The Colorado Uniform Limited Cooperative Association Act (ULCAA)
Chair of Colorado ULCAA Drafting Committee
Reporter for NCCUSL ULCAA Drafting Committee
Contents
General background on ULCAA
What is unique about ULCAA?
Background information for understanding Colorado ULCAA
Colorado ULCAA
Differences between Colorado ULCAA and NCCUSAL ULCAA
Summary comments regarding ULCAA generally
The discussion that follows provides a brief outline of the background and provisions of Colorado’s newly enacted Colorado Uniform Limited Cooperative Association Act. In appropriate situations, this Act can provide a very flexible type of entity through which its members can conduct operations for their mutual benefit.
The Uniform Limited Cooperative Association Act (ULCAA), adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 2007, was adopted in Colorado, with modifications, as Senate Bill 11-191 in the 2011 Colorado General Assembly and was signed by the Governor on May 23, 2011. It will be known in Colorado as the “Colorado Uniform Limited Cooperative Association Act” (Colorado ULCAA). It will be codified as Article 58 of Title 7, Colorado Revised Statutes (CRS). Colorado ULCAA is effective April 2, 2012.
References to sections of Colorado ULCAA in this discussion are to Colorado ULCAA as codified. References to specific provisions of the NCCUSL version that differ from Colorado ULCAA will be to “NCCUSL ULCAA Sec. ____.” Where there are generally common provisions or comments referenced in this discussion with respect to Colorado ULCAA and NCCUSL ULCAA, references will simply be to “ULCAA.”
A cooperative organization is one owned by persons who join together (1) to utilize the organization to provide themselves with goods, services or other items, (2) to have democratic control over the association, (3) to provide the basic equity financing for the association, and (4) to share in the financial benefits of the organization in accordance with their respective use of the association. It is not a “not for profit” organization because its profits are returned to its members at the end of each year in cash, evidence of equity investment, rebates or in other forms. Unlike “for profit” organizations, however, traditional cooperatives do not permit outside investment from persons who would have a vote in the governance of the cooperative.
ULCAA provides for a new and unique form of cooperative organization that provides for the organization of unincorporated limited cooperative associations, or “LCAs,” that can have outside investors to be admitted as members of the organization. Many attributes of LCAs under ULCAA are similar to other forms of cooperative organizations such as those organized under Article 55 or Article 56 of Title 7, CRS.
What makes ULCAA different from other cooperative entity statutes in Colorado and elsewhere is the ability of a limited cooperative association to admit outside investors as members with voting rights and participation in the financial gains or losses from the operations of the LCA. This is a significant change from traditional cooperatives of all kinds and from the cooperative models on which much federal law related to cooperatives has been developed. To what extent federal laws relating to cooperatives will apply or be available to LCAs organized under an ULCAA-type state statute will only be determined as LCAs come into wider use. These federal laws include, among many others, cooperative provisions in the Internal Revenue Code and limited exemptions from federal antitrust laws for agricultural cooperatives.
Background information for understanding Colorado ULCAA
This discussion is intended to outline leading provisions for Colorado ULCAA and note where Colorado ULCAA differs significantly from NCUSSL ULCAA. The discussion is not intended to be a thorough discussion of Colorado ULCAA or of cooperative organizations in general.
For a good understanding of ULCAA, knowledge of cooperative organizations in general is helpful. Overviews of cooperative organizations can be found in James B. Dean and Donald A. Frederick, “Business Cooperatives: Characteristics, Opportunities and Legal Foundation,” 22 Colo. Lawyer 953 (May 1993); James B. Dean and Donald A. Frederick, “Business Cooperatives: Taxes, Finances and Other Legal Issues,” 22 Colo. Lawyer 1685 (Aug. 1993); James B. Dean, John J. Conway, and Charles F. Holum, “The New Colorado Cooperative Act: A Setting for a Business Structure,” 25 Colo. Lawyer 3 (Dec. 1996); and with respect to worker owned cooperatives, Linda D. Phillips, “Worker Cooperatives: Their Time Has Arrived,” 40 Colo. Lawyer 33 (Sept. 2011). A comparison of Colorado cooperatives with other types of Colorado entities is found at Robert R. Keatinge et al., Choice of Entity in Colorado: An Update,” 25 Colo. Lawyer 3 (Oct. 1996).
