SENATE BILL REPORT

SHB 430

BYHouse Committee on Trade & Economic Development (originally sponsored by Representatives 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

Senate Committee on Commerce & Labor

Senate Hearing Date(s):March 24, 1987; March 25, 1987

Majority Report:  Do pass as amended.

      Signed by Senators Warnke, Chairman; Smitherman, Vice Chairman; Anderson, Lee, Tanner, Vognild, Williams, Wojahn.

Senate Staff:Jack Brummel (786-7429)

                  March 25, 1987

Senate Committee on Ways & Means

Senate Hearing Date(s):April 6, 1987

Majority Report:  Do pass as amended by Committee on Commerce & Labor.

      Signed by Senators McDermott, Chairman; Gaspard, Vice Chairman; Bauer, Bluechel, Kreidler, Lee, McDonald, Moore, Owen, Rinehart, Talmadge, Vognild, Warnke, Williams, Wojahn, Zimmerman.

Senate Staff:Stephen Rose (786-7443)

                  April 6, 1987

AS REPORTED BY COMMITTEE ON WAYS & MEANS, APRIL 6, 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:

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.  Only employees of a cooperative may be members.

Employee cooperatives issue a class of voting stock designated as "membership shares".  A member owns only one share which is issued for a fee as determined by the directors.  No capital stock other than membership shares is 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 are apportioned and distributed according to the cooperatives articles of incorporation.  Net earnings declared as patronage allocations, which are allocated according to the amount of work performed by a cooperative member, are 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.

An employee cooperative establishes 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 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 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.  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 other employee cooperatives.

Cooperative membership shares are exempt from regulation as securities under RCW 21.20.140 through 21.20.310.

SUMMARY OF PROPOSED SENATE AMENDMENT:

An employee ownership program is created in the Department of Community Development.  The program provides technical assistance to cooperatives and conducts educational programs on employee ownership and self-management.  An advisory panel assists in the development of the program.  Reports to the Governor and Legislature are required.

Fiscal Note:      none requested

Senate Committee - Testified: COMMERCE & LABOR:  Carol Bergen, Puget Sound Coop Federation; Richard Feldman, consultant; Steve Brough, attorney

Senate Committee - Testified: WAYS & MEANS:  No one