The State of Wisconsin has joined a handful of other states in adopting a flexible alternative to the traditional cooperative statute. The Wisconsin State Legislature passed the new statute with bipartisan support and Governor Jim Doyle signed it into law.
The new statute is a “hybrid” cooperative statute that borrows many features from limited liability company laws. It is hoped the statute will lead to the creation of additional cooperatives under Wisconsin law, notably those cooperatives that require a large commitment of upfront capital that patron members often do not have access to, such as valueadded processing facilities and ethanol plants. The new statute is of general applicability and is suitable for use by many different businesses, not only agricultural business.
The first new such hybrid statute was the Wyoming Processing Cooperative Law, adopted in 2001. Since then, Minnesota (2003), Iowa (2005), and Tennessee (2005) have adopted similar statutes. A common feature of these new statutes includes the ability of investors to be nonpatron members of the cooperative as a means to provide an additional source of equity capital for a cooperative.
The existing Wisconsin cooperative statute, codified at Chapter 185 of the Wisconsin statutes, has not been replaced. The new statute, codified at Chapter 193 of the Wisconsin statutes, will serve as an alternative host statute in certain circumstances. This new statute provides formation alternatives to cooperatives, but does not require implementation of all such options in a cooperative’s bylaws.
THE NEW CHAPTER 193
Chapter 193 authorizes the formation of an unincorporated cooperative association upon the filing of articles with the Wisconsin Department of Financial Institutions. Highlights of Chapter 193 include:
A Chapter 193 cooperative must have at least one patron member. If any patron member is an individual (rather than another cooperative or other business entity) then the cooperative must have at least five patron members who are individuals.
Chapter 193 authorizes nonpatron membership interests, most likely an investormember, that may have voting rights if authorized in the articles or bylaws. Collectively, the patron membership interests must have rights to at least 51% of the profit allocations and distributions of the cooperative. However, the patron members may authorize that the required 51% be a lower amount, but not less than 30%, of the profit allocations and distributions of the cooperative.
If voting rights are granted to nonpatron members, the collective voting rights of patronmembers may not be reduced to less than 51% of total member voting power. The collective vote of the patron members is determined by a majority vote of the patron members voting on the matter. Chapter 193 allows, if authorized in the articles or bylaws, patron members to have an additional vote in certain circumstances in determining the collective vote.
Unless the cooperative’s articles or bylaws otherwise provide, a nonpatron member may force the cooperative to buy the nonpatron member’s interest if the articles or bylaws are amended in a way that materially and adversely affects the nonpatron member’s rights and preferences.
Board of Directors
The directors elected by the patron members must have at least 51% of the voting power on “general” matters of the cooperative. In addition, the patron member directors vote must be voted as a bloc, as determined by a majority vote of the patron member directors. This ensures the patron membership controls routine issues facing the cooperative. However, it also will allow nonpatron interests to essentially have a veto right on “nongeneral” or special matters of the cooperative. The bylaws of such a cooperative may specify certain matters that will require the consent of the nonpatron interests.
The patron members may also elect an outside director who is an expert in financial matters but does not possess a financial interest in the cooperative. Such a director may not vote unless the articles or bylaws authorize voting rights for the outside director.
All directors must, at least annually, attend a course given by a “recognized provider of cooperative director education” on at least two out of eleven topics mandated in Chapter 193. As with the establishment of an audit committee, this requirement is an added expense a startup cooperative must consider.
Chapter 193 requires that the cooperative establish an audit committee to ensure an independent review of the cooperative’s finances is conducted. The board of directors must ensure audited financial statements (or unaudited, if authorized by the articles or bylaws) are given to the members.
- Chapter 193 allows existing businesses to elect to convert into a Chapter 193 cooperative. However, a Wisconsin cooperative formed under Chapter 185 may not convert into a Chapter 193 cooperative, either directly or indirectly with a business entity formed outside of Wisconsin.
- A cooperative formed under Chapter 193 is an unincorporated association, and similar to a limited liability company, may elect to be taxed as a partnership under Subchapter K of the Internal Revenue Code, or as a cooperative under Subchapter T. Partnership taxation (with single tax pass through treatment) may be preferable if a cooperative will be conducting nonpatronage sourced business that would otherwise be subject to corporate doubletaxation.
THE FUTURE OF COOPERATIVES UNDER CHAPTER 193
Other states with hybrid cooperative statutes have had moderate success. About 17 new cooperatives have formed under the Minnesota statute. To date, we are aware of one cooperative forming under the Tennessee statute and we are not aware of any forming under the Iowa statute. At least one new cooperative has already been formed under Chapter 193.
A new cooperative forming under Chapter 193 must also consider the potential impact of a flexible structure. Although a new entity may use the term “cooperative” in its name, it may also lose many benefits of forming as a traditional cooperative. A traditional cooperative may be eligible for a CapperVolstead antitrust exemption or a 521 taxexempt status. However, if adopting a flexible structure, a new cooperative may find itself denied such benefits. For example, a CapperVolstead cooperative can completely lose its antitrust exemption if a single member is not a producer of agricultural products. Additionally, potential members of a newly formed cooperative may resist joining a hybrid cooperative, preferring the model and operation of a traditional cooperative.
However, Chapter 193 offers flexibility, but does not mandate a cooperative forming under it use all the available features. We have worked with numerous cooperatives that formed under the new Minnesota statute, but have maintained traditional cooperative principles. Chapter 193 may be appropriate for cooperatives that require additional upfront capital and do not require certain cooperative benefits, such as the CapperVolstead antitrust exemption.
Originally appeared in Dorsey's Agribusiness News Update