the law of cooperative corporations university of arkansas llm program, agricultural law, 2007...

The Law of Cooperative The Law of Cooperative CorporationsCorporations

University of ArkansasUniversity of Arkansas

LLM Program, Agricultural Law, 2007LLM Program, Agricultural Law, 2007Fayetteville, ArkansasFayetteville, Arkansas

April, 2007April, 2007

James R. BaardaJames R. Baarda

IntroductionIntroduction

5.Conceptual foundations

4.Current and future issues

3.The law of farmer cooperatives

2.Basic cooperative business

1.Perspectives

Course OverviewCourse Overview

ObjectivesObjectives

Farmer Cooperatives and LawFarmer Cooperatives and Law• An integrated approach• From principles to law and back• What is known• What is uncertain• What is changing

Farmer Cooperatives and LawFarmer Cooperatives and Law• “Organic” cooperative law• Privately created cooperative law• Laws applied to all cooperatives• Laws applied to farmer cooperatives• Laws with peculiar consequences• The law of business• Laws affecting all individuals

Effective CounselEffective Counsel

1. Define the problem2. Identify objectives3. Define options4. Devise action plans5. Predict consequences

1. Define the problem2. Identify objectives3. Define options4. Devise action plans5. Predict consequences

Effective CounselEffective Counsel

1. Relationships2. Obligations3. Transactions


5.Why cooperatives?

4.Matters of principle

3.Corporate entities

2.Basic definitions

1.The business enterprise



5.Federal statutes and programs

4.Proposed uniform law

3.New statutes

2.Incorporation and principles

1.Statutory development

StatutesStatutes


3.Boards of directors

2.Organization control

1.Members

MembershipMembership


5.Current issues

4.The patronage refund

3.Marketing agreements

2.Member relationships

1.Benefits

OperationsOperations


2.Counselor roles

1.Process

FormationFormation


5.Equity redemption

4.Base capital plans

3.Revolving fund system

2.Patronage based equity

1.Techniques and sources

FinanceFinance


5.Non-member equity

4.Globalization issues

3.Strategic alliances, subsidiaries

2.Limited liability companies

1.“New generation” cooperatives

InnovationsInnovations


5.Basic tax rules

4.Patronage refunds defined

3.Section 521

2.Subchapter T

1.Principles

TaxationTaxation


8.Income sources

7.Losses

6.Patronage financing

Taxation (cont.)Taxation (cont.)


5.Undue price enhancement

4.Current issues

3.Scope of behavior

2.Capper-Volstead Act

1.The problem

AntitrustAntitrust


5.Current issues

4.Sarbanes-Oxley implications

3.Blue sky laws

2.Is it a “security”?

1.Statutes and exceptions

SecuritiesSecurities LawLaw


4.Dissolution

3.Conversion

2.Recapitalization

1.Merger, consolidation

RealignmentsRealignments


6.Cooperative life stages theories

5.Cooperative typology

4.Contracts and cooperatives

3.Theories of the firm

2.Economic contract theory

1.Supply chain organization

Tall ThoughtsTall Thoughts


1. What do people need?1. What do people need?2. What institutions have developed 2. What institutions have developed

to satisfy those needs?to satisfy those needs?3. How are processes and systems 3. How are processes and systems

implemented in practice?implemented in practice?

Three Critical QuestionsThree Critical Questions

Human needsHuman needs Spiritual beliefsSelf-fulfillment

Artistic expressionFreedom

Self-determinationSocial interaction

ProcreationSafetyShelter

ClothingFood

Feb 17, 7:43 AM ESTU.N.: Hunger Kills 18,000 Kids Each Day By EDITH M. LEDERER Associated Press Writer UNITED NATIONS (AP) -- Some 18,000 children die every day because of hunger and malnutrition and 850 million people go to bed every night with empty stomachs, a "terrible indictment of the world in 2007," the head of the U.N. food agency said.

