"1001 Questions" Concerning Bylaws of Agricultural Cooperatives

Randy E. Dunn and James B. Dean

Membership        Marketing and Purchasing Contracts        Meetings        Directors        Management        Officers        Patrons                                    Dissolution    Unclaimed Money    Disputes    Distribution of By-Laws    Fiscal Year and Seal   Amending By-Laws

INTRODUCTION

The purposes of the questions which follow are twofold: (1) to provide a practical guide to the type of questions which should be asked and confronted when a new agricultural cooperative organization is organized or when an existing agricultural cooperative is reorganized; and (2) to provide a springboard to an extensive analysis of the policy behind provisions of a cooperative's bylaws to foster a better understanding of the reasons for bylaw treatment of various subjects.

This discussion should not be viewed as complete. It is not written as an authoritative treatise. It is written to call attention to some areas of concern and to stimulate thought and discussion concerning the structuring of the cooperative and its bylaws. Other corporate documents, such as the articles of incorporation, also need careful consideration so that the documents are drafted in a manner best suited to achieve the goals of the cooperative and its members.

The authors do not intend to begin to answer the questions presented. Most of the questions need to be determined at the local level to fit local needs. Some answers are fairly obvious. Some depend on the local jurisdiction's statutory and case law. Some depend on the needs and desires of the cooperative and its members.

This article deals with many possible provisions of the bylaws of agricultural cooperatives. However, the authors have chosen not to include a discussion of equity retainment or equity retirement. Such a discussion, due to its complexity, is best reserved for an article dealing exclusively with equity. On the other hand, the authors hope that the following discussion will illustrate the fact that "non-equity" areas of cooperative bylaws present a wide variety of issues that should be addressed. All too frequently cooperatives and their professional advisors become entangled in the complexity of equity issues and lose sight of the importance of the reminder of the bylaws. This discussion focuses on those matters.

The majority of this article is in question form. The authors have, however, included a short discussion of a few areas which will help focus the questions pertaining to those areas. Frequent references to Legal Phases of Farmer Cooperatives (4th ed), prepared by the Agricultural Cooperative Service, United States Department of Agriculture, is due to the fact that it is one of the better modern discussions on farmer cooperatives, and it is easily obtained from the United States Government Printing Office at a nominal price. Frequent citation to relevant Colorado statutes is due to the familiarity of the authors with Colorado cooperative law. Also, the Colorado Cooperative Marketing Association statutes are quite similar to the relevant cooperative statutes of several other agricultural states.

Whether writing bylaws for a new cooperative or revising and updating bylaws of an existing cooperative, the authors hope that in considering the questions which follow the cooperative and its professional advisors will be assisted in better understanding how the cooperative can be structured to work for and best satisfy the needs of its members.

MEMBERSHIP

May a cooperative select its members?

Most authorities indicate "yes" in reference to other types of nonstock associations. Stock corporations have the right to determine to whom they will sell their stock. State statutes regulating cooperatives generally do not grant cooperatives the specific right to establish restrictive membership qualifications. Such statutes do, however, frequently provide that the cooperatives bylaws may include "qualifications for membership, manner of succession and conditions for withdrawal or expulsion". Other statutes provide that "any person, firm or corporation or any other cooperative association may become a member of such association upon meeting uniform terms and conditions set forth in its bylaws, and that any association may admit other associations to membership or may become a member in another association upon such terms and conditions as may be provided by the bylaws.

Can such statutory sections reasonably be read to allow the association to exclude a person who satisfies all the membership requirements and makes the prescribed application for membership? If not, may the bylaws contain a membership provision which allows the cooperative to refuse admission to an applicant if the Board of Directors finds, based on reasonable grounds, that the applicant's admission would prejudice the interests, hinder or otherwise obstruct, or conflict with, any purpose or operation of the cooperative?

If the Board of Directors desires a veto power over the acceptance of an application for membership, should the Board be required to demonstrate reasonable grounds for such denial? Would it be easier to defend against an action by the denied applicant if the Board does not have to prove reasonable grounds?

Generally, reasonable grounds for denying membership are not required. The cooperative may simply accept whom it desires to have as its members.

Statutes regulating agricultural cooperatives generally provide that under the terms and conditions prescribed in the bylaws, the cooperative may admit only those persons who are engaged in the production of agricultural products to be handled through the association. Generally, courts appear to hold that membership in a cooperative is a privilege, not a right, and that "limiting membership to those with whom and for whom the cooperative will conduct its affairs is an important means of protecting the cooperative character of the organization".

Is it advisable to allow firms, partnerships, corporations or associations to apply for membership or should membership be limited to individuals?

Should the president or the designated representative or a stockholder of a member corporation be able to apply for and receive a separate membership in a cooperative in which the corporation is already a member? If so, what does that do to "one member one vote" principles and statutory provisions? If each partner in a partnership were to become a member? If each member of an association became a member? Where there is a "business entity" member with many owners or employees who could also be agricultural producers, should the bylaws prevent the owners and employees from becoming cooperative members because of possible influence or control problems? Is a bylaw provision, such as "the cooperative may refuse admission to an applicant if the Board of Directors finds, based on reasonable grounds, that the applicants admission would prejudice the interests, hinder or otherwise obstruct, or conflict with, any purpose or operation of the cooperative," broad enough to exclude such people if the cooperative found or believed that admitting those related members to the cooperative would damage the cooperative? If the language is not broad enough, how can such a requirement be drawn? Would such a requirement be constitutional or violate any statute or equitable principle? Is it good cooperative policy?

If such a person is denied membership in the cooperative, does this deny Farmer Brown the right to be a member when Family Brown, Inc. is a member of the cooperative? Allowing Family Brown, Inc. and Farmer Brown both to be members would give Farmer Brown two votes. Is this in conflict with statutes allowing only one vote per member? Should Farmer Brown (or Family Brown, Inc., depending on which is a member first) be specifically allowed, or specifically denied, the privilege of becoming a member in the cooperative? Can such membership be denied if Family Brown, Inc. qualifies as a lessor and Farmer Brown qualifies as a lessee of land used for the production of agricultural products? Could one legally be allowed membership without voting rights?

May Farmer Brown and Family Brown, Inc. apply for single membership in joint tenancy or cotenancy if each cotenant is individually eligible for membership? Is there any advantage in doing so? Or should joint tenancy membership be prohibited by the bylaws?

Would there be an advantage to the family corporation if Farmer Brown, as a joint tenant, dies? Would the paying out of Farmer Brown's equity be any easier? Any harder?

Is the applicable statutory provision a sufficient definition of a producer of agricultural products? How could the definition be modified to best serve the needs of the cooperative or possible federal statutory or regulatory requirements?

Is there any reason for a different definition of a producer of agricultural products for the purposes of bylaws for a marketing or a supply cooperative?

To what extent, under the controlling statute, must a prospective member be involved with agriculture to qualify for membership in the cooperative? If the controlling statute does not require a particular type of involvement or is silent on the matter, should the cooperative formulate such a requirement?

For instance, is it advantageous from a policy perspective to distinguish between types of landlords and to exclude all landlords who do not h ave varying earnings based on the risks of the farming venture?

The answer would seem to be a definite "yes". The landlord has more of an interest in the operation of the cooperative if his fortunes fall and rise with the other agricultural producers. Moreover, the Internal Revenue Service does not believe a cash rent landlord is an agricultural producer eligible for membership.

