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

2. 5. Conceptual foundations 4. Current and future issues 3. The law of farmer cooperatives 2. Basic cooperative business 1. Perspectives Course Overview Objectives

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

4. Farmer 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

5. Effective Counsel 1.Define the problem 2. Identify objectives 3. Define options 4. Devise action plans 5. Predict consequences 1.Define the problem 2. Identify objectives 3. Define options 4. Devise action plans 5. Predict consequences

6. Effective Counsel 1.Relationships 2.Obligations 3.Transactions 1.Relationships 2.Obligations 3.Transactions

7. 5. Why cooperatives? 4. Matters of principle 3. Corporate entities 2. Basic definitions 1. The business enterprise Introduction Course Overview

8. 5. Federal statutes and programs 4. Proposed uniform law 3. New statutes 2. Incorporation and principles 1. Statutory development Statutes Course Overview

9. 3. Boards of directors 2. Organization control 1. Members Membership Course Overview

10. 5. Current issues 4. The patronage refund 3. Marketing agreements 2. Member relationships 1. Benefits Operations Course Overview

11. 2. Counselor roles 1. Process Formation Course Overview

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

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

14. 5. Basic tax rules 4. Patronage refunds defined 3. Section 521 2. Subchapter T 1. Principles Taxation Course Overview

15. 8. Income sources 7. Losses 6. Patronage financing Taxation (cont.) Course Overview

16. 5. Undue price enhancement 4. Current issues 3. Scope of behavior 2. Capper-Volstead Act 1. The problem Antitrust Course Overview

17. 5. Current issues 4. Sarbanes-Oxley implications 3. Blue sky laws 2. Is it a “security”? 1. Statutes and exceptions SecuritiesLaw Securities Law Course Overview

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

19. 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 Thoughts Course Overview

20. 1. The business enterprise

21. 1. What do people need? 2. What institutions have developed to satisfy those needs? 3. How are processes and systems implemented in practice? Three Critical Questions

22. Human needs Spiritual beliefs Self-fulfillment Artistic expression Freedom Self-determination Social interaction Procreation Safety Shelter Clothing Food

23. Feb 17, 7:43 AM EST U.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.

24. 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

25. Institutions Spiritual beliefs Self-fulfillment Artistic expression Freedom Self-determination Social interaction Procreation Safety Shelter Clothing Food Economic Activity Specialization Exchange Money Organization Ownership Obligation Laws Actions

26. Implementation Spiritual beliefs Self-fulfillment Artistic expression Freedom Self-determination Social interaction Procreation Safety Shelter Clothing Food Economic Activity Specialization Exchange Money Organization Ownership Obligation Laws Custom, Tradition Property Agreements, Contract Markets Government Business Entities

27. Spiritual beliefs Self-fulfillment Artistic expression Freedom Self-determination Social interaction Procreation Safety Shelter Clothing Food Economic Activity Specialization Exchange Money Organization Ownership Obligation Laws Custom, Tradition Property Agreements, Contract Markets Government Business EntitiesImplementation Business entities

28. Agricultural Systems -- The “Supply Chain”

29. Policy Equity Capital Services Credit Tax, Legal Research Institutions Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market

30. Farmers and Markets Sale on spot market Sale on spot market - Straight sale - Auction Options, derivatives, hedging Options, derivatives, hedging

31. Farmers and Markets Coordination by contract Coordination by contract - Production contracts - Marketing contracts

32. Farmers and Markets Integration Integration - System coordination - Product ownership - Role of grower

33. Farmers and Markets Cooperation, collaboration Cooperation, collaboration

34. 2. Basic definitions

35. Sole proprietorships Sole proprietorships Partnerships Partnerships Corporations Corporations Cooperatives Cooperatives Syllabus: Introduction Business Organizational Structure

36. Limited liability companies Limited liability companies Non-profit organizations Non-profit organizations Contracted organization Contracted organization Quasi-governmental Quasi-governmental Syllabus: Introduction Business Organizational Structure