James Morris … said that while the percentage of people who are hungry and malnourished has decreased from a fifth of the world's population to a sixth of the population, the actual number of hungry people is growing by about 5 million people a year because of the rising population.

750 children die each hour --from hunger and malnutrition

A child dies every 4.8 seconds --from hunger and malnutrition

By 11:00 Thursday morning, 55,500 children will have died -- from hunger and malnutrition

If we fill every seat in Razorback Stadium,by Friday’s lunch they all will have died --

from hunger and malnutrition

InstitutionsInstitutions Spiritual beliefsSelf-fulfillment




ClothingFood

Economic Activity

Specialization ExchangeMoney

OrganizationOwnershipObligation

Laws

ActionsActions

ImplementationImplementation Spiritual beliefsSelf-fulfillment




ClothingFood

Economic Activity



Laws

Custom, TraditionProperty

Agreements, ContractMarkets

GovernmentBusiness Entities

Spiritual beliefsSelf-fulfillment




ClothingFood

Economic Activity



Laws

Custom, TraditionProperty

Agreements, ContractMarkets

GovernmentBusiness Entities

ImplementationImplementation

Business entities

Agricultural Systems --Agricultural Systems --The “Supply Chain”The “Supply Chain”

Policy

Equity Capital

Services

Credit

Tax, Legal

Research

Institutions

Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing

Marketing/Distribution

Final Market

Farmers and MarketsFarmers and Markets

• Sale on spot marketSale on spot market- - Straight saleStraight sale- Auction- Auction

• Options, derivatives, hedgingOptions, derivatives, hedging


• Coordination by contractCoordination by contract- - Production contractsProduction contracts- Marketing contracts- Marketing contracts


• IntegrationIntegration- - System coordinationSystem coordination- Product ownership- Product ownership- Role of grower- Role of grower


• Cooperation, collaborationCooperation, collaboration

2.Basic definitions

• Sole proprietorshipsSole proprietorships• PartnershipsPartnerships• CorporationsCorporations• CooperativesCooperatives

Syllabus: Introduction

Business Organizational Business Organizational StructureStructure

• Limited liability companiesLimited liability companies• Non-profit organizationsNon-profit organizations• Contracted organizationContracted organization• Quasi-governmentalQuasi-governmental

Syllabus: Introduction

Business Organizational Business Organizational StructureStructure

• InvestmentInvestment• OperationsOperations• FinanceFinance

• InvestmentInvestment• OperationsOperations• FinanceFinance

The “Analytical Triangle”The “Analytical Triangle”

OperationsOperationsOperationsOperations

Investment Operations FinanceInvestment Operations FinanceInvestment Operations FinanceInvestment Operations Finance


The Operating StatementThe Operating StatementThe Operating StatementThe Operating Statement

PurchasesPurchasesPurchasesPurchases

Administrative ExpensesAdministrative ExpensesAdministrative ExpensesAdministrative Expenses

Physical AssetsPhysical AssetsPhysical AssetsPhysical Assets

Financing ExpensesFinancing ExpensesFinancing ExpensesFinancing Expenses

SalesSalesSalesSales

NetNet MarginsMarginsNetNet MarginsMargins


InvestmentInvestmentInvestmentInvestment


The Balance SheetThe Balance Sheet

AssetsAssetsAssetsAssets


Current AssetsCurrent AssetsCurrent AssetsCurrent Assets

InvestmentsInvestmentsInvestmentsInvestments

Plant,Plant,PropertyProperty

EquipmentEquipment


EquipmentEquipment


FinanceFinanceFinanceFinance


The Balance SheetThe Balance Sheet

LiabilitiesLiabilitiesLiabilitiesLiabilities

Member EquityMember Equity Member EquityMember Equity


Short-termShort-termLiabilitiesLiabilities


Long-termLong-termLiabilitiesLiabilitiesLong-termLong-termLiabilitiesLiabilities

MemberMemberEquityEquity

MemberMemberEquityEquity


InvestmentInvestmentInvestmentInvestment OperationsOperationsOperationsOperations FinanceFinanceFinanceFinance