Would a provision that a prospective or current member must have an equity financial investment in an agricultural venture and varying earnings depending upon the risks involved in such a venture be a sufficiently restrictive definition to satisfy the Internal Revenue Service? To satisfy the desires of the cooperative?

Should a cooperative's bylaws require a landlord to live within the territory of the cooperative's operations? Should a firm, partnership, corporation or association be required to transact and carry on business within the territory of the cooperative's operations? Should such business be of an agricultural nature, or may it be any type of business? For what reasons would it be advantageous or necessary for each unnatural member to be required to transact business within that territory?

Is it crucial, or simply convenient, for a member who is a natural person to live within that territory? Should any or all of the above restrictions be explicitly stated in the bylaws, or is this something that should be (or could be) left to the discretion of the Board of Directors in their power (discussed above) to refuse admission to an applicant who otherwise satisfies the requirements for membership?

Should a single membership in joint tenancy be allowed? For what purpose? From the cooperative's perspective? From the joint tenants' perspective? Is a joint tenancy the proper property interest, or would some other form of property interest be more beneficial? Should this be of concern to the cooperative? Upon death of the more active farming joint tenant, can the surviving lesser active joint tenant be considered an agricultural producer and remain an active member? Could (or should) the bylaws provide for any particular solution?

Should a minor be eligible for membership in the cooperative?

Generally, minors are eligible for membership in the absence of statutory restrictions. Membership would give the minor the right to vote so long as he can comprehend the significance of the right to vote.

Should such a provision be in the bylaws? Should there be any other restrictions to minors gaining membership?

Does the controlling statute or case law require that payment be made in full for the stock or membership certificate before the applicant is considered a member? If not, should the cooperative require payment "up front"? Or should a cooperative allow an applicant to "earn his way in"? If he may "earn his way in", what rights does or should he have until the full price is realized? May he vote? May he be elected or appointed to an office in the cooperative? Should a time limit be imposed for completing the "earning in"?

In the absence of statutes or case law concerning payment of the membership fee or the full consideration for the stock, it would seem that the cooperative may establish its own rules regarding the same. The practical effects and limitations of allowing an applicant to "earn his way in" should be considered carefully before allowing such a method of gaining membership.

What are the statutory restrictions, if any, upon the transfer of a member's stock or membership certificate? If there are no statutory restrictions upon transfer, should the cooperative adopt restrictions? If a cooperative wishes to be selective in admitting new members, is it reasonable for the cooperative to place similar requirements on the transferees of the stock or membership certificate? Should the restrictions be specifically stated? Should they parallel the requirements for membership? Or should the Board of Directors be given the power to affirm or deny, in its discretion, each transfer? If the Board of Directors is given such power of approval, my the Board then devise a method of transfer, with specific requirements for transfer, and sit as a judicial body to determine whether the correct procedure and requirements have been met?

Unless prohibited by statute, should the Board of Directors be given the power to approve the transfer of stock or a membership certificate to a person who does not qualify for membership? If approval is given, should the Board transfer the stock or membership certificate to an equal amount of preferred stock, participating certificates, or interest-bearing certificates of indebtedness, which do not carry the right to vote?

Should there be an appeals process from the denial of the Board of Directors of a transfer or of an action by the Board to transfer a member's common stock or membership to another form of interest without a voting privilege? The question is really one of how much control should the Board be allowed to exercise. Also, is voting a privilege or a right? May it be denied to a member upon a finding by the Board that he does not meet the proper requirements? Is the member entitled to a form of due process? Is the only effect of a transfer from a voting interest to a nonvoting interest that of taking away the voting privilege, or does the "member" lose more? He would appear to lose, at least, the right to share with other members in asset distributions upon final liquidation. Is this the result the cooperative desires?

Would it be more practical to adopt a specific provision that no common stock of, or membership certificate in, the cooperative shall be transferred to any person by the original holder thereof except to a spouse for holding in cotenancy, to a business entity controlled by the original holder, to the cooperative upon redemption or acquisition thereof by the cooperative, or to a person entitled thereto by operation of law?

If the stock or membership certificate were to be transferred to a business entity controlled by an original holder and control of the business entity subsequently passes to another who is not eligible to receive the transfer, what should be the result? Can the Board hold that the transfer was void? Would the length of time between transferring the stock or certificate to the business entity and changing the controlling party make any difference in whether the Board could find that the transfer was void? May the Board terminate the membership? What if the new controlling party is otherwise eligible for membership? What if he is a member in his own right? May the cooperative in good faith terminate the transferred membership?

If the original holder wants to transfer to his spouse for holding in cotenancy, is there a need to specifically provide for interests in cotenancy elsewhere in the bylaws?

Should this type of provision specify that any purported transfer not falling into any of the categories of permissible transfers is void? Or is this adequately presumed from the language in this provision?

What should be the procedure for withdrawal from membership?

Should notice of withdrawal be required in writing? Should the bylaws specify that withdrawal only becomes effective a given number of days after receipt of the written notice? Or may a member's withdrawal become effective prior to receipt of the written notice by the secretary of the cooperative? If so. is backdating by the member allowed? Should it be allowed? If the effective date of the notice is prior to receipt of the written notice by the secretary, but the member continues to receive the benefits of membership, should or can the cooperative seek compensation from the member for the benefits? What should the measure of compensation be? Or should the bylaws provide that the effective date is the date of receipt of the written notice by the secretary of the cooperative?

Should there be a maximum time limit between receipt of the written notice and the desired effective date? If so, what time period would be proper? Should the decision be left to the discretion of the Board of Directors?

Should a member who has withdrawn for any reason be required to wait a designated period of time before he is again eligible for membership? If so, what period of time would best suit the needs of the cooperative?

Should the withdrawal section of the bylaws distinguish the member who is withdrawing solely because he quit farming or has moved out of the territory in which the cooperative is operating from those who withdraw for other reasons? Should the member be allowed to reapply for membership before a designated number of years has passed? Does the Board decide whether the withdrawal was solely because the member moved out of the territory? If so, when should the Board make its determination? At the time of withdrawal when all the facts are current? Or only when the former member reapplies for membership before the designated number of years has passed? If the Board of Directors finds that the former member withdrew for any additional reasons and that he must therefore wait for the period of years, is there an appeals process available to the former member? If not, should the bylaws not require the several years delay requirement and simply allow the Board of Directors to exercise its discretion in readmitting former members in a manner similar to admitting new members? In other words, what would be the policy behind requiring a former member to wait several year before he is eligible to reapply for membership?

What, if any, are the statutory provisions for termination of membership? If the cooperative is permitted to establish its own causes of termination and procedures therefor, what should they be? Should the power of termination be given to the Board of Directors?

"The power to expel members is fundamentally in the membership. Unless the members have, by an appropriate bylaw, placed this power in the Board of Directors, the Board would not have the authority to expel a member. Prescribed procedures for expulsion of members, or for termination of membership, should be carefully followed."

If the member ceases using the cooperative's facilities for a specified period of years:

(1) What time period is appropriate? What standards should be used in determining the period? May the cooperative choose any time period it desires? Does the length of time affect the rights of a member who is being terminated? Should nonuse of the cooperative's facilities be sufficient grounds for termination?

If the member removes himself from the territory served by the cooperative:

(2) Should removal of the member from the territory served by the cooperative be sufficient grounds for termination? Should there be a provision for finding that the member has moved away permanently, or for a period of years? Care should be taken so that in the way the clause is worded, no problems would occur if a member moved away, the cooperative terminated his membership and the member moved back in a month, and still desired membership in the cooperative.

