Chapter 15 - § 15.9 • EQUITY REDEMPTION

• Jurisdiction: Colorado

§ 15.9 • EQUITY REDEMPTION

§ 15.9.1—Generally

It is a principle of cooperatives that the members provide the primary source of equity capital. By the cooperative retaining portions of member patronage dividends and the retention of per-unit retains, cooperative members build up individual personal capital or equity accounts in the cooperative as years go by. The members of a cooperative also change over time. As a result, a cooperative needs to establish a method by which to redeem equity capital accumulated by the cooperative on behalf of its members who no longer use the cooperative or whose use has declined over the years. This process is customarily called equity redemption.

Too many cooperatives neglect the important equity management aspect of cooperative finance. Studies have been conducted into various means for retiring or redeeming cooperative equities to require that the invested capital in a cooperative be provided by currently active members.¹³⁵ A cooperative's bylaws must address this issue to provide the authority for the board of directors to administer an equity-redemption program. In Colorado, articles 56 and 58 grant the board of directors broad authority to determine if or when equity is to be redeemed.¹³⁶

"Three methods of redeeming member equity have achieved general acceptance: the 'revolving fund plan,' the 'base capital plan,' and 'special plans.' Although the systems are often viewed as unrelated, they may, in fact, operate together."¹³⁷

§ 15.9.2—Revolving Fund

A revolving fund plan is a plan by which a cooperative regularly and systematically redeems (or repurchases) outstanding patron equity accounts or per-unit retains. The cooperative uses cash generated from current operations to redeem equity retained from prior years.

Two revolving fund methods are the most common. In the first method, the cooperative retires the oldest invested equities first. In the second method, the cooperative redeems a portion or percentage of all outstanding equities each time an equity redemption is made. This redemption method is also called the "percentage of the pool" method. It has the benefit of providing a cash payment to all members, which frequently can encourage patron support and loyalty to the cooperative. It does not, however, eliminate the equity investments of persons who are no longer active members before repaying equity investments of newer members. This means that the cooperative's equity financing requirements are not solely met...