Administrative ExpensesAdministrative ExpensesAdministrative ExpensesAdministrative Expenses

Physical AssetsPhysical AssetsPhysical AssetsPhysical Assets

SalesSalesSalesSales

Financing ExpensesFinancing ExpensesFinancing ExpensesFinancing Expenses

NetNet MarginsMarginsNetNet MarginsMargins

PurchasesPurchasesPurchasesPurchases

Current AssetsCurrent AssetsCurrent AssetsCurrent Assets

InvestmentsInvestmentsInvestmentsInvestments


EquipmentEquipment


EquipmentEquipment



Long-termLong-termLiabilitiesLiabilitiesLong-termLong-termLiabilitiesLiabilities

EquityEquityEquityEquity

AgricultureAgriculture• Local, regional, nationalLocal, regional, national

Types of CooperativesTypes of Cooperatives

• Single, multiple functionSingle, multiple function• Centralized, federatedCentralized, federated

Cooperative

Cooperative

Cooperative

Cooperative


Rural non-agricultureRural non-agriculture


Rural non-agricultureRural non-agriculture• Community, shared servicesCommunity, shared services


Rural non-agricultureRural non-agriculture• Community, shared servicesCommunity, shared services• UtilitiesUtilities


Number 864 distribution 66 G&T

Service 40 million individuals

12% of U.S. population 17 million businesses

States 47Counties 2,500 of 3,141Lines 43% of U.S. linesPower 10% of U.S. kw hours

Number 864 distribution 66 G&T

Service 40 million individuals

12% of U.S. population 17 million businesses

States 47Counties 2,500 of 3,141Lines 43% of U.S. linesPower 10% of U.S. kw hours

Types of CooperativesTypes of Cooperatives Rural non-agricultureRural non-agriculture• Community, shared servicesCommunity, shared services• UtilitiesUtilities• FinanceFinance

Types of CooperativesTypes of Cooperatives Rural non-agricultureRural non-agriculture• Community, shared servicesCommunity, shared services• UtilitiesUtilities• FinanceFinance• Health, insurance, housingHealth, insurance, housing

Types of CooperativesTypes of Cooperatives Other economic sectorsOther economic sectors

Other economic sectorsOther economic sectors• FranchiseesFranchisees


Other economic sectorsOther economic sectors• FranchiseesFranchisees• RetailRetail


Other economic sectorsOther economic sectors• FranchiseesFranchisees• RetailRetail• Shared servicesShared services


Other economic sectorsOther economic sectors• FranchiseesFranchisees• RetailRetail• Shared servicesShared services• Credit unionsCredit unions


Number 8,534Memberships 87.4 millionAssets/credit union $85 millionLoans outstanding $507 billion

Number 8,534Memberships 87.4 millionAssets/credit union $85 millionLoans outstanding $507 billion

Other economic sectorsOther economic sectors• FranchiseesFranchisees• RetailRetail• Shared servicesShared services• Credit unionsCredit unions• “ “Unlimited” possibilitiesUnlimited” possibilities


World of CooperativesWorld of Cooperatives • Total in the United StatesTotal in the United States

- Numbers- Numbers- Descriptions- Descriptions

U.S. Farmer CooperativesU.S. Farmer Cooperatives Number of Cooperatives 2,982

Memberships 2.7 million

Gross Business Volume $116.9 billion

Net Income $1.4 billion

Total Assets $47.8 billion

Net Worth $20 billion

Full-time Employees 163,500

Part-time Employees 59,300

Syllabus: Introduction, p. 2

U.S. Farmer CooperativesU.S. Farmer Cooperatives



• Largest 100 U.S. ag. cooperativesLargest 100 U.S. ag. cooperatives



• Largest 100 U.S. ag. CooperativesLargest 100 U.S. ag. Cooperatives• Largest 100 in the U.S.Largest 100 in the U.S.