If the member ceases to be an agricultural producer:

(3) Again, should there be a specified period of time which must pass before the cooperative may terminate a membership for this reason? Or should it be left to the discretion of the Board? And is this likely to be a problem anyway?

If the member otherwise ceases to eligible for membership in the cooperative:

(4) Even if the bylaws allow the Board of Directors to refuse membership to an applicant on a finding that the applicant will prejudice the interests, hinder or otherwise obstruct, or conflict with, any purposes or operations of the cooperative, may the Board of Directors make such a finding to terminate a current membership under a termination clause? Would such a finding be construed as arbitrary or subjective? Is such a clause too broad? Or does the Board of Directors need a wide discretion in termination matters?

Are the member's due process rights adequately insured by requiring written notice to be given and by allowing termination for one of only four specific "causes"?

The United States Supreme Court has held that "expelled members of a grocery cooperative were denied due process because of lack of impartiality of the cooperative's board and the expulsion from membership was invalid even though the board followed the procedure prescribed by the bylaws for a disciplinary hearing". Thus, the cooperative needs to be concerned about the due process in termination proceedings.

Should an appeals process be allowed, perhaps through an appeal to the membership as a whole? But would an appeal to the membership as a whole be practical? Would it be prudent? What should be the procedure of such an appeal?

If no such appeal is allowed, should the bylaws attempt to insure the impartiality of the Board of Directors? How can this be accomplished? Or should the bylaws be silent on the subject and allow the cooperative to deal with the termination problem should it ever arise?

Bylaws are treated as a contract between the cooperative and each member. As such, each member is agreeing to the termination procedure when he becomes a member. If the cooperative is concerned about the impartiality of the Board of Directors and strives to insure the terminated member's due process rights, the bylaw provision on termination should be able to withstand a court challenge.

But what is necessary to insure due process? Some research into a few of the relevant cases would be helpful for a cooperative concerned with this issue.

Must the Board of Directors, upon an affirmative finding in one of the termination categories, terminate the membership immediately, or can the effective date of termination be set for some future time? And, therefore, can there be, in essence, a probationary period? Does the cooperative wish to set up a probationary period? Should this be left to the discretion of the Board of Directors?

Can a person whose membership has been terminated be eligible for membership at some future time? Does he have to wait for a period of time, as in the withdrawal section? Should such a person be allowed to rejoin the cooperative? Should he be barred? Or should the matter be left to the discretion of the Board of Directors?

Underlying this whole discussion is the issue of whether the cooperative wants to write the bylaws so as to avoid litigation, or to take a risk of litigation by, for instance, not providing a clause pertaining to due process upon termination. As a policy matter, what posture does the cooperative want to assume?

Upon withdrawal or termination, how does the cooperative wish to pay out the former member's equity? What does the controlling statute allow?

If an applicable statute requires prompt payment of "property rights and interests" upon termination or withdrawal of a member, is the cooperative legally able to define "property rights and interests" restrictively to include only the amount paid by the member for capital stock or membership certificates acquired as a condition for membership in the cooperative? Is there any advantage to paying out retained equity over a period of years? May the cooperative legally exclude "equity capital" from "property rights and interests" to be able to delay paying out the retained equity? Could a present value method of valuing retained equity be employed?

If a member of the cooperative is other than a natural person, who may represent the member? Should such representative be an officer or manager of the member? Should the member be required to designate its representative to the cooperative in writing?

May such a representative be elected or appointed as an officer or director of the cooperative? May a person who has an individual membership in the cooperative also represent a member who is other than a natural person? If so, is the requirement of one vote per member in jeopardy? Should the cooperative require a periodic update or statement from such members regarding the authorized representative? If so, would a yearly update be appropriate?

Should the bylaws contain a penalty clause for violation of the bylaws by a member? For violation of the bylaws by the cooperative? What form should the penalty take? Monetary damages under contract theory? Loss of rights and privileges? Should termination of membership be the only penalty? Would penalties tend to promote or avoid litigation?

Should the bylaws include a paragraph whereby the member, by his continued membership, agrees to abide by and follow the tax status of the cooperative? If so, what form should it take?

Should the bylaws require the cooperative to keep a record of names and current addresses of its members? What information should be included? Should there be a set time period in which the cooperative must be informed of any changes in the information? What time period would be most effective? Should the bylaws require a notice of change to be in writing?

MARKETING AND PURCHASING CONTRACTS: POOLING

Should the Board be required to adopt a uniform marketing or purchasing contract? If the Board does adopt a uniform contract, should all member be required to abide by the contract? Should the members have a course of action to oppose the adoption of a uniform contract (other than calling a special membership meeting or removing the directors)? For example, should the bylaws require that the membership vote on any contract proposed by the Board? On particular contracts? If so, should a majority vote be required? A two-thirds vote? A three-fourths vote? A unanimous vote? Should the dissenting members be bound by the vote? Should such language be in the bylaws? Or, if no vote is taken or required, should the bylaws require that each member sign or otherwise express or acknowledge agreement with the uniform contract? Would such a requirement prevent litigation? Should the bylaws provide for a periodic, such as a yearly, review of the contract?

If the cooperative anticipates entering into marketing arrangements with another cooperative for a commodity for which it has been approved to participate in a Commodity Credit Corporation price support program, should the bylaws provide that the cooperative must be a member of the cooperative performing the marketing service?

Again, should the members have a course of action to oppose the cooperative's entering a marketing arrangement or a marketing pool (other than calling a special meeting or removing the directors)? Should the bylaws require or provide for a membership vote on any agreement or pool which the Board proposes to enter? If so, should a majority vote be required? A two-thirds vote? A three-fourths vote? A unanimous vote? Should the dissenting members be bound by the vote? Should such language be in the bylaws? Should the bylaws provide for a yearly review of the pooling contracts?

General Provisions

Should the bylaws adopt, within statutory and common law limits, any remedies or guidelines for remedies against members who breach any provision of marketing or purchasing or pooling agreements? Should the Board of Directors be authorized to adopt such rules and regulations as it deems appropriate in connection with such agreements? Should the rules and regulations be binding upon any member of the cooperative who enters into an agreement with the cooperative, whether or not he signs the agreement? Should the cooperative be authorized in the bylaws to require every member to enter into any agreement with the cooperative covering the total amount of agricultural commodities or supplies produced or purchased by the members? Should the bylaws instead require prior approval of a majority of the members present at a regular annual or special meeting of the members? A two-thirds vote? A three-fourths vote? A unanimous vote? Should the members not attending the meeting be required to abide by the rules and regulations?

Should the bylaws authorize such an agreement to provide for injunctive relief against a member? For specific performance? For liquidated damages?

MEETINGS OF MEMBERS

Is one regular membership meeting sufficient to meet the needs of the cooperative? How soon after the close of the fiscal year is the proper time for the regular annual membership meeting?

Is there a statute that requires a minimum number of the members to sign the petition calling for a special meeting? Should the number of members signing conform to the statutory minimum, or should a larger number be required? Can the number be enlarged under the statute? If no minimum number of members is required to sign by statute, what percentage should be set? The issue is how difficult does the cooperative want it to be to call a special membership meeting?

Should the Board of Directors be able to call a special membership meeting? If so, should a majority vote by the directors be sufficient?

What are the statutory requirements for providing notice of meetings? Are these requirements adequate to meet the needs of the cooperative and its members? Should the bylaws require a longer period for notice? Should other forms of notice be used?

