. A similar provision requiring members to abide by the articles and bylaws, as written at

the time the agreement is signed or subsequently a&nded,

makes it clear that a member can’t abrogate the agreement if the

membership approves a change in the cooperative organizational documents the individual member doesn’t like. That member

must honor the agreement until the annual period for orderly

termination arrives.

I

Section 15. Articles and Bylaws. Producer

agrees to conform to and observe the articles of

incorporation and bylaws of the Association now in

force and as they may be amended hereafter.

Assignment. Sometimes reorganizations occur during the

year at either the association or the member level. The right of a

new entity replacing one of the parties to enforce the contract

can be clarified in the agreement itself. Because the association

is the members as a whole, it can usually assign its rights at will.

However, to protect against one member assigning rights to an

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unqualified person, usually a member must have board approval

to assign contract rights.

Section 26. Assignment. This agreement may

be assigned by the Association in its sole discretion.

Producer may assign this agreement, but only upon

written authorization granted by the board of directors of the Association.

Entire agreement. A major cause of disputes over business

contracts is the unwritten exception. One party to the contract

will say, “I know the contract says that, but you told me you

would do this.”

Marketing agreements will frequently include language

stating that the organizational documents and the agreement

itself are the only contracts between the parties and no oral or

other types of agreements will be honored. The manager, in particular, needs to be reminded of this rule. Special unauthorized

promises or “deals” for selected members can do serious harm to

the cohesiveness of the association.

~ Section 17. Entire Agreement. It is agreed that

the articles of incorporation and the bylaws of the

Association, now or hereafter in effect, and this marketing agreement constitute the entire agreement

between the Association and Producer, and that there

are no oral or other conditions, promises, covenants,

representations, or inducements in addition to, or at

variance with, any terms of this agreement.

Governing law. Even if an association intends to limit its

activity to a single State, disputes that involve the marketing

agreement can arise from transactions that cross State lines in

any number of ways. To avoid arguments over which State’s law

shall be applied, the contract might have a clause naming the

State. This can be particularly important if the association is

incorporated under a statute of a State different from the one

where its headquarters are located.
I

Section 18. Governing Law.

This agreement shall be governed by the laws of the

State of ,

Signatures. To make the contracts official, they must be

signed by both parties. If the producer is a business and not a

real person, the association should check to make sure the

signee for the business is authorized to enter into such agreements for the business.

IN WITNESS WHEREOF, these parties have executed

this agreement as of the day, month and year first

above written:

Producer

(Cooperative name)

BY

President

ATTEST

I Secretary

MEMBERSHIP APPLICATION

When a person applies for membership in a cooperative, it

is a good idea to have a simple document that ties the loose ends

together and, when approved, serves as official notice that the

applicant is a bona fide member of the association. If the articles, bylaws, and marketing agreement are well drafted, this

need be little more than a summary of the commitments made.

Applicant certifies that the requirements of membership have

been met, and the appropriate cooperative officers, usually the

president and secretary, acknowledge board approval of the

applicant.

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MEMBERSHIP APPLICATION

Applicant’s Statement. I hereby apply for membership in and agree to

abide by the articles of incorporation and bylaws of

the association, now and hereafter in effect, copies of

which have been presented to me for inspection. I

certify that I am a producer of , have tendered the purchase price of one share of common

voting stock, have signed a marketing agreement,

and met such other qualifications for membership as

have been explained to me.

After my membership shall have been in

effect for one year from the date of its acceptance by

the association, either party may terminate it by notifying the other party in writing of this intention

between (date) and (date) of any

year. If neither of the parties to this agreement so

notifies the other, it is mutually agreed that this shall

constitute conclusive evidence that the parties have

renewed this agreement for another year.

Date ,199_.

Applicant’s: name

address

telephone number

social security number

Applicant’s signature

Acceptance. This certifies that

is a member of and is

entitled to all of the rights, benefits, and privileges of

membership in the association.

Date , 199_.

President:

Secretary:
As mentioned earlier, familiarity with the documents

reviewed in this report is an ongoing responsibility of each

cooperative leader, particularly members of the board of directors. The same is true for other important cooperative papers:

e.g., audit reports and current financial statements, board policies, loan agreements, the manager’s job description, and minutes of board and membership meetings.

As the manager’s job is to run the day-to-day operations of

the cooperative, the manager acquires the necessary familiarity

with these items as part of his or her ongoing duties.

Directors usually don’t have the continuous contact with

the business that the manager does. They need to have the documents available so they can look up information and ask

informed questions when necessary. A good director handbook

meets this need.

The director handbook can be nothing more than a solid

three-ring binder that contains up-to-date copies of all documents the directors need to set cooperative policy. Every new

director should get a current handbook as soon as he or she is

elected to the board. At each board meeting the manager or the

president should distribute minutes of the previous meeting and

new versions of any documents that have been modified or

adopted since the last meeting. Time should be taken to make

sure the directors place the new pages in the proper place in the

book and to let the directors review and ask questions about the

additions and replacements.

