business with nonmembers." If an association engages in a business or activity not authorized by its charter, any member of the association who does not consent thereto can obtain an injunction restraining the directors and officers from such course of action." In addition, the State can prevent the doing of the unauthorized business and, in a proper case, can revoke the charter of the association on account thereof." At least in cases tried in Federal courts, the fact that an association is acting ultra vires may adversely affect its rights. A cooperative livestock association transacted business with nonmembers in violation of its charter and the Supreme Court of the United States held that the association could not successfully complain of a boycott by dealers in livestock, insofar as the nonmember business was concerned."

An association has implied authority to enter into such contracts and business transactions as are usual or necessary for carrying into effect the exercise of its specific powers, provided they are not inconsistent with the charter or prohibited by statute or public policy."

It is believed that all the States have provisions in their statutes or constitutions covering the revocation of charters of corporations. Independent of such provisions, it is generally held that, if an association or other corporation violates the laws of the State in the conduct of its affairs, the State that granted the charter may revoke it." Those receiving the charter accept it on the implied condition that it will be used for lawful purposes only. It is apparent that a State would never create a corporation to violate its laws; hence revocation of a charter for the violation of such laws appears reasonable.

There are statutes in many States under which a charter which expires at the end of a given period may be renewed. In some instances

40 United States v. American Live Stock Commission Co., 279 U. S. 435, 49 St. Ct. 425, 73 L. Ed. 787.

"McCauley v. Arkansas Rice Growers' Co-op. Ass'n, 171 Ark. 1155, 287 S. W. 419; Galloway v. Mitchell County Electric Membership Corporation, 190 Ga. 428, 9 S. E. 2d 903.

42 People ex rel. Clark v. Milk Producers' Association of Central California, Inc., 60 Cal. App. 439, 212 P. 957.

43 United States v. American Livestock Commission Company, 279 U. S. 435, 49 S. Ct. 425, 73 L. Ed. 787.

44 Kasch v. Farmers' Gin Company, (Tex. Com. App.) 3 S. W. 2d 72; 13 Am. Jur. 773.

15 State ex. inf. Hadley v. Delmar Jockey Club, 200 Mo. 34, 92 S. W. 185, 98 S. W. 539; State ex rel. Crabbe v. Thistle Down Jockey Club, 114 Ohio St. 582, 151 N. E. 709.

these statutes require those voting for renewal to purchase the stock of those voting against renewal."

Generally speaking, a State may, by quo warranto proceedings, inquire into the question whether a corporation, cooperative or otherwise, is exceeding or unlawfully exercising its powers.

In a quo warranto proceeding" involving a cooperative association, it was said:

It certainly is a matter of public concern that a corporation, under the color or guise of a nonprofit concern, is usurping the functions of an ordinary corporation by employing its capital to engage in business for a profit, and is combining with others in the illegal restraint of trade.

De Facto Corporations

As previously pointed out, the incorporation and organization of a cooperative association is a matter demanding careful and competent attention. It is imperative that all requirements be met and that all prerequisites to beginning business be observed.

If the incorporators of an association fail to include in their articles of incorporation all the provisions required by the statute under which they are attempting to incorporate, or if the incorporators fail to observe other statutory requirements for incorporation, generally speaking, in all jurisdictions the State may maintain quo warranto proceedings against the association and thus cause a cancelation of its charter.48

Again, there are instances in which members have been held liable as partners because of defects in the incorporation and organization of corporations. In an Iowa case," decided in 1929, it was held "that

4 Terrell v. Ringgold County Mutual Telephone Company, 225 Iowa 994, 282 N. W. 702; Apsey v. Kimball, 221 U. S. 514, 31 S. Ct. 695, 55 L. Ed. 834. See also Ervin v. Oregon Railway & Navigation Company, 27 F. 625.

47 People ex rel. Clark v. Milk Producers' Ass'n of Central California, Inc., 60 Cal. App. 439, 212 P. 957, 958.

48 13 Am. Jur., P. 192, sec. 45; People v. Montecito Water Company, 97 Cal. 276, 32 P. 236, 33 Am. St. Rep. 172 and note thereto.

