BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 816 Hearing Date: July 1,
2015
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|Author: |Bonta |
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|Version: |June 22, 2015 Amended |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Eileen Newhall |
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Subject: Cooperative corporations: worker cooperatives.
SUMMARY Renames the Consumer Cooperative Corporation Law as the
Cooperative Corporation Law; authorizes the creation of worker
cooperatives, as specified; and increases, from $300 to $1000,
the maximum aggregate investment that may be made by a
shareholder in shares or a member in memberships of a
cooperative corporation.
DESCRIPTION
1. Increases, from $300 to $1,000, the maximum aggregate
investment that may be made by a shareholder in shares or by
a member in memberships of a cooperative corporation. As
long as this cap is not exceeded, sales of those shares or
memberships are exempt from state securities permitting
laws.
2. Renames the Consumer Cooperative Corporation Law as the
Cooperative Corporation Law, and authorizes the creation of
worker cooperatives under that law, as follows:
a. Defines a "worker cooperative" or "employment
cooperative" as a corporation that includes a class of
worker-members who are natural persons, whose patronage
consists of labor contributed to, personal services
performed for, or other work performed for the
corporation.
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b. Defines a "worker" as a natural person contributing
labor or services to a worker cooperative.
c. Defines a "candidate" as a worker who is being
considered for membership in a worker cooperative.
d. Defines a "worker-member" as a member of a worker
cooperative who is a natural person and also a patron of
that worker cooperative, and provides that worker
memberships cannot be divided into partial memberships.
e. Defines "community investor" as a person who is not
a worker-member and who holds a share or other
proprietary interest in a worker cooperative.
f. Defines "collective board worker cooperative" as a
worker cooperative in which there is only one class of
members consisting of worker-members, all of whom are
members of the board. Exempts collective board worker
cooperatives from the requirement to hold an annual
meeting of their members.
g. Provides that if a corporation is organized as a
worker cooperative, the corporation's patrons are its
worker-members, and that patronage may be measured by
work performed, including wages earned, number of hours
worked, number of jobs created, or some combination of
those measures.
h. Provides that a worker cooperative may create an
indivisible reserves account, which may only be derived
from non-patronage-sourced income and that may not be
distributed to members. Funds in the indivisible
reserves account must be used as capital for the
cooperative in a manner provided in the articles or
bylaws, or by the board.
i. Authorizes a worker cooperative to establish itself
as a capital account cooperative in its articles or
bylaws. The articles or bylaws of a capital account
cooperative may authorize assignment of a portion of
retained earnings and net losses to an unallocated
capital account. Earnings assigned to the unallocated
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capital account may be used for any and all corporate
purposes, as determined by the cooperative's board of
directors. The articles or bylaws of a capital account
cooperative may permit the periodic redemption of written
notices of allocation and capital stock and provide for
recall and redemption of membership shares upon
termination of membership in the cooperative.
j. Provides that, upon dissolution of a worker
cooperative, the majority of the unallocated capital
account must be distributed to members on the basis of
patronage, capital contributions, or a combination of the
two. Amounts in the indivisible reserve account must be
allocated to a cooperative development organization
designated in the articles of incorporation or the
bylaws.
aa. Provides that community investor voting power in a
worker cooperative shall be provided in the articles or
bylaws of that cooperative, and is limited to approval
rights over a merger, sale of major assets,
reorganization, or dissolution.
bb. Provides that election to be organized as a worker
cooperative or an employment cooperative does not create
a presumption that workers are employees of the
corporation. However, at least 51% of the workers must
be worker-members or candidates.
cc. Prohibits a worker cooperative from consolidating or
merging with another corporation other than another
worker cooperative.
dd. Provides special notice rules for worker cooperatives
that hold meetings to authorize actions of their
cooperatives, when the meetings are meetings of only
worker-members. In these cases, notice of the meeting
must be made not less than 48 hours before the meeting,
if the notice is delivered personally to every
worker-member.
EXISTING LAW
3. Establishes the Consumer Cooperative Corporation Law
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(Corporations Code Section 12200 et seq.). Provides, under
that law, that:
a. A member is any person who, pursuant to a specific
provision of a corporation's articles or bylaws, has the
right to vote for the election of a director or
directors, or possesses proprietary interests in the
corporation. The articles or bylaws may confer some or
all of the rights of a member upon any person or persons
who do not have voting rights (Corporations Code Section
12238).
b. If the corporation is organized to provide goods or
services to its members, the corporation's "patrons" are
those who purchase those types of good from or use those
types of services of the corporation (Corporations Code
Section 12243).
c. If the corporation is organized to market, process,
or otherwise handle its members' products or services,
the corporation's "patrons" are those persons whose
products or services are marketed, processed, or handled
by the corporation (Corporations Code Section 12243).
d. The patronage of a patron is measured by the volume
or value, or both, of a patron's purchases of products
from and use of services furnished by the corporation,
and by products and services provided by the patron to
the corporation for marketing (Corporations Code Section
12243).
e. Generally requires cooperatives to provide notice of
meetings to their members not less than ten nor more than
90 days before the date of a meeting, as specified
(Corporations Code Section 12461).
