BILL ANALYSIS �
AB 1255
Page 1
Date of Hearing: August 29, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 1255 (Pan) - As Amended: March 18, 2013
SUBJECT : Corporations: consumer cooperatives.
SUMMARY : Expands the Consumer Cooperative Corporation Law to
allow consumer cooperatives to include in the articles of
incorporations provisions related to preferred, nonvoting
shares. Specifically, this bill :
1)Provides that if expressed in the articles of incorporation
that a consumer cooperative can set forth, the classes of
preferred, nonvoting shares, if any, and whether the directors
may set the number, the series, and the rights, preferences,
privileges, restrictions, and conditions attaching to each
class.
EXISTING LAW
1)Establishes the California Consumer Cooperative Law under
Corporations Code, Section 12200 through 12704.
2)Requires consumer cooperative corporations to set forth the
following in their articles of incorporation:
a) The name of the corporation;
b) The following statement:
"This corporation is a cooperative corporation organized under
the Consumer Cooperative Corporation Law. The purpose of this
corporation is to engage in any lawful act or activity for
which a corporation may be organized under such law."
c) The name and street address in this state of the
corporation's initial agent for service of process;
d) The initial street address of the corporation;
e) The initial mailing address of the corporation, if
different from the initial street address; and,
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f) Whether the voting power or the proprietary interests of
the members are equal or unequal. If the voting power or
proprietary interests of the members are unequal, the
articles shall state either (i) the general rule or rules
by which the voting power and proprietary interests of the
members shall be determined or (ii) that such rule or rules
shall be prescribed in the corporation's bylaws. Equal
voting power means voting power apportioned on the basis of
one vote for each member. Equal proprietary rights means
property rights apportioned on the basis of one proprietary
unit for each member. [Corporations Code, Section 12310]
3)Allows consumer cooperative cooperation's to set forth any or
all of the following provisions which become effective when
expressly provided in the articles:
i) A provision limiting the duration of the
corporation's existence to a specified date.
ii) A provision providing for the distribution of the
remaining assets of the corporation, after payment or
adequate provision for all of its debts and liabilities,
to a charitable trust.
a) Nothing contained in (3) shall affect the
enforceability, as between the parties thereto, of any
lawful agreement not otherwise contrary to public policy.
b) The articles of incorporation may set forth any or all
of the following provisions:
i) The names and addresses of the persons appointed to
act as initial directors.
ii) Provisions concerning the transfer of memberships.
iii) The classes of members, if any, and if there are two
or more classes, the rights, privileges, preferences,
restrictions and conditions attaching to each class.
iv) Any other provision, not in conflict with law, for
the management of the activities and for the conduct of
the affairs of the corporation, including any provision
which is required or permitted by this part to be stated
in the bylaws.
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v) A provision conferring upon members the right to
determine the consideration for which memberships shall
be issued. (Corporations Code, Section 12313)
FISCAL EFFECT : None.
COMMENTS :
BACKGROUND:
CO-OP:
Simply put, a cooperative is a locally-owned business owned and
managed by its members. The structure is to pool resources to
satisfy a common need while providing goods and services as
economically and efficiently as possible. Owners can have a
voice in what is sold to them, as well as in the overall
organization of their particular co-op. Owners get the most
buying power for their money and the money stays in the
community, contributing to its economic strength.
There are roughly 30,000 consumer cooperatives in the United
States employing more than two million and bringing in $654
billion in revenue. There are co-ops that sell bicycles,
furniture, camping equipment, appliances, carpeting, clothing,
crafts and books. There are cooperative wholesalers, like those
in the grocery, natural foods and hardware businesses. There are
cooperatives that disseminate news and cooperatives for artists.
There are cooperative electric and telephone utilities. There
are thousands of farm co-ops, along with co-ops that provide
financing to those farm co-ops. There are subscriber-owned cable
TV systems and parent-run day-care centers. There are
cooperatively organized employee-owned companies, cooperative
purchasing groups for fast food franchises, and various kinds of
cooperative housing. There are co-ops that provide health care,
such as health maintenance organizations and community health
clinics. There are cooperative insurance companies. There are
cooperative food stores, food buying clubs and discount
warehouses. There are even cooperative funeral societies. The
first cooperative was established in 1844.
The Consumer Cooperative Corporation Law also known as the co-op
law, became effective as of January 1, 1984, and applies to all
co-ops incorporating under it as well as (with certain limited
exceptions) to those co-ops incorporated under the repealed
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pre-1984 law related to co-ops. Generally, the "new" co-op law
represents a synthesis of provisions from the former co-op
statutes and the current Nonprofit Mutual Benefit Corporation
Law, in addition to some completely new provisions.