40

Wilkin Grain Company v. Monroe County Co-operative Association, 208 Iowa 921, 223 N. W. 899, 902; 225 N. W. 868. For other cases in which stockholders have been held liable as partners because of defective incorporation see: Bergeron v. Hobbs, 96 Wis. 641, 71 N. W. 1056; Hughes Company v. Farmers' Union Produce Company, 110 Neb. 736, 194 N. W. 872, 37 A. L. R. 1314; Fatzer v. K. & N. Inc., (New Jersey Department of Labor-Workmen's Compensation Bureau) 191 A. 291, 15 N. J. Misc. 379; Ogden Packing & Provision Co. v. Wyatt, 59 Utah 481, 204 P. 978, 22 A. L. R. 359. See also: Swofford Bros. Dry Goods Company v. Owen, 37 Okla. 616, 133 P. 193, L. R. A. 1916C 189 and note thereto; 13 Am. Jur., p. 192, sec. 45; and DEFECTIVE FORMATION AND SUITS IN THE CORPORATE NAME, 84 University of Pennsylvania Law Review 514. 1936.

the failure of the Secretary of State to properly certify that he accepted the articles of incorporation was sufficient to and did prevent the institution from becoming a de jure corporation, and made of it a de facto status only."

A creditor who had not dealt with the corporation as a corporation. recovered from stockholders of the corporation as partners. The court said: "Due to the defects of organization, notice of the incorporation was not constructively imparted."

In some jurisdictions liability is imposed by statute upon the members, as partners or otherwise, of an organization which has been defectively formed.50 In some States stockholders or officers of a corporation are liable for its debts if the corporation begins business before the requisite amount of capital has been subscribed. 51

In general, if incorporators of an organization proceed with its incorporation to a stage where a de facto corporation results, the incorporators and stockholders are not personally liable for corporate obligations.52 In order to have a de facto corporation there must be "(1) a valid law under which a corporation with the powers assumed might be incorporated; (2) a bona fide attempt to organize a corporation under such law; and (3) an actual exercise of corporate powers." 53 Difficulties and differences of opinion arise in determining if the steps taken by incorporators and the circumstances involved result in a de facto corporation.54

Aside from the danger of members of a defectively incorporated organization being held personally liable for debts of the organization, it is believed that a cooperative association which is imperfectly organized would be unable to enforce marketing agreements and subscriptions for stock which were signed or made prior to incorporation, because the persons have not contracted to become members of a defective organization.

55

Bylaws

The adoption of bylaws is a matter to be taken up after the creation of an association. The power of a corporation to make bylaws exists

54

Hughes Company v. Farmers' Union Produce Company, 110 Nebr. 736, 194 N. W. 872, 37 A. L. R. 1314.

513 Am. Jur., p. 210, sec. 67; Byronville Creamery Association v. Ivers, 93 Minn. 8, 100 N. W. 387. See also State ex rel. Havner, Attorney General v. Assooiated Packing Company, 216 Iowa 1344, 249 N. W. 761, 90 A. L. R. 1339; but see Farmers Mutual Telephone Company v. Howell, 132 Iowa 22, 109 N. W. 294 (strong dissenting opinion).

at common law. Frequently, however, it is given by the charter or statutes. The statutes of some of the States require that cooperative associations shall adopt bylaws within a certain length of time after their formation. In the absence of a statutory requirement it is not necessary, although highly desirable, for an association to adopt bylaws. The power to adopt bylaws resides in the stockholders or members, and they alone have the power to adopt them in the absence of a provision in the general law or in the charter, placing such power in the hands of a particular body.

