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

4. Dissolution 3. Conversion 2. Recapitalization 1. Merger, consolidation Realignments

Observations Syllabus: Realignments Range of realignments Range of realignments Causes and effects Causes and effects - Forestalling failure - Capitalizing on success - Strategic plans Personalities and traditions Personalities and traditions

Observations Roles and involvement Roles and involvement - Management - Boards of directors - Membership Syllabus: Realignments Economics Economics Capitalization Capitalization

Syllabus: Realignments Rights and obligations Rights and obligations Statutory authority Statutory authority Success or failure? Success or failure? The process The process Role(s) of legal counsel Role(s) of legal counsel Observations

1. Merger, consolidation Syllabus: Realignments

InvestmentOperationsFinance Administrative Expenses Physical Assets Sales Financing Expenses Net Margins Purchases Current Assets Investments Plant,PropertyEquipment Short-termLiabilities Long-termLiabilities Equity

Membership Directors Management Name Products Traditions Culture, style Territory Banks Advisors Suppliers, buyers Debt structure Equity structure Redemption Revolving period Strengths Weaknesses Strategies

Business corporation statutes Business corporation statutes Syllabus: Realignments, pp Statutes Variation among states Variation among states Sources of conflict Sources of conflict - Control - Equity interests

Denes v. Countrymark (1989) Denes v. Countrymark (1989) No cooperative statute provision No cooperative statute provision For-profit statute For-profit statute - Preferred stock - Voting and dissenting rights Non-profit statute Non-profit statute Process Syllabus: Realignments, pp

Denes v. Countrymark (1989) Denes v. Countrymark (1989) Cooperative principles Cooperative principles Hybrid in nature Hybrid in nature “Deemed non-profit” “Deemed non-profit” Impact of preferred holders’ Impact of preferred holders’ right to vote Syllabus: Realignments, pp Process

Denes v. Countrymark (1989) Denes v. Countrymark (1989) Syllabus: Realignments, p. 14 Process “If preferred shareholders are allowed to vote on extraordinary transactions, they could easily defeat a merger that the members, the agricultural producers, want or need. … This result would jeopardize the future success of an otherwise beneficial merger by seriously depleting the working capital of the merging cooperatives.”

Van Der Maaten (1991) Van Der Maaten (1991) The Iowa statute The Iowa statute Early payment required Early payment required Syllabus: Realignments, pp Dissenters’ Rights

Van Der Maaten (1991) Van Der Maaten (1991) Syllabus: Realignments, p. 18 “Iowa [statute] provides that dissenting members may not do business with the new association. Under [the cooperative’s] reading of the statute, the dissenting member would be prohibited from doing business with the cooperative, yet the cooperative would be permitted to use the member’s ‘investments’ for up to fifteen years without interest. Dissenters’ Rights

Van Der Maaten (1991) Van Der Maaten (1991) Syllabus: Realignments, p. 18 “We do not attribute to the legislature an intention to deny a former member the privilege of doing business with a cooperative, yet in effect, require the member to continue financial support of it.” Dissenters’ Rights

Atwood Grain (1989) Atwood Grain (1989) Growmark sale of grain assets Growmark sale of grain assets Loss of control Loss of control Loss of business advantages Loss of business advantages Syllabus: Realignments, pp Sale of Assets

Atwood Grain (1989) Atwood Grain (1989) Syllabus: Realignments, p. 23 “To the extent that plaintiffs’ claims rely on their being in a relationship other than that of shareholders to the corporation, these claims cannot survive…. Shareholders of a corporation have sought a unique business arrangement, in which they deliberately agree to remove themselves from the daily operation of the business.” Sale of Assets

Atwood Grain (1989) Atwood Grain (1989) Ordinary course of business Ordinary course of business Not “all or substantially all” Not “all or substantially all” Grain not separate division Grain not separate division Diminution of grain service Diminution of grain service Syllabus: Realignments, p. 23 Sale of Assets

Atwood Grain (1989) Atwood Grain (1989) Syllabus: Realignments, pp. 23, 24 “Courts are traditionally reluctant to review the substance of a board of directors’ corporate decisions. … In this case plaintiffs do not quibble with the specific procedure by which the Board reached a decision, but rather they are unhappy with the effects of the decision and the Board’s failure to consult the shareholders.” Sale of Assets

