Do We Need A New Cooperative Law? Bill Oemichen President & CEO Wisconsin Federation of Cooperatives Minnesota Association of Cooperatives October 18,

Do We NeedDo We NeedA New Cooperative Law?A New Cooperative Law?

Bill OemichenBill OemichenPresident & CEOPresident & CEO

Wisconsin Federation of CooperativesWisconsin Federation of CooperativesMinnesota Association of CooperativesMinnesota Association of Cooperatives

October 18, 2002October 18, 2002

A New Minnesota/Wisconsin A New Minnesota/Wisconsin Cooperative Law?Cooperative Law?

Problems in the Cooperative WorldProblems in the Cooperative World– Difficult preferred stock offeringsDifficult preferred stock offerings– Declining cooperative formation and Declining cooperative formation and

registration registration Wisconsin - In 2001, 22 new cooperatives Wisconsin - In 2001, 22 new cooperatives registered out of 21,892 new entitiesregistered out of 21,892 new entities

Minnesota - similar resultsMinnesota - similar results


Minnesota and Wisconsin Cooperatives Minnesota and Wisconsin Cooperatives are facing difficulties in obtaining financing are facing difficulties in obtaining financing for new value-added ventures when they for new value-added ventures when they have less than 40% equityhave less than 40% equity

Minnesota and Wisconsin laws limit Minnesota and Wisconsin laws limit cooperatives to no more than 8% cooperatives to no more than 8% dividendsdividends

Cooperatives have difficulty retiring Cooperatives have difficulty retiring member equitymember equity


Minnesota and Wisconsin cooperatives Minnesota and Wisconsin cooperatives are exploring creation of an additional are exploring creation of an additional cooperative law similar to the new cooperative law similar to the new Wyoming lawWyoming law

In July 2002, six meetings were held In July 2002, six meetings were held across Minnesota with more than 65 across Minnesota with more than 65 cooperativescooperatives

Research/member feedback process Research/member feedback process continues; several trends are clearcontinues; several trends are clear

A New Minnesota/Wisconsin A New Minnesota/Wisconsin Cooperative Law? Cooperative Law?

Cooperative MembershipCooperative Membership– Wyoming law allows patron and investment Wyoming law allows patron and investment

membersmembers– Cooperatives recognize the difficulty of Cooperatives recognize the difficulty of

obtaining outside equity through preferred obtaining outside equity through preferred non-voting stocknon-voting stock

– Cooperatives have concerns when coupled Cooperatives have concerns when coupled with financial rightswith financial rights


Financial RightsFinancial Rights– Wyoming law provides for allocations and Wyoming law provides for allocations and

distributions on the basis of patronage for distributions on the basis of patronage for patron members and investment for patron members and investment for investment membersinvestment members

– Wyoming law provides for at least 15% of Wyoming law provides for at least 15% of allocations and distributions going to patron allocations and distributions going to patron members, regardless of ownership level members, regardless of ownership level


Financial Rights Financial Rights – Cooperatives agree there must be a minimum Cooperatives agree there must be a minimum

protection for patron membersprotection for patron members– The question is whether 15% is sufficient to The question is whether 15% is sufficient to

“protect” patron members “protect” patron members Some argue the minimum threshold should be Some argue the minimum threshold should be higher by statutehigher by statute

Others argue the issue should be left to the Others argue the issue should be left to the cooperative’s bylawscooperative’s bylaws


Financial RightsFinancial Rights– Some cooperatives are concerned about the Some cooperatives are concerned about the

type of investor that would be allowedtype of investor that would be allowedShould Xcel be allowed to purchase shares in an Should Xcel be allowed to purchase shares in an electric cooperative?electric cooperative?

Shouldn’t the focus be on other cooperatives as Shouldn’t the focus be on other cooperatives as investors and local business persons who have a investors and local business persons who have a stake in local economic development?stake in local economic development?

Doesn’t an investor from “elsewhere” potentially Doesn’t an investor from “elsewhere” potentially have a different investment motivation? have a different investment motivation?


Board of DirectorsBoard of Directors– Wyoming law provides for at least three (3) Wyoming law provides for at least three (3)

members; at least one director must be members; at least one director must be elected by the patron members and the elected by the patron members and the patron members must have at least 50% of patron members must have at least 50% of the voting controlthe voting control

– Significant issue for cooperatives because of Significant issue for cooperatives because of perceived potential problems perceived potential problems


– Some are concerned there may be a Some are concerned there may be a “knowledge” imbalance between patron board “knowledge” imbalance between patron board members and investment board membersmembers and investment board members

– Some are interested in defining who may Some are interested in defining who may serve on the board and require annual serve on the board and require annual meeting attendance of all board directorsmeeting attendance of all board directors