How should the "one member one vote" provision be set out? Should the cooperative allow an individual who is a member in his own right and is also the duly authorized representative of another member which is not a natural person to vote once for his own membership and once for the other membership? As a matter of policy, should such a situation be addressed in the bylaws? If so, where? Would a possible solution be to prohibit a member from being the authorized voting representative of another member? Should voting be permitted on a basis other than "one member one vote"?

Are voting by proxy and cumulative voting prohibited by statute at all meeting s of the cooperative? If not, should the cooperative so provide in its bylaws?

Should members absent from the membership meeting be allowed to vote by mail? What type of questions should qualify for voting by mail? Should there by an amendment to the question at the meeting, should the meeting be adjourned with respect to that question until a new vote can be solicited by mail with respect to the amendment or the amended question? Or should it be stipulated that mail ballot questions cannot be amended at the meeting?

Is it sufficient to require that the mail ballots shall be counted only in the meeting at the time in which such vote is taken, or should the bylaws specify that the mail ballots not be opened and counted until the time at which the vote is taken at the meeting? is there a problem in allowing the ballots to be opened prior to counting the votes at the meeting?

If a copy of the exact wording of the motion or resolution is not forwarded with and attached to the vote of the member voting by mail, is the ballot invalidated? If so, do the members receive notice of this requirement with their ballot? Should this be specified in the bylaws?

Does the applicable statute set out a minimum number of members present at a meeting to constitute a quorum? Should the bylaws set a higher percentage as a quorum?

Can a valid meeting be held unless the number of members specified in the bylaws as constituting a quorum is present a the time each proposition is voted upon? Should the bylaws provide that the meeting be recessed or adjourned until such a time that a quorum can again be obtained? Or, if a quorum is present at the start of the meeting, should the meeting be permitted to continue if a quorum is subsequently lost? Should mail-in ballots be counted toward reaching a quorum, at any membership meeting?

Should an order of business be included in the bylaws? How specific should the order be? Should the order of business be mandatory, or should it simply be a guide? If mandatory, should the bylaws provide a means of circumventing the order of business, such as a majority vote of those members present?

Should the bylaws specify that all membership meetings be governed by Robert's Rules of Order (Revised) or some other recognized text on parliamentary procedure?

DIRECTORS

Is there a statutory minimum number of directors required? Should eligibility be restricted to only those members having the right to vote? To only those members who patronize the cooperative? To only those members who have the right to vote and who patronize the cooperative?

Cooperatives frequently find a requirement that directors be members valuable, since the interest of directors as owners helps insure good management.

Is it ever advisable to have "public" directors appointed by the Board, i.e., persons appointed to be directors who are not members of the cooperative?

Is there any problem in allowing a duly authorized representative of a member which is not a natural person to be a director? Should Farmer Brown be permitted to serve on the Board of Directors when Family Brown, Inc. is the actual member of the cooperative? Should the cooperative, through its bylaws, distinguish between Family Brown, Inc. as a member cooperative and a large corporation member?

Should a finding that a current or prospective director is in competition with or is engaged in any enterprise that is in competition with the cooperative be sufficient to remove him from or deny him the position of director? How should such a finding be made? Should only a majority of the Board of Directors be able to find that a director is engaging in an enterprise that is in competition with the cooperative? Would two-thirds vote better insure the individual director's position? Or rights?

What type of activities should be considered competition? Should this determination be left solely to the Board of Directors? Should there be an appeals process? Is there a question of due process?

In the absence of any evidence that indicates a director has an interest adverse to that of his corporation, he will not be presumed unfaithful to his trust. Where any self-dealing appears, the burden is upon the interested director to establish his good faith and the fairness of transaction to the corporation. Directors cannot engage in a rival business to the detriment of the corporation. The underlying question is how much control and discretion does the cooperative wish the Board of Directors to exercise in reaching a finding of competition.

What, if any, should be the appropriate number of consecutive regular Board meetings which a director fails to attend without cause for him to be removed from the Board? Should the frequency of the regular Board meetings make any difference in the number of meetings permitted to be missed? Should the bylaws allow the Board's discretion to be exercised in declaring a vacancy on the Board of Directors due to a director's failure to attend?

Is there statutory language providing that no director shall be a party to a contract with the cooperative differing in any way from the business relations accorded regular members? If so, should such language be incorporated into the bylaws? What purpose would it serve? If the controlling statutes do not so provide, should the bylaws contain such a provision anyway?

Should the bylaws provide that a director, after serving a stipulated number of years, shall not be eligible to be re-elected to the Board of Directors? May such a director again become eligible? If so, how? Should a member or a designated representative of a member be ineligible to be elected to the Board of Directors after passing a certain age? If so, at what age should he become ineligible?

Should a person be ineligible to serve as a director if a member of his immediate family is an employee of the cooperative? What policy is behind such a provision? Should such a policy extend to persons beyond the immediate family?

The statutes in most states regulating cooperatives "specifically authorize associations incorporated under them to adopt bylaws prescribing general qualifications that must be possessed by persons to be eligible to be directors. These qualifications may relate to membership, residence and similar matters. Such bylaws, if reasonable, are valid.

Should directors be nominated from the cooperative's membership at large or should nominations be obtained in each of several districts within the cooperative's territory? If nominations are obtained by district, should the election be by the entire membership? If nominations and/or elections are by district, how should the cooperative's territory be divided? What weight should geographical differences or membership location carry in such a decision? Should each district elect the same number of directors? Should the number of directors per district be based solely on number of members in that district? What other factors should be considered?

What is the best means of obtaining nominations? should there be a primary election? Or should nominations be obtained by committee? If a nominating committee is to be set up, should the membership elect the committee? If so, should the committee's term last only one year (from one annual membership meeting to the next)? If the directors appoint the nominating committee, what should be the length of appointment?

How large should the nominating committee be? Should all members of the nominating committee be members of the cooperative? Should they all have the right to vote? Should there be any other requirements to be eligible to serve on the nominating committee? Should any current directors be allowed to serve? If so, how many?

How many nominees for each vacancy should the committee secure? Should the nominees be required to agree to accept the directorship and its responsibilities if elected? What form should the acceptance take? Any reason for it to be in writing?

Should the nominating committee be required to nominate persons representative of the ares served and products or supplies handled by the cooperative? If so, and provided the current Board of Directors is the proper mix of representatives, do the nominees credentials have to match those of the outgoing director(s) in order to retain the proper mix? If there is not a proper mix on the Board, does the nominating committee have to find nominees who will provide the proper mix? And who decides what a proper mix is? Should a formula be set out in the bylaws? Or should such a provision be viewed more as a goal than as a requirement?

What timetable should be established for the nominating process? If mail-in ballots are cast for directors the nominations must be completed in time to prepare and mail out the mail-in ballots. Should nominations be permitted from the floor? If so, should mail-in ballots be prohibited?

If mail-in ballots are accepted and there is a nomination from the floor, the mail-in ballots would be incomplete. If the bylaws provide that when a question for which mailed ballots have been received is amended at the meeting, the meeting shall be adjourned with respect to that question until a new vote can be solicited by mail with respect to the amended question, it would seem that balloting for directors would have to be postponed until a complete ballot could be mailed and returned. Such a delay might not be practical or good policy. It would seem prudent to allow either mail-in ballots of election of directors or nominations from the floor, but not both.

If nominations are received from the floor, who should decide whether such nominees meet all the requirements to be directors? Whether they are from the proper district? Whether they will provide the "proper mix"? Should these nominees also be required to agree to accept the directorship and its responsibilities if elected?

