Oregon Cooperative Law

Oregon cooperative corporations are treated differently from other Oregon business entities. The laws governing the organization and operation of Oregon cooperative business entities are found generally under the Oregon Cooperative Corporation Act in Chapter 62 of the Oregon Revised Statutes (“ORS”).

Cooperative Law Generally

Oregon cooperative corporations have operated as unique business entities for over one hundred years. Even before the first Oregon cooperative corporation statute in 1913, the earliest cooperative corporations were established for agricultural purposes under the state’s general corporation statutes. Today, Oregon cooperative corporations are recognized to be distinct business entities organized “for the purpose of providing services and profits to its members and not for corporate profit.” Linnton Plywood v. Tax Com., 241 Or 1, 4, 403 P2d 708 (1965).

Statutes

Oregon Cooperative Corporation Act

To underscore the notable ways in which cooperative corporations are unique, the Legislative Assembly enacted an entire chapter in the Oregon Revised Statutes devoted to cooperative corporations. The Oregon Cooperative Corporation Act, chapter 62 of the ORS, differs substantially from chapters defining other business entities by specifically addressing cooperative methods of formation, particularly voting rights, allocation of savings and losses, and regulation of members and boards. Cooperative corporations in Oregon may be organized for any lawful purpose, except banking or insurance. Certain aspects of the chapter 62 apply only to employee owned cooperative corporations, as discussed further in this guide.

ORS 62.125 lists what a cooperative corporation can do, including:

– perpetual succession (the business continuing on),unless limited in duration by the articles

– conduct business

– lend money for corporate purposes, purchase real estate, execute contracts, etc.

One interesting permission is in 62.125(12) allows a cooperative corporation to “make donations for the public welfare or for charitable, scientific or educational purposes.”

Legal Entities

Cooperative Corporations Not Organized Under ORS Chapter 62

Corporations that operate cooperatively may choose to organize as a different entity under Oregon law. However, only those corporations incorporated under chapter 62 of the ORS may use the term “cooperative,” or any of its variations, as part of the entity name or title. See ORS 62.850. When organizing a cooperative corporation outside of chapter 62 of the ORS, it is important to either incorporate provisions authorizing cooperative methods of operation into the corporate bylaws or to make such provisions legally binding on the corporation by contract.

Types of Co-ops

Consumer Cooperative Corporations

Oregon consumer cooperative corporations operate in many different industries, including consumer retailing (e.g. buying clubs or grocery stores), consumer wholesaling (e.g. tire and automotive goods), housing (e.g. condominiums and manufactured dwellings), health care (e.g. medical and hospital supply), recreation (e.g. hotel or resorts), transportation (e.g. taxi and trucking services), or public utilities (e.g. telephone and electric supply). Consumers control the operations of the cooperative business, and profits earned by the cooperative are returned to consumers proportionately to the amounts spent on products or services purchased through the cooperative.

Worker Cooperative Corporations

In Oregon, worker cooperative corporations are called employee cooperative corporations, and are employee-owned and employee-controlled cooperative corporations. Employee cooperative corporations in Oregon are specifically addressed in 62.765 to 62.792 of the ORS. Cooperative corporations forming under chapter 62 of the ORS may elect to be governed as employee cooperative corporations by providing a statement in the articles of incorporation or by amendment. In this type of cooperative, employees control the business operations and profits earned by the cooperative are returned to employees in proportion to hours worked for the cooperative or value contributed to the cooperative. Members of an employee cooperative in Oregon must be natural persons employed by the cooperative on a full-time or part-time basis. Although capital shares may be granted, only membership shares have voting power in an employee cooperative. Moreover, unless otherwise stated in the bylaws, only members are authorized to amend the bylaws and articles of incorporation.

Oregon permits the formation of a more specific type of worker cooperative, an internal capital account cooperative, as described in ORS 62.786.

This type of cooperative has its entire net book value reflected in

(1) internal capital accounts (one per member) and

(2) a collective reserve account.

Only members may own capital shares and each member shall have only one vote. The main purpose of these provisions is to reduce the sales price for shares.