AgricultureGroceryEnergy and communications FinanceHardware and lumberHealthcareFoodservice distributionRecreationalMediaFranchise

381818 11732111

Total business, 2005 $140.8 bilTotal assets, 2005 131.1 bil

Total business, 2005 $140.8 bilTotal assets, 2005 131.1 bil



• Largest 100 U.S. ag. CooperativesLargest 100 U.S. ag. Cooperatives• Largest 100 in the U.S.Largest 100 in the U.S.• ICA Global 300ICA Global 300

No. of Global 300

cooperativesRank Country

1 62 USA

2 45 France

3 33 Germany

4 28 Italy

5 19 Netherlands

6 18 Japan

7 16 UK

8 9 Canada

9 9 Finland

10 7 Switzerland

11 6 New Zealand

12 6 Norway

13 6 Sweden

14 5 Spain

15 4 Ireland

Total business volume -- $965 billionTotal business volume -- $965 billion

Global 300 Cooperatives, 2004: Total Turnover and Turnover per cooperative

-

50,000,000,000

100,000,000,000

150,000,000,000

200,000,000,000

250,000,000,000

300,000,000,000

350,000,000,000

Food and A

gr.

Retaili

ng

Insu

rance

Finan

cial

Banks

Health

Care

Mater

ials

Utiliti

es

Energy

Teleco

mm

unicatio

n

Comm

ercia

l S&

S

Transp

orta

tion

Med

ia

Capital G

oods

Consum

er Ser

vices

GICS Group

US$

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000

US$ per cooperative

$US Turnover

Turnover per coop

Global 300 Cooperatives, 2004: Total Turnover and Number of Cooperatives, by Country

0

20,000,000,000

40,000,000,000

60,000,000,000

80,000,000,000

100,000,000,000

120,000,000,000

140,000,000,000

160,000,000,000

180,000,000,000

200,000,000,000

France

Japan

USA

Germany

Nether

lands

Italy

Switzer

landUK

Finland

Korea

Norway

Canada

Sweden

Spain

Denm

ark

New Z

ealand

Belgium

Irela

nd

Austria

China

India

Israe

l

Brazil

Australi

a

Singap

ore

Taiwan, C

hina

Portu

gal

Méx

ico

Country

US$

0

10

20

30

40

50

60

70

Cooperatives

$US Turnover

No. of Global 300 cooperatives

Global 300 Cooperatives, 2004: Turnover and Number of Cooperatives

in Terms of GDP and Population, by Country

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Finland

New Z

ealand

Switzer

land

Nether

lands

Norway

France

Denm

ark

Sweden

Germany

Korea

Irela

nd

Japan

Italy

Israe

l

Belgium

Canada

Singap

ore UKSpain

Austria

USA

Portu

gal

Taiwan, C

hina

Brazil

India

Australi

a

China

Méx

ico

Country

USD Turnover:GDP

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Cooperatives per 1 M population

Turnover:GDP

Coops per 1,000,000 pop.

DescriptionDescription

Business entities

• A matter of principlesA matter of principles• CorporationsCorporations• CooperativesCooperatives• Principles in commonPrinciples in common

DescriptionDescription

Syllabus: Introduction, pp. 17-39


1. Legal person2. Limited liability3. Perpetual existence4. Centralized management5. Standardized relationships


Corporate PrinciplesCorporate Principles

6. Broad range of capital sourcing7. Interests freely transferable


Corporate PrinciplesCorporate Principles

Cooperative PrinciplesCooperative Principles

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


2.2. The User-Control Principle: Those who control the cooperative are those who use the cooperative



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



ICA PrinciplesICA Principles 1. Voluntary and open membership2. Democratic member control3. Member economic participation4. Autonomy and independence5. Education, training and

information6. Co-operation among co-operatives7. Concern for community

Corporate Entity

ControlControl

BenefitBenefit

FinanceFinance

USEUSE

• Rule setsRule sets

Specify RulesSpecify Rules • Rule setsRule sets• Interests recognizedInterests recognized• Rule setsRule sets• Interests recognizedInterests recognized• ObjectivesObjectives

