Chapter 15 - § 15.11 • DISSOLUTION

• Jurisdiction: Colorado

§ 15.11 • DISSOLUTION

It is easy to overlook the notion of liquidation or dissolution of the cooperative's assets in the organizational phase of a cooperative. While the Co-op Act provides for flexibility in many areas by permitting a cooperative to address such matters in its articles of incorporation and bylaws in a manner different from the default provisions of the Act itself, the authorization and approval procedures for a voluntary dissolution are prescribed by the Co-op Act.¹⁴² The Act provides flexibility as to the order in which the cooperative's property is to be distributed upon dissolution. The cooperative's articles of incorporation or bylaws may modify the order from the provisions contained in the statutory scheme, but all remain subject to general debtor-creditor laws.¹⁴³

Many cooperatives incorporate "poison pills" in their articles of incorporation and/or bylaws that neutralize or discourage a profitable sale or demutualization. The purpose of these poison pill provisions is to preserve the cooperative's mission and cooperative structure and to ensure the cooperative continues to exist in perpetuity, without succumbing to the temptation to accept a financially lucrative offer to sell or liquidate the cooperative. The foundation of parity and perpetuity that profitable sale poison pills create attracts members, investors, and stakeholders to the cooperative without fear that any other stakeholder will seek to extract value for its self-interest at the expense of other stakeholders. Thus, in many ways, some have described cooperatives as "economic trusts."¹⁴⁴ By way of example, several cooperatives have adopted provisions that in dissolution, each class of member and even investors shall only be entitled to the return of their initial capital contribution and allocated but unredeemed patronage dividends or stock dividends (or alternatively, the balance of the internal capital account), but that any residual value shall be given to a charitable organization. Such "residual sweeping" mechanisms discourage the motivation to pursue profitable sales and neutralize any incentive for members to seek to profit at the expense of outside investors.

The authority to vary from the statute can be deceptive, however. Other statutes may limit the cooperative's flexibility by finding that certain approaches to asset distribution upon liquidation by their very existence in articles or bylaws may cause the cooperative not to operate on a cooperative basis...