ULCAA endeavors to balance traditional cooperative principles with the concept of having non-user investors as voting members of the cooperative organization (“investor members”) together with the traditional members who utilize the services of the cooperative (“patron members”). The Prefatory Note and Official Comments to NCCUSL ULCAA provide information on how this has been approached and how the sections of ULCAA are intended to operate. The Note and Comments can be found at the NCCUSL website (www.nccusl.org) under “Limited Cooperative Association Act.” A detailed discussion of ULCAA, including extensive references to various cooperative literature and places in ULCAA that may require interpretation by the courts, can be found in Thomas Earl Geu & James B. Dean, “The New Uniform Limited Cooperative Association Act: A Capital Idea for Principled Self-help Value Added Firms, Community-based Economic Development, and Low-profit Joint Ventures,” 44 Real Property, Trust and Estate L. J. 55 (Spring 2009).
Before one undertakes to utilize Colorado ULCAA, it is strongly recommended that some or all of these materials be examined.
Colorado ULCAA provides for the creation of a statutorily defined entity, the limited cooperative association or LCA, that combines traditional cooperative values with modern financing mechanisms by providing two distinct categories of members: patron members and investor members. An LCA is an unincorporated association of individuals or businesses that unite to meet their mutual interests by creating and using a jointly owned enterprise. The Act contemplates the formation of various types of limited cooperative associations, for marketing, advertising, bargaining, processing, purchasing, real estate, worker-owned cooperatives, or any other lawful purpose, but other statutes and regulations (such as those applicable to banking) may make it difficult for a LCA to be used for some purposes.
An LCA is not required to have investor members; more traditional cooperatives may use Colorado ULCAA to organize and may wish to do so to take advantage of the flexibility of ULCAA, but in doing so these cooperatives need to examine the potential effect of organizing under ULCAA rather than traditional cooperative statutes with respect to relationships to other laws that may not recognize an LCA as a “cooperative” for purposes of those laws.
Colorado ULCAA combines concepts from the Colorado Cooperative Act, for profit and non-profit corporate statutes, limited liability companies, and various types of partnerships. To preserve a foundation in cooperative principles, there are some areas of the Act that contain required provisions, but generally the Act contemplates that its organizational documents and the relationships among the members are contractual in ways similar to limited liability companies. Colorado ULCAA contains default provisions for most aspects of a limited cooperative association if the organizational documents do not provide otherwise. Some of the default provisions must be varied, if at all, in the articles of organization, Sec. 7-58-303(3). Others may be varied in the articles of organization or the bylaws, Sec. 7-58-305(3). The articles and bylaws constitute an LCA’s organizational documents.
The Act provides:
- Operating definitions and an outline of the nature and powers of limited cooperative associations. The act also deals with the effect of articles of organization, bylaws, required record retention, service of process, and business dealings between members and the limited cooperative association.
