Request By:
Mark Farrow, Chief of Staff, General Counsel
Department of Agriculture
Opinion
Opinion By: Albert B. Chandler, III, Attorney General; Monica M. McFarlin, Assistant Attorney General
Opinion of the Attorney General
INTRODUCTION
The Department of Agriculture requests the Attorney General's opinion on the issue of whether a stock-issuing agricultural cooperative corporation organized under KRS Chapter 272 is considered a for-profit corporation. Recently, the Articles of Incorporation of a stock-issuing agricultural cooperative, organized as a nonprofit, were rejected by the Kentucky Secretary of State. According to the Secretary of State, since the agricultural cooperative chose to organize with stock, it was deemed to be subject to KRS 271B, the chapter dealing with business corporations operated for profit; therefore, the Secretary stated that the cooperative could not be organized as a nonprofit.
The Department of Agriculture has requested the opinion of the Attorney General regarding a number of provisions under KRS Chapter 272. Specifically, the Department of Agriculture seeks an opinion regarding the applicability of KRS 271B, the general business corporation provisions, to a stock-issuing agricultural cooperative association organized as a nonprofit corporation under KRS 272.121 to 272.341.
I. Overview
A cooperative has been defined as a mutual benefit enterprise formed for the purpose of uniting producers or consumers, or both, to provide goods or services for those producers or consumers. Cooperatives are not generally considered "for profit" corporations because they are not organized to make a profit for the organization or its members, but rather for the members as producers.
Cooperative Grain & Supply Co. v. Commissioner of Internal Revenue, 407 F.2d 1158 (8th Cir. 1969). In Cooperative Grain & Supply Co. , the Eighth Circuit discussed the history of the federal tax exemption to farm cooperatives. Specifically, the court noted that the original exemption, enacted in 1916 to cover non-stock cooperatives, was extended in 1926 to permit farm cooperatives with capital stock to obtain exempt status. 407 F.2d at 1162. In examining the Congressional intent supporting the federal tax exemption for stock farm cooperatives, the court noted that the policy was not to benefit the cooperative as a business organization, but to benefit its members as producers rather than stockholders. Id. at 1163.
State statutes, which generally govern the incorporation and operation of cooperative organizations, embrace this policy that members benefit as producers rather than stockholders. In the majority of states, cooperative marketing associations are organized under express enabling statutes which set forth specific rules regarding structure and operation. In some states, a cooperative corporation is deemed a nonprofit organization. In states where a cooperative is deemed a nonprofit under the enabling statute, a similar provision typically exists within the statutory framework for incorporation both with and without stock.
Since cooperatives are creatures of statute, some state statutes provide that the general or business corporation laws apply to cooperative associations unless specifically exempted or unless the business corporation provisions are inconsistent with the specific provisions of the cooperative statute. Such provisions reflect the principle that the law governing the actions of cooperatives differs from, and preempts corporate law when cooperative marketing associations are involved. Such provisions also reflect the strong public policy promoting the marketing of agricultural products. In interpreting state cooperative statutes, the courts have liberally construed such acts to accomplish the purposes for which they were enacted.
National Broiler Marketing Association v. United States, 436 U.S. 816 (1978).
II. Analysis of KRS Chapter 272
The Department of Agriculture requested this opinion after the Kentucky Secretary of State refused to accept Articles of Incorporation for a nonprofit agricultural cooperative association organized under Chapter 272 with stock. The Secretary of State asserted that KRS 272.042 dictates that an agricultural cooperative organized with stock is subject to the business corporation provisions in KRS 271B; hence, that cooperative may not organize as a nonprofit with stock. A review of the relevant provisions set forth in KRS Chapter 272, the sections governing cooperatives, indicates that an entity may organize as a cooperative corporation or as an agricultural cooperative association. The characterization of the entity determines the applicability of the general business statutes of 271B; the particular formation of the cooperative also determines the applicability of KRS 272.042.
