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SYMPOSIUM ON NEW GENERATION CO-OPERATIVES

SYMPOSIUM ON NEW GENERATION CO-OPERATIVES. March 2, 1999 Winnipeg, Manitoba THOMAS P. DOOLEY AIKINS, MACAULAY & THORVALDSON 30-360 Main Street Winnipeg, Manitoba R3C 4G1 Phone No.: 957-4628 Fax No.: 957-0840. OUTLINE. 1. CO-OPERATIVE CHARACTERISTICS TRADITIONAL NEW GENERATION

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SYMPOSIUM ON NEW GENERATION CO-OPERATIVES

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  1. SYMPOSIUM ON NEW GENERATION CO-OPERATIVES March 2, 1999 Winnipeg, Manitoba THOMAS P. DOOLEY AIKINS, MACAULAY & THORVALDSON 30-360 Main Street Winnipeg, Manitoba R3C 4G1 Phone No.: 957-4628 Fax No.: 957-0840

  2. OUTLINE 1. CO-OPERATIVE CHARACTERISTICS • TRADITIONAL • NEW GENERATION 2. RECENT LEGISLATIVE CHANGES 3. DELIVERY CONTRACTS 4. RAISING CAPITAL 5. CONSIDERATIONS WHEN INCORPORATING

  3. TRADITIONAL CHARACTERISTICS OF CO-OPERATIVES • SHARE CAPITAL • NOMINAL QUALIFYING CAPITAL • PAR VALUE • DEMOCRATIC CONTROL • ONE MEMBER/ONE VOTE • INCOME DISTRIBUTED BASED ON BUSINESS DONE, NOT INVESTMENT • DISTRIBUTION OF ASSETS ON WINDING UP • SHAREHOLDERS LIMITED TO PAR VALUE

  4. TRADITIONAL METHOD OF DISTRIBUTION OF SURPLUS • BASIS BUSINESS DONE NOT SHARES • DIRECTORS COMPUTE BUSINESS DONE • DIFFERENTIAL RETURNS ON GOODS OR SERVICES AND CLASSES • CASH, PATRONAGE LOAN, OR MEMBERSHIP SHARES • ACCUMULATION OF PATRONAGE LOANS OR SHARES • PAYOUT OF PATRONAGE LOANS OR SHARES • RETIREMENT • DEATH

  5. TRADITIONAL CONCEPTS OPEN MEMBERSHIP SURPLUS (PROFITS) DISTRIBUTED BASIS PATRONAGE PATRONAGE LOANS FROM PATRONAGE DIVIDENDS RETURN OF PAR VALUE ON WINDING UP NEW CONCEPTS CLOSED OR RESTRICTED MEMBERSHIP NO PAR VALUE SHARES (VALUE VARIES WITH MARKET) EQUITY RAISED IN INITIAL OFFERING RATHER THAN BY ACCUMULATING PATRONAGE LOANS DISTRIBUTION ON WINDING UP (LIQUIDATION PROCEEDS) IN ACCORDANCE WITH HOLDINGS OF MARKETING SHARES NEW GENERATION CO-OPERATIVE

  6. NEW GENERATION CO-OPERATIVE ESSENTIAL CHARACTERISTICS FOR MARKETING SHARES • RISK CAPITAL • NO PAR VALUE • ISSUE AT MARKET VALUE • TRADE AT MARKET VALUE • RIGHTS ON WINDING UP • NO DIVIDENDS • MINIMUM HOLDINGS (DELIVERY CONTRACT)

  7. NEW GENERATION CO-OPERATIVE Special investment shares 42(8) The articles of a cooperative may provide (a) that the cooperative may issue a special class of investment shares that may be issued only to members of the cooperative; (b) that each member of the cooperative who owns shares of the special class is entitled or obliged to conduct a specific amount or percentage of business with the cooperative that is dependent on the number or percentage of such shares owned by the member; and (c) that, notwithstanding clause (1)(e) and subsections 338(1) and 341(7), each member of the cooperative who owns shares of the special class is entitled, on the liquidation and dissolution of the cooperative, to a pro rata share, dependent on the number or percentage of such shares owned by the member, of all remaining property of the cooperative after payment of all debts and liabilities of the cooperative including unpaid dividends, the amounts to be paid to the owners of its investment shares of other classes and any amounts to be paid on the redemption of its membership shares and the repayment of its member loans and patronage loans.