Atwood Grain (1989) Atwood Grain (1989) Syllabus: Realignments, p. 25 “If plaintiffs had no right to approve the transaction and the Board of Directors had the sole right [to approve the transaction], then as a matter of law, if a disinterested Board acted on full information, the shareholders are attributed with full information.” Sale of Assets

Syllabus: Realignments, pp Recapitalization

Atwood Grain (1973) Atwood Grain (1973) United issued “participation United issued “participation certificates”; revolving fund Atwood paid taxes on face value Atwood paid taxes on face value United suffered losses United suffered losses Syllabus: Realignments, pp Recapitalization

Exchanged for preferred stock Exchanged for preferred stock upon merger Value of preferred stock reduced Value of preferred stock reduced to account for losses Cooperative – debt Cooperative – debt IRS – equity IRS – equity Syllabus: Realignments, pp Recapitalization

Syllabus: Realignments, p Redeemable only at board discretion 2.Holders had no right to enforce payment 3.No interest 4.Terms said capital in revolving fund 5.Subordinated to indebtedness 6.Not segregated from other capital funds 7.No fixed maturity nor payable on demand 8.Allocations offset by operating lossesRecapitalization

Exchange not according to plan Exchange not according to plan of merger Therefore, non-taxable Therefore, non-taxablerecapitalization Syllabus: Realignments, pp “A recapitalization is a reshuffling of a capital structure within the framework of an existing corporation.”Recapitalization

Process important Process important Documentation Documentation Unforeseen consequences Unforeseen consequences Counsel and information Counsel and information Syllabus: Realignments, pp Recapitalization

Letter Ruling Letter Ruling Allocated equities Allocated equities Non-patronage source income Non-patronage source income Distribute on allocated basis Distribute on allocated basis Stock issued in exchange Stock issued in exchange for unallocated equity Syllabus: Realignments, pp Recapitalization

Stock issued for allocated Stock issued for allocatedequity Subchapter T applied Subchapter T applied No taxable transactions No taxable transactions Syllabus: Realignments, pp Recapitalization

Syllabus: Realignments, p Conversion

Syllabus: Realignments, p. 42 Conversion, Demutualization Incidence Incidence To corporation To corporation To limited liability company To limited liability company Sale to non-cooperative Sale to non-cooperative Reasons Reasons

Syllabus: Realignments, p. 42 Conversion, Demutualization The Dakota Growers Pasta saga The Dakota Growers Pasta saga The GoldKist saga The GoldKist saga Credit Union demutualization Credit Union demutualization The Farm Credit Services The Farm Credit Services of America saga

Syllabus: Realignments, p. 42 Conversion, Demutualization Concerns in principle Concerns in principle Competitive yardstick rationale Competitive yardstick rationale Management benefits Management benefits New member position New member position Hidden agenda Hidden agenda

Syllabus: Realignments, pp Dissolution

Syllabus: Realignments, pp Reasons, Process Capitalization, equity issues Capitalization, equity issues - Non-cooperatives - Cooperatives Failure - or success? Failure - or success? Capturing value Capturing value The residual principle The residual principle

InvestmentOperationsFinance Purchases Administrative Expenses Physical Assets Sales Financing Expenses Net Margins Purchases Current Assets Investments Plant,PropertyEquipment Short-termLiabilities Long-termLiabilities MemberEquity

InvestmentFinance Investments Plant,PropertyEquipment Short-termLiabilities Long-termLiabilities MemberEquity

InvestmentFinance Investments Plant,PropertyEquipment Short-termLiabilities Long-termLiabilities MemberEquity Cash

Short-termLiabilities Long-termLiabilities MemberEquity Residuals Upon dissolution, after all debts and liabilities of the association shall be paid, Upon dissolution, after all debts and liabilities of the association shall be paid, A bylaw provision Syllabus: Realignments, p. 42

Upon dissolution, after all debts and liabilities of the association shall be paid, Upon dissolution, after all debts and liabilities of the association shall be paid, Equity Syllabus: Realignments, p. 42 Residuals A bylaw provision

Upon dissolution, after all debts and liabilities of the association shall be paid, Upon dissolution, after all debts and liabilities of the association shall be paid, Equity Syllabus: Realignments, p. 42 Residuals A bylaw provision

