BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
AB 1255 (Pan) Hearing Date: July 3, 2013
As Amended: June 12, 2013
Fiscal: No
Urgency: No
SUMMARY Would authorize a consumer cooperative corporation to
do all of the following: provide for preferred memberships
and/or non-voting memberships in its articles of incorporation
or bylaws; divide a membership class into one or more series;
and authorize the board of directors to fix the rights,
privileges, preferences, restrictions, and conditions attaching
to any wholly unissued class or series of memberships. Would
also make conforming changes to the laws governing consumer
cooperative corporations.
DESCRIPTION
1. Would, within the Consumer Cooperative Corporation Law,
define the terms "preferred memberships" and "series."
2. Would add the following to the list of topics that may be
set forth in the articles of incorporation or bylaws of a
consumer cooperative corporation:
a. A provision authorizing the board of directors,
within any limits or restrictions stated, to fix the
rights, privileges, preferences, restrictions and
conditions attaching to any wholly unissued class of
memberships authorized in the bylaws or the articles.
b. If the bylaws or articles authorize a class of
memberships to be divisible into series, a provision
authorizing the board of directors to fix the rights,
privileges, preferences, restrictions, and conditions
attaching to any wholly unissued series of a membership
class that is authorized to be divisible into series, and
a provision fixing the number of memberships in such
series and the designation of such series.
3. Would provide that, if the articles or bylaws of a consumer
AB 1255 (Pan), Page 2
cooperative corporation authorize at least one class of
voting memberships, a corporation may also authorize and
issue additional classes of memberships, preferred or
otherwise, that are divisible into series and/or are
non-voting.
4. Would make a variety of conforming changes to existing
provisions of the Consumer Cooperative Corporation Law,
consistent with the changes above.
AB 1255 (Pan), Page 3
EXISTING LAW
5. Provides for the Consumer Cooperative Corporation Law
(Corporations Code Section 12200 et seq.). That law equates
the terms shareholder and member (Section 12247), and thus
also equates the terms shares and memberships. Where this
analysis uses the term membership, the term share can be
substituted with no change in meaning, and vice versa.
COMMENTS
1. Purpose: This bill is sponsored by the Sacramento Natural
Foods Cooperative, to allow consumer cooperative
corporations, such as food co-ops, to raise money via the
issuance of preferred, non-voting memberships.
2. Background: The problem this bill would solve has existed
as part of California law since 1984 (the last time the laws
governing consumer cooperatives were amended). According to
the sponsor, it has not come up previously, because member
financing has not been a necessary part of consumer
cooperative financing until recently. The food industry has
consolidated and become increasingly competitive over the
past ten to fifteen years, especially in the "healthy,
organic, alternative" food category. Food cooperatives are
challenged to compete with the shopping experience offered
by stores such as Whole Foods, and have sought to make
significant capital investments to stay competitive.
Virtually all consumer cooperatives began through investment by
cooperative members in capital shares issued by the
cooperatives. However, for cooperatives to remain vital and
to grow, they need to be able to offer their members the
opportunity to make further, voluntary capital investments.
Consumer cooperatives would typically prefer to raise needed
money from their members, rather than via borrowing from
alternative sources of capital such as banks or credit
unions. Selling additional shares to their membership
allows cooperatives to raise money via equity investments
from their members, rather than by taking on debt. Member
investments also spur member patronage. Because the
financial success of each cooperative depends on member
patronage, members who have made a capital investment in a
cooperative are more likely to patronize and support their
cooperative, rather than shopping elsewhere.
AB 1255 (Pan), Page 4
Preferred, non-voting shares provide a mechanism for use by
cooperatives that want to raise additional funds from their
members. The shares are non-voting, to preserve the
cooperative principle of "one member, one vote." Under that
principle, no shareholder/member may have more than one
vote, regardless of the number of shares/memberships that
person holds.
Consumer cooperatives organized under California law as it
existed prior to 1984 were governed by the General
Corporation Law, and were thus expressly authorized to
divide classes of memberships into series and issue
preferred non-voting memberships. The 1982 revisions to the
consumer cooperatives law (operative in 1984) separated the
Consumer Cooperative Corporation Law from the General
Corporation Law. For reasons that are unclear, the new law
did not expressly authorize a cooperative to divide a
membership class into series, nor did it expressly authorize
a board of directors to fix the rights of wholly unissued
classes or series in a cooperative's articles of
incorporation or bylaws. Although the 1982 amendments
improved many features of the old law, they also created
significant confusion. According to this bill's sponsor, it
can be confusing to figure out which law(s) apply to
consumer cooperatives formed prior to 1984, and which apply
to consumer cooperatives formed after 1984.
3. Discussion: Because the existing Consumer Cooperative
Corporation Law is silent on the ability of consumer
cooperatives to divide membership classes into series and to
authorize a board of directors to fix the rights,
privileges, preferences, restrictions, and conditions
attaching to any wholly unissued class or series of
membership, the Secretary of State's office has declined to
file articles of incorporation for cooperatives that include
those provisions. According to this bill's sponsor, the
changes proposed in AB 1255 are necessary for the Secretary
of State's office to file consumer cooperative article
provisions submitted by consumer cooperatives created after
1984, when they divide membership classes into series and/or
authorize a board of directors to fix the rights,
privileges, preferences, restrictions and conditions
attaching to any wholly unissued class or series of
memberships.
4. Summary of Arguments in Support:
AB 1255 (Pan), Page 5
a. The Sacramento Natural Foods Cooperative is
sponsoring the bill for the reasons stated above.
According to this bill's sponsor, at least four other
states authorize the issuance of preferred, non-voting
memberships by consumer cooperatives, including Texas,
Wisconsin, Minnesota, and North Carolina. California
used to permit the issuance of these types of
memberships, but, as noted above, revision of the codes
in 1984 removed this express authorization. The
pre-/post-1984 dichotomy results in some California
consumer cooperatives being able to issue these types of
memberships (e.g., those cooperatives formed prior to
1984), and in other consumer cooperatives being denied
this ability by the Secretary of State's office (e.g.,
cooperatives formed after 1984, which have applied to
modify their articles of incorporation to include this
authority).
b. Sacramento Natural Foods Cooperative was joined by
nine other food co-ops in the state and by the National
Cooperative Grocers Association in support. Each of
these supporting cooperatives write, "AB 1255 will help
our membership make sound investments in their local
economy and support our mission of providing families
with healthy, sustainable food."
5. Summary of Arguments in Opposition: None received.
6. Amendments:
a. The author will be offering the following amendments
in Committee, to correct inadvertent drafting errors by
the Legislative Counsel:
Page 3, line 25, strike the first "a"
Page 3 line 29, strike "a"
Page 3, line 32, after "decrease": add a comma and the
words "but not below the number of memberships then
outstanding,
Page 3, line 33, strike "of this type"
Page 3, lines 34 and 35, strike the comma and the words
AB 1255 (Pan), Page 6
"but not below the number of memberships then outstanding
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Sacramento Natural Foods Cooperative (sponsor)
BriarPatch Co-op
Chico Natural Foods Cooperative
Co-opportunity Consumers Cooperative
Davis Food Co-op
National Cooperative Grocers Association
North Coast Cooperative
Ocean Beach People's Food Co-op
Quincy Natural Foods Co-op
Twin Pines Cooperative Foundation
Ukiah Natural Foods Co-op
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102