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The Law of Cooperative Corporations

The Law of Cooperative Corporations. University of Arkansas LLM Program, Agricultural Law, 2007 Fayetteville, Arkansas April, 2007 James R. Baarda. Finance. 1. 2. Techniques and sources . 3. Patronage based equity. 4. Revolving fund system. 5. Base capital plans. Equity redemption.

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The Law of Cooperative Corporations

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  1. The Law of Cooperative Corporations University of Arkansas LLM Program, Agricultural Law, 2007 Fayetteville, Arkansas April, 2007 James R. Baarda Finance

  2. 1. 2. Techniques and sources 3. Patronage based equity 4. Revolving fund system 5. Base capital plans Equity redemption Finance Syllabus: Finance

  3. 1. 2. “New generation” cooperatives 3. Limited liability companies 4. Strategic alliances, subsidiaries 5. Globalization issues Non-member equity Innovations

  4. Investment Operations Finance Purchases Short-term Liabilities Current Assets Administrative Expenses Physical Assets Long-term Liabilities Investments Financing Expenses Plant, Property Equipment Equity Sales NetMargins

  5. Legal Foundations • Implementation • - Statutes • - Articles of incorporation • - Bylaws • - Certificates • - Policies and practices Syllabus: Finance, pp. 13 - 20

  6. Common statutory provisions [Persons] may form a non-profit, cooperative association, with or without capital stock, under the provisions of this Act. No association shall issue stock to a member until it has been fully paid for. Any association organized with stock under this act may issue preferred stock, with or without the right to vote. Syllabus: Finance, pp. 1,2

  7. 1. Techniques and sources Syllabus: Finance, pp. 1,2

  8. Debt Capitalization • Short-term liabilities • - Secured interests • - Transaction based • Long-term debt • - Loan agreements • - Membership indebtedness • - Bonds Syllabus: Finance, pp. 1,2

  9. Equity Capitalization • Membership equity • Patronage-based equity • Hybrids • “Outside” equity • Off balance sheet financing Syllabus: Finance, pp. 1,2

  10. Cooperative Principles 1.The User-Owner Principle: Those who own and finance the cooperative are those who use the cooperative. Syllabus: Introduction, p. 23

  11. Principles and Finance • Cooperative objectives • Obligation to finance • Ownership and control • Burden of finance • Objectives, burdens, benefits Syllabus: Finance, pp. 1 - 3

  12. User-Control + + + - + - - - User-Ownership + + - + - + - - User-Benefit + - + + - - + -

  13. User-Control + + + - + - - - User-Ownership + + - + - + - - User-Benefit + - + + - - + -

  14. 2. Patronage based equity Syllabus: Finance, pp. 4 - 18

  15. Patronage Refunds Syllabus: Operations, p. 62

  16. “Retained” Patronage Refunds Syllabus: Finance, p. 8

  17. Patronage Refunds Paid in Cash Syllabus: Finance, p. 8

  18. Per-Unit Retains Syllabus: Finance, p. 9

  19. Per-Unit Retains A bylaw provision 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. Syllabus: Finance, pp. 1,2

  20. Distribution

  21. Distribution Cash Non-cash Unallocated Dividends Taxes

  22. Revolving Fund System • Equity contribution • Member equity totals • Current equity needs • Excess equity capital • Redemption of excess Syllabus: Finance, pp. 9 - 11

  23. Syllabus: Finance, p. 10

  24. Syllabus: Finance, p. 10

  25. Revolving Fund System Syllabus: Finance, p. 11

  26. Revolving Fund System A bylaw provision 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 being the first redeemed. Syllabus: Finance, pp. 1,2

  27. Base Capital Plan • Equity contribution • Member equity totals • Current equity needs • Member share Syllabus: Finance, pp. 11 - 13

  28. Base Capital Plan Syllabus: Finance, p.12

  29. Current Assets Administrative Expenses Investments Plant, Property Equipment Investment Operations Finance Purchases Purchases Short-term Liabilities Physical Assets Long-term Liabilities Financing Expenses Member Equity Sales NetMargins

