New State Statutes Allow Nonmember Equity Capital for Cooperatives

Shermain D. Hardesty

In the Spring of 2001, the Wyoming Processing Cooperative Statute was adopted It allows both patron and nonpatron investment in a cooperative. This change resulted from Wyoming lamb producers' desire to form a cooperative to process value-added product using a new generation cooperative model. In July, 2003, Minnesota adopted similar legislation. Other states, including Wisconsin and North Dakota, are considering similar reforms; they are motivated by the desire to expand rural development opportunities. Numerous cooperative leaders have expressed concern about these reforms.

The key provisions of the Wyoming statute are reviewed below. Although the law was designed with agriculture cooperatives in mind, it has applicability to other types of cooperatives, including purchasing, housing, utility and health, care cooperatives.

The Wyoming Statute

The Wyoming Statute enables cooperatives to be organized as unincorporated associations similar to Limited Liability Companies (LLCs). There are four key provisions to the statute:

1. The cooperative's owners are divided into two classes: "Patron members" have rights and obligations of delivery of product to the cooperative; and "Nonpatron members" who have no product delivery obligations and are primarily investors. Patron members may participate also as investors.
2. Voting rights are differentiated between patron and nonpatron members. Patron members vote using a one member, one vote basis, subject to certain exceptions. Nonpatron members have voting rights proportional to their investment, or as otherwise provided in the bylaws. However, they are limited to a maximum of 85% of the total member voting rights.
3. At least one member of the cooperative's board of directors must be elected by the patron members. Directors elected by patron members must have at least 50% of the voting power in Board voting decisions.
4. Patron members are allocated distributions based on their patronage, while investment members are allocated financial rights proportionate to their capital contributions. However, patron members must receive at least 15% of the cooperative's profit allocations and distributions.

Like traditional cooperatives subject to Subchapter T of the Internal Revenue Code, cooperatives organized under the Wyoming statute are allowed pass-through taxation on their patron-based earnings. However, they are also eligible for pass-through taxation on the profits from their nonpatron business; this is similar to the tax treatment of LLCs. If they have nonpatron members, they are not eligible for the antitrust protection provided by the Capper Volstead Act to agricultural cooperatives.

Questions

These reforms raise many questions in the cooperative community. Cooperative leaders are concerned that they undermine the user-driven nature of cooperatives. After all, can a business that pays out 85% of its returns to nonpatrons truly operate for the benefit of its user members and be considered a cooperative?

However, agricultural cooperatives often require significant capital to operate and compete effectively. The trend in conversion of cooperatives to non-cooperative forms, such as LLCs, has been attributed to the need to gain greater access to equity. If investment capital in cooperatives is constrained by both producer/patrons' lack of capital and institutional requirements, can the cooperative form of business in the US survive? Can the cooperative model be restructured to have more flexibility without destroying its unique user-driven nature? These questions deserve significant attention from cooperative leaders and researchers.

Footnotes

¹ This description is based on the 2002 report, "A Cooperative Without Corporate Tax Restrictions: The Wyoming Processing Cooperative Law" by Mark Hanson. Mr. Hanson is a partner in Lindquist & Vennum, P.L.L.P., the law firm that wrote most of the new Wyoming cooperative law.