4. Generally allows any corporation to merge with another
domestic corporation, foreign corporation, or other business
entity (Corporations Code Section 12530)
COMMENTS
1. Purpose: AB 816 is co-sponsored by the East Bay Community
Law Center and the Sustainable Economies Law Center to
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expressly recognize the existence of worker cooperatives in
California law.
2. Background: According to this bill's sponsors, worker
cooperatives are businesses democratically owned and
governed by their worker-owners. The United States
Federation of Worker Cooperatives estimates that there are
approximately 350 worker cooperatives in the United States,
employing over 5,000 people and accounting for $500 million
in annual revenue. Sixty percent of all worker cooperatives
have formed since 2000, and 31% have formed since 2010,
according to the Democracy at Work Institute.
This bill contains two different provisions: authority to
establish worker cooperatives and an increase in the maximum
dollar value of shares and memberships that may be sold by
cooperatives without triggering a securities permitting
requirement. Each provision is described separately below.
3. Authority to Establish Worker Cooperatives:
The Need for This Provision: California's existing Consumer
Cooperative Corporation Law does not prohibit the creation
of worker cooperatives, but does not contain any provisions
specific to the formation and governance of those
cooperatives. The lack of language specific to worker
cooperatives is viewed as problematic by this bill's
sponsors.
AB 816 would authorize (though not require) the creation of
worker cooperatives and add language to the Cooperative
Corporation Law specific to the formation and governance of
worker cooperatives. Among the bill's key provisions: it
adds labor to the definition of patronage; limits worker
cooperatives to a single class of patron member called
worker-members; allows worker cooperatives to create a
collective board of directors, on which each worker-member
sits; exempts collective board worker cooperatives from
having to hold meetings of their members; and defines
capital account cooperatives, whose entire net book value is
reflected in their member capital accounts. The sponsors
believe that these are important distinctions that better
reflect the needs of worker cooperatives than the existing
Consumer Cooperative Corporation Law.
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Other states: To date, according to this bill's sponsors,
eleven other states have enacted statutes explicitly
authorizing the formation of worker cooperatives, including
Alabama, Connecticut, Delaware, Maine, Massachusetts, New
York, Oregon, Vermont, Washington, Pennsylvania, and
Colorado.
Allocation of Money to Cooperative Development Organizations:
One provision of this bill would authorize a worker
cooperative to allocate money in its indivisible reserves
account to a cooperative development organization upon the
dissolution of the worker cooperative. According to this
bill's sponsor, cooperative development organizations are
organizations such as the California Center for Cooperative
Development, the Democracy At Work Institute, the U.S.
Federation of Worker Cooperatives, and other organizations
that exist to provide technical assistance to worker
cooperatives or promote the development of worker
cooperatives in other ways.
Under some European cooperative laws (e.g., Italy and France),
cooperatives can benefit from tax incentives when they set
aside funds in an indivisible reserves account. Some
cooperative movement leaders believe that these policies are
partially responsible for the large number of European
worker cooperatives and their strong track records of job
stability. The provisions of this bill that authorize the
creation of an indivisible reserves account and that
authorize the allocation of money in that reserves account
to a cooperative development organization upon the
dissolution of a worker cooperative are attempts on the
sponsors' part to plant the seed for future policies modeled
off European laws that incentivize the establishment of
these accounts.
Recognizing Worker Cooperatives Within California's Cooperative
Law Versus Creating a New, Stand-Alone Law Only for Worker
Cooperatives: Several of the points raised in opposition to
this bill reflect the author's and sponsors' decision to
authorize worker cooperatives within California's existing
Cooperative Corporation Law instead of creating a new law
specifically designed for worker cooperatives. When asked
why they chose to work within existing law rather than
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create a new law specific to worker cooperatives, the
sponsors responded that there are dozens of existing worker
cooperatives formed under California's Consumer Cooperative
Corporation Law, who will be able to benefit from the bill
as it is currently drafted.
Furthermore, a few years ago, when the sponsors began developing
the concept that led to AB 816, they pursued a stand-alone
law specifically for worker cooperatives. They encountered
resistance from cooperative attorneys and accountants, who
believed that a separate law would complicate efforts to
establish worker cooperatives, not enhance them. Those
attorneys and accountants favor the approach taken in AB
816.
4. Increase in Maximum Dollar Value of Shares and Memberships
in Consumer Cooperative Corporations: Existing California
law caps the maximum aggregate investment that may be made
by a shareholder in shares or by a member in memberships in
a consumer cooperative corporation. As long as this cap is
not exceeded, sales of those shares or memberships are
exempt from state securities permitting laws. The cap of
$300 was placed in California law, effective January 1,
1984. This bill's sponsors of this bill are seeking to
increase the cap from $300 to $1,000, to give cooperative
corporations greater ability to raise funds from their
members, without running afoul of California's securities
laws. By allowing cooperatives to solicit needed financing
from their own members, rather than from non-member,
professional investors who will want to control the
direction of the co-operative, the sponsors are seeking to
give co-operatives greater ability to raise capital in ways
that align with their values and structures. This bill's
sponsors also observe that the current $300 cap is too small
to allow worker cooperatives to raise capital for their
businesses.