A. Cooperative Corporation
KRS Chapter 272 provides that three or more Kentucky residents may organize as a cooperative corporation to conduct an agricultural business. KRS 272.020(1). The relevant statute provides that the cooperative shall be organized with shares or with memberships, as provided in the Articles of Incorporation. KRS 272.020(2). Any cooperative company may become subject to the provisions of KRS 272.020 to 272.050 by filing with the Secretary of State a declaration that the company, by a majority vote of its stockholders or members, has decided to adopt KRS 272.020 to 272.050.
Unless otherwise provided in KRS 272.010(1) and 272.020 to 272.050, a cooperative corporation organized with shares shall be subject to the provisions of KRS 271B, and a cooperative corporation organized with memberships and operated on a nonprofit basis shall be subject to the provisions of KRS 273.161 to 273.390. KRS 272.012. The applicability of KRS 272.010(1) and 272.020 to 272.050 are only applicable to cooperative associations organized under KRS 272.020 to 272.050 . KRS 272.044. A company, corporation or association doing business for profit in Kentucky may use the word "cooperative" in its name only if that company has complied with the provisions of KRS 272.020 to 272.050.
Thus, an affirmative declaration may be made in the Articles of Incorporation to organize as a cooperative corporation under KRS 272.020 to 272.050. The applicability of the general business code provisions depends upon whether or not the cooperative corporation is organized with shares or memberships interests.
B. Agriculture Cooperative Association
KRS Chapter 272 also provides that an entity or association may organize as an agricultural cooperative association. KRS 272.1001. An "association" organized under KRS 272.121 to 341 shall be classed as and deemed to be a nonprofit corporation. KRS 272.1001(7). "Member" means the holder of a membership in an association without capital stock or it means the holder of voting stock in an association organized with capital stock. 272.1001(3). Hence, an agricultural cooperative association organized under 272.121 to 272.341 is statutorily deemed a nonprofit and such association can be formed with or without capital stock . KRS 272.121(1).
KRS 272.341 provides that the general business corporations provisions of KRS 271B apply to every agricultural association, with or without stock, except where a provision of 271B conflicts, or is inconsistent with Chapter 272. This provision establishes that the more specific provisions of 272 take priority over the general business corporation provisions; it also recognizes the hybrid nature of the agricultural business cooperative. The provisions set forth in KRS 273 prohibiting the issuance of stock by nonprofit corporations do not apply to agricultural cooperative associations.
Thus, under KRS 272.042, the applicability of the general business statutes of KRS 271B or the nonprofit statutes of KRS 273 depend upon whether a cooperative corporation is organized with or without shares. The provisions of KRS 272.042 do not apply to agricultural cooperative associations. The statutory provisions applicable to agricultural cooperative association embrace the concept that a stock interest in an agricultural cooperative association differs from a stock interest in a business corporation.
The issue of the nonprofit status of a stock-issuing agricultural cooperative association has not been the subject of litigation in the Kentucky Courts. This office asserts, however, that Kentucky's statutory framework in KRS Chapter 272 is clear and unambiguous. The relevant statutes support an analysis which comports with the policy enunciated by federal and state courts favoring agricultural cooperatives. This conclusion also harmonizes apparent inconsistencies in these statutes and interprets those provisions in a way which gives effect to each.
City of Vanceburg v. Plummer , 275 Ky.713, 122 S.W.2d 772 (1938).
KRS Chapter 272 clearly provides two choices: to organize as a cooperative corporation or to organize as an agricultural cooperative association. If a cooperative corporation is chosen, the applicability of KRS 271B or KRS 273 depend upon whether shares of stock are issued. If the entity organizes as an agricultural cooperative association, that entity is statutorily deemed a nonprofit and may organize with or without stock without violating the provision of KRS 273. Accordingly, West Kentucky Grower Cooperative may organize as an agriculture cooperative association with capital stock and enjoy nonprofit status under KRS Chapter 272.