BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1255
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          ASSEMBLY THIRD READING
          AB 1255 (Pan) 
          As Amended  May 9, 2013
          Majority vote 

           BANKING & FINANCE   12-0                                        
           
           -------------------------------- 
          |Ayes:|Dickinson, Morrell,       |
          |     |Achadjian, Blumenfield,   |
          |     |Bonta, Chau, Gatto,       |
          |     |Hagman, Linder, Perea,    |
          |     |Torres, Weber             |
          |     |                          |
           -------------------------------- 
           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  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; 








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             e)    The initial mailing address of the corporation, if  
               different from the initial street address; and, 

             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:

             a)   A provision limiting the duration of the corporation's  
               existence to a specified date.

             b)   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.

            Nothing contained in 3) above shall affect the enforceability,  
            as between the parties thereto, of any lawful agreement not  
            otherwise contrary to public policy.

            The articles of incorporation may set forth any or all of the  
          following provisions:

             a)   The names and addresses of the persons appointed to act  
               as initial directors.

             b)   Provisions concerning the transfer of memberships.

             c)   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.









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             d)   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.

             e)   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  :  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. 

          This bill 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, this bill 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.  


           Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916)  








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          319-3081 


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