  8. DETERMINATION OF MARKETING SHARE VALUE • MARKETING RIGHTS/OBLIGATIONS • PLANT PROXIMITY TO FARM GATE • GUARANTEED MARKET FOR PRODUCTION • TECHNOLOGY SHARING • ANTICIPATION OF PATRONAGE RETURNS • OPERATING PROFITS BASIS USE • MARKET VALUE OF CO-OP’S ASSETS • AS A GOING CONCERN • APPRECIATION/DEPRECIATION • CUSTOMER LIST/GOODWILL • ON SALE OR WINDING UP

  9. DELIVERY CONTRACT • WRITTEN AGREEMENT • CO-OP MEMBER (MARKETING SHAREHOLDER) • OBLIGATION/ENTITLEMENT • SUPPLY PRODUCT • QUANTITY (NUMBER OR PRODUCTION) • TIED TO MARKETING SHARES HELD • TIME OF DELIVER OF QUANTITY • QUALITY/SPECIFICATIONS/GRADES • DELIVERY, ACCEPTANCE, REJECTION • PRICE AND PAYMENT • SPECIFICATIONS/GRADES • FIXED/REFERENCE POINTS • TIME/MANNER, ADVANCE PAYMENTS • SECURITY INTEREST (DISCHARGE) • DEFAULT/DAMAGES/REMEDIES • TERMINATION • SPECIFIED TERM • FAILURE RE: MEMBERSHIP/ MARKETING SHARES • MUTUAL CONSENT • GOVERNING LAW

  10. A member/producer would be entitled/obliged to deliver to the Co-operative crop grown by the member on specified acres (or number head of animals). Each share in the Co-operative might entitle/oblige the member to market all crop derived from one acre to the Co-operative (ie. 20 acres would require 20 shares - 80 acres would require 80 shares) (or one share per animal). DELIVERY CONTRACT

  11. NEW GENERATION CO-OPERATIVE

  12. Partnering with Marketer / Processor

  13. Partnering with Marketer / Processor (cont.) • The Co-operative and marketer/distributor would each contribute 50% of equity required to establish the processing plant and would be entitled to nominate 50% of the members of the Board of Directors of the processing plant. • The entity owing the processing plant would be owned 50% by Co-operative and 50% by marketer/distributor (could be a corporation, limited partnership, etc.). • To the degree possible (say 50%) the Co-operative’s investment in a processing plant would be derived from the issuance of share capital to its members. • The Co-operative’s return on investment in processor would be distributed to producers by way of patronage dividend.

  14. Issues in Raising Pools of Capital by New Generation Co-operative • SHARE CHARACTERISTICS • TRADING VALUE • TIE TO DELIVERY RIGHTS • WINDING UP PRIVILEGES • ALLOCATING CAPACITY TO CAPITAL • DIVIDE NECESSARY EQUITY BY CAPACITY • RELATE MEMBERSHIP TO SHARES IN ARTICLES AND BY-LAWS • PROTECTION OF PUBLIC • SECURITY/COOPERATIVE ACT RULES • ACCEPTANCE OF ONE MEMBER/ONE VOTE CONCEPT

  15. Issue of Securities • GENERAL PRINCIPLES • FULL, TRUE, PLAIN DISCLOSURE OF ALL MATERIAL FACTS AND USE OF FUNDS • PROSPECTUS OR OFFERING MEMORANDUM • FORM AND CONTENT COMPLIANCE • MATERIAL CHANGE REQUIRES AMENDMENT • SALES THROUGH REGULATED SALES AGENTS • FUNDS IN ESCROW UNTIL CLOSING • BACK OUT PROVISIONS • GOVERNING LEGISLATION • THE CO-OPERATIVES ACT • THE SECURITIES ACT

  16. THE CO-OPERATIVES ACT MEMBERSHIPS OR MEMBERS SHARES MEMBER/NON-MEMBER SHARE OWNERSHIP OFFERING STATEMENT REQUIRED PRIOR TO ISSUE UNLESS: $100.00/QUALIFY FOR MEMBERSHIP EXEMPTION ORDER RE THE SECURITIES ACT EXEMPTION ORDER THE SECURITIES ACT NOT APPLY TO CO-OP SECURITIES UNLESS CO-OP REGISTRAR ORDERS PROSPECTUS/ OFFERING MEMORANDUM EXEMPTION ORDER Issue of Co-operative Securities

