Do We Need
A New Cooperative Law?
Bill Oemichen
President & CEO
Wisconsin Federation of Cooperatives
Minnesota Association of Cooperatives
October 18, 2002
A New Minnesota/Wisconsin
Cooperative Law?
Problems in the Cooperative World
– Difficult preferred stock offerings
– Declining cooperative formation and
registration
Wisconsin - In 2001, 22 new cooperatives
registered out of 21,892 new entities
Minnesota - similar results
A New Minnesota/Wisconsin
Cooperative Law?
Minnesota and Wisconsin Cooperatives
are facing difficulties in obtaining financing
for new value-added ventures when they
have less than 40% equity
Minnesota and Wisconsin laws limit
cooperatives to no more than 8%
dividends
Cooperatives have difficulty retiring
member equity
A New Minnesota/Wisconsin
Cooperative Law?
Minnesota and Wisconsin cooperatives
are exploring creation of an additional
cooperative law similar to the new
Wyoming law
In July 2002, six meetings were held
across Minnesota with more than 65
cooperatives
Research/member feedback process
continues; several trends are clear
A New Minnesota/Wisconsin
Cooperative Law?
Cooperative Membership
– Wyoming law allows patron and investment
members
– Cooperatives recognize the difficulty of
obtaining outside equity through preferred
non-voting stock
– Cooperatives have concerns when coupled
with financial rights
A New Minnesota/Wisconsin
Cooperative Law?
Financial Rights
– Wyoming law provides for allocations and
distributions on the basis of patronage for
patron members and investment for
investment members
– Wyoming law provides for at least 15% of
allocations and distributions going to patron
members, regardless of ownership level
A New Minnesota/Wisconsin
Cooperative Law?
Financial Rights
– Cooperatives agree there must be a minimum
protection for patron members
– The question is whether 15% is sufficient to
“protect” patron members
Some argue the minimum threshold should be
higher by statute
Others argue the issue should be left to the
cooperative’s bylaws
A New Minnesota/Wisconsin
Cooperative Law?
Financial Rights
– Some cooperatives are concerned about the
type of investor that would be allowed
Should Xcel be allowed to purchase shares in an
electric cooperative?
Shouldn’t the focus be on other cooperatives as
investors and local business persons who have a
stake in local economic development?
Doesn’t an investor from “elsewhere” potentially
have a different investment motivation?
A New Minnesota/Wisconsin
Cooperative Law?
Board of Directors
– Wyoming law provides for at least three (3)
members; at least one director must be
elected by the patron members and the
patron members must have at least 50% of
the voting control
– Significant issue for cooperatives because of
perceived potential problems
A New Minnesota/Wisconsin
Cooperative Law?
– Some are concerned there may be a
“knowledge” imbalance between patron board
members and investment board members
– Some are interested in defining who may
serve on the board and require annual
meeting attendance of all board directors
– There is substantial interest in requiring more
than one patron board member and more
than 51% voting control
A New Minnesota/Wisconsin
Cooperative Law?
Board of Directors
– Substantial agreement, however, that outside
directors are desirable
– Some want the board of directors issue to be
left to cooperative bylaws rather than state
statute
– Some want the proposed statute to be very
specific on the board makeup
A New Minnesota/Wisconsin
Cooperative Law?
Capper-Volstead Antitrust Protection
– Generally not an issue that was raised by
many cooperatives, partly because of the
diversity of the cooperatives attending the
Minnesota meetings
– More than several agreed with the idea that
antitrust protection means little if the
cooperative cannot obtain financing
A New Minnesota/Wisconsin
Cooperative Law?
Co-op Securities Exemption
– Minnesota, and Wisconsin to a lesser degree,
exempt Section 521 cooperatives from state
securities law
– Same with 1933 Securities and Exchange Act
– “Wyoming Co-op” appears to be able to utilize
the same exemptions
A New Minnesota/Wisconsin
Securities Law?
Financing
– Eligibility concern for Minnesota and
Wisconsin cooperatives
CoBank
–
–
–
–
80% producer control
One member one vote
10% limitation on dividends
Would CoBank seek a change in regulations to allow
lending to new “Wyoming Co-op” style cooperatives?
A New Minnesota/Wisconsin
Cooperative Law?
Financing
– Eligibility concern for Minnesota and
Wisconsin cooperatives
Cenex Finance Association
– Must be a “local” co-op (owned and controlled by
members)
– One member - one vote
– Would CFA change its requirements to allow lending to
new “Wyoming Co-op” style cooperatives?
A New Minnesota/Wisconsin
Cooperative Law?
Financing
– If CoBank and CFA financing isn’t available to
“Wyoming-style” cooperatives, there still is
financing available from the Farm Credit
System
A New Minnesota/Wisconsin
Cooperative Law?
Taxation
– Goal is to ensure taxation at the patron level,
not cooperative level
– “Wyoming Cooperative” appears to be eligible
for Subchapter K or T taxation
Under Subchapter K, “Wyoming cooperative”
treated like a partnership with taxation at the
patron member level rather than at the entity level
This is seen as a positive for cooperatives
A New Minnesota/Wisconsin
Cooperative Law?
Philosophical issues:
– Compared to an LLC, “cooperative” better
describes the efforts that existing cooperatives,
agricultural producers, and residents of rural
communities are taking for rural economic
development and greater self-sufficiency
– When does a cooperative become a “cooperative
in name only”?
– Expanding the number of participants increases
the potential base or purchasers
– Is it time to further evolve cooperatives?
A New Minnesota/Wisconsin
Cooperative Law?
Participant Consensus in Minnesota
– Move forward with a new, additional
cooperative law (Minn. Stat. Chapter 308b),
where:
There are adequate safeguards for patron
members and board directors
The new cooperative must not be a “cooperative in
name only”