Producer Cooperative Corporations

Producer cooperative corporations are organized to market, process, and distribute the products of its members. Oregon has a long history of producer cooperative corporations, particularly in the agricultural industry. In fact, some of the first cooperative corporations in the state were organized by producers (namely farmers) in order to encourage economic growth for rural communities. These agricultural cooperative corporations enabled farmers to work together or separately to increase their marketing potential and production efficiency. Today, three main types of producer cooperative corporations continue:

1. Producer-marketing cooperative corporations earn revenue primarily from sales of products produced, grown, or raised by members.

2. Producer-supply cooperative corporations earn revenue primarily from sales of production supplies for a particular industry, such as equipment, materials, fertilizer, and fuel.Producer-marketing cooperative corporations earn revenue primarily from sales of products produced, grown, or raised by members.

3. Producer-service cooperative corporations earn revenue primarily from providing specialized services to a particular industry, including the transporting, storing, and processing of products.

Nonprofit Cooperative Corporations

Cooperative corporations may be considered to be nonprofit in the sense that these entities operate for the mutual benefit of members by dividing and returning profits earned by the cooperative corporation back to members or patrons in proportion to business transacted with the cooperative corporation. Often cooperative corporations are not charitable entities under the rules of the Internal Revenue Code because the monies earned by charitable entities cannot be distributed to private individuals. Interestingly, Oregon case law clarifies that a Chapter 62 cooperative corporation’s net earnings from business transacted with members and proportionately returned to members as refunds are not considered profits of the cooperative corporation that insure to the benefit of any individual. See Univ. of Oregon Co-Op Store v. State, Dep’t of Rev., 273 Or 539, 552, 542 P2d 900 (1975).

Credit Unions: Financial Cooperative Corporations

Although cooperative corporations are highly flexible and customizable entities found in a variety of industries, Oregon law does not permit cooperative corporations for banking or insurance purposes. Credit Unions are regulated under ORS 723.

Governance & Management

Voting

A cooperative corporation’s members’ voting rights are described generally in ORS 62.265. Typically, one member is entitled to one vote. However, Oregon cooperative corporations may create bylaws that allow member voting based on actual, estimated, or potential patronage. The term “patronage” refers to an individual member’s contribution to the cooperative corporation’s business, distinguishable from the amount of capital interest a member may own in the cooperative corporation.

Shareholders’ voting rights are described generally in ORS 62.195 and more particularly for amendments to articles in ORS 62.560. Shareholders of capital stock can be different from the general class of cooperative corporation members. In such case, shareholders have limited voting rights which are specified in chapter 62.560.

Those members present at any annual or special member meeting of a cooperative corporation constitute the quorum at the meeting, unless the bylaws of that cooperative provide that a greater number is required.

Members

Membership is described generally in ORS 62.145, which authorizes cooperative corporations in Oregon to include the operational details in their articles of incorporation and bylaws.

Conditions for membership must be included in the articles of incorporation. For example, the articles must state whether members are required to pay a membership fee or own membership stock shares. Cooperative corporations are authorized to update their membership fees without filing amended or restated articles with the Secretary of State.

The particular qualifications for membership must be set forth in the bylaws. For example, bylaws must address the methods and conditions of member acceptance and termination.

Board of Directors

Boards of directors are described generally in ORS 62.280. A cooperative corporation must have at least 3 directors. Unless the bylaws authorize nonmembers to serve as directors, all directors of cooperative corporations in Oregon must be and remain members of the cooperative corporation for his or her entire term of office. However, a majority of the cooperative corporation board must be comprised of members. Only the members may establish compensation and benefits for a director for services as a director.

Financing Cooperative Enterprises

Membership and Stock Classifications

Membership in a cooperative corporation is conditional on ownership of a share of membership stock or payment of a membership fee as set forth in the articles. A cooperative corporation’s capital shares may be divided into more than one class with such designations, preferences, limitations, voting rights and restrictions, and any other relative rights as shall be stated in the articles. No certificate of stock may be issued for any share until the share is fully paid. See ORS 62.175.

Membership stock shares are authorized only for members. Typically, each individual member may have only one single share. The issuance fee for a membership share is fixed and may be determined by the board of directors. The transfer of membership stock is generally limited.

In contrast, capital stock may be issued, pay dividends, and may be transferred without limitation. Unless specifically authorized by chapter 62 of the ORS, there is no voting power associated with capital stock in a cooperative corporation. Capital stock shareholders may be entitled to vote if an amendment is proposed to the cooperative corporation bylaws that could adversely affect the capital stockholders’ rights.