37. Investment Investment Operations Operations Finance Finance The “Analytical Triangle” The “Analytical Triangle”

38. Operations Investment Operations Finance

39. The Operating Statement

40. Purchases Administrative Expenses Physical Assets Financing Expenses Sales Net Margins Investment Operations Finance

41. Investment

42. The Balance Sheet Assets Investment Operations Finance

43. Current Assets Investments Plant,PropertyEquipment Investment Operations Finance

44. Finance

45. The Balance Sheet Liabilities Member Equity Member Equity Investment Operations Finance

46. Short-termLiabilities Long-termLiabilities MemberEquity

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

48. Agriculture Local, regional, national Local, regional, national Types of Cooperatives Single, multiple function Single, multiple function Centralized, federated Centralized, federated

49. Cooperative Types of Cooperatives

50. Rural non-agriculture Types of Cooperatives

51. Rural non-agriculture Community, shared services Community, shared services Types of Cooperatives

52. Rural non-agriculture Community, shared services Community, shared services Utilities Utilities Types of Cooperatives

53. Number 864 distribution 66 G&T Service 40 million individuals 12% of U.S. population 17 million businesses States 47 Counties 2,500 of 3,141 Lines 43% of U.S. lines Power 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 47 Counties 2,500 of 3,141 Lines 43% of U.S. lines Power 10% of U.S. kw hours

54. Types of Cooperatives Rural non-agriculture Community, shared services Community, shared services Utilities Utilities Finance Finance

55. Types of Cooperatives Rural non-agriculture Community, shared services Community, shared services Utilities Utilities Finance Finance Health, insurance, housing Health, insurance, housing

56. Types of Cooperatives Other economic sectors

57. Franchisees Franchisees Types of Cooperatives

58. Other economic sectors Franchisees Franchisees Retail Retail Types of Cooperatives

59. Other economic sectors Franchisees Franchisees Retail Retail Shared services Shared services Types of Cooperatives

60. Other economic sectors Franchisees Franchisees Retail Retail Shared services Shared services Credit unions Credit unions Types of Cooperatives Number 8,534 Memberships 87.4 million Assets/credit union $85 million Loans outstanding $507 billion Number 8,534 Memberships 87.4 million Assets/credit union $85 million Loans outstanding $507 billion

61. Other economic sectors Franchisees Franchisees Retail Retail Shared services Shared services Credit unions Credit unions “Unlimited” possibilities “Unlimited” possibilities Types of Cooperatives

62. World of Cooperatives Total in the United States Total in the United States - Numbers - Descriptions

63. U.S. Farmer Cooperatives Number of Cooperatives2,982 Memberships2.7 million Gross Business Volume$116.9 billion Net Income$1.4 billion Total Assets$47.8 billion Net Worth$20 billion Full-time Employees163,500 Part-time Employees59,300 Syllabus: Introduction, p. 2

64. U.S. Farmer Cooperatives

65. World of Cooperatives Total in the United States Total in the United States - Numbers - Descriptions Largest 100 U.S. ag. cooperatives Largest 100 U.S. ag. cooperatives

67. World of Cooperatives Total in the United States Total in the United States - Numbers - Descriptions Largest 100 U.S. ag. Cooperatives Largest 100 U.S. ag. Cooperatives Largest 100 in the U.S. Largest 100 in the U.S.

68. Agriculture Grocery Energy and communications Finance Hardware and lumber Healthcare Foodservice distribution Recreational Media Franchise 38 18 11 7 3 2 1 Total business, 2005 $140.8 bil Total assets, 2005 131.1 bil Total business, 2005 $140.8 bil Total assets, 2005 131.1 bil

69. World of Cooperatives Total in the United States Total in the United States - Numbers - Descriptions Largest 100 U.S. ag. Cooperatives Largest 100 U.S. ag. Cooperatives Largest 100 in the U.S. Largest 100 in the U.S. ICA Global 300 ICA Global 300

70. No. of Global 300 cooperatives RankCountry 162USA 245France 333Germany 428Italy 519Netherlands 618Japan 716UK 89Canada 99Finland 107Switzerland 116New Zealand 126Norway 136Sweden 145Spain 154Ireland Total business volume -- $965 billion

78. Description Business entities

79. A matter of principles A matter of principles Corporations Corporations Cooperatives Cooperatives Principles in common Principles in common Description

80. Syllabus: Introduction, pp. 17-39 3. Corporate entities

81. 1. Legal person 2. Limited liability 3. Perpetual existence 4. Centralized management 5. Standardized relationships Syllabus: Introduction, pp. 17-39 Corporate Principles

82. 6. Broad range of capital sourcing 7. Interests freely transferable Syllabus: Introduction, pp. 17-39 Corporate Principles

