Cooperative Information Report       40

Sample Legal Documents for       Cooperatives

Abstract

Donald A. Frederick,       Attorney-AdviserCooperative Services DivisionAgricultural       Cooperative ServiceU.S. Department of Agriculture

        This       report explains the rationale for the primary legal documents required to       establish and operate a cooperative. It discusses each issue usually       covered in each document and presents options that organizers and leaders       might consider in drafting and reviewing the documents. It also provides       sample language for use as a model in drafting new, and updating existing,       cooperative legal documents.

Key words: Cooperative, articles, bylaws, marketing       agreement,   membership agreement, organization.

Cooperative Information Report Number       401990

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 upate 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 poing; the working is       not to be copied without review and thought.

Contents

SAMPLE       LEGAL DOCUMENTS FOR COOPERATIVES

ORGANIZATION       AGREEMENT    Statement of       Purposes    Organization       Committee    Patronage Commitment          Financial Commitment    Calling of Membership       Meeting    Accounting

SELECTING       THE PROPER STATE INCORPORATION STATUTE

ARTICLES       OF INCORPORATION          Heading    Name    Principal Place       of Business    Purposes          Powers    Duration          Directors    Capital Structure          Amendment    Signatures

BYLAWS          Membership    Meetings of Members          Directors and Officers    Duties of       Directors    Duties of Officers          Operation at Cost and Members' Capital    Equity       Redemption    Consent    Nonmember       Busines    Nonpatronage Income          Handling of Losses    Dissolution          Indemnification    Amendment

MARKETING       AGREEMENT          Introduction    Sales Terms          Enforcement    Termination and       Renewal    Miscellaneous Provisions

MEMBERSHIP       APPLICATION

DIRECTOR       HANDBOOK

APPENDIX       A, ELECTION OF DIRECTORS BY DISTRICTS

APPENDIX       B, ALTERNATIVE EQUITY REDEMPTION BYLAWS

APPENDIX       C, BASE CAPITAL PLAN 

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. 

Table       of Contents 

Organization       Agreement

        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 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:
NameAddress________________________________________________________________________________________________
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.

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).

                 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.

4. Producer agrees to purchase one share of           voting common stock of the association, par value $_____ , payable on           demand following a favorable vote by the signees of agreements similar           hereto to 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:

                  $_____ cash on demand following incorporation of the           association,        $_____ on           or before , 19__ , 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 develops. Few associations overcome internal strife during the       formation period to become useful and viable cooperative       enterprises.

5. If, on or before ______, 19__, 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_______ , 19__ , 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 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 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.       

Table       of Contents 

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:

  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.

 A corporation conveys to members and           outsiders the image of a solid, long-lasting venture.

 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:

 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.

 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.

 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:

 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.

 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.

 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 out-of-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:

 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.

 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.

 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 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. 

Table       of Contents 

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.

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 the           ________________.

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______________ , State of ______________.

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 purposes 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.

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.

Powers

        The       State statute authorizing formation of a cooperative will set out in       detail the activities the cooperative may engage in. As a general rule,       the statutory language is copied virtually verbatim into the articles. The       following is an example of a typical statutory provision restated as an       article of incorporation:

ARTICLE IV. POWERS

    This association shall have           the following powers:

                      (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.

                      (c) 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.

                      (f) 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 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.

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 appropriately 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:
NAMEADDRESS____________________________________________________________________________________________________________________________________________________________________________________________________
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 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 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 (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.

* * * * * * * * * * * 

ARTICLE VII. MEMBERSHIP (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.

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 support 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.____________________________________________________________

Table           of Contents

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 for-profit 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 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.

    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 association, 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.           

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 embarassing dispute right before or even during a           membership meeting over how such a member will vote on an issue. Many           cooperatives 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______ , at 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 address of each member not               less than (__) 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 (__%) 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.        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.                  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-of-pocket 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.

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____ (__) consecutive full term(s)               shall be eligible to succeed himself or herself, but after a lapse               of____ (__) year(s) shall 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 qualification 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 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 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 1 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 ____(__ ) 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 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.

ARTICLE 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 association 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, 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.        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.

Duties of Officers

                  While the tasks that go with each major office of a corporation 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 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 shall 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 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 as 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 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, making reasonable               additions to reserves, and redeeming capital credits. 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 8-1/2 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 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 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.

ARTICLE VII. EQUITY           REDEMPTION

                      Section 1. 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.

Consent

        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 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.        If the           association does nonmember business, the Capper-Volstead 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. It               shall 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 sources.           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 sourced, and less use of           section 521. The bylaws should recognize 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.

ARTICLE X. NONPATRONAGE           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 sourced 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.        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 1. 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.

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.

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 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.

ARTICLE XIII.           INDEMNIFICATION

    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 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. AMENDMENTS

                      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. 

Table           of Contents

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 controlled 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.

MARKETING AGREEMENT

THIS AGREEMENT, made as of this___ day               of_____ 19__ , by and between , herein referred to as               "Producer," and __________, 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 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 ******

                      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               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.S

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

                      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 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 by-products 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 authorized 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 short-term 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 agreements. 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) committed 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______               (product), 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 10. 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.

                      Section 11. 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.                 Nonconformimg 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 amended, 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.

                      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 unqualified person, usually           a member must have board approval to assign contract rights.

                      Section 16. 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.

    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:

________________Secretary 

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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.

                               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____________________
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                      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: _____________

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Director           Handbook

        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. (First               paragraph as in sample language on page , 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-at-large 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 1. 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 member-patron 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 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 redemption               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.

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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 8-1/2 months after the close                   of the association's fiscal               year.

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