Should each director elected be required to receive a majority of all votes cast? Or should only a plurality be required?

If mail-in ballots are allowed and a majority is required, but no candidate receives a majority, then presumably a new ballot would have to be mailed out and the election would be postponed. If, however, mail-in ballots are not allowed, and no candidate receives a majority, then the bylaws could provide for a run-off election between the top two candidates. The other solution, viable whether or not mail-in ballots are allowed, is to require only a plurality vote to elect directors. The cooperative should decide which system will best serve its needs.

Is there any legal problem in not allowing mail-in ballots for the election of directors under applicable laws? If permitted to help arrive at a quorum, are mail-in ballots generally needed to constitute a quorum?

If the directors are nominated and/or elected by districts, how should the bylaws provide for review and reapportionment of the districts? Should there be a yearly review? Should the directors be charged with reformulating the districts? What guidelines should they follow? Should the reapportionment be subject to membership review and approval? If so, should a special membership meeting be called?

If the cooperative should choose to allow the districts to elect directors who are then subject to ratification by the entire membership, how shall the district elections be held? Should a nominating committee be formed? Should a district meeting be held? How should the temporary chairman and secretary for these meetings be chosen? Should the Board of Directors appoint these positions? Is it necessary that the temporary chairman and secretary have voting rights? Should the district meeting, once it has convened, select its own "permanent" chairman and secretary?

What should constitute a quorum at a district meeting? Should mail-in ballots, if allowed, be counted toward reaching a quorum?

Should a majority vote be required to elect a director at the district meeting?

How should the entire membership ratify the directors elected by the districts? Should the bylaws provide that such elections be ratified by the next regular meeting of the association or be considered final as to the association? If the district-elected primary candidate is rejected by the entire membership, what procedure should follow? Should the district members present at the annual meeting caucus to select another candidate? Would this fulfill the bylaw requirement? Must there be enough members from the district present to form a quorum at the district meeting? Or does the district have to initiate a completely new election procedure? What happens to the director's position that was to be filled? Does it sit vacant, or is the outgoing director required to serve until his successor can be elected and ratified?

What is the proper length for a director's term? Should the term of directors be staggered so that not all the terms expire in any one year? Shall the initial term of a director elected to fill an unexpired term run only for the remaining period of the unexpired term?

Should officers be elected or appointed? By the membership or the Board?

What are the statutory requirements for the election of officers? What offices should the cooperative establish? When should the election of officers be held? Within 30 days of the adjournment of the annual membership meeting? Should the term of office of the officers be for only one year? How should nominations be made? Form the floor? Should the election be by secret ballot? Should a majority of votes be received to be elected to the office, or is a plurality sufficient?

Should all of the officers be directors? Should any? What advantages would be gained if some or all officers were directors? Were not directors? What managerial problems might occur under the different arrangements? Would there be any other problems, such as divided loyalties?

Should the bylaws require that all of the officers be members? Should the president be required to be a member? Should exceptions be allowed in specific situations, i.e., a bank being designated as treasurer?

How many vice-presidents should the cooperative have? What purposes would they serve?

Should the Board be granted the power to create, alter or abolish any additional offices and the duties thereof as it may, in its discretion, consider desirable, or should such power be reserved to the membership?

What are the statutory requirements for removal of officers or directors? Should the bylaws incorporate these requirements? If permitted under the statute, should the cooperative adopt more stringent requirements? Less stringent?

Should the bylaws provide a definite period of time in which notice, in writing, of charges against an officer or director must be given to the officer or director prior to the meeting at which his removal is to be considered? Should members be given the right to demand a recall election for an officer or director? If so, what procedures should be followed?

Should the bylaws provide that any matter of policy that has been approved or passed by the Board, upon demand of one-third or some other percentage of the entire Board of Directors, must be referred to the entire membership for decision at the next special or regular meeting of the members? What would be the policy behind such a provision? What effect would such a provision have on the functioning of the Board? Should it be required that the demand be made at the same meeting at which the original motion was voted on and passed? Should the bylaws provide that a special meeting be called for the purpose of having the entire membership pass on the matter of policy? If such demand is made, does the matter of policy not take effect until the entire membership votes on the matter?

How should a vacancy in the Board of Directors be filled which occurs other than from expiration of a term of office? Does the controlling statute permit variations?

How often should the Board of Directors meet? Weekly? Monthly? Quarterly? Should a time and place be specified of left to the discretion of the Board?

How should special Board meetings b e called? By the president? By a percentage of the Board? Should a time and place be specified in the call? What type of business may the Board transact? Does the business to be transacted have to be specified in the call? May a meeting of the Board of Directors be held at any place or time with or without notice upon consent of the directors? Should such consent be unanimous?

Should oral notice be adequate, or should notice be given in writing? How far in advance of the meeting must notice be given? Who should give the notice? May notice be waived by any or all of the directors? What should constitute a waiver? If appearance at a meeting constitutes waiver of notice, should there be an exception to such a waiver if the member or director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened?

What number is the practical, efficient or necessary number of directors to constitute a quorum?

Should a meeting be permitted to continue in the event a quorum is lost? Is it good policy to do so?

Should each director ever have more than one vote?

Should a director be disqualified to vote on any matter in which he is personally involved in any capacity other than as a member of the cooperative? Does the whole Board of Directors decide if a director os personally involved in a matter to an extent that he may not vote, or is it left to the individual director to disqualify himself? What actions can be taken to insure such a provision will be followed?

Does the cooperative want to compensate directors for their time or expenses? Does the cooperative want to pay mileage for the directors? For an executive committee? Should the bylaws be specific in then type of out-of-pocket expenses which may be reimbursed?

Does the cooperative want to pay a daily compensation to the directors for time spent on cooperative business? To an executive committee?

Should there be an upper limit to the number of days in a year for which the cooperative will provide compensation to directors? If so, what is a proper upper limit for compensation? If the Board of Directors assigns a large share of the Board's duties to an executive committee, should the executive committee be allowed a greater number of compensated days? Should the rest of the Board of Directors then be allowed proportionately fewer compensated days?

Given the possibility of a difficult amendment process for the bylaws (i.e., requiring a three-fourths vote to amend the bylaws), Should a bylaw section on compensation provide for no maximum rate of compensation but rather allow the Board of Directors to set compensation or permit the membership to set the maximum compensation rates at each regular annual membership meeting?

If the bylaws do provide maximum rates of compensation, should the bylaws provide for the possibility of compensating the directors beyond the limits in extraordinary circumstances?

Example 1: The directors of a cooperative probably spend a great deal of time, more than 25 days, on cooperative business in a year when, for example, the directors are involved in planning, arranging financing and supervising a major construction project for the cooperative.

Example 2: Should another oil shortage occur, and the price of gasoline doubles in the first six months following the annual meeting causing business concerns and difficult- ies for the cooperative necessitating numerous emergency meetings, should the bylaws provide for a method of bypassing the maximum limits of compensation without calling a special membership meeting and/or trying to amend the bylaws?

Should the bylaws provide that no member of the Board of Directors occupy any position in the cooperative on a regular salary? If the bylaws allow the directors to set their own rates of compensation, should the rates be subject to membership approval at the annual meeting?

