More on New "Co-op" Laws

Defending the brand and principles of cooperatives in light of new laws:

Adding to recent contributions in Cooperative Grocer on new laws which allow a greater role for private investors in corporations that blend cooperative and LLC structures, Don Kreis of Hanover Co-op had some valuable comments in a recent posting to the listserv at I'm copying Don's remarks here in order to share them with more readers and to encourage continuing discussion on the issues raised by these new forms of incorporation. Following are Don Kreis statements:

The legislation in question remains pending in the Vermont Legislature. To date, all I have to report is favorable committee action (or at least what I regard as favorable committee action).

The National Conference of Commissioners on Uniform State Laws is a prestigious body that writes model statutes that it hopes individual states will adopt. Examples are the Uniform Commercial Code, the Uniform Gifts to Minors Act and the Uniform Probate Code. A couple of years ago, a committee of the NCCUSL drafted something known as the Uniform Limited Cooperative Association Act (ULCAA). A very well-written bit of legislation, the ULCAA is designed to improve on statutes that had been adopted in a couple of states (e.g., Wyoming, where this first came up). Both the ULCAA and its predecessors have as their purpose the creation of a new kind of corporate entity -- the Limited Cooperative Association -- which I will delicately refer to as the bastard child of the cooperative and the LLC (limited liability corporation). "Bastard child" here means an entity that purports to be a cooperative but that actually has two distinct classes of members -- so-called "patron members" and so-called "investor members."

To my way of thinking, a cooperative that has profit-seeking investors is, in reality, not a cooperative at all. I say that with respect to the drafters of the ULCAA, whose laudable purpose is to address an endemic problem that readers of this message know all too well -- that of raising capital. Even George Soros is unlikely to invest a million or two of equity in my consumer co-op if all I can offer him by way of a return is some modest percentage (1%?) of his annual grocery purchases.

What I told the Legislature in Montpelier in my capacity as a law professor and self-proclaimed "entity geek," and what Laddie Lushin told the Legislature in his capacity as perhaps the nation's most venerable cooperative attorney, and what the Neighboring Food Co-op Association told the Legislature on behalf of Vermont's food co-ops, is that allowing something that is not a cooperative to call itself a cooperative squanders a precious asset -- the goodwill and public trust that reposes in the word "cooperative." I explained that, in an era where food co-ops have lost any edge they might have enjoyed with regard to particular product lines (organics, natural foods, etc.), what allows us to compete successfully with the Whole Foods and Piggly Wigglies of the world is our ability to inspire trust and confidence in the consumers who own our businesses -- an edge we would start to lose if businesses could start calling themselves cooperatives when, in fact, they were subject to substantial control by return-maximizing investors.

As a result of these arguments, the ULCAA bill is being reported to the floor of the Vermont House with a key amendment. "Limited Cooperative Association" has been replaced by "Mutual Benefit Enterprise." In other words, you would be able to incorporate one of these bastards in Vermont but you would not be allowed to use the word "cooperative" in its name. I am reasonably confident that the bill as amended will be signed into law.

One reason you should care about this is that the chair of the committee that drafted the ULCAA, Peter Langrock, is a Vermont attorney who has invested considerable time and effort in shepherding the bill through the legislature of his home state. Peter explicitly embraced the change reflected in the amendment, from Limited Cooperative Association to Mutual Benefit Enterprise, after indicating that others who were involved in creating the uniform law agree this amendment is a good idea. This would suggest that there is potential for this approach to take root in other states as well. Readers of Cooperative Grocer magazine and others will note that the advent of Limited Cooperative Associations has been a matter of considerable controversy -- with proponents like Joel Dahlgren (another venerable co-op lawyer lots of you know) pointing out that a Limited Cooperative Association is a better idea than a co-op that has gone out of business for lack of capital. To my way of thinking, calling this beast a Mutual Benefit Enterprise goes a long way toward making everyone happy.

Let me be clear, though -- not everyone is happy. Without purporting to speak for either Erbin or Laddie, let me forthrightly acknowledge that both of those excellent thinkers are more queasy than I am about letting these things go forward under the MBE banner. Laddie in particular sees in this statute a cynical attempt to manipulate people into forming corporate entities that look beneficent but in fact are really about greed and exploitation (or, perhaps, just profit). My comeback is that this horse has already left the barn, in the form of a self-proclaimed "socially responsible investment" sector of the economy.

We have more work to do. Vermont law, and I suspect the law of other states as well, are insufficiently protective of cooperatives in general, particularly when it comes to authorizing entities incorporated in other states from doing business under a name that contains the word "co-op" or "cooperative." It is nice that Vermont will soon incorporate Mutual Benefit Enterprises for co-ops that want investor-members -- but the fact is that you can incorporate the exact same entity in Nebraska, call yourself a "Limited Cooperative Association," and arguably do business in other states (including Vermont) under that name.

Assuming things go forward as planned in Vermont, this is a modest though laudable legislative accomplishment. There are so many other reforms to be achieved. I'd love to hear folks ideas for them, and also to answer any questions you might have about the ULCAA and its odyssey here in Vermont.

pour the maple syrup,

Don Kreis, Treasurer and Board Member, Hanover Consumer Cooperative Society

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