Generally, the rights, duties and privileges of the members of a cooperative association are stipulated in the articles of association, bylaws, or the association agreement. The law under which the association is organized is the governing factor with respect to membership and the duties incidental to such membership. The governing document shall contain the number and qualification of members of the association, the conditions precedent to membership, the option for transfer or withdrawal of stocks held by the members, the conditions under which membership shall cease, the automatic suspension of the rights of a member when he/she ceases to be eligible to membership and the manner and effect of expulsion of members[i]. In certain cases, the stock certificates issued by the cooperative association may stipulate the rights and liabilities of members.
Generally, the provisions of the charter and by-laws prescribing the eligibility for membership must be considered together. However, courts have also observed that where the charter is more restrictive in its requirements than the by-laws, then the charter provisions shall prevail[ii]. A prospective member may submit an application to the association and the association may accept such application if the applicant meets the associations membership credentials.
Members enjoy a wide spectrum of rights including the right to inspect the association’s books and records[iii]. Every member of a non stock corporation has a right of inspection if such member whether he has an interest in the corporation and a voice in its management which the law protects and the enforcement of which will be aided by an inspection of the books and records. Thus, the real test is not whether the interest of the member is evidenced by a certificate of stock or of membership. However, this right is not absolute and can be denied on evidence of malafide intention. Also, if the cooperative is a party to a law suit, a member may be disqualified from serving on a jury on showing of actual bias.
Members are entitled to the profits of a cooperative association. A cooperative association may distribute its profits in the form of patronage refunds or dividends. Members have a right to profit and the cooperative association has no right to withhold profits unreasonably. However, members’ right to profit is not absolute and is subject to the claims of the associations’ creditors. Hence, profits may be distributed among the members only after discharging the association’s debts. “The assets of a corporation constitute a trust fund for the payment of its debts, which cannot lawfully be divided up until the creditors of the corporation are paid[iv].” The association’s debts are given more priority and the members are often required to refund advances made to them by the association for the payment of lawful indebtedness of the cooperative.
In the event of liquidation of the cooperative association, the proceeds from the assets shall be used to pay the expense of liquidation. The second priority is to pay the association’s lawful debts. Members’ patronage dividend shall be distributed only after meeting the expenses for the liquidation and settlement of debts.
Generally, cooperative associations adopt a plan called revolving capital plan whereby each member of the association is credited with his/ her proportionate part of the profit on the books of the association. This is known as equity credit and the association may provide a certificate to the member showing the credit. The credited amount form part of the capital of the association and is in the nature of earned surplus of a conventional business organization. Equity credits are not immediately payable and the members are paid such credit on an unspecified later date. Moreover, equity credit cannot be used as a setoff against a member’s present indebtedness to the association, until they have accrued.
Also, upon the death of a member, his/her interest will automatically vest and qualifies it for the retirement of its patronage credits[v]. However, this is not the rule in all cooperatives.
Unless otherwise stipulated, a member of a cooperative is authorized to transfer his/her certificates representing produce delivered to the association, and deliver a good title to the certificate as against the claims of his/ her creditors. This practice is often followed in agricultural marketing associations. However, the association has power to restrict the membership to growers and provide against the transfer of stock to anyone not a grower.
[i] Thomason v. Clark County Farm Bureau Tobacco Cooperative, Inc., 259 S.W.2d 64, 66 (Ky. 1953)
[ii] Porterfield v. Black Bill & Doney Parks Water Users’ Ass’n, 69 Ariz. 110, 115 (Ariz. 1949)
[iii] Shaw v. Agri-Mark, Inc., 50 F.3d 117 (2d Cir. Vt. 1995)
[iv] Northwest Roofers & Employers Health & Sec. Trust Fund v. Bullis, 114 Idaho 56 (Idaho Ct. App. 1988)
[v] Schill v. Langdon Farmers Union Oil Co., 442 N.W.2d 408 (N.D. 1989)