While co-ops incorporated prior to 1984 are not required to
amend their articles of incorporation to take into account
current co-op law, those same co-ops may find at least some of
their bylaw provisions now in conflict with co-op law. Where
there is a conflict, co-op law generally supersedes the contrary
bylaw provisions for acts, transactions, etc., occurring after
1984. Also, many co-ops have relatively brief bylaws that do not
deal at all with certain corporate "housekeeping" matters (e.g.,
how to properly "notice" a meeting or retain unclaimed member
equity interests). Such gaps in the bylaws may well lead to
legally improper actions (or omissions) by a co-op.
Cooperatives incorporating under the California Consumer
Cooperative Corporation Law are not formed under the "nonprofit"
statutes of the California Corporations Code. Similarly, it is
virtually impossible for co-ops incorporated under the co-op law
to attain tax-exempt status, mainly due to the fact that coops
are established to further the mutual benefit of their members,
not the general public.
California statute specifies that co-ops are democratically
controlled and are not organized to make a profit for
themselves, as such, or for their members, as such, but
primarily for their members as patrons. This is important to
note because it may be questioned whether what this bill
proposes falls in line with the premise of a co-op. Each member
of a cooperative, no matter how many shares or memberships she
or he has purchased, is generally entitled to only one vote. The
primary objective of a cooperative is to provide benefits to its
members, rather than a return on members' capital investment.
Cooperatives are not required to obtain a "permit" from the
Department of Corporations for the sale of memberships or shares
up to $300 per member, co-ops may issue unlimited shares of
stock (or memberships) to any single member to help generate
capital. Under California law, co-ops have to file their
articles of incorporation with the Secretary of State (SOS).
A co-op may amend its articles of incorporation in any way so
long as the articles, as amended, contain only those provisions
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that would be lawful as of the time the provisions are filed
with the SOS. Although co-op law mandates certain provisions in
a co-op's articles, these provisions do not have to be adopted
by a co-op that was incorporated before the current co-op law
went into effect.
NEED FOR THE BILL:
AB 1255 amends the code section pertaining to what a consumer
cooperative may lay out in their articles of corporation. While
the changes made in 1984 helped, it caused cooperatives
established pre-1984 and post-1984 to be regulated differently.
According to the author, AB 1255 is needed to "eliminate
confusion about the law and to enable Consumer Cooperatives to
self-finance through the issuance of non-voting, preferred
shares to their members." The author goes on to state, "Modern
consumer cooperatives need the ability to self-finance through
the sale and issuance of preferred non-voting to its member.
Modern consumer cooperatives need a uniform statutory scheme,
which does not discriminate between cooperatives formed before
or after 1984 in its application."
California Consumer Cooperatives would like the ability to issue
non-voting, preferred shares to their members for the purpose of
self-financing improvements and expansions. These Cooperatives'
ability to self-finance has been denied by the SOS based on
confusion with how the SOS's Office interprets the Consumer
Cooperative Statute. In addition, Consumer Cooperatives
incorporated before 1984 and after 1984 are governed by
different rules in regards to issuing preferred shares which
creates further confusions.
The post 1984 changes to the Consumer Cooperative Law have made
it more difficult for cooperatives to self-finance through the
sale and issuance of preferred non-voting shares to their
members. This is because, while cooperatives routinely separate
voting rights from proprietary rights, non-cooperative
businesses keep ownership interests and voting rights linked
together by a voting structure which votes ownership units.
Virtually all consumer cooperatives are governed by a
one-member, one-vote structure, regardless of the level of
investment, or ownership units a particular member has in a
cooperative.
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QUESTIONS :
1)Currently, are co-ops denied/rejected by the SOS based solely
on a CCC trying to amend their articles of incorporation to
issue preferred, nonvoting shares?
2)Pre-1984, it is implied that CCCs are allowed to issue
nonvoting shares, at that time was it implied or expressed in
statute? In any case, why when the law became effective in
1984, did the statute not explicitly allow for the ability to
issue preferred nonvoting shares?
3)Why is the issue being raised now, when the statute has not
explicitly allowed for this for almost 30 years?
4)Why would a co-op want to issue nonvoting shares which is a
bigger risk to the co-op and its members rather than taking
out a loan from a bank or credit union?
5)How many co-ops have been granted this authority in California
and how many have been denied? In addition, do other states
allow co-ops to issue nonvoting shares?
6)Could a co-op offer these preferred, nonvoting shares to
non-members?
7)What happens if a member purchases nonvoting shares but then
does not renew their membership, making them no longer a
member?
REGISTERED SUPPORT / OPPOSITION :
Support
BriarPatch Community Market
Chico Natural Foods Cooperative
Co-opportunity Consumers Cooperative
Davis Food Co-op
National Cooperative Grocers Association
Ocean Beach People's Food Co-op
Quincy Natural Foods Co-op
Sacramento Natural Foods Cooperative, Inc.
Twin Pines Cooperative Foundation
Ukiah Natural Foods Co-op
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Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081