Blue-sky Laws

A cooperative association should ascertain if any plan which it intends to follow in obtaining capital is subject to the blue-sky laws of the State in which sales or contracts will be made.

In a number of States the securities issued by farmers cooperative marketing and purchasing associations are not subject to the requirements of the blue-sky laws and in some States special statutory provisions exempt securities issued by rural electric cooperatives. It seems that, in the absence of a specific statutory exemption, the securities issued by cooperatives would be regarded as subject to the blue-sky laws.

The blue-sky laws generally are comprehensive in scope and cover, in addition to stock, various kinds of certificates or agreements which are issued or made to raise money.16

In Oregon it was held that the blue-sky law of that State, by its terms, did not apply to certain transactions involving cooperative associations.17

In Utah it was held that the blue-sky law of that State was applicable to a corporation which claimed to be a cooperative and in which no one could acquire stock unless he agreed to raise sugar beets.18 Some of the blue-sky laws apply to unincorporated as well as incorporated associations and some apply to nonstock corporations.19 An association obtained a permit, under the Corporate Securities Act of California, to enable it to sell membership certificates for $200 each. Because the association failed to exhibit and deliver to a producer the permit issued by the Commissioner of Corporations as required by its terms, it was held, at the suit of the member, that his membership and marketing agreement were void.20

Generally speaking, a note given for the purchase of a security of an organization that has not complied with the blue-sky laws is at

16 Hamlin County Livestock Sales Pavilion Company v. Karlstad, 48 S. D. 82, 202 N. W. 141; Farm Products Company of Michigan v. Jordan, 229 Mich. 235; 201 N. W. 198; Hill v. Campbell, 90 Ind. App. 687, 169 N. E. 865; State v. Gopher Tire & Rubber Company, 146 Minn. 52, 177 N. W. 937; State v. Hudson, 214 Mo. App. 260, 259 S. W. 877.

Kirk v. Farmers' Union Grain Agency, 103 Ore. 43, 202 P. 731; Cannon v. Farmers' Union Grain Agency, 103 Ore. 26, 202 P. 725.

18 National Bank of the Republic v. Price, 65 Utah 57, 234 P. 231.

19

State v. Hudson, 214 Mo. App. 260, 259 S. W. 877.

20 Klombies v. Weeks Poultry Community, Inc., 121 Cal. App. 175, 8 P. 2d 940.

least voidable in the hands of any person who is not a bona fide holder.21

In Illinois, as the blue-sky law of the State had not been complied with, a purchaser of stock in a cooperative association recovered the sale price of the stock from the agent of the cooperative after it became insolvent.22

Where a corporation issued stock without complying with the bluesky law, which provided that contracts entered into for the sale of stock, if the law was not complied with, were void, it was held that inasmuch as the stockholder had accepted dividends and attended meetings of the corporation, he was estopped to assert that he was not a stockholder.23

The action of the State Securities Commission of South Dakota was upheld in refusing to grant permission to a corporation to sell stock where "the contents of plaintiff's articles of incorporation are of a nature fitted to deceive the unwary, and to lead to the perpetration of a fraud upon those who would purchase its stock in reliance upon some of its provisions." 24

It has been held that, where a cooperative association sold stock without complying with the blue-sky law of the State, on its liquidation by a receiver the purchaser and holder of such stock, on tendering it back, was to be treated as a general and not as a preferred creditor.25

When conveyances of property were made to a cooperative enterprise in exchange for its stock, without the corporation's complying with the blue-sky laws of the State, it was held, in Oklahoma,26 that such conveyances could not be set aside because of the grantor's acquiescence in the transaction for a number of years and his acceptance and retention of profits distributed by the corporation, and as the rights of the other stockholders would be adversely affected.

"National Bank of the Republic v. Price, 65 Utah 57, 234 P. 231; Hill v. Campbell, 90 Ind. App. 687, 169 N. E. 865; Weisendanger v. Lind, 114 Kans. 523, 220 P. 263.

22 Morrison v. Farmers' Elevator Company, 319 Ill. 372, 150 N. E. 330. Winfred Farmers' Company v. Smith, 47 S. D. 498, 199 N. W. 477.

23

"National Co-operative Farm Loan Company v. Hirning, 40 S. D. 448, 167 N. W. 1055.

25 Howard v. Corn Belt Farmers' Co-operative Association, 225 Ill. App. 449. See also Coe v. Portland Farmers' Elevator Company, 236 Mich. 34, 209 N. W. 829.

20 Farmers' Union Co-Operative Royalty Co. v. Little, 182 Okla. 178, 77 P. 2d 33. See also Farmers' Union Co-operative Royalty Company v. Southward, 183 Okla. 402, 82 P. 2d 819.

Name of Association

It is absolutely essential that a corporation have a name under which it will transact its business. This is necessary for purposes of identification. Fundamentally the incorporators may select any name they choose for their corporation that is not an imitation of a name already used by a corporation engaged in a line of business similar to that in which the new corporation will be engaged. Statutory provisions in reference to this subject now exist in many States. These provisions frequently require that the name shall clearly indicate that the corporation is incorporated. Sometimes the statutes require that the name shall include the word "corporation," "incorporated," or the abbreviation "Inc." Restrictions prohibiting the adoption of a name already in use or so similar thereto as to be easily mistaken for it exist in many States. Under such a statute it was held that the Secretary of State of Washington was justified in refusing to file articles of incorporation for the "Kennewick Fruit Exchange" because of the similarity of its name to that of the "Kennewick District Fruit Growers' Association," an existing corporation.27 Independent of statute, for one corporation to imitate the name of another corporation may constitute unfair competition, and if such is the case the courts will enjoin the corporation that is guilty of such imitation. In an Oregon case 28 it was said, "In any case, to entitle the complaining corporation to an injunction, the name used by defendant, when not the same as that of plaintiff, must be so similar thereto that, under all the circumstances of locality, business, etc., its use is in itself reasonably calculated to deceive the public and result in injury to plaintiff, or else it must be used fraudulently in such a way as to have that effect." The court further said: "Injunction will be refused where no probability of deception by reason of the name is shown. Priority in adoption and use usually confers the superior right."