Staff notes that if the $300 cap had been allowed to increase
with inflation since 1984, it would equal $695 in 2015,
lower than the proposed increase to $1,000.
5. Summary of Arguments in Support:
a. The sponsors assert that worker-owned businesses
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have unique potential to grow local economies, because
worker cooperatives generate high-quality local jobs and
prevent outsourcing, and because worker-owners reinvest
their wages and profits locally. Participation in worker
ownership builds business skills in communities that are
historically underrepresented in the business community,
and increases overall civic engagement. By distributing
business surpluses among workers rather than sending them
to corporate headquarters, worker cooperatives create
jobs and promote community stabilization. Finally,
worker cooperatives can aid small- and family-owned
businesses with their succession strategies. According
to the sponsors, a California worker cooperative law will
facilitate the sale of businesses from retiring owners to
their workers, potentially saving thousands of jobs in
the state over the next decade.
b. Rainbow Grocery, DIG Cooperative, New Hope Farms,
and the Design Action Collective are currently
incorporated under the consumer cooperative corporation
statute, because there was no way to legally form as
worker cooperatives when they incorporated. The language
of the existing statute does not accurately portray the
organization and structure of a worker-owned cooperative.
A worker cooperative specific statute would provide
clarity and guidance for businesses wishing to operate as
worker cooperatives.
c. Prospera Community Development has supported the
launch of eight worker cooperatives. All were formed
under the limited liability company statute, because the
current Consumer Cooperative Corporation Law can create
cumbersome barriers for worker cooperatives to
effectively operate. AB 816 will strengthen the
cooperative movement by providing businesses a framework
to form worker cooperatives.
6. Summary of Arguments in Opposition:
a. Two private individuals submitted letters of
opposition based on an earlier version of the bill. It
is unclear whether they remain opposed to the current
version of the bill. Among the concerns raised by the
opponents:
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AB 816 would undermine worker cooperatives, because it
provides no clear guidance and begins to muddy the waters
with language that is non-conforming with existing worker
cooperative statutes set by the federal government and
implemented in other states. In addition, the
cooperative idea is still in its infancy and needs time
to grow.
AB 816 undermines workplace democracy by allowing a
differential in voting power. This removes the whole
ideal behind today's worker cooperative of one person,
one vote. One person, one vote will enhance the equal
voices of all employee owners in decision making and
prohibit any one group from selling out without the
consent of the other owners.
Furthermore, by destroying the one person, one vote
structure, AB 816 would fail to conform with Internal
Revenue Service tax statutes. Differentials in voting
would make every entity an Employee Stock Option Plan for
which incorporation laws exist, and would be taxed
differently than today's worker cooperatives. This will
add a burden on worker owners.
Because some worker cooperatives, especially union
cooperatives, may seek to take over faltering businesses
that may be of size, prohibitions on employee owner
contributions would make such acquisitions almost
impossible. Such directions undermine workplace
democracy.
AB 816 obliterates worker owner guidelines on meetings,
notifications, terminations, relationships between and
among different decision-making structures, regardless of
the size of the worker cooperative.
AB 816 opens the public sale of shares, which worker
cooperatives do not do. Currently, shares are not
publicly traded, and are available only to those people
who will become full worker owners. AB 816 creates a
loophole of public access and undermines workers'
authority over their own workplace.
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7. Amendments:
a. The author plans to offer the following clarifying
amendments in Committee:
Page 5, line 32, after "including" add: , but not limited
to,
Page 6, line 18, strike the comma and strike personal
services performed for,
8. Prior and Related Legislation:
a. SB 577 (Hueso), 2015-16 Legislative Session: Among
its provisions, SB 577 increases, from $300 to $1000, the
maximum aggregate investment that may be made by a
shareholder in shares or a member in memberships of a
cooperative corporation. Passed the Senate Banking and
Financial Institutions Committee; currently pending in
the Senate Judiciary Committee.
b. AB 1161 (Skinner), 2011-12 Legislative Session:
Would have renamed the Consumer Cooperative Corporation
Law as the Cooperative Corporation Law and authorized the
establishment of worker cooperatives. Never taken up by
its author in the Assembly Banking and Finance Committee.
c. AB 2525 (Bonta), 2013-14 legislative Session: Would
have established the Limited Liability Worker Cooperative
Act to provide for the organization and operation of
worker cooperative companies. Never taken up by its
author in the Assembly Banking and Finance Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Sustainable Economies Law Center (co-sponsor)
East Bay Community Law Center (co-sponsor)
California Center for Cooperative Development
Design Action Collective
DIG Cooperative
Network of Bay Area Worker Cooperatives
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New Hope Farms
Praxis Peace Institute
Prospera Community Development
Rainbow Grocery
Roots of Change
Sarana Community Acupuncture
TeamWorks Development
Three Stone Hearth Community-Supported Kitchen
Four private individuals
Opposition
Two private individuals
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