  17. Issue of Marketing Shares • PIONEER PROCESS • EXEMPTION ORDER • DISCLOSURE DOCUMENT • SUBSCRIPTION AGREEMENT • CLOSING WHEN MINIMUM TARGET ACHIEVED • ACT WAS NOT DESIGNED FOR MARKETING SHARES • ARTICLES MUST BE CAREFULLY PREPARED TO AVOID INVESTMENT SHARE REQUIREMENTS • REGULATED EXEMPTION CALLED FOR • ISSUE OF MARKETING SHARES • TO MEMBERS • WHO SIGNED OR ARE WILLING TO SIGN DELIVERY CONTRACT FOR AGRICULTURAL PRODUCT • WITH PROCEEDS OF OFFERING USED FOR VALUE-ADDED ACTIVITY TO PROCESS OR MARKET MEMBER’S FARM GATE AGRICULTURAL PRODUCTS

  18. Issue of Investment Shares • FLEXIBLE FINANCING TOOL • ISSUE TO NON-MEMBERS • COMMUNITY INVOLVEMENT • EXPENSIVE/TIME CONSUMING • OFFERING STATEMENT • BROKER • NOTIFICATION/VETO PRIVILEGES IF RIGHTS AFFECTED • LENDER WATCHDOGS • UP TO 20% DIRECTORS • OTHER CONSIDERATIONS • PROXIES • INSIDER TRADING RULES • FINANCIAL DISCLOSURE REQUIREMENT • AUDIT COMMITTEE REQUIREMENT

  19. Forming a New Generation Co-operative • ARTICLES OF INCORPORATION • NAME (SEARCH AND RESERVATION) • INCORPORATORS (3 INDIVIDUALS) • REGISTERED OFFICE • SHARE CAPITAL • MEMBER SHARES (Y/N) • INVESTMENT SHARES (Y/N) • SPECIAL INVESTMENT SHARES (MARKETING SHARES) • NUMBER OF DIRECTORS • TYPE OF CO-OPERATIVE • RESTRICTIONS ON BUSINESS (Y/N) • RESTRICTIONS ON MEMBERSHIP • DISTRIBUTION ON DISSOLUTION • LIMITS ON DIRECTOR’S POWERS (Y/N) • BY-LAW - TYPE PROVISIONS (Y/N)

  20. Capitalization • MEMBER SHARES • PAR VALUE - ISSUE AND REDEEM • NOMINAL VALUE • NOT NECESSARY • DISCLOSURE EXEMPTIONS (NOMINAL) • INVESTMENT SHARES • NO PAR VALUE • MEMBERS AND PUBLIC • SECURITY ISSUANCE RESTRICTIONS • DIVIDENDS • QUANTIFY • REDEEMABLE/RETRACTABLE • VALUE? • NON-VOTING: EXCEPTIONS RE DIRECTORS AND IMPACT ON RIGHTS (PROXY VOTING PERMITTED) • MAY TRIGGER FINANCIAL DISCLOSURE/AUDIT COMMITTEE REQUIREMENTS • MARKETING SHARES (SIS) • NO PAR VALUE • NO DIVIDEND • MEMBERS ONLY • DELIVERY CONTRACT REQUIRED • EQUITY RIGHTS ON WINDUP

  21. Formation of New Generation Co-operative BY-LAWS • DEMOCRATIC CONTROL • DIRECTORS/OFFICERS/COMMITTEES • MEMBERS • ELIGIBILITY • MAINTENANCE OBLIGATIONS • TERMINATION • VOLUNTARY • INVOLUNTARY • AUDITORS • DISTRIBUTION OF SURPLUS • CONTRACT PROVISIONS • FILE WITHIN 30 DAYS OF ADOPTION

  22. NO FILE CHARTER BY-LAWS TO INCORPORATE ELIMINATE “PURPOSE” FROM ARTICLES “TYPE” OF CO-OP (MAIN SERVICE OR OTHERWISE) REQUIRED MUST OPERATE ON A CO-OPERATIVE BASIS “CO-OPERATIVE BASIS” REDEFINED OPEN MEMBERSHIP FINANCING OPTION INVESTMENT SHARES TO PUBLIC TERMINATION MEMBERSHIP AMALGAMATIONS AND CONTINUANCES REDEFINED DIRECTOR’S RESPONSIBILITIES LIMITS ON DIRECTOR’S POWERS ARTICLES UNANIMOUS AGREEMENT FINANCIAL DISCLOSURE REQUIREMENTS HOUSING CO-OPS AND WORKER CO-OP RULES DISSENT RIGHTS RE FUNDAMENTAL CHANGES Legislative Changes

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