Securities Registration

Oregon has adopted blue sky laws, state laws that regulate the offering and sale of securities ostensibly to protect the public from fraud. Generally, the laws are broad and intricate and failure to comply can result in civil and criminal penalties for cooperative corporation board members and their advisers, including attorneys. It’s essential that a cooperative corporation understand if securities registration is required. See Oregon Securities Law, ORS Chapter 59.

For exempt securities or exempt securities transactions, see Oregon Administrative Rules 441-025-0005 to 441-025-0126, and 441-035-0005 to 441-035-0300.

For registration of securities, see also Oregon Administrative Rules 441-065-0001 t0 441-065-0260.

Oregon cooperative corporations’ memberships are generally not considered a security by the federal Securities and Exchange Commission, or they are exempt from registration under the intrastate exemption.

Cooperative Corporation Shares

Even if a sale is exempt, there might still be rules to follow or special notices to file. It’s crucial to understand these requirements before offering shares in an Oregon cooperative corporation to anyone.

Similar to the position taken by the Securities and Exchange Commission, in Oregon, a share of stock evidencing a cooperative corporation membership interest is not a security if:

(1) the interest is not transferrable,

(ii) pays no dividends (other than patronage rebates), and

(iii) does not appreciate in value.

The Oregon Department of Insurance and Finance issued an opinion letter confirming this position on May 3, 1989, and to date the current Oregon regulating authority, the Oregon Department of Consumer and Business Services, Division of Financial Regulation, continues to rely on this no action letter. See Breitenbush Community, Healing-Retreat Conference Center, OP 18-89. If the cooperative corporation intends for its membership shares to comply with these guidelines it should be addressed in the cooperative corporations’ bylaws.

If the cooperative corporation is raising money (by investment in common or preferred shares or by issuing a debt instrument), the shares are likely securities under Oregon law. If no exemption is available under the Oregon Securities Law, the cooperative corporation must prepare and submit a detailed document (called a prospectus) that includes a information about the business, a salesperson license, financial statements. They also have to pay fees, which can range from $200 to $1,500, depending on how much money they’re trying to raise. These rules are all laid out in the Oregon Administrative Rules 441-065-0001 to 441-065-0260.

A few exemptions found in ORS 59.025 and 59.035 include:

Membership interests in certain industries including: agriculture, fishing, renewable energy. ORS 59.025(9) and (10),
Grocery buying cooperative corporations (so long as the membership share price does not exceed $300 among other things). ORS 59.025(11),
Deals with wealthy investors can skip some of these rules if they don’t advertise broadly under ORS 59.035(5)
There’s also a small offering exception that allows selling to a few people in Oregon within a year, but it has to follow strict guidelines. ORS 59.035(12).

Allocation of Net Proceeds, Savings and Losses

The money a cooperative makes or saves should be divided and given out as the bylaws say. Specifically, any money earned from members using the cooperative’s services should be divided in accordance with the ratio which each member’s patronage during the period to total patronage by all members during the period. The bylaws can also say how to handle losses. If you work for a workers’ cooperative, the work you do counts as using the cooperative’s services.

Distributions and payments may be in cash, credits, capital stock, certificates of interest, revolving fund certificates, letters of advice or written evidence of indebtedness or other equity interest issued by the cooperative.

A cooperative may provide in its bylaws:

(a) The minimum amount of any single patronage transaction; and

(b) The minimum aggregate amount of patronage transactions by any patron during the fiscal year of the cooperative. See ORS 62.415.

Cooperative Support Organizations

Cooperative Portland is for people interested in co-ops and workplace democracies in the Portland metro area. It connects people in cooperatives with existing co-operators to gain perspectives and help each other out.

Northwest Cooperative Development Center is a not-for-profit, 501(c)(3), organization devoted to assisting new and existing cooperative businesses, from daycare centers to credit unions.

The Oregon Secretary of State website has essential corporate forms, like the Articles of Formation that can be download.

Author

Kristin Scheel Downes- Corporate and Securities Attorney- Scheel Legal

777 NW Wall Street, Suite 202

Bend, Oregon 97703

541.668.6168 (direct)

kristin@scheellegal.com