Should the cooperative have advisory directors? What purpose would they serve? Should advisory directors meet the requirements as for regular directors? Should advisory directors be members of the cooperative? Who appoints the advisory directors? What should the term of office be? May advisory directors be reappointed indefinitely? What would giving advisory directors all of the rights and powers of the regular directors (except voting) do to the rights and powers of the regular directors? If the rights and powers of the regular directors is diminished, is this usurping the rights of the members to elect directors?

Should the advisory directors be given the right to vote? If not, should the advisory directors be counted to find a quorum?

Are advisory directors subject to the same liabilities as are the regular directors? Are they also indemnified to the extent the regular directors are indemnified?

Should the bylaws provide for the formation of an executive committee? Should the executive committee be mandatory, or should the Board of Directors be allowed, in its discretion, to create and dissolve the executive committee as the need arises? What should the number of executive committee members be? Should the Board of Directors have the power to set the numbers? May the executive committee ever consist of persons who are not directors?

Should the Board as a whole be liable for the actions of the executive committee? Should the Board retain the power of approval and control of the committee?

"A director, however, is not liable for losses occasioned by the misconduct of co-directors when he is without fault. Directors are not liable for losses due to dishonesty of officers or employees unless such directors have failed to exercise reasonable care in the selection of the employees or have retained dishonest officers or employees, after their dishonesty was known."

However, the Board of Directors seems to have a duty to direct and control the executive committee.

"But a director who fails to attend properly to the duties of his office is always faced with the fact that, generally, he will be held liable for losses resulting from fraud on the part of officers, agents or other directors of the association. Moreover, he may be held liable for specific losses, such as one caused by the unlawful expenditure or employment of association funds, if he could reasonably have been expected to prevent the losses by attending to his duties."

Should the issue of liability for the actions of the executive committee be addressed in the bylaws?

Should the bylaws provide that the Board of Directors may, in its discretion, appoint such other committees as may be necessary? Should any such committees be appointed only from the Board of Directors or the membership of the cooperative? Should the membership have a means of restricting the formation of committees other than through the removal of directors? Should the bylaws provide for the mandatory existence of any committee?

Does the cooperative want to provide indemnification for its past and present directors? For its past and present advisory directors? Should the directors decide what degree of indemnification they desire?

A section dealing with indemnification needs to be worded very carefully. Subtle differences can have far-reaching impacts.

Does acquiring indemnification insurance require a membership vote, or may the Board of Directors acquire insurance on its own? Should the bylaws so provide?

DUTIES OF DIRECTORS

Should this section be specific or general? How should the Board assume its management responsibilities? Should the bylaws set out a number of specific responsibilities, or should the Board be allowed to exercise some discretion? Does the Board really understand its role in relation to the role of the management? How should that role be defined? Are the bylaws the appropriate place for such a definition?

Should a manager be employed? What kind of relationship should the board maintain with the manager?

How should the Board relate to the employees? Should the Board be able to exercise any control over the employees? Over the cooperative's day-to-day operations? Or should the bylaws require the Board to operate only through the manager?

Does statutory law or common law permit the Board to dismiss the manager without cause at any time without liability?

"At common law, the general rule permits the Board of Directors to remove officers and other agents elected or chosen by them or under their authority without a hearing, although it would seem advisable to hold a hearing. Liability on the part of the association on account of such action would depend on whether cause for removal existed."

Does the Board have the power or right or authority to review specific actions of the manager? Should the Board be able to do so? Should this review be specified or authorized in the bylaws?

Should the Board of Directors be required to present to the members a detailed statement or report of the business of the preceding year? What items should be included? Should this detailed statement of the business of the preceding year be presented at every regular and special meeting? Would it be sufficient to present this statement at the first regular or special meeting following the close of the fiscal year? Should a copy of this statement be mailed to each member as well as presented at the regular meeting?

Should the cooperative require the manager and all other officers, agents and employees charged by the cooperative with responsibility for the custody of any of its funds or negotiable instruments to give adequate bonds? If so, should the cost of the bonds be paid by the cooperative? What is an adequate bond? Should it be defined in the bylaws?

Where does (or should) the liability fall if one of the people required to be bonded is not bonded? Should the Board of Directors have the responsibility of making sure all persons required to be bonded are in fact bonded? Should obtaining bond be a condition of employment?

Should the bylaws require the cooperative to carry adequate property and liability insurance? Is "adequate" insurance enough coverage to replace or repair damaged property? Is it enough coverage to compensate for any and all accidents to any person? Or does adequate insurance require coverage beyond this? Should the Board determine the amount of coverage needed? Should a periodic report be made to the membership concerning the cooperative's insurance coverage?

Should the Board of Directors be required to insure that a complete inventory report is prepared each year? What is the purpose of the annual inventory report? When should such report be prepared? What should the report include?

Should a comprehensive audit of the cooperative be made at least on a yearly basis? Should the Board of Directors be able to conduct an audit at other times as the directors deem necessary? Should the membership of the cooperative be able to initiate an audit?

What should be included in the audit? Who should conduct the audit? What requirements should the audit meet?

The requirements for the audit may be formulated with many variations. The Board of Directors should meet with the auditors, the banks for the cooperative and any other necessary party to determine what requirements for the audit should be incorporated in the bylaws to best serve the cooperative's needs.

Should the cooperative send a summary financial statement to each member each year while retaining a copy of the annual audit at the office of the cooperative for review by any member? Or should the cooperative send a complete copy of the annual audit to each member?

Does a section authorizing the Board of Directors to select one or more banks to act as depositories of the funds of the cooperative need to be in the bylaws? Or could it assumed under the duties of directors or management of business section?

Should the bylaws specify which officers, directors, and agents may sign the checks of the cooperative, or should this be left to the discretion of the Board?

Should a degree of control in this section be formulated for the membership? Or should total control rest with the Board of Directors? Again, the basic question is how much authority should the Board of Directors have to take independent action?

Should the Board of Directors be given the power to carry out all agreements of the cooperative with its members in every way advantageous to the cooperative representing the members collectively?

Should the phrase "in everyday advantageous to" be further defined? Or should such a determination be left to the discretion of the Board of Directors?

Is such a section necessary in view of the general discretionary powers conveyed in the duties of the directors or management of business section? Or is there a policy reason to include such a section?

Should the bylaws specify that no immediate relative of any director shall be employed by the cooperative? What is the purpose of such a requirement? Is it similar to the rationale in the number and qualifications of directors section which disqual- ifies a potential director if any of his immediate family is employed by the cooperative? Is such a requirement necessary? Is there another way to achieve the same end? Should this section be in the bylaws?

Should there be a section in the bylaws requiring the Board of Directors to establish and enforce a credit policy and to inform the members and other appropriate persons fully of the credit policy? What purpose does it serve by being included in the bylaws? Could such duty and power be inferred from the management of business section?

To what extent must the Board of Directors inform the members and others to comply with such a section? To what other persons must the information be made available?

Should the Board of Directors be allowed to designate any member of the cooperative to represent the cooperative in any other business entity or trade association in which the coopera- tive has an interest?

Must such a representative be a member? Should such a representative be an officer or director? Will the representative be considered an employee? Will the representative receive compensation other than wages? Should the Board of Directors be allowed to determine the compensation? If not, who should do so?

DUTIES OF OFFICERS

Should the bylaws set out long, complex duties for the president, or should the description of his duties be of a general nature? How much flexibility should the president be allowed? How much power and authority should he possess?

Are there any specific duties which should be assigned to the vice-president(s) in the bylaws other than performing the duties for the president in his absence?

Should the duties of the secretary be set out in detail in the bylaws?