The statutes of a number of States prohibit the use of the word "cooperative" in the name of a corporation unless the corporation is in fact a cooperative or unless it is organized under a certain statute.

The term "association" standing alone at common law and in the absence of a statute does not have a definite legal meaning. While it suggests an organization it gives no indication of whether the

* State ex rel. Collins v. Howell, 80 Wash. 649, 141 P. 1157.

28

Umpqua Broccoli Exch. v. Um-Qua Valley Broccoli Growers, 117 Ore. 678, 245 P. 324. See also Terry v. Cooper, 171 Ark. 722, 286 S. W. 806, 48 A. L. R. 1254; Drugs Consolidated, Inc. v. Drug Incorporated, 16 Del. Ch. 240, 144 A. 656.

organization is incorporated or unincorporated. Probably to many it suggests a corporation, and many of the statutes providing for the incorporation of a cooperative association state that the term means a corporation. But in the absence of a statute making it so, the term is not synonymous with corporation. The words "exchange," "union," and "company" likewise do not have an exact meaning, but to many they undoubtedly mean the same as the word "corporation," and in a number of the States statutes for the incorporation of cooperative associations provide that they are synonymous with the word "corporation."

Charter

In the days when corporations were formed through application. to the king, the paper or instrument issued by him, if he acted favorably on the application, was called the charter. It was evidence that a corporation had been formed and it stated the objects, powers, and limitations. Again, when corporations were created by special acts of the legislature,30 the act setting forth similar facts was called the charter. At this time when corporations are created under general statutes, the formal instrument (whether called articles of association or articles of incorporation or certificate of incorporation) signed by those desirous of being incorporated, the incorporators, is commonly looked upon as the charter after its acceptance and approval by the official of the State to whom application for incorporation is made.

The charter is really much more than the articles of incorporation. It "consists of the provisions of the existing State constitution, the particular statute under which it is formed and all other general laws which are made applicable to corporations formed thereunder, and of the articles of association or incorporation filed thereunder, or the charter or certificate of incorporation granted by the court or officer in compliance with its terms; and its powers, rights, duties, and liabilities are determined accordingly." 31 The foregoing definition makes it clear that the rights, powers, and liabilities of a corporation cannot be determined merely by reference to the articles of association and that the charter is something more than a paper.

"See Millott v. Association of Mare Island Employees, 187 Cal. 162, 201 P. 118.

30 It is interesting to note that the Eastern Shore Produce Exchange, a cooperative organization of Onley, Va., was created by a special act of the general assembly of that State. See also In re Litchfield County Agricultural Society, 91 Conn. 536, 100 A. 356.

31 14 C. J. 117.

It has been held that those dealing in stock of a cooperative are charged by law with knowledge of restrictions in its charter with respect thereto."2

Stockholders who consent to amendments to articles of incorporation or bylaws which decrease their rights are bound thereby."

Illustrating the scope of amendments to charters, when the statute under which a corporation is formed provides in effect that an amendment may be adopted depriving stock previously issued of preferential rights attached thereto, such an amendment adopted in accordance with the statute is valid; but, if the statute does not authorize an amendment canceling accrued dividends on such stock, an amendment, insofar as it attempts to do so, is void."

The articles of incorporation may not be amended without the consent or acquiescence of all the stockholders of the corporation, unless the power of amendment is reserved." The power to amend may be reserved by the constitution or statutes of the State in which the corporation is formed or by its articles of incorporation.

A State may extend wide and comprehensive privileges with respect to the amendment of the charters of nonstock corporations as well as of stock corporations."

It has been held that the articles of incorporation may not be changed by amendment so as to alter the original purpose for which the corporation was formed," but in applying this rule the courts allow considerable latitude."

An association should confine its operations to those activities authorized by its charter. If an association, for instance, is incorporated to handle one kind of tobacco, it is without authority to handle another kind." If an association under the statute under which it is formed may do business only with members, it is without authority to do

32

Stuttgart Cooperative Buyers Association v. Louisiana Oil Refining Corporation, 194 Ark. 779, 109 S. W. 2d 682. See also Mayse v. Mineola Cooperative Exchange, 139 Kan. 24, 30 P. 2d 120.

33

Koeppler v. Crocker Chair Company, 200 Wis. 476, 228 N. W. 130.

34 Keller v. Wilson & Company, 180 A. 584, 190 A. 115, 194 A. 45. See also; Blumenthal v. Di Giorgio Fruit Corporation, 30 Cal. App. 2d 11, 85 P. 2d 580, Bay Newfoundland Company v. Wilson & Company, - Del. 4 A. 2d 668.

35 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed., sec. 3726.

86

Gulcz v. Delaware Polish Beneficial Association, 20 Del. Ch. 52, 169 A. 595. "Midland Co-operative Wholesale v. Range Co-operative Oil Association, 200 Minn. 538, 274 N. W. 624, 111 A. L. R. 1521.

38 Fower v. Provo Bench Canal & Irrigation Company, 99 Utah 267, 101 P. 2d 375, certiorari denied 61 S. Ct. 841, 85 L. Ed. 1523); Martin Orchard Company v. Fruit Growers Canning Company, 203 Wis. 97, 233 N. W. 603.

"Brame v. Dark Tobacco Growers' Co-op. Ass'n, 212 Ky. 185, 278 S. W. 597.