BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 816| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 816 Author: Bonta (D), et al. Amended: 7/6/15 in Senate Vote: 21 SENATE BANKING & F.I. COMMITTEE: 7-0, 7/1/15 AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell ASSEMBLY FLOOR: 55-17, 5/22/15 - See last page for vote SUBJECT: Cooperative corporations: worker cooperatives SOURCE: East Bay Community Law Center Sustainable Economies Law Center DIGEST: This bill 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. ANALYSIS: Existing law: 1)Establishes the Consumer Cooperative Corporation Law (Corporations Code Section 12200 et seq.), as specified. 2)Caps the maximum aggregate investment that may be made by a AB 816 Page 2 shareholder in shares or by a member in memberships of a cooperative corporation at $300 (Corporations Code Section 25100). As long as this cap is not exceeded, sales of those shares or memberships are exempt from state securities permitting laws. This bill: 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. 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 or other work performed for the corporation. b) 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. c) 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. Community investor voting power is limited to approval rights over a merger, sale of major assets, reorganization, or dissolution. d) 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, but not limited to, wages earned, number of hours worked, number of jobs created, or some combination of those measures. e) 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 AB 816 Page 3 authorize assignment of a portion of retained earnings and net losses to an unallocated capital account. Earnings assigned to the unallocated 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. f) 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. g) Prohibits a worker cooperative from consolidating or merging with another corporation other than another worker cooperative. h) 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. Background Worker cooperatives are businesses that are owned by their workers 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. Comments Authority to establish worker cooperatives. 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 AB 816 Page 4 cooperatives. The lack of language specific to worker cooperatives is viewed as problematic by this bill's sponsors. AB 816 authorizes the creation of worker cooperatives and adds language to the Cooperative Corporation Law specific to the formation and governance of worker cooperatives. Among this 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. To date, according to this bill's sponsors, 11 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. 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. It would equal $695 in inflation-adjusted dollars today. AB 816 increases 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. AB 816 Page 5 Prior/Related Legislation AB 2525 (Bonta, 2014 ) would have established the Limited Liability Worker Cooperative Act to provide for the organization and operation of worker cooperative companies. The bill died in the Assembly Banking and Finance Committee. AB 1161 (Skinner, 2011) would have renamed the Consumer Cooperative Corporation Law as the Cooperative Corporation Law and authorized the establishment of worker cooperatives. The bill died in the Assembly Banking and Finance Committee. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified7/9/15) East Bay Community Law Center (co-source) Sustainable Economies Law Center (co-source) California Center for Cooperative Development Design Action Collective DIG Cooperative Network of Bay Area Worker Cooperatives 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 individuals OPPOSITION: (Verified7/9/15) Two individuals ARGUMENTS IN SUPPORT: The Sustainable Economies Law Center and East Bay Community Law Center assert that worker-owned businesses have unique potential to grow local economies, AB 816 Page 6 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. 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. ARGUMENTS IN OPPOSITION: The opponents assert that AB 816 will undermine worker cooperatives, because it contains 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. Opponents also believe that AB 816 undermines workplace democracy by allowing a differential in voting power. This removes the whole idea behind today's worker cooperative of one person, one vote. By destroying the one person, one vote structure, AB 816 fails to conform with Internal Revenue Service tax statutes. Differentials in voting will make every entity an Employee Stock Option Plan for which incorporation laws exist; these entities will be taxed differently than today's worker cooperatives, which will add a burden on worker owners. AB 816 Page 7 Furthermore, because some worker cooperatives, especially union cooperatives, may seek to take over faltering businesses that may be of size, prohibitions on employee owner contributions will make such acquisitions almost impossible. AB 816 opens the public sale of shares, which worker cooperatives do not do. Finally, 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. ASSEMBLY FLOOR: 55-17, 5/22/15 AYES: Achadjian, Baker, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Irwin, Jones-Sawyer, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, McCarty, Medina, Mullin, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Williams, Wood, Atkins NOES: Travis Allen, Bigelow, Chang, Chávez, Beth Gaines, Gallagher, Grove, Hadley, Harper, Jones, Kim, Mayes, Obernolte, Patterson, Steinorth, Wagner, Wilk NO VOTE RECORDED: Alejo, Brough, Melendez, Nazarian, O'Donnell, Olsen, Waldron, Weber Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102 7/10/15 15:55:32 **** END ****