Oregon Co-ops

Legal Guide

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

The laws governing the organization and operation of Oregon business entities are found under the Oregon Revised Statutes (“ORS”). General purpose cooperative organizations are formed in Oregon pursuant to chapter 62 of the ORS. Only a cooperative incorporated under chapter 62 of the ORS may use the term “cooperative,” or any of its variations, as part of the entity’s business name or title.

Statutes

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

Voting

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

Shareholders’ voting rights are described generally in ORS 62.195 and more particularly for amendments to articles in ORS 62.560. Shareholders of capital stock can be different from co-op members.  In such case, shareholders have limited voting rights which are specified in chapter 62. 

Allocation of Savings and Losses

Employee cooperatives may assign a portion of retained net earnings and net losses to a collective reserve account as described in ORS 62.783. The board may determine the use of the collective reserve account funds for any and all corporate purposes.

Stock Classifications

The membership shares can be separate from capital shares and can have different voting rights, which are specified in the bylaws.  The distinction between membership stock from capital stock is described in ORS 62.175.

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

In contrast, capital stock may be issued or transferred without limitation. Any cooperative is authorized to issue capital stock with the designations, preferences, and other limitations as stated in the articles. However, unless specifically authorized by chapter 62 of the ORS, there is no voting power associated with capital stock in a cooperative. As an example of one of these limited instances, shareholders may vote on amendments to the cooperative bylaws that may adversely affect their rights.

Cooperative Shares & Securities Registration

Oregon has rigorous security laws and filing requirements.  In Oregon, cooperative association shares are generally not exempt from securities registration.  However, cooperatives formed for certain industries and purposes are exempt under ORS 59.025, including: agriculture, fishing, renewable energy, grocery buying cooperatives.  If the cooperative association will be limited to 10 members or less, it may meet the small offering exemption under ORS 59.035(12), which permits sales to 10 or fewer Oregon residents during a consecutive 12 month period. Additionally, cooperatives may be permitted to sell to accredited investors so long as there is no general advertising or solicitation under ORS 59.035(5)

The types of securities listed under ORS 59.025 are exempt from registration or notice filing requirements. With the exception of renewable energy cooperatives, no filing or fee is required to utilize any registration exemption in the statute as these registration exemptions are self-executing under Oregon Administrative Rule 441-025-0005. However, persons relying on exemptions from securities registration in Oregon have the burden of proof in establishing the availability of an exemption.

Oregon does not exempt issuers from securities registration if they do not otherwise qualify for an existing exemption. However, under OAR 441-065-210, the Director of the Department of Consumer and Business Services (DCBS) may modify or waive securities registration requirements if an applicant for waiver provides proof and arguments that the requested action is consistent with Oregon law and that investors are otherwise adequately protected. Granting such waivers is uncommon, but one may make a written request for a waiver by seeking an opinion or interpretation from the DCBS Division of Financial Regulation. There is no fee to request an opinion, however the Division may decline to answer the request or take further action. A response by the Division will be based only on the facts presented and may be limited only to whether further action is required by the party seeking the opinion. The timeframe for receiving a response varies depending on the complexity of the factual issues and the Division’s workload. More details about requesting an opinion or interpretation can be found here.

If the cooperative association’s shares are securities under Oregon law that are not subject to any available exemption, the cooperative association must prepare and submit disclosure materials, prepare audited financial statements, get a salesperson licensing application, and pay registration fees. The fees can range from $200 to $1,500, depending upon the offering’s size. The filing and fee requirements are under Oregon Administrative Rules 441-065-0001 to 441-065-0270.1

Regulation of Members

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

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

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

Regulation of the Board of Directors

Boards of directors are described generally in ORS 62.280. Unless the bylaws authorize nonmembers to serve as directors, all directors of cooperatives in Oregon must be and remain members of the cooperative for his or her entire term of office.   However, a majority of the cooperative board must be comprised of members. Oregon requires at least three directors for cooperatives, unless the cooperative has fewer than three members. 

Cooperatives Not Organized Under ORS Chapter 62

Organizations that operate cooperatively may choose to organize as a different entity under Oregon law. However, only those organizations incorporated under chapter 62 of the ORS may use the term “cooperative,” or any of its variations, as part of the entity name or title. ORS 62.850. 

When organizing a cooperative organization outside of chapter 62 of the ORS, it is important to either incorporate provisions authorizing cooperative methods of operation into the corporate bylaws or to make such provisions legally binding on the corporation by contract.

Consumer Cooperatives

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

Worker Cooperatives

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

Oregon permits the formation of a more specific type of worker cooperative, an internal capital account cooperative, as described in ORS 62.786. This type of cooperative has its entire net book value reflected in (1) internal capital accounts (one per member) and  (2) a collective reserve account. Only members may own capital shares and each member shall have only one vote. The main purpose of these provisions is to reduce the sales price for shares.

Producer Cooperatives

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

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

Producer-supply cooperatives earn revenue primarily from sales of production supplies for a particular industry, such as equipment, materials, fertilizer, and fuel.

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

Nonprofit Cooperatives

Cooperatives may be considered to be nonprofit in the sense that these entities operate for the mutual benefit of members by dividing and returning revenues earned by the cooperative back to members or patrons in proportion to business transacted with the cooperative.  Often cooperative associations are not charitable entites under the rules of the Interal Revenue Code because the revenues earned by the cooperative are charitable monies that cannot be distributed to private individuals.

Oregon case law clarifies that a Chapter 62 cooperative organization’s net earnings from business transacted with members and proportionately returned to members as refunds are not considered profits of the cooperative corporation that insure to the benefit of any individual. See Univ. of Oregon Co-Op Store v. State, Dep’t of Rev.273 Or 539, 552, 542 P2d 900 (1975).

Credit Unions: Financial Cooperatives

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

Authors

Scheel Legal

Kristin Scheel Downes

Myra DIoquino

www.ScheelLegal.com

541.668.6168