- Requirements for records filed with the secretary of state and procedures for signing and filing the records, referencing Article 90 of Title 7, CRS, for most of these provisions;
- A statutory formation process for limited cooperative associations, including the required contents of articles and bylaws, and the initial organizing directors;
- Qualifications for membership in a limited cooperative association, the rights and powers that come with belonging to the organization, and the requirements for annual members meetings and special members meetings;
- Permission for an LCA to have investor members and the structure for LCA patron and investor members, and creates their interests as personal property interests, consisting of governance rights, financial rights, and for patron members the possible right or obligation to do business with the LCA;
- For a two-tiered voting structure intended to provide some protection to patron members where an LCA also has investor members, under which all votes are counted and then only patron votes are counted to determine if a measure passes by the applicable majority in both instances;
- Authorization of marketing contracts between the limited cooperative association and patrons for marketing of member goods to third parties;
- For the directors of the limited cooperative association, their qualifications, and their authority and powers, with balancing mechanisms for the numbers of directors to be elected by patron members and by investor members;
- For the division of earnings at the end of the year between patron members and investor members with some accounting provisions that can or must be utilized;
- Designation through incorporation by reference of the governing law for indemnification of individuals who incur liability on behalf of the association and a grant of authority to the association to purchase insurance on these parties’ behalf;
- Unless otherwise provided by the association’s organizational documents, a statutory recognition that member contributions to a limited cooperative association may consist of tangible or intangible personal property or any other benefit to the association, including money, labor, services, promissory notes, agreements to contribute, and contracts to be performed;
- The right of a member to dissociate and the consequences of dissociation;
- The statutory right of a member to maintain a derivative action to enforce an association’s right where the association fails or refuses to enforce that right;
- Permission for foreign limited cooperative associations to apply for and receive a certificate of authority to transact business in Colorado;
- A statutory process and required filings for conversion of a limited cooperative association to another entity or vice versa, and the effect of conversion on the rights, duties, liabilities, immunities, and debts of the converting entity;
- A statutory process and required filings for merging of a limited cooperative association into another entity or vice versa, and the effect of merger on the rights, duties, liabilities, immunities, and debts of the merging entity;
- A statutory process and required filings for dissolving a limited cooperative association, including judicial, voluntary, and administrative dissolution or suspension; and
- Member-approved and nonmember-approved disposition of the association’s assets.
Differences between Colorado ULCAA and NCCUSL ULCAA
An MS Word document comparison between Colorado ULCAA and NCCUSL ULCAA would make it appear that Colorado’s drafting committee made an extremely large number of changes to NCCUSL ULCAA in arriving at Colorado ULCAA. There are indeed a large number of changes but the appearance is deceiving.
In Article 90 of Title 7, CRS, many provisions of Colorado’s entity statutes in Title 7 are harmonized for various entities (corporations, limited liability companies, partnerships, cooperatives and other forms of entities). To be consistent with other entities in Colorado, provisions covered in Article 90 were removed from NCCUSL ULCAA in drafting Colorado ULCAA. This removed many pages from the Colorado version.
There are many words in NCCUSL ULCAA that are not words used in Colorado’s statutory drafting. These words were changed from the NCCUSL version to the Colorado version. There were other words throughout NCCUSL ULCAA that the Colorado drafting committee believed were either unclear or did not follow typical Colorado approaches. An example of perhaps both of these is the changing of “organic rules” in NCCUSL ULCAA to “articles [of organization] and bylaws” in Colorado ULCAA. Colorado ULCAA makes it clear in a number of places that notices or other communications must be in a “record” as in Sec. 7-58-1101(4)(a), CRS, that requires a notice by a member of voluntary withdrawal to be in a record while NCCUSL ULCAA simply says a member may withdraw “by express will.”
Some provisions of NCCUSL ULCAA were relocated in Colorado ULCAA where the Colorado drafting committee believed the relocation helped make it easier to find a provision or make it more easily understood in the context of other provisions.
None of the changes described in the preceding three paragraphs were intended to make any material change to NCCUSL ULCAA as adopted in Colorado. Rather the changes were intended to harmonize NCCUSL ULCAA with Colorado’s statutory scheme for all entities or to clarify places where the Colorado drafting committee believed it would be helpful for users of Colorado ULCAA.
The Colorado drafting committee did make a few material changes to NCCUSL ULCAA.
