UNITED STATES DEPARTMENT OF AGRICULTURE

BULLETIN No. 541

Contribution from Bureau of Markets

Washington, D. C.

CHARLES J. BRAND, Chief

March 23, 1918

COOPERATIVE ORGANIZATION BY-LAWS.

By C. E. BASSETT, Specialist in Cooperative Organization, and O. B. JESNESS, Assistant in Cooperative Organization.

The founders of every cooperative association should have a definite plan of action mapped out before the organization actively engages in business, as the lack of such a plan has resulted in the failure of many cooperative enterprises. The importance of the bylaws of a cooperative association is readily comprehended when it is realized that the purpose of the by-laws is to serve as a working plan for the organization. The relation of the by-laws to the organization resembles the relation of the specifications for a building to the finished structure. The blue prints furnish the builder with a graphic representation of the work to be done and this is supplemented by the necessary descriptive material, so that he knows before the building operations are commenced what each room is to be like and how the entire structure will appear when finished. Satisfactory results are not obtained when the plans furnished the builder are incomplete or inaccurate. A person about to erect a building does not obtain a photograph of a structure, the appearance of which pleases him, and expect the workmen to be able to build one like it with no other guide than this photograph. Organizations on the

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other hand too often expect to obtain the desired results by merely providing a general set of by-laws, which do not go into the details of the form of organization or the method of conducting the business.

ADAPTATION OF THE BY-LAWS TO LOCAL NEEDS.

It is impossible to draw up a standard form of by-laws which will adequately meet the needs of all organizations, for certain features may be highly desirable for one organization and decidedly impracticable for another organization. Among the reasons for variation in the by-laws, the kind of business engaged in is important. Thus the regulations in the by-laws of a fruit-shipping association regarding the grading and packing of goods shipped are not applicable to the business of a creamery organization. Many other illustrations could be given.

Certain parts of the by-laws must be drawn to suit the form of organization. Thus an association with capital stock will have clauses relating to its stock, while a nonstock association must substitute other sections more particularly adapted to its form of organization. The size of organization also should be taken into consideration, because by-laws drawn to meet the needs of a small local association would have to be changed before they would suit a large organization. The general plan may be the same in both cases, but some of the details necessarily will differ. Thus, in a small organization with a selected membership, restrictions on the individual members may be observed, while in a large organization it would probably be impossible to enforce such restrictions.

Differences in the requirements of various locations must not be overlooked. Not only may the local conditions surrounding a cooperative creamery in Vermont differ from those of a similar plant in Texas, but the local conditions at one creamery may vary considerably from those at a plant only a few miles away. The questions of proximity to market, of competition, of the characteristics of the local population, and the kind of farming all must be considered. The State law under which the organization is to be incorporated also influences the character of the by-laws. Some of the States have special laws providing for the formation of cooperative associations; in other States such associations are formed in accordance with the general incorporation laws. The State laws are far from uniform, and it is therefore important to ascertain the requirements of the laws of the State in which the association is being incorporated, in order that the by-laws may be drawn in accordance with the law.

IMPORTANCE AND ADVANTAGES OF INCORPORATION.

A cooperative association may be in the form of a voluntary unincorporated association or it may be incorporated under the laws of the State in which it is being formed, or those of some other State.

Associations of the former class are rather loosely organized and lack certain advantages which are gained by incorporation.

It is advisable for all organizations to incorporate, as this gives the organization a distinct legal status which can not be obtained otherwise. For instance, an unincorporated association is hampered in the matter of bringing suit as an organization, while the incorporated association is not subject to such disability. Another advantage of the incorporated over the unincorporated form is that, in the former, the individual liability of a member is fixed by statute and is usually limited to the amount which he has invested in its capital stock. In some States the unincorporated organization is considered a partnership. Where this is the case, the liability of the members is that of partners. In other States the unincorporated organization is regarded as an agent for its members. Where it is so held, the liability of the members is that of principals. Moreover, the incorporated association has a more definite form of organization than the unincorporated and the management thereof is placed in the hands of certain officers who can be required to account more strictly to the association. Among other advantages of incorporation may be included its value in providing an established business, the continued existence of which is assured more fully than that of the unincorporated. Incorporation usually prevents any dispute as to the ownership of the property held by the association.

The relation of the by-laws to the State incorporation laws has already been discussed, but it should be remembered that some of the States have more than one law for the incorporation of associa tions. In that event, it must be decided which law is the most desirable and the by-laws must be drawn accordingly. Articles of incorporation must be prepared before incorporation, but as the form of this procedure differs somewhat in the various States and the requirements can usually be ascertained from the Secretary of State or other official in charge of such matters, a suggested form for articles of incorporation is not included here.

