In part one of this series, it was noted there is significant and growing interest in cooperative CUSOs these days as an effective and economical means of offering financial services and operational services on a cooperative basis. This series focuses on how credit unions should structure a cooperative CUSO to prevent organizational issues from interfering with the effectiveness of the CUSO enterprise.
Below are several more issues every credit union considering a CUSO should also take into consideration.
Management
How will the board of managers be selected? Credit unions want a say in who manages the CUSO. That is normal and expected. Typically, each owner will be able to appoint at least one manager to the board. It is common that the person appointed by the credit union is required to be a member of the credit union's senior management. This will insure a high level of representation and integration between the CUSO and the respective owners. Generally, the appointing owner can remove a manager it has appointed at any time. If the board is limited to a specific number of seats and there are more owners than seats, it is common to have a rotation system where all owners have representation on the board over time. Sometimes there is a desire to establish Class B ownership rights for credit unions making a smaller investment in the CUSO. I call them Associate Members. They have all the rights of owners with some limitations such as in the selection of board members. Associate Members may have a board seat that will represent them as a collective unit or be limited to appointing persons to an advisory board that has no management powers. There are other solutions that can be worked out depending on the goals of the parties.
What types of decisions will be required by the owners and not the board? This is not an issue if all the owners have equal representation on the board of managers, as all credit unions will be represented. If that is not the case, some of the very important decisions usually require the concurrence of all the owners.
What types of decisions will require unanimous consent, super majority consent and majority consent? The state LLC statutes usually mandate that some decisions must have the unanimous consent of all members, such as changing the certificate of organization or the operating agreement. There are other significant decisions that CUSOs can elect to require unanimous consent or a super majority to approve. The more routine day-to-day management decisions only require a simple majority. A super majority can be defined as desired. Usually it is two-thirds, 75% or 80% of the owners or board, as the case may be. The advantage of a super majority is that one or two credit unions in a CUSO owned by many credit unions could not block a near consensus of the other owners. The disadvantage is that your credit union might be the credit union that is on the short end of the stick. In CUSOs owned by five or fewer credit unions, unanimous consent is the norm for the important decisions.
Will the LLC have officers? Officers, such as president and secretary, are not required in LLCs. LLCs are run by managers. However, credit unions like the familiarity of officers and most LLC CUSOs have officers who do not have to be managers.
Services
Will non-owners be served? I recommend that non-owners be served only after the owners are receiving the service they expect. The advantage of serving owners is that owners have a stake in the success of the CUSO and are more likely to be good customers and supporters of the CUSO. This is why CUSOs often permit smaller credit unions to buy into the CUSO as Associate Members.
Should the operating agreement limit the services provided? I recommend defining the purposes of the CUSO broadly to permit the greatest flexibility in what services the CUSO can offer the credit unions and their members. However, if there are a lot of owners, it will be more difficult to have multiple services in the CUSO, as it is unlikely that all owners will want all the services. For example, if not all credit union owners participate in all the services how will profits and losses be allocated among the credit union owners? Therefore, we often see credit unions in multiple CUSO relationships with varied credit union partners.
Will there be geographic limitations on the services? This is a strategic question that is tied to the business plan.
Getting Divorced-Voluntary Withdrawal
How will an owner withdraw from the LLC? Some LLC operating agreements do not permit withdrawal. We think that is a mistake for CUSOs, as most credit unions do not want to stay with a partner that is not supportive. We recommend that a credit union be permitted to withdraw and that the withdrawing credit union receive its net capital account back less any sums due the CUSO. To avoid a financial hardship to the CUSO, the CUSO can be given an election to pay the capital account over time with a stated interest rate. It is not typical that a credit union is paid for equity growth of its ownership interest in this situation.
Getting Divorced-Involuntary Withdrawal
Will you kick an owner out for non-payment of its obligations or failing to support the CUSO? Many credit unions do not want a credit union as a co-owner unless the credit union is committed to supporting the CUSO. Otherwise, the economies and efficiencies are reduced. Other credit unions don't mind if credit unions just want to be non-active investors. If credit unions want to remove a credit union for non-support, you should be very specific in the operating agreement on what is meant by non-support. The non-support should be subject to objective measurements. If non-support occurs, we recommend that the non-supporting credit union be given a written notice with a right to cure before the forced divestiture occurs. The amount paid is usually the same as for voluntary withdrawals.
We have seen situations where a non-credit union owner is brought on for its expertise, such as an insurance agency that runs the CUSO. The credit union owners have the right to replace the insurance agency, and if they do, the insurance agency would be paid for the growth in equity as an incentive to grow the equity in the CUSO for the benefit of all the owners.
Another common reason to cause an involuntary withdraw is if the credit union owner converts to a savings and loan or savings bank.
Right of First Refusal
In the event that an owner desires to sell its ownership interest to a ready, willing and able buyer, it is typical to require the selling owner to first offer its ownership interest to the CUSO and/or the other owners. This provision helps keep the ownership "in the family."
Parting Advice
If a credit union finds that a CUSO partnership with other credit unions makes strategic sense, if there is personal trust between the participants and if there is passion for the enterprise, then the dating phase is successful. If the credit union partners can address and agree upon the nitty-gritty details of the marriage at the outset, then they have the organizational basis for a successful relationship. If the CUSO does not work out for a credit union, the operating agreement will serve as a pre-nuptial agreement that will permit the credit union to breakaway gracefully. Breaking up will not be hard to do. Fall in love with your heart but make sure your head covers the contingencies.
Guy Messick is an attorney in private practice with the law firm of Lastowka & Messick P.C., and legal counsel to NACUSO. He can be reached at 108 Chesley Drive, Media, PA 19063, at 610-565-0330, or at gmessick
