this may be deemed advisable. It has likewise been suggested that the bylaws should provide that there be at least two candidates nominated for each director to be elected. The purpose of this suggestion, of course, is to foster democratic control of the association.

In stock associations it is highly important that restrictions relative to the stock be printed on the certificates so as to give notice to all concerned of the limitations to which the stock is subject. Where an association adopts restrictions for the purpose of confining its voting membership to producer-patrons, it is believed that such restrictions are binding on all new members and on old members who voted in favor of their adoption.73

The importance of having all matters pertaining to the organization of an association handled in strict conformity with the applicable legal requirements is illustrated by the numerous instances in which associations have been unable to enforce their stock or membership subscription agreements because of some legal defect in organization such as failure to file the articles of incorporation with the proper authority, failure to comply with the blue-sky laws, failure to organize an association of the type and character described in the subscription agreement, or organizing an association before the conditions precedent to organization stated in the subscription agreement had been met. Moreover, in a number of instances, actions have been brought by various States to forfeit the charters of associations which were defectively organized.

Cooperative associations usually are incorporated under State cooperative marketing acts, and of course the charter and bylaws of an association and the methods of their adoption and filing should conform to the statute under which it is incorporated. Every statutory requirement should be strictly observed. In addition, it ordinarily is necessary to examine the general corporation laws of the State, since nearly every statute authorizing the incorporation of cooperative associations provides that the general corporation law of the State, except where inconsistent with the cooperative statute, is also applicable to such associations.75 Occasionally, some provision of the State constitution may also be applicable.

In the preparation of the marketing agreement, due consideration should be given to the court decisions as well as the statute law of the State. For example, if a liquidated-damage clause is used, it should be one which the State courts, under applicable decisions, will sustain as reasonable.

73 See Reorganization of Associations, p. 79.

74 See Subscribers, Stock, Capital Stock, p. 54.

75

Sagness v. Farmers' Cooperative Creamery Company, 67 S. D. 379, 293 N. W.

In approximately two-thirds of the States, an association must comply with the blue-sky laws before engaging in the issue and sale of capital stock, memberships or other types of securities.76

The incorporators are the charter members of a cooperative association. By virtue of being the incorporators, they are, generally speaking, members." Nearly all the cooperative statutes specify the percentage of members that is required for the adoption of bylaws. If the number of members is large, it is sometimes difficult to obtain the approval of the required percentage. Inasmuch as the first board of directors of an association under practically all of the statutes is named in the articles of incorporation, the board of directors may act for the purpose of doing anything that might be deemed necessary to make themselves, as well as the incorporators, members. In many instances, for convenience, bylaws are adopted by the incorporators and the persons who compose the board of directors, all of whom at the time are regarded as the only members of the association. Even though bylaws for cooperatives are to be adopted in the manner outlined, it is generally regarded as highly desirable that as many of the prospective members as possible be acquainted with the terms and conditions of the bylaws and given such opportunities as are practicable to express themselves with respect to them.

In addition to performing the various legal services heretofore mentioned, the attorney who organizes a cooperative association usually advises it regarding its State and Federal tax liability, applicable statutes with which it must comply, and reports which it must file; and procures licenses and permits for it if any are required.

After a cooperative association is organized and operated, its success will depend upon a number of factors, but probably the most important of these is management. The selection of a manager is one of the most important functions that a board of directors performs. There is no magic in cooperation. Unless a cooperative association can perform the functions that it is engaged in performing, at least as effectively as comparable commercial concerns, it will never achieve a large measure of success. The effectiveness with which an association functions is largely dependent on the manager. When the di

76 See Blue-sky Laws, p. 35.

77 Low v. Connecticut & P. R. R. Co., 45 N. H. 370; Lechmere Bank v. Boynton, 11 Cush. (Mass.) 369; Monterey & Salinas Valley R. Co. v. Hildreth, 53 Cal. 123; 8 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed., sec. 3756; Ballantine's MANUAL OF CORPORATION LAW AND PRACTICE, p. 886. See also: Chase v. Lord, 77 N. Y. 1; Kardo Company v. Adams, 231 F. 950; Beck v. Stimmel, 39 Ohio App. 510, 177 N. E. 920.

402026 42

rectors are considering the employment of a manager they should compare candidates with successful operators in the same field.

The location of the plant or plants of a cooperative association, the amount which an association has invested in permanent facilities, the relation between such facilities and the volume of business handled, are all factors affecting its success. Some associations have built facilities far beyond their needs and these excess facilities have proved a serious handicap.

The problems which cooperative associations must face are essentially business problems and as in a commercial concern, an energetic and harmonious board of directors, able management and sound business policies will go a long way toward assuring a successful enterprise.

A

Incorporated Associations or Corporations

Nature and Characteristics

POINT to be made clear at the beginning is that an incorporated cooperative association, whether formed with or without capital stock, is just as much a corporation as an incorporated organization formed to manufacture automobiles, farm implements, or steel. It is true that incorporated cooperative associations are a particular type of corporation, just as incorporated commercial concerns or charitable organizations are particular types. As nearly all farmers' cooperatives are incorporated, and as it is highly desirable, as a rule, that they should be, the greater part of this bulletin will be devoted to a consideration of incorporated associations. Whenever the word "association" is used herein, unless otherwise specified, an incorporated association is meant.

