Assessing the Adequacy of Your Co-op's Bylaws

Most food co-ops -- from the smallest to the very largest, including wholesale operations -- don't realize how bad their bylaws really are. Many small retails have bylaws that were originally written by well-meaning persons whose legal training consisted of passing a notary public test. Others written by lawyers devote an inordinate amount of time to obscure or irrelevant issues while ignoring very important issues that are peculiarly applicable to cooperative and nonprofit organizations. In between these extremes are a variety of errors and omissions that defy generalization.

In the face of this problem, board members typically have little idea as to how to evaluate the overall adequacy of their co-op's bylaws or make any reasonable decision as to whether they may need specialized assistance. To help cooperators know what to look for in their co-op's bylaws and how to evaluate what they might find there, the following materials in questionnaire format may be of assistance.

Maintain legalities

Have your bylaws been prepared by a lawyer or at least reviewed as to their conformity with your state's incorporation statute?

If not, you probably have bylaws that are invalid in whole or in part. This can lead to procedural violations of legal requirements, the conduct of business that may subsequently be invalidated, and the possibility of challenge by state officials or disgruntled members or directors.

Bylaws must be consistent with your articles of incorporation, and both must be consistent with the statute of incorporation and other relevant laws. It is surprising how frequently co-op boards fail to consider that the law may provide some limits to what can or cannot be put into the bylaws. Being incorporated provides certain advantages to the organization and its members; but one of the prices the co-op pays for these advantages is the need to conform to substantive and procedural requirements of state law. An important function of well-written bylaws should be to provide a guide for maintaining good standing under the law.

Making it flexible

Are your bylaws predominantly mandatory, seldom permissive, and so detailed and inflexible that you can hardly do anything without violating them to some extent?

If so, your bylaws could probably use some improvement. Bylaws need not be painfully overdetailed and allow for no alternatives. They need not, for example, list all the powers and responsibilities of the board or membership or prescribe a detailed agenda for meetings or name and describe every conceivable committee. Incorporation statutes rarely require these and other such inflexible details.

Too many bylaws seem to have been prepared on the assumption that people are stupid or depraved and need to be rigidly controlled. Bylaws should instead be as permissive and flexible as possible, while still assuring basic procedural fairness and compliance with the law.

Keeping it readable...

Are your bylaws so loaded with legalisms and convoluted sentences that you need a lawyer to interpret them for you?

If so, they are of very limited usefulness -- no matter how technically sophisticated they may be. Bylaws certainly involve many complex aspects of the law; but they need not read like a commercial insurance policy. Until recently, it was the norm in legal draftsmanship to always prefer legal jargon over plain English. It was commonplace to find such abominations as always saying anything of importance in at least three different ways (lest anyone misconstrue one well-stated phrase) and including anything related to a single concept within one sentence (lest anyone somehow argue that conditions or restrictions in separate sentences didn't really accomplish their plain purpose).

Fortunately, the trend in legal draftsmanship is swinging in the other direction. Readable bylaws are of particular importance to co-ops that typically have significant social aspects to their purpose and function. If bylaws are not understandable to people without legal training, they will not be used as they should be on a ready reference basis.

...But not simple

Are your bylaws so simple and readable that, with better plot development, they might almost make it as a Reader's Digest feature?

If so, you undoubtedly have a technically inferior document. The problem is that corporate, tax, securities and other complex laws affect almost every co-op -- no matter how small. No amount o fskillful draftsmanship can completely eliminate this complexity. Unfortunately, too many bylaws simply ignore these legal complexities. Seldom do such legal problems ripen into actual controversies. But it can and does happen; and the risks become greater as a co-op grows, becomes economically significant and increases its public visibility.

Even without such externally imposed technicalities, good bylaws cannot be very simple without sacrificing function, efficiency, thoroughness and legal advantage. A better approach is for bylaws to be technically sophisticated while being logically organized, well-labeled, and accessible with moderate effort to an average reader. Provisions that are necessarily of a technical nature -- such as patronage refunds, capital structure, and indemnification -- can be drafted to avoid much unnecessary legal jargon. They can also be put at the end of the bylaws, or otherwise isolated, so that they don't interfere with understanding of more general interest items, such as membership requirements, meeting procedures and provisions regarding the board and officers.