– There is substantial interest in requiring more There is substantial interest in requiring more than one patron board member and more than than one patron board member and more than 51% voting control 51% voting control


Board of DirectorsBoard of Directors– Substantial agreement, however, that outside Substantial agreement, however, that outside

directors are desirabledirectors are desirable– Some want the board of directors issue to be Some want the board of directors issue to be

left to cooperative bylaws rather than state left to cooperative bylaws rather than state statutestatute

– Some want the proposed statute to be very Some want the proposed statute to be very specific on the board makeup specific on the board makeup


Capper-Volstead Antitrust ProtectionCapper-Volstead Antitrust Protection– Generally not an issue that was raised by Generally not an issue that was raised by

many cooperatives, partly because of the many cooperatives, partly because of the diversity of the cooperatives attending the diversity of the cooperatives attending the Minnesota meetingsMinnesota meetings

– More than several agreed with the idea that More than several agreed with the idea that antitrust protection means little if the antitrust protection means little if the cooperative cannot obtain financingcooperative cannot obtain financing


Co-op Securities ExemptionCo-op Securities Exemption– Minnesota, and Wisconsin to a lesser degree, Minnesota, and Wisconsin to a lesser degree,

exempt Section 521 cooperatives from state exempt Section 521 cooperatives from state securities lawsecurities law

– Same with 1933 Securities and Exchange ActSame with 1933 Securities and Exchange Act– ““Wyoming Co-op” appears to be able to utilize Wyoming Co-op” appears to be able to utilize

the same exemptions the same exemptions

A New Minnesota/Wisconsin A New Minnesota/Wisconsin Securities Law?Securities Law?

FinancingFinancing– Eligibility concern for Minnesota and Eligibility concern for Minnesota and

Wisconsin cooperativesWisconsin cooperativesCoBankCoBank

– 80% producer control80% producer control– One member one voteOne member one vote– 10% limitation on dividends10% limitation on dividends– Would CoBank seek a change in regulations to allow Would CoBank seek a change in regulations to allow

lending to new “Wyoming Co-op” style cooperatives?lending to new “Wyoming Co-op” style cooperatives?


FinancingFinancing– Eligibility concern for Minnesota and Eligibility concern for Minnesota and

Wisconsin cooperativesWisconsin cooperativesCenex Finance AssociationCenex Finance Association

– Must be a “local” co-op (owned and controlled by Must be a “local” co-op (owned and controlled by members)members)

– One member - one voteOne member - one vote– Would CFA change its requirements to allow lending to Would CFA change its requirements to allow lending to

new “Wyoming Co-op” style cooperatives?new “Wyoming Co-op” style cooperatives?


FinancingFinancing– If CoBank and CFA financing isn’t available to If CoBank and CFA financing isn’t available to

“Wyoming-style” cooperatives, there still is “Wyoming-style” cooperatives, there still is financing available from the Farm Credit financing available from the Farm Credit SystemSystem


TaxationTaxation– Goal is to ensure taxation at the patron level, Goal is to ensure taxation at the patron level,

not cooperative levelnot cooperative level– ““Wyoming Cooperative” appears to be eligible Wyoming Cooperative” appears to be eligible

for Subchapter K or T taxationfor Subchapter K or T taxationUnder Subchapter K, “Wyoming cooperative” Under Subchapter K, “Wyoming cooperative” treated like a partnership with taxation at the treated like a partnership with taxation at the patron member level rather than at the entity levelpatron member level rather than at the entity level

This is seen as a positive for cooperativesThis is seen as a positive for cooperatives


Philosophical issues:Philosophical issues:– Compared to an LLC, “cooperative” better describes Compared to an LLC, “cooperative” better describes

the efforts that existing cooperatives, agricultural the efforts that existing cooperatives, agricultural producers, and residents of rural communities are producers, and residents of rural communities are taking for rural economic development and greater taking for rural economic development and greater self-sufficiencyself-sufficiency

– When does a cooperative become a “cooperative in When does a cooperative become a “cooperative in name only”? name only”?

– Expanding the number of participants increases the Expanding the number of participants increases the potential base or purchaserspotential base or purchasers

– Is it time to further evolve cooperatives?Is it time to further evolve cooperatives?


Participant Consensus in MinnesotaParticipant Consensus in Minnesota– Move forward with a new, additional Move forward with a new, additional

cooperative law (Minn. Stat. Chapter 308b), cooperative law (Minn. Stat. Chapter 308b), where:where:

There are adequate safeguards for patron There are adequate safeguards for patron members and board directorsmembers and board directors

The new cooperative must not be a “cooperative in The new cooperative must not be a “cooperative in name only”name only”

Documents

Do We Need A New Cooperative Law? Bill Oemichen President & CEO Wisconsin Federation of Cooperatives Minnesota Association of Cooperatives October 18,