Should the bylaws require the secretary to:

Attend all the meetings of the members and of the Board of Directors to record all votes and the minutes of all proceedings in a book or books to be kept for that purpose;

Perform like duties for all standing committees when so required;

Have general charge and supervision of all corporate records, except those under the supervision of the treasurer;

Sign and affix the corporate seal to all membership or stock certificates and such other papers pertaining to the cooperative as he may be authorized or directed to sign by the Board of Directors;

Provide for complete and proper membership records and conduct such correspondence as may be delegated to him by the Board;

Serve all notices required by law and by the bylaws and make a full report of all meetings and business pertaining to his office at membership meetings;

Make such corporate records as required by law; and

Deliver to his successor all records and other property that he may have in his custody?

What other duties, if any, should be specified?

How specifically should the duties of the treasurer be set out in the bylaws?

Should the bylaws require the treasurer to:

Supervise the cooperative's financial records and keep, or cause to be kept, a full and accurate records of all receipts and disbursements thereof;

Render to the Board of Directors at regular meetings of the Board, or whenever the Board may require it, a statement of all his transactions as treasurer and of the financial condition of the cooperative;

Cause to be prepared and distributed to the members present at each regular meeting of the members a statement of the financial condition of the cooperative;

Deliver to his successor all money, books, and other property belonging to the cooperative that he may have in his custody?

If the treasurer is a bank or other depository, is the secretary required to perform the usual accounting duties of the treasurer? Should this provision be included in the bylaws?

If the bylaws for the cooperative are an effort to set out rules of conduct and to offer continuing, passive legal counsel, perhaps the provision should be included.

Or should the bylaws prohibit a bank or other depository from being the treasurer?

If a bank or other depository is designated as treasurer, must the bank or depository be a member of the cooperative? See questions in "Directors, Election of Officers" section, above. Are any of these concerns relevant to a particular cooperative's situation?

If the Board of Directors combines the offices of secretary and treasurer, would this change the duties? Should the bylaws include a section specifying any changes?

MANAGEMENT

How specifically should the manager's duties be defined? How much authority should the manager have in the day-to-day operation of the cooperative? What form should the direction of the Board of Directors take? Should it be particularly defined in the bylaws? What part does the Board of Directors want to play in the management of the cooperative?

Should the manager be required to maintain his records and accounts in such a way that the condition of the business may be ascertained therefrom at any time? Is it necessary and cost efficient to do so?

Should the bylaws stipulate that the manager be required to submit his monthly and annual reports to the directors? Or can such a requirement be assumed from the general powers the Board of Directors have to manage the business of the cooperative?

Should the manager have exclusive control of the employees? What control, if any, does the Board of Directors have over individual employees? What, if any, control should the Board have? Is the distinction of who hires an employee or agent satisfactory to determine whether the manager or the Board of Directors will supervise the employee or agent? Should auditors, agents or legal counsel specifically employed by the Board of Directors be under the exclusive supervision of the Board? Should such a provision be in the bylaws?

DISSOLUTION

May the cooperative adopt whatever formula it desires for distributing its property, after satisfying its debts, upon dissolution? Should the cooperative adopt a series of priorities for such dissolution? Would doing so prevent litigation? What should the formula be? Who should receive priority?

State statutes may provide specific provisions or may permit flexibility. The Internal Revenue Service also requires a certain order of distribution before it will permit a cooperative to qualify for treatment under Section 521 of the Internal Revenue Code of 1954.

If the Internal Revenue Service does not approve of a particular approach, what should the priorities be? What tax problems are involved? Should the payments within each priority be made without regard to time of investment? Or should a revolving payment plan be formulated which pays on a first-in-time basis?

Is it clear to the cooperative what a section on dissolution is trying to accomplish?

Should participating patrons be entitled to share in the allocation of the cooperative's property? If so, what share should they receive? What priority?

UNCLAIMED MONEY

Should the bylaws provide for the occasion whenever the cooperative is ready, able and willing to pay a certain class of claims for money, but payment of a claim cannot be made due to the cooperative's inability to locate the one to whom it is payable? May the cooperative lawfully remove the claim as a liability on the cooperative books if the claim is not actually paid within a certain period (one year) after it becomes payable? How does this provision operate with respect to the state escheat laws?

Is a period of one year a sufficient period of time to maintain the claim?

Should this provision also require that before a claim is removed from the books the cooperative must first send by registered mail a written notice of the proposed removal to the person appearing from the cooperative's records to be entitled to payment of money at the last address of the person shown by the records of the cooperative? How far in advance of the removal should the notice be mailed?

If, after giving written notice, the claim is removed of record, can the cooperative regard the claim as extinguished? May any monies not claimed be transferred to the cooperative's general account? Or should a separate reserve account be established for any and all monies not paid on the claims, and provision made for thereafter paying the principal amount to any claimant who establishes his right to receive payment? Is this provision allowing subsequent payment an effort to avoid litigation? Does it avoid state escheat laws? Is it effective? Is it practical?

Is there any accounting problem in deeming the claim to be extinguished but subsequently paying the principal amount to a bona fide claimant? Does transferring the unclaimed monies to a separate reserve account solve any of these problems?

DISPUTES

Does the cooperative wish to include a provision in the bylaws in an effort to keep disputes out of court? Is such a provision good policy from the viewpoint of the cooperative?

Should the bylaws provide that, in the event of a dispute between a member and the cooperative, and after an adequate notice period (10 days?), the Board of Directors will convene a hearing on the disputed matter and enter written findings and rulings thereon? If so, may either party have legal counsel present at the hearing? If a member who is a party to the dispute and is affected by the Board's final ruling refuses to acquiesce or abide by the ruling, should he thereafter be subject to further action by the cooperative? Should he lose some of his rights as a member of the cooperative? Should he face termination proceedings? Would such action by the cooperative be lawful?

Can a member who was not a party to the dispute be affected by the ruling? Can he be forced to acquiesce or face termination?

Is termination the appropriate remedy for a member's nonac-

quiescence? Should the Board of Directors be allowed an alternative remedy?

Should there be an appeals process set out, or should the decision of the Board of Directors be final? Who would hear the appeal?

Should this section provide that either party after receiving the decision of the Board of Directors may thereafter bring an appropriate action in any court of proper jurisdiction regarding such matter? If so, should such action be brought within a certain period of time following the Board's ruling? What would be an appropriate period?

May a member bring an action in court prior to subjecting himself to a hearing by the Board of Directors? Would doing so make him subject to termination by the Board? Should there be special circumstances when a suit in court would be allowed without a prior hearing by the Board?

Would requiring a hearing by the Board of Directors as a condition precedent to filing suit be effective in keeping disputes out of court?

PARTICIPATING PATRONS

Does the cooperative wish to allow people to become participating patrons? Is there any advantage in allowing for participating patrons over requiring everyone to become a member to take advantage of the cooperative? Should a participating patron be entitled to all the rights of members? Must he be so entitled? To so entitle the participating patron creates an incentive for a person to become a participating patron rather than to remain a nonmember customer/ What is the advantage to the cooperative in providing such rights?

Should participating patrons, upon meeting all conditions for that status, be entitled to participate in the cooperative's net margins on the same basis as members? Should the bylaws specifically provide that the Board of Directors shall have the power to carry out all agreements of the cooperative with participating patrons in every way advantageous to the cooperative respecting its members collectively? Or is this provision implicit in the application process?

Should a participating patron status be terminable at will by either party? Should more than delivering written notice to the other party be required for termination?