  30. Current Assets Administrative Expenses Investments Plant, Property Equipment Investment Operations Finance Purchases Purchases Short-term Liabilities Member Equity Patron A -- $3,205 Patron B -- $1,518 Patron C -- $4,993 Patron D -- $2,090 Patron E -- $1,364 Physical Assets Long-term Liabilities Financing Expenses Sales NetMargins

  31. Net Worth as Percentage of Total Assets

  32. Current Assets Administrative Expenses Investments Plant, Property Equipment Member Equity Investment Operations Finance Purchases Purchases Short-term Liabilities Physical Assets Long-term Liabilities Financing Expenses Sales NetMargins

  33. Current Assets Administrative Expenses Investments Plant, Property Equipment Member Equity Investment Operations Finance Current Assets 51.4% ----- Fixed Assets 30.8% ----- Other Assets 17.7% Purchases Purchases Current Liabilities 39.1% ----- Long-term Debt 20.8% ----- Equity Capital 40.9% Short-term Liabilities Physical Assets Long-term Liabilities Financing Expenses Sales NetMargins

  34. Current Assets Administrative Expenses Investments Plant, Property Equipment Member Equity Investment Operations Finance Current Assets 51.4% ----- Fixed Assets 30.8% ----- Other Assets 17.7% Purchases Purchases Equity Capital ========== Allocated Equity 76.5% ----- Unallocated Equity 23.5% Short-term Liabilities Physical Assets Long-term Liabilities Financing Expenses Sales NetMargins

  35. Equity Redemption • Regular or special • Conflicts • Establishing rights, obligations • Description of the system • Board of directors’ role Syllabus: Finance, pp. 13 - 20

  36. Equity Redemption • Debt or equity • - Significance • - Balance sheet • - Set-off • - Atchinson County • Convertibles, redemption Syllabus: Finance, pp. 19 - 42

  37. Equity Redemption • Legal issues • - Contract • - Course of conduct • - Liens on equity • - Setoff • - Valuation Syllabus: Finance, pp. 19 - 42

  38. Equity Redemption • Degree of obligation • - Fiduciary relationships • - Sources of obligation • - HAJMM v. House of Raeford • Importance of clarity • Flexibility v. certainty Syllabus: Finance, pp. 19 - 61

  39. Equity Redemption • Triggering events • - Membership change • - Patronage change • - Passage of time • Lambert v. Fishermen’s Dock • Accounting and “convergence” Syllabus: Finance, pp. 61 - 75

  40. 1. 2. Techniques and sources 3. Patronage based equity 4. Revolving fund system 5. Base capital plans Equity redemption Finance Syllabus: Finance

  41. 1. 2. “New generation” cooperatives 3. Limited liability companies 4. Strategic alliances, subsidiaries 5. Globalization issues Non-member equity Innovations

  42. Cooperative Challenges – External • Globalization • Concentration • Industrialization • Size and complexity • General and specific

  43. Cooperative Challenges – Internal • Meeting the “competition” • Member expectations • Diminished commitment • Finding good people • Management ambitions

  44. Inherent Cooperative Limitations • Homogeneity • Horizon • Scope • Membership • Governance • Equity • Competitive yardstick • Markets and growth

  45. 1. “New generation” cooperatives Syllabus: Finance, pp. 76 - 78

  46. “New Generation” Cooperatives – Capital • Capital requirements • - Total capital • - Capital and product • Up-front contribution Syllabus: Finance, pp. 76 - 78

  47. “New Generation” Cooperatives – Delivery • Unit measures • Capital and delivery basis • Right and requirement Syllabus: Finance, pp. 76 - 78

  48. “New Generation” Cooperatives – “Closed” membership • Total production needs • Equity investment Syllabus: Finance, pp. 76 - 78

  49. “New Generation” Cooperatives – Tradable Equity Interests • Producer to producer • “Market” price Syllabus: Finance, pp. 76 - 78

  50. “New Generation” Cooperatives – Market Orientation • What can be marketed • What can be produced • Commodity acceptance based on market forces Syllabus: Finance, pp. 76 - 78

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