SECTION 6 OF THE CLAYTON AMENDMENT.

In 1890 Congress passed the Sherman antitrust law, and in 1914 an amendment to the antitrust law, commonly known as the Clayton amendment, was passed. Section 6 of the Clayton Act is of particular interest to farmers' cooperative associations, because to a valuable extent it exempts such associations, provided they conform to its requirements, from the operation of the United States antitrust laws. Section 6 of the Clayton Act reads as follows:

That the labor of a human being is not a commodity or articie of commerce. Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, or horticultural organizations, instituted for the purposes

of mutual help, and not having capital stock or conducted for profit, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organizations, or the members thereof, be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws.

It is obvious that if an association is to get the benefit of the section, it must comply with its requirements. It must be, first, a "labor, agricultural, or horticultural organization"; second, it must be "instituted for the purpose of mutual help"; third, it must be formed without "capital stock"; and, fourth, it must not be "conducted for profit."

As to the first requirement, there may be some difference of opinion regarding the membership of an agricultural or horticultural organization. Therefore it is safer that such an organization be composed only of persons engaged in or directly interested in farming. If it were not for this restriction it might be possible for a number of men engaged in some other line of business to organize, as an agricultural or horticultural organization, and claim the exemption provided by section 6 of the Clayton Act.

The second requirement provides that the organization shall be formed for mutual help; that is, it must be a cooperative association formed for the benefit of all its members and patrons and not of a few only. An organization formed or conducted with a different motive than for the purpose of mutual help can not come within the terms of the letter or the spirit of the section.

The third requirement is that the organization be formed without capital stock. Care must be taken to distinguish between the term "capital" and "capital stock." The qualification that an organization shall be without capital stock does not mean that it is not permitted to have any capital. Capital, or money needed to carry on the business, must be provided in some other way than by the issuance and sale of shares of stock. Capital stock is a common characteristic of the usual form of a profit-making corporation. The exclusion of capital stock serves further to differentiate organizations operating under section 6 from the ordinary profit-making corporation. It is obvious that the elimination of the capital stock feature removes much of the temptation to convert a cooperative organization into a profit-making enterprise.

The final requirement that the organization must not be conducted for profit, is in line with the second qualification, which provides that the organization shall be mutual. A distinction must be made between profits and savings. While under section 6 of the Clayton Act only such organizations as are not conducted for profit are given the benefits of the exemption from the operation of the United States antitrust laws, this does not mean that an organization meeting the requirements of this section is not permitted to effect

savings for its members. If the farmers, through cooperative collective bargaining, are able to effect economies in the matter of the sale and distribution of their products and the purchase of their supplies, to that extent each member is benefited by his proportion of the savings. If the organization takes out only what is necessary to cover the cost of operation and to provide adequate maintenance and reserve funds, and prorates the balance among the members and other patrons, in accordance with the amount of patronage which each has given the organization, it is believed that it is not being conducted for profit. In that case the so-called "patronage dividend" is only a refund to the member or patron of what the year's business experience has demonstrated to be an overcharge for services rendered the member. In this way the member makes savings only and the association never can make profit.

DEALING WITH NONMEMBERS. ·

If an organization handles the products of both members and nonmembers, and prorates any surplus it may accumulate among the members only, it is neither strictly mutual nor nonprofit and therefore does not measure up to the requirements of section 6. It follows that an organization transacting business with nonmember patrons must deal with such patrons on the same basis, with respect to its charges for services rendered and the distribution of savings effected, as it does with its members.

The test of mutuality and equality is to be found in the fact that the association does not charge the nonmember patron for services rendered to him more than the actual cost of such service, including his prorata part of all overhead expenses. This must be so, or otherwise a small group of farmers could organize an agricultural association, and, by doing a large business with nonmembers, make large profits for themselves. It is thus seen that section 6 makes it obligatory for every organization, desiring to secure its benefits, to treat all patrons alike, in the matter of charging for services rendered and distributing savings made.

The necessity for mutuality and equality, exacted by section 6, makes it highly desirable, if not obligatory, to have all patrons enrolled as members, as this removes any doubt which might otherwise exist as to whether or not the organization complies with the provisions of section 6. This presents a problem of some difficulty, for there may be instances where a nonmember desires to deal through an organization without becoming a member. The best way to meet the difficulty is to make it as easy as possible for anyone eligible to membership to unite with the organization. Then if such person does not want to become a member, it may be advisable for the association to refuse to act as his agent.