Eliminating irrelevancies

After carefully reading your articles and bylaws, are you left with questions as to why a particular provision or group of provisions is in the bylaws at all?

If so, you should insist upon obtaining adequate answers to your doubts. Often you will get perfectly acceptable reasons for particular provisions. But, equally often, obscure or seemingly irrelevant provisions turn out to have no business being there in the first place. For example, why should a co-op that is not tax exempt be prohibited from carrying on activities not permitted to an organization exempt from taxation, or be required on liquidation to distribute its net assets to a 501(c)(3) organization? Why are there detailed provisions regarding patronage refunds when the co-op has never distributed them and seems too small for such a complex procedure ever to be practical?

Even matters that appear trivial may be suggestive of ways to improve the relevance and readability of bylaws. Why should there be a provision for all members to sign a consent in lieu of a meeting when the co-op has 300 members? Why is the president referred to as having the powers normally associated with the office of president, or even referred to as the chief executive officer, when he or she is really little more than a meeting facilitator and coordinator of staff relations? Many other irrelevancies will usually surface when bylaws are approached with a critical attitude.

Foreseeing all eventualities

Does a reading of your bylaws leave you with the impression that a lot of valuable space has been taken up with matters that have never happened before and may not happen in the future?

If so, you shouldn't be too alarmed. A very legitimate and important function of bylaws is to prevent, or provide the means to resolve, particularly acute and important potential problems-even if they are not regularly occurring problems. This is sometimes referred to as the worst case scenario function of bylaws.

Thus, in addition to matters such as name change and dissolution, one should expect to see provisions dealing with, for example, the right to refuse membership to persons having ulterior motives for joining, termination of membership and directorship for cause, the right of members to force the calling of a meeting for a particular purpose, the right to refuse member access to certain information or meeting sessions under specified circumstances, etc.

Reminding of legal obligations

Have you noticed that your bylaws contain materials that are copied or paraphrased from provisions in the articles of incorporation and state statute?

If so, this is not necessarily a bad thing and may, in fact, be a very useful procedure. Certainly, bylaws should not deal with matters which the statute adequately covers and which will invariably require the services of a lawyer, such as reorganization, merger, sale of substantially all assets, and liquidation.

On the other hand, members and directors seldom see the articles and governing statute which contain matters about which they should be aware. For example, corporate purposes should be restated or paraphrased to reinforce a sense of direction and common goals, and as a guide to making important policy and operational decisions. It is also useful to include a reminder of certain filing requirements that can easily be overlooked, such as the need to maintain a registered agent and registered office, to assure that authorized capital is not exceeded, and to file notices of the issuance of stock. Other provisions of state law may be of continuing operational significance, such as the need for directors to avoid entering into atypical contracts for profit with the co-op or participating in decisions in which they have a conflict of interest.

Mitigating potential legal problems

If your bylaws were written or reviewed by a lawyer and are not outrageously difficult to work with, can you safely assume that they are legally advantageous or adequate to keep the co-op out of legal trouble?

Unfortunately, the answer is usually no -- unless your lawyer happens to be skilled and experienced in the problems of co-ops. Cooperative and nonprofit organizations have been around a long time, and have accumulated a formidable body of very distinctive laws. In addition, a wide range of more typical legal problems impact small co-ops and nonprofits in distinctive ways. Little has been written about these problems, and the meager resources that do exist are largely inaccessible. Thus, even a competent lawyer can easily do a less than adequate job in drafting organizing documents fora co-op.

Some of the more common legal problems found in many co-op bylaws include the following: (1) member equity credits being given characteristics that create securities law problems; (2) member equity credits not represented by stock being given characteristics that potentially can make them taxable to the co-op; (3) failure to assure that the co-op can offset amounts owed by members against their equity credits; (4) failure to deal with the peculiar taxation of membership organizations under IRC 277; and (5) language that may exacerbate the problem of employment taxes applying to member labor. These and other problem areas can be made considerably worse by inattentive draftsmanship. On the other hand, each of these problem areas can be solved, actually or potentially, by skillful drafting of articles and bylaws.

See other articles from this issue: #019 October - November - 1988