- Colorado ULCAA reduces the time period for keeping certain records required to be kept by a limited cooperative association from six years to three years, Sec. 7-58-112, CRS;
- Throughout ULCAA, on significant changes to the organizational documents (articles or bylaws) or changes to the organization (such as mergers, conversions, dispositions of assets requiring member approval, dissolution), NCCUSL ULCAA provided for a two-thirds vote of the members for approval although it could be reduced in the articles or bylaws; Colorado ULCAA changes this throughout to a simple majority vote, but permits the articles or bylaws to provide for a larger majority, see, e.g. Sec. 7-58-405(1), CRS;
- NCCUSL ULCAA provides for one member to constitute a quorum for a membership meeting; Colorado ULCAA conforms to the Colorado Cooperative Act which provides for 5% of all members or 30 members, whichever is less, as a quorum requirement, subject to a different requirement provided in the articles or bylaws, Sec. 7-58-510, CRS;
- NCCUSL ULCAA took a traditional approach to unanimous consent in writing in lieu of a meeting of members; Colorado ULCAA adopted the Colorado Business Corporation Act approach permitting an LCA to provide for less than unanimous written consent, Sec. 7-58-510, CRS;
- Under NCCUSL ULCAA the Uniform Commercial Code governs transferability of governing rights (generally the right to vote) in a limited cooperative association if an LCA seeks to prohibit transferability with the result that prohibitions are very limited; Colorado ULCAA reverses NCCUSL ULCAA on this point and defers to Article 90 which as for all Colorado entities allows the articles, bylaws or other agreements to prohibit the transfer of governing rights by members; transfers of financial rights are transferable, Sec. 7-58-603;
- As permitted by NCCUSL ULCAA, Colorado ULCAA adopts provisions of the Colorado Business Corporation Act as the governing law of an LCA with respect to standards of conduct and liability, conflicts of interest and indemnification of directors and others, Secs. 7-58-818, -819, and -901, CRS;
- Colorado ULCAA follows the Colorado Cooperative Act in providing for the relationship of Colorado formed limited cooperative associations to Colorado’s anti-trust, securities and unclaimed property laws, Secs. 7-58-110, -1009, and -1010, CRS;
- In connection with derivative actions, if the plaintiff wishes to discontinue or settle the action, Colorado ULCAA requires that notice must be given to the LCA, Sec. 7-58-1304, CRS, where NCCUSL ULCAA does not; and Colorado ULCAA allows a court to award attorney fees and expenses to the defense if a court finds the proceeding was commenced or maintained without reasonable cause or for an improper purpose, Sec. 7-58-1305(3), CRS;
- Colorado ULCAA contains provisions for the merger of a parent and wholly-owned subsidiary, Sec. 7-58-1607, CRS, which NCCUSL ULCAA does not have;
- NCCUSL ULCAA requires a membership vote on dispositions of assets if the disposition leaves the LCA without “significant continuing business activity”; Colorado ULCAA adopts the more customary membership vote requirement of dispositions not in the “usual and regular course of business” and extends the voting requirement to certain encumbrances of property of the LCA, Secs. 7-58-1501 and -1502, CRS.
Summary comments regarding ULCAA generally
ULCAA is a new approach to cooperatives by permitting membership to voting investors who do not patronize the cooperative. It is a lengthy and complex statute as are corporate and many partnership statutes, but just as familiarity with corporate statutes results in an ease of use, familiarity with ULCAA allows one to work within its parameters with a fair degree of ease. Colorado’s version of ULCAA has hopefully removed some ambiguities that appear to exist in NCCUSL ULCAA, but may not have eliminated all of them or may have created other ambiguities.
Colorado ULCAA can offer opportunities through its flexibility for the creation of cooperative-type entities, both with and without investor members, that can serve their members in new and innovative ways.
A portion of the preceding discussion is taken (with some alterations) from “Legislation Passed During 2011 Legislative Session,” compiled by Machael Valdez, 40 Colo. Lawyer 33 at 34 (Aug. 2011). Substantial input on the drafting of Colorado ULCAA was provided by Thomas Morris of Colorado’s Office of Legislative Legal Services.
The Colorado drafting committee for ULCAA consisted of:
James B. Dean, chair (and a reporter on NCCUSL ULCAA)
Vanessa Becker of Holland & Hart LLP
Peter M. Eggleston of McClure & Eggleston LLC
Charles F. Holum
Linda D. Phillips of Dean, Dunn & Phillips LLC
Sarah Steinbeck of the Business & Licensing Division, Colorado Secretary of State
A. Keith Whitelaw, former Director of the Business & Licensing Division, Colorado Secretary of State
Representatives of the Cooperative Development Center at Rocky Mountain Farmers Union