• Rule setsRule sets• Interests recognizedInterests recognized• ObjectivesObjectives• ImplementationImplementation

Specify RulesSpecify Rules

• Rule setsRule sets

User-Control + + + - + - - -User-Ownership + + - + - + - -User-Benefit + - + + - - + -



• Rule setsRule setsSpecify RulesSpecify Rules

• Interests RecognizedInterests Recognized

• Members• Equity holders• Patrons• Creditors• Management

• Employees• Customers• Social interests• Public interests



• Interests RecognizedInterests Recognized Specify RulesSpecify Rules

• ObjectivesObjectives Specify RulesSpecify Rules

The firm -- investor-oriented corporation

Maximize the value of the firm

Maximize stockholder wealth

Maximize stock prices


The firm -- cooperative

“Associations organized hereunder shall be deemed ‘nonprofit’ inasmuch as they are not organized to make profit for themselves, as such, or for their members, as such, but only for their members as producers.”


- The firm –- Each recognized interest,

constituencies


• ImplementationImplementation



• Identity of owners• Governance

Who votes?On what basis?Identity of board of directorsStructure of board

• Management

• ImplementationImplementation Specify RulesSpecify Rules

• OperationsChoices of business activityBenefits generationBenefits allocationStrategies


• FinancingCapitalizationEquity generationInvestmentPatronage-based equityRedemptionPermanencyLiquidity


Rules or framework?Rules or framework? • Effective implementationEffective implementation• Role of legal systemRole of legal system• Roles of legal profession Roles of legal profession


5.Why cooperatives?

• MarketMarket• BargainBargain• SupplySupply• Provide serviceProvide service• Add valueAdd value


What Farmer Cooperatives DoWhat Farmer Cooperatives Do

U.S. Farmer CooperativesU.S. Farmer Cooperatives Cooperative Shares -- Marketing (%)

Milk/milk products 83

Grains/oilseeds 38

Cotton/cottonseed 42

Fruits/vegetables 19

Livestock/wool/mohair 13

All other 12

Total 28


U.S. Farmer CooperativesU.S. Farmer Cooperatives Cooperative Shares -- Supply (%)

Fertilizer 45

Petroleum 46

Crop protectants 34

Feed 15

Seed 13

Total 26


• Market system failureMarket system failure• Certainty of marketCertainty of market• Bargaining powerBargaining power• “ “Competitive yardstick”Competitive yardstick”• Value added captureValue added capture• Risk managementRisk management


Why Cooperatives?Why Cooperatives?

• Self-determinationSelf-determination• EfficiencyEfficiency• Community impactCommunity impact• Social benefitsSocial benefits• Philosophical commitmentPhilosophical commitment• Political objectivesPolitical objectives


Why Cooperatives?Why Cooperatives?

Policy

Equity Capital

Services

Credit

Tax, Legal

Research

Institutions

Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing


Final Market

Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing


Final MarketIndividual

Natural Resources

Other Inputs

ProducerProducerProducerProducerProducerProducerProducerProducerProducerProducerProducerProducer

Buyer

Second Market

Processing


Final MarketIndividual andCooperative

Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing



Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing



Policy

Equity Capital

Services

Credit

Tax, Legal

Research

Institutions

Policy

Equity Capital

Services

Credit

Tax, Legal

Research

Institutions

Natural Resources

Other Inputs

Producer

Buyer

Second Market

Processing





5.Why cooperatives?

4.Matters of principle


2.Basic definitions



the law of cooperative corporations university of arkansas llm program, agricultural law, 2007...

Documents

transactions slide

business enterprise

baarda introduction

law of farmer cooperatives

cooperative law laws

law organic cooperative

law of business laws

agricultural law