HOUSE BILL REPORT

HB 430

BYRepresentatives Fisch, Jacobsen, B. Williams, Schoon, Lux, P. King, Day, Kremen, Basich, Unsoeld, Pruitt and Hargrove

Authorizing creation of employee cooperatives.

House Committe on Trade & Economic Development

Majority Report:     The substitute bill be substituted therefore and the substitute bill do pass. (12)

     Signed by Representatives Wineberry, Vice Chair; Belcher, Braddock, Cantwell, Doty, Grant, Holm, Kremen, McLean, Moyer, Rasmussen and Schoon.

House Staff:Stephen Hodes (786-7092)

AS REPORTED BY COMMITTEE ON TRADE & ECONOMIC DEVELOPMENT

FEBRUARY 12, 1987

BACKGROUND:

Washington state statutes do not explicitly authorize employee cooperatives as a separate form of corporation.  Existing state law does recognize cooperative associations.  These provisions of law were drafted in 1913 in order to regulate agricultural cooperatives.  These elements are not well suited to cooperatives composed of the employees of a firm as opposed to independent producers.  While the provision of state law regarding incorporation have been used to incorporate employee cooperatives, particularly in the case of the state's cooperative plywood firms, they are not drawn to take advantage of the existence of employee stock option plans (ESOPs) or other more recently developed forms of structuring employee cooperatives.

The federal Deficit Reduction Act of 1984 contains financial incentives for employee stock ownership plans.  It allows the exemption of a percentage of dividend and interest income from taxation.  The Tax Reform Act of 1986 left all financial incentives for employee ownership substantially intact.

SUMMARY:

SUBSTITUTE BILL:  The employee cooperative corporations act is created.  Any corporation organized under state law may elect to establish itself under the provisions of the act by filing articles of incorporation under the act.  Only people employed on a full-time or part-time basis by the employee cooperative may be members of the cooperative.

Employee cooperatives shall issue a class of voting stock designated as "membership shares".  A member shall own only one share which shall be issued for a fee as determined by the directors.  No capital stock other than membership shares shall be given voting power.  An employee cooperative may revoke election results under this chapter by a two-thirds vote.

The net earnings or losses of an employee cooperative shall be apportioned and distributed according to the cooperatives articles of incorporation.  Net earnings declared as patronage allocations, which shall be allocated according to the amount of work performed by a cooperative member, shall be paid to members according to the ratio of the member's patronage of the cooperative to the total patronage by all cooperative members during the period.

The bill permits an employee cooperative to establish a system of internal capital accounts to reflect the value of membership shares.  The periodic redemption of capital stock and the patronage allocation may be permitted by the cooperative's articles of incorporation.  An employee cooperative is required to provide for the redemption of the its shares upon an employee's termination of membership.  Earnings and losses may also be assigned to a collective reserve account and be used for corporate purposes as determined by the directors.

An internal capital account cooperative is defined in the bill as an employee cooperative: whose entire net book value is reflected in internal capital accounts; and in which no one other than members own capital stock.  The bill provides that if an employee cooperative decides to revoke its cooperative status, the articles of amendment shall provide for the conversion of membership shares.  Employee cooperatives may only merge with another employee cooperatives under the provisions of the bill.

The bill exempts cooperative membership shares from regulation as securities under RCW 21.20.140 through 21.20.310.

SUBSTITUTE BILL COMPARED TO ORIGINAL: All references to cooperative membership shares in the Securities Act are deleted. The intent of the Legislature is clarified to except membership shares in cooperatives operating under the listed criteria from the act, but the authority of the Securities Division to investigate fraud concerning firms which purport to be cooperatives but which do not operate under the listed criteria is maintained.

Fiscal Note:    Not Requested.

House Committee ‑ Testified For:     Carol Bergin, Puget Sound Cooperative Federation; Roger Yakke, Pacific Northwest Interfaith Network; Richard Feldman, consultant, Port Townsend; Jim Lyons, Port Townsend Shipwrights' Cooperative; and Steven Brough, attorney, Seattle.

House Committee - Testified Against: None Presented

House Committee - Testimony For:     Employee cooperatives becoming more popular nationally, because they allow businesses to survive while maintaining control by employees.  New incorporation procedures would lower barriers to acceptance of worker cooperatives by financing institutions.  One small element in facilitating economic development in state.  Local ownership inspires increased performance.  Use of internal capital account structure permitted in law allows use of most advantageous tax structure possible. Bill would streamline incorporation process which is currently difficult, and would be a valuable resource for employee cooperatives. The consideration of cooperative membership shares as securities is the prime stumbling block to the formation of cooperatives.

House Committee - Testimony Against: None Presented