83. Cooperative Principles 1. 1. The User-Owner Principle: Those who own and finance the cooperative are those who use the cooperative. Syllabus: Introduction, p. 16

84. 2. 2. The User-Control Principle: Those who control the cooperative are those who use the cooperative Syllabus: Introduction, p. 16 Cooperative Principles

85. 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. Syllabus: Introduction, p. 16 Cooperative Principles

86. ICA Principles 1.Voluntary and open membership 2.Democratic member control 3.Member economic participation 4.Autonomy and independence 5.Education, training and information 6.Co-operation among co-operatives 7.Concern for community

87. Corporate Entity

88. Control Benefit Finance USE

89. Rule setsRule sets Specify Rules Rule setsRule sets Interests recognizedInterests recognized Rule setsRule sets Interests recognizedInterests recognized ObjectivesObjectives

90. Rule setsRule sets Interests recognizedInterests recognized ObjectivesObjectives ImplementationImplementation Specify Rules

91. Rule setsRule sets User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- Specify Rules

92. User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- Rule setsRule sets Specify Rules

93. Interests RecognizedInterests Recognized Members Equity holders Patrons Creditors Management Employees Customers Social interests Public interests Specify Rules

94. User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- Interests RecognizedInterests Recognized Specify Rules

95. ObjectivesObjectives Specify Rules

96. The firm -- investor-oriented corporation Maximize the value of the firm Maximize stockholder wealth Maximize stock prices ObjectivesObjectives Specify Rules

97. 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.” ObjectivesObjectives Specify Rules

98. - The firm – - Each recognized interest, constituencies ObjectivesObjectives Specify Rules

99. User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- ObjectivesObjectives Specify Rules

100. ImplementationImplementation User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- Specify Rules

101. Identity of owners Governance Who votes? On what basis? Identity of board of directors Structure of board Management ImplementationImplementation Specify Rules

102. Operations Choices of business activity Benefits generation Benefits allocation Strategies ImplementationImplementation Specify Rules

103. Financing Capitalization Equity generation Investment Patronage-based equity Redemption Permanency Liquidity ImplementationImplementation Specify Rules

104. User-Control+++-+--- User-Ownership+ +- + - + - - User-Benefit+-++--+- ImplementationImplementation Specify Rules

105. Rules or framework? Effective implementationEffective implementation Role of legal systemRole of legal system Roles of legal professionRoles of legal profession

106. Syllabus: Introduction, pp. 39-72 5. Why cooperatives?

107. Market Market Bargain Bargain Supply Supply Provide service Provide service Add value Add value Syllabus: Introduction, pp. 39-72 What Farmer Cooperatives Do

108. U.S. Farmer Cooperatives Cooperative Shares -- Marketing (%) Milk/milk products83 Grains/oilseeds38 Cotton/cottonseed42 Fruits/vegetables19 Livestock/wool/mohair13 All other12 Total28 Syllabus: Introduction, p. 4

109. U.S. Farmer Cooperatives Cooperative Shares -- Supply (%) Fertilizer45 Petroleum46 Crop protectants34 Feed15 Seed13 Total26 Syllabus: Introduction, p. 3

110. Market system failure Market system failure Certainty of market Certainty of market Bargaining power Bargaining power “Competitive yardstick” “Competitive yardstick” Value added capture Value added capture Risk management Risk management Syllabus: Introduction, pp. 39-72 Why Cooperatives?

111. Self-determination Self-determination Efficiency Efficiency Community impact Community impact Social benefits Social benefits Philosophical commitment Philosophical commitment Political objectives Political objectives Syllabus: Introduction, pp. 39-72 Why Cooperatives?

112. Policy Equity Capital Services Credit Tax, Legal Research Institutions Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market

113. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual

114. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative

115. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative

116. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative

117. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative

118. Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative Policy Equity Capital Services Credit Tax, Legal Research Institutions

119. Policy Equity Capital Services Credit Tax, Legal Research Institutions Natural Resources Other Inputs Producer Buyer Second Market Processing Marketing/Distribution Final Market Individual and Cooperative 1.Relationships 2.Obligations 3.Transactions 1.Relationships 2.Obligations 3.Transactions

120. 5. Why cooperatives? 4. Matters of principle 3. Corporate entities 2. Basic definitions 1. The business enterprise Introduction