The director handbook will get the important cooperative

papers out of the file cabinet and into the mainstream of the

decision-making process. It will minimize the likelihood leaders will innocently violate a provision of the articles and bylaws,

contracts, or other written guidelines. It will provide ready

answers to questions about the limitations on managerial discretion imposed by these documents. And it will facilitate the conduct of business meetings in a professional and efficient manner.

In summary, it will soon become a valuable tool for cooperative

management and planning.

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Appendix A. Election of Directors

by Districts (bylaw provision)

ARTICLE III. DIRECTORS AND OFFICERS

Section 2. Election of Directors by Districts.

(Two paragraphs as in sample language on page 29,

main text. Next, add the following:)

The territory in which the association has

members shall be divided into _ (same number as

number of directors) districts. The respective districts and their boundaries shall be established by

resolution of the board of directors.

The board of directors may from time to time

change the boundaries of one or more districts by

adding territory not included within any district, by

adding to one district territory previously included

in another district, or by excluding from a district a

part of its territory.

There shall be as many directors as there are

districts, one director to be elected by the members

of each district. However, when the number of districts is an even number, there shall be one additional director to be known as a director-at-large and to

be elected by all members of the association. A district director must be a resident of, or be a producer

of agricultural products in, the district for which

such director is elected or appointed.

Any questions as to the effect of any changes

made in district boundaries, or the number or identity or districts, shall be conclusively determined by

the board of directors.

Nominations for directors, either for a district

or at large, shall be made by petition addressed to

the secretary of the association requesting placement

on the ballot of the name of the person so nominated. Such a petition nominating a district director

shall be signed by not less than _ members of that

district. Such a petition nominating a director-atlarge shall be signed by not less than _ members of

the association.

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Appendix B. Equity Redemption

(alternative bylaw)

ARTICLE VII. EQUITY REDEMPTION

Section I. Regular Redemption, Percent of

All Equities. It shall be the policy of the association,

when other redemption priorities set forth herein

have been met, and when funds are available, to

redeem in cash a percentage of each member

patron’s capital credits, rather than ratably by year.

The time and method of any such redemption shall

be determined by the board of directors.

Section 2. Specified Special Redemptions.

The association shall give priority to redemption of

members’ capital credits held by deceased persons

for the settlement of their estate. The association

shall thereafter grant priority redemption to capital

credits of former members who have attained their

65th birthday and are no longer actively engaged in

agricultural production as actual producers or landlords in share tenancy. The time and method of

such redemption shall be determined solely by the

board of directors, dependent upon the financial

condition of the association. In the case of redemption of the equities of those persons who have

attained age 65 and retired from farming, preference

may be given to the oldest retirees in establishing the

order of priority among those eligible.

In the case of a corporation or partnership

holder of members’ capital credits, such corporation

or partnership shall be considered eligible for priority treatment to the same extent as the individual

stockholders of such corporation or partners of the

partnership would have qualified, if each individual

stockholder or partner were an individual memberpatron of this association. Any redemption shall be

made to the corporation or partnership, and not to

the individual stockholder or partner thereof.

Each corporation or partnership shall report to

the association the percentage of ownership interest

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in the corporation or partnership of each of its stockholders or partners. Failure to report accurately the

percentage of individual ownership interest shall

disqualify any allocations made to the corporation or

partnership by this association from redemption priority. If a corporation or partnership should dissolve, its capital credits in this association shall be

prorated among, and transferred to, the individual

stockholders or partners and considered for redemp

tion on an individual ownership basis. The amount

of any redemption or prorate related to a corporate

or partnership member shall be determined by the

percentage of ownership interest as reported by the

corporation or partnership.

When two or more persons are holders of capital credits as tenants in common, without a designation of rights of survivorship, they shall be deemed

by this association to be acting as partners and shall

be subject to the same requirements as a partnership.

Capital credits held in joint tenancy with

rights of survivorship shall be considered for priority

of redemption according to the qualifying status of

the youngest member of the joint tenancy or, in the

event of death of one of the joint tenants, of the survivor.
Appendix C. Base Capital Plan

(bylaw provision)

ARTICLE VII. EQUITY REDEMPTION

Section 1. Members’ Equity Requirements.

Each year the board of directors shall determine the

amount of equity capital necessary for successful

operation of the cooperative.

The total amount of member volume and the

volume each member has marketed through the association during the past _( ) years shall be calculated.

Each member’s equity requirement is equal to

the amount of equity, determined necessary by the

board of directors, multiplied by the member’s proportion of the association’s total member volume

during the base _ year period.

Section 2. Member Investment. Members can

invest equity to meet their requirements by direct

cash investment, allocated patronage refunds, and

per-unit capital retains.

Section 3. Member Account Adjustments. At

the end of each fiscal year the association shall recalculate each member’s capital credits account to

include all per-unit retains for the year and each

member’s share of patronage refunds for the year.

(a) If a member’s total capital credits are less

than the member’s equity requirement for that year,

cash returns on business done with the association

will be limited to those required by the Internal

Revenue Code or other applicable law.

(b) If the member’s capital credits, less any

cash that must be refunded to comply with the

Internal Revenue Code or other applicable law, are

greater than the member’s equity requirement for

that year, the excess shall be redeemed in cash within g-112 months after the close of the association’s

fiscal year.

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