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Legal Opinion Summary
Topic:Incidental Authority/Promotional Activity: May a Farm Credit System association buy $10,000 of preferred stock in a farmer-owned cooperative that processes durum into pasta?
ID Number:01-02
Issue Date:04/27/2001

An association asked whether it may purchase $10,000 of preferred stock in a farmer-owned cooperative that processes durum into special shapes and sizes of pasta. The cooperative is setting up a new pasta manufacturing facility, and it has raised additional funds by selling its preferred stock to other local cooperatives (such as grain elevators, rural utilities, and farm supply cooperatives) that serve farmers. The association believes that purchasing a small amount of the cooperative’s preferred stock will help it to (1) demonstrate its commitment to fostering growth in the agricultural economy, (2) promote its expertise in financing all types of agriculture, and (3) earn the goodwill of farmers. OGC concluded that the association may buy $10,000 of preferred stock in this cooperative under its incidental powers to promote the association’s expertise in agricultural finance to farmers and earn their goodwill.

The Farm Credit Act (Act) grants associations the power to exercise “all such incidental powers as may be necessary or expedient to carry on the business of the association.” See Sections 2.2(20) and 2.12(20) of the Act (12 U.S.C. 2073(20) and 2093(20)). The FCA has long held that activities that promote an association and earn it the goodwill of farmers are incidental to its express powers to make loans and enter into contracts. A prior OGC opinion concluded that a Farm Credit System institution is usually exercising its incidental powers when it buys a de minimus and passive interest in entities that serve agriculture. See OGC Opinion dated April 29, 1999 (Summary No. 99-08). The association in this case will purchase only a small amount of preferred stock, which will represent a de minimus percentage of the cooperative’s equity. Furthermore, the association will have only a passive ownership interest in the pasta cooperative because preferred stock does not convey effective control or meaningful governance rights in a cooperative. These factors indicate that the association is exercising its incidental powers to promote its expertise in and commitment to financing agriculture rather than seeking a return on an investment or engaging in an entrepreneurial activity.

This opinion is fact specific and, therefore, it does not create a precedent for this association or any other Farm Credit System institution to acquire an interest in another non-Farm Credit System entity. Similarly, this opinion does not authorize any Farm Credit System institution, including this association, to purchase additional amounts of preferred stock in this cooperative.

(April 27, 2001)