Some discussion of the characteristics of corporations may be desirable at this point. It should be kept in mind that these characteristics belong to incorporated cooperative associations, stock and nonstock,78 as well as other corporations. The term "incorporation" is used with • reference to corporations which do not have capital stock as well as with reference to those which have capital stock. It describes the act of creating a corporation. A corporation is an artificial entity created by the law; it is a creature of the law. The definition of a corporation which is probably more widely employed in this country than any other

"Meikle, receiver, North Pacific Fruit Distributors v. Wenatchee North Central Fruit Distributors, 129 Wash. 619, 225 P. 819; In re Mt. Sinai Hospital, 250 N. Y. 103, 164 N. E. 871, 62 A. L. R. 564.

is that given by Chief Justice Marshall in the Dartmouth College ,79 in which he defines a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of the law."

case,

"A corporation is an artificial being, separate and distinct from its agents, officers, and stockholders." 80 Just as Smith and Jones are different persons, so a corporation is normally a legal entity distinct from its agents, officers, stockholders, or members.81 Individuality, if the term may be employed, is the dominant distinguishing quality of a corporation. The stockholders or members of a corporation, as well as its officers and directors, may change constantly, but the existence of the corporation is not affected thereby. It lives on as unaffected by these changes as a man is unaffected by changes of clothing. As an engine is separate from the engineer who runs it, so a corporation is normally separate from its agents, officers, stockholders, or members. The members do not have title to the property of a corporation. They cannot transfer the legal title thereto, although all of them join in the execution of papers purporting to transfer the property.s

83

82

It can be done only through the proper officers or agents of the corporation. A corporation can act only through its officers or agents,84 and these must have been authorized to act by the board of directors of the corporation. Normally, if one man acquires all the stock of a corporation, the title to the property of the corporation is not in him, and he can neither sue in his own name for damages to the property nor transfer title to it.85 Neither can he if not an attorney, it has been held, represent the corporation in court.86 A stockholder as such is not an agent of the corporation.87

A stockholder or member of a corporation has no control over any part of the assets of the corporation prior to its liquidation. A stockholder or member of an association, on the other hand, is not because of this relationship a creditor of the association; and the possession

79

80

Dartmouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629, 635.

Lange v. Burke, 69 Ark. 85, 61 S. W. 165; Aiello v. Crampton, 201 F. 891; J. J. McCaskill Company v. United States, 216 U. S. 504, 30 S. Ct. 386, 54 L. Ed. 590; McCarroll v. Ozarks Rural Electric Coop. Corp., 201 Ark, 329, 146 S. W. 2d 693, 81 Rutledge Co-operative Association, Inc. v. Baughman, 153 Md. 297, 138 A. 29. Rhode Island Hospital Trust Company v. Doughton, 270 U. S. 69, 46 S. Ct. 256, 70 L. Ed. 475; Wabash Railway Company v. American Refrigerator Transit Company, 7 F. 2d 335; Adams v. Farmers' Gin Company (Tex. Civ. App.), 114 S. W. 2d 583.

82

83

City of Winfield v. Wichita Natural Gas Company, 267 F. 47.

Grosfield v. First National Bank, 73 Mont. 219, 236 P. 250.

84

85

Button v. Hoffman, 61 Wis. 20, 20 N. W. 667; City of Winfield v. Wichita Natural Gas Company, 267 F. 47.

86

Cary & Company v. F. E. Satterlee & Company, 166 Minn. 507, 208 N. W. 408.

ST United States v. Strang, 254 U. S. 491, 41 S. Ct. 165, 65 L. Ed. 368.

at par to new applicants because they feel that this will reduce the book value of outstanding stock; and new applicants are reluctant to pay the actual value for the stock. These factors operate to restrict the sale of stock and prevent associations from obtaining new members. This situation may be met partially, at least in theory, by the declaration of dividends payable in stock or other certificates, or by the incorporation of a new association to take over the assets of the old association. If a new association is formed, stockholders in the old association usually receive, for their interest therein, stock in the new association. It is also possible to issue voting stock to those who expect to patronize the new association and to issue nonvoting preferred stock to others who do not.

The revolving-fund plan of financing may be used by a stock as well as by a nonstock cooperative, and this should operate to prevent the stock from acquiring a book value appreciably in excess of its par value. In the organization papers of a cooperative formed with capital stock, adequate provision should be made for revolving its stock, except that each producer who is to have the status of a member in the cooperative should continue to be the owner of at least one share of common stock. Moreover, it should be noted that a stock cooperative may use common stock, preferred stock, or revolving-fund certificates as the medium for revolving its capital.

The writer is of the opinion that the revolving-fund plan of financing may be adapted to any type of cooperative association, even though there is no specific statutory authority therefor, since it would appear to be simply a matter of contract between the association and its members.

Generally speaking, it is considered desirable for a cooperative association to meet the terms and conditions of the Capper-Volstead Act.68 Likewise, if it is intended that an association will be exempt from the payment of Federal income taxes, care should be taken to meet the conditions for exemption.69

In drafting the legal papers," an attorney should constantly keep in mind that, in a cooperative, the financial benefits and advantages should accrue to the members because of their patronage of the association and not because of their investment. A cooperative should be simply an instrument by which the advantages of collective action on the part of member-patrons will redound to them on the basis of their patronage on as equitable a basis as is practicable. In this respect, cooperatives are unlike commercial corporations which endeavor to make money for their stockholders as investors.