What is due the participating patron upon termination? When is payment due? Should such payment receive priority equivalent to similar payments to members, or should such payment be secondary to similar payments to members?

FISCAL YEAR AND SEAL

What should be the fiscal year of the cooperative to best serve its needs?

Does statutory law require the cooperative to adopt a corporate seal? If not, should the cooperative adopt one? Should the bylaws set out the form of the seal, or leave adoption of the seal to the discretion of the Board of Directors?

AMENDMENTS OF BYLAWS

How may the cooperative amend its bylaws? If the cooperative may choose between the Board of Directors or the membership or stockholders, which should amend the bylaws? Or should a proposal be required to receive the Board's approval, then receive an affirmative vote from the membership or stockholders, to become an amendment? Are there any policy reasons for requiring a double approval? If a double approval is required, should there be a means of proposing an amendment from the floor at the annual membership or stockholder's meeting? Or would this defeat the purpose of the double approval?

If the cooperative chooses to give the Board of Directors the power to amend the bylaws, should the amendment process require all the directors to vote on the amendment? Or is a vote taken at a duly called and convened board meeting adequate for an amendment to be approved? Should notice of the proposed amendment be required to be given in advance of the board meeting at which the vote will be taken? How many directors should be required to vote affirmatively to adopt the amendment? Is a simple majority vote sufficient, or should a two-thirds affirmative vote be required? Or three-fourths?

If the cooperative chooses to reserve the right to amend the bylaws to the membership or stockholders, how should the amendment be proposed? May proposed amendments be made from the floor of the annual membership or stockholder's meeting? Or should the bylaws require that all proposed amendments must be mailed to the membership or stockholders with the meeting notice? Should the proposed amendment be stated word-for-word? If so, should mail-in ballots be accepted? Or should just the general character of the amendment be given in the notice of a meeting? If just the general character of the amendment is allowed, should mail-in ballots be allowed?

How many members or stockholders must vote affirmatively to adopt an amendment? Should it be a majority of all members or stockholders? Should it be two-thirds, or three fourths? Or is a majority, two-thirds, or three-fourths affirmative vote of those members or stockholders voting sufficient to adopt the amendment? Is the mailed notice an adequate basis for allowing adoption of a bylaw on the basis of just those members or stockholders voting as opposed to the entire body of members or stockholders? Can those members or stockholders who do not vote be considered to have acquiesced in the outcome of the vote? If the amendment is approved, can those who did not vote be bound under its provisions?

"The members of a corporation and its directors and officers usually are conclusively presumed to have notice of bylaws and of what they contain, and hence are bound by them, although, as a fact, they may be ignorant of them." Thus, even if the bylaw amendment was not mailed to each member or stockholder, he would presumably be bound by its provisions if adopted.

Should those who voted against the amendment be bound by it upon adoption?

"The answer is 'Yes,' if such bylaws are reasonable and consistent with the charter and the general law. Herein lies an important difference between bylaws and other contracts. A valid bylaw is binding upon a member or stockholder although he opposed its adoption, but assent is necessary to the creation of other contracts." The member or stockholder can withdraw from the cooperative if he does not wish to abide by the terms of the amendment.

Should the bylaws provide that any and all persons who become members or purchase stock agree "to be bound by all present and future bylaws"?

"Agreements to abide by future bylaws will be given effect in certain types of cases." However, the cooperative may not "adopt bylaws which will deprive [a member or stockholder] of vested rights under the bylaws which were in effect when he became a member." Of course, if the member or stockholder agrees to such an amendment, he will be bound thereby.

Should a majority vote be sufficient for amending some bylaws, while a two-thirds or three-fourths vote would be more desirable on more important matters? How would such a system be set up?

DISTRIBUTION OF BYLAWS

Should the bylaws specify how the bylaws should be printed, i.e., as a booklet or pamphlet, or on plain typing paper? Who should be charged with distribution of the bylaws? The Board of Directors?

Distribution of the bylaws is very important and must be done in a thorough manner. Since members and stock- holders are "presumed to have notice of bylaws and of what they contain" it is extremely important from a policy point of view, as well as the legal point of view, for the cooperative to distribute a copy of its bylaws to all who qualify to receive a copy.

Who, besides the members, qualifies to receive a copy of the bylaws? Do participating patrons receive a copy?

Upon adoption of any and all amendments of the bylaws, should a copy of the amendment as adopted be distributed to each member or stockholder? Or should the amendment be placed in its proper position within the body of the bylaws and the entire set of bylaws then be distributed? If only a copy of the amendment is distributed, how often should the bylaws be reprinted incorporating all the amendments? Should such updating be left to the discretion of the Board of Directors?

A FINAL NOTE

There are many statutes and regulations which affect determinations to be made on many of the questions set forth in this article. With rare exceptions, these have not been noted but must be examined by a cooperative and its advisors in considering bylaw provisions. Among the federal statutes are the Internal Revenue Code of 1954, the Capper-Volstead Act, and the Farm Credit Act of 1971. Regulations promulgated pursuant to those statutes and others, as well as regulations of the Commodity Credit Corporation relating to price supports for cooperative marketing pools, may require specific bylaw treatment of various subjects.

Many factors, including statutory and regulatory considerations, can influence answers to the questions which have been raised. Obviously, preparing a set of bylaws is a complex task --one which all too often receives inadequate attention from cooperatives and their advisors.

FOOTNOTES

1. Legal Phases of Farmer Cooperatives (4th ed), Information 100, Farmer Cooperative Service, United States Department of Agriculture, p 90 (herein referred to as Legal Phases).

Under the terms and conditions prescribed in the bylaws adopted by it, an association may admit as members or issue common stock to only persons engaged in the production of the agricultural products to be handled by or through the association, including the lessees and tenants of land used for the production of such products and any lessors and landlords who receive as rent all or any part of the crop raised on the leased premises.

Various federal statutes also require membership to be limited to agricultural producers. See, e.g., IRC (1954), Sec 521, as amended.

18. One case has held that a cooperative may deny membership rights to members who have not paid in full for their stock. Farmers Truck Assn v. Strawberry & Vegetable Auction, Inc., 163 So 181 (La App, 1935). "An applicant for membership is not entitled to the rights of membership until he has fulfilled all the prerequisites for membership." Legal Phases, p 96.

19. CRS 1973, subsection 7-55-101 (1):

Such bylaws may include: (i) the qualifications for membership, manner of succession and conditions for withdrawal or expulsion.

22. Legal Phases, p 100, describing the holding of Certified Grocers of Illinois v. Sparkle Food Center, 409 US 1007 (1972).

24. Legal Phases collects several cases on this issue at pp 99-101.

In case of the withdrawal or expulsion of a member, the board of directors shall equitably and conclusively appraise his property interests in the association and shall fix the amount thereof in money, which shall be paid to him within one year after his expulsion or withdrawal.

57. "A provision for expulsion, although unreasonable as a bylaw as being against common right, may, if assented to by a member, be binding on him as a contract." Legal Phases, p 66, quoting from Elfer v. Marine Engineers Beneficial Assn No. 12, 179 La 383, 154 So 32 (1934).

58. The type of participating patrons the cooperative may allow may depend on the tax structure (IRC 1954), Sec 521 or subchapter T, as amended, chosen by the cooperative.

Last Revised: August 27, 2001

Home Page    What We Do    Accomplishments    Awards    Cooperative News    Upcoming Events    Helpful Links    Board of Directors    Return to Co-op Info