The landmark new Chapter 308B statute was proposed to provide flexibility to Minnesota cooperatives attempting to raise equity for modernization or expansion.
Chapter 308B allows for the ability to raise equity from non-patron investors and patron members to meet the minimum equity requirements and pay more than 8% return on the investment.
Chapter 308B requires that patron-members hold at least 50% of the voting powers in “general matters of the cooperative.” Patron members are guaranteed at least 50% of the voting power on the board of directors and patron member board votes are counted as a block. This 50% threshold is intended to encourage consensus decision-making with investor board members. However, patron members can set this minimum level higher.
Chapter 308B provides significant protections for patron members. Patron members have the financial right to no less than 60% of the 308B cooperatives’ profit allocations and distributions unless patron members vote to reduce their financial rights. If patron members vote for a change that reduces their financial rights to less than 60%, the patron members must still receive at least 15% of the profits even if investor members own more than 85% of the equity. Patron members can set significantly higher levels of patron member financial rights in the bylaws.
It is unlikely existing, profitable chapter 308A Minnesota cooperatives taxed under Subchapter T of the Internal Revenue Code would convert to a 308B cooperative taxed under Subchapter K because the IRS would likely view the conversion as a liquidation of the cooperative with a sale of assets.
Under Chapter 308B, two cooperatives and an outside investor can form a new Chapter 308B cooperative, be taxed like an LLC, and still potentially qualify for Capper-Volstead Act antitrust immunity protection. Allowing non-patron investor members into the cooperative may place this immunity at risk, however, and should be carefully considered by the cooperative’s legal and tax experts. Capper-Volstead protection is generally authorized only for cooperatives marketing agricultural products and many existing cooperatives already do not enjoy the act’s protections.
Chapter 308B provides significant flexibility for joint ventures. For example, two electric cooperatives can join with a non-cooperative business in a Chapter 308B cooperative for the purpose of conducting joint right-of-way maintenance, security services, etc.
Depending on how a new 308B cooperative is established, the cooperative may not be eligible for securities exemptions. Federal and state securities laws should be closely examined.
For more information on the statute, a 308B educational DVD is free for each Cooperative Network cooperative. Additional copies are available for $35. Call 651/228-0213 for more info.