… all shares of preferred stock and common stock redeemed Preferred Stock Common Stock Syllabus: Realignments, p. 42 Residuals A bylaw provision

… all shares of preferred stock and common stock redeemed Patronage-based Equity Syllabus: Realignments, p. 42 Residuals A bylaw provision

…all capital furnished through patronage shall have been retired without priority on a pro rata basis, Patronage-based Equity Syllabus: Realignments, p. 42 Residuals A bylaw provision

…the remaining property and assets … shall be distributed among the members and former members …the remaining property and assets … shall be distributed among the members and former members Syllabus: Realignments, p. 42 Residual Residuals A bylaw provision

…in the proportion which the aggregate patronage of each member bears to the total patronage of all such members insofar as practicable …. …in the proportion which the aggregate patronage of each member bears to the total patronage of all such members insofar as practicable …. Syllabus: Realignments, p. 42 Residual Residuals A bylaw provision

Corporate statutes Corporate statutes Appropriateness Appropriateness Cooperative documents Cooperative documents Process Process Substance Substance Planning Planning Statutory Guidelines Syllabus: Realignments, pp

Shinn (1988) Shinn (1988) Examples Syllabus: Realignments, pp Conversion, not dissolution Conversion, not dissolution Retained earnings Retained earnings Non-patronage income Non-patronage income Plaintiffs Plaintiffs - Significant equity - Little patronage

Shinn (1988) Shinn (1988) Distribution on basis of Distribution on basis of patronage held acceptable Syllabus: Realignments, pp Examples

Shinn (1988) Shinn (1988) Syllabus: Realignments, p. 50 “[The cooperative’s] plan to distributed its retained earnings in the form of revolving fund certificates is consistent with the requirements of section (3) and comports with the underlying purpose of cooperative associations to benefit their member/patrons.”Examples

Shinn (1988) Shinn (1988) Syllabus: Realignments, p. 50 “The [plaintiffs] are mistaken in their belief that their paid-in capital entitles them to a pro rata share in [the cooperative’s] net profit. Cooperatives differ from for-profit corporations in that their retained earnings benefit members in proportion to their patronage, not their shareholdings.”Examples

Shinn (1988) Shinn (1988) Syllabus: Realignments, p. 49 “Section (3) makes no … distinction [between earnings from member business and non-member business], stating only that earnings which become reserves or surpluses are to be distributed to members on the basis of patronage.”Examples

Shinn (1988) Shinn (1988) Syllabus: Realignments, p. 49 “This is in keeping with the purpose of cooperative associations formed under chapter 618 to benefit their member/patrons rather than their patrons generally.”Examples

Letter Ruling (1977) Letter Ruling (1977) Syllabus: Realignments, pp Ruling that organization is operating on a cooperative basis “is made upon the express condition that [the cooperative’s] bylaws be amended to provide for a distribution on dissolution, insofar as practicable, on a patronage basis to all members and former members regardless of the chronology of such patronage,Examples

Letter Ruling (1977) Letter Ruling (1977) Syllabus: Realignments, pp on the basis of their respective patronage contributions as shown on the books and records of the cooperative after satisfying all debts and other obligations of the cooperative and after redeeming all outstanding capital stock, equity certificates or credits, etc.”Examples

Revenue Ruling (1970) Revenue Ruling (1970) Organization is “operating on a Organization is “operating on a cooperative basis” Syllabus: Realignments, pp Examples

Revenue Ruling (1970) Revenue Ruling (1970) Syllabus: Realignments, pp “In the event of liquidation, it will liquidate on a cooperative basis, i.e., pay all liabilities, return to its members their membership fees, return to the members the face amount of outstanding patronage equities, and distribute the remaining assets to the members on the basis of their past patronage.”Examples

Letter Ruling (1984) Letter Ruling (1984) Syllabus: Realignments, pp Examples Section 521 cooperative Section 521 cooperative Surplus from sale of assets Surplus from sale of assets Allocation to patrons during Allocation to patrons during asset ownership years Allocated on patronage basis Allocated on patronage basis

4. Dissolution 3. Conversion 2. Recapitalization 1. Merger, consolidation Realignments