If the statute under which an association is incorporated authorizes the making of bylaws on specific subjects, barring constitutional questions, the association may adopt bylaws covering those subjects, but even where the power to adopt bylaws is thus expressly conferred the bylaws should be reasonable and fair.56

Statutory requirements and limitations should be complied with, and bylaws in conflict with them fail.57 Even where bylaws are adopted by unanimous consent of all the stockholders they have been held void if in conflict with the statute.58 It has been held that a bylaw which is not within the limitations of the statute under which the association is incorporated, is invalid at least as to third persons.59 A bylaw is void if it contravenes limitations in the State or Federal constitution.60 A bylaw that is valid when made may be rendered invalid by a statute subsequently adopted."1

The purpose of bylaws is to provide rules for the regulation of the affairs of the corporation. They can make provisions consistent with. law and with the charter for any matter or thing relative to the conduct or business of the corporation. For instance, independent of statute, it has been held that bylaws may provide for liquidated damages,62 a subject that will be discussed later. A bylaw has been upheld which provided that action taken by the board of directors should,

56 Oyster v. Slovene National Benevolent Society of U. S. A., 154 Misc. 19, 278 N. Y. S. 320.

57 Oklahoma Cotton Growers' Ass'n v. Salyer, 114 Okla. 77, 243 P. 232; Noble v. California Prune & Apricot Growers' Ass'n, 98 Cal. App. 230, 276 P. 636; Security Savings & Trust Company v. Coos Bay Lumber & Coal Company, 219 Wis. 647, 263 N. W. 187; Tapo Citrus Association v. Casey, 45 Cal. App. 2d 796, 115 P. 2d 203; Lee v. Farmers Co-op. Ass'n of Mountain View, 189 Okla. 55, 113 P. 2d 391.

Gaskill v. Gladys Belle Oil Company, 16 Del. Ch. 289, 146 A. 337; Security Savings & Trust Company v. Coos Bay Lumber & Coal Company, 219 Wis. 647, 263 N. W. 187.

59

Lewis v. Monmouth County Farmers' Co-operative Association, 105 N. J. Eq. 257, 147 A. 550.

60

61

Spayd v. Ringing Rock Lodge No. 665, 270 Pa. 67, 113 A. 70, 14 A. L. R. 1443. Grisim v. South St. Paul Live Stock Exchange, 152 Minn. 271, 188 N. W. 729.

13 Ex parte Baldwin County Producers' Corporation, 203 Ala. 345, 83 So. 69.

402026°-42- 4

on petition of a percentage of the members, be submitted to them for approval or rejection."

The courts upheld as reasonable, bylaws relative to the nomination of candidates for the office of director, providing

for nominations: First, by the nominating committee of the association, to be posted not less than two weeks prior to the annual meeting; second, by independent nominations, to be posted not less than 5 days prior to such meeting; and, finally, that "no candidates for directors shall be balloted for, other than those proposed in either one of these two ways.”

It has been held that a cooperative association, in the absence of specific statutory authority therefor, may adopt a bylaw under which the association is obligated to repurchase its stock under specified conditions." Bylaws should perform the same function for a corporation or association that a blueprint performs for a builder. They should constitute a working plan for the corporation. Among the matters usually provided for in the bylaws of a corporation are the following: Eligibility requirements for membership, restrictions on the transfer of stock or membership, the right to make specified deductions, provisions for expelling or suspending the rights of members, the time, place, and manner of calling and conducting meetings and the giving of notice thereof, the number of members constituting a quorum, the qualifications, terms of office, and duties of directors and officers and their compensation, if any, and suitable penalties for violation of the bylaws. A bylaw must be general in its application and not aim at a particular member. Where stock in a mutual ditch company was acquired after ascertaining that the company did not have a bylaw prohibiting the transfer of water from one tract of land to another without the approval of the board of directors, a bylaw adopted by the board of directors immediately after the acquisition of such stock, prohibiting such a transfer, was held arbitrary and unreasonable.67

Bylaws should be distinguished from rules adopted for the guidance of the public dealing with the association. The members of a corporation and its directors and officers usually are conclusively presumed to have notice of bylaws, and of what they contain, and hence

Callaway v. Farmers Union Cooperative Association of Fairbury, 119 Neb. 1, 226 N. W. 802.

64

In re O'Shea, 241 App. Div. 699, 269 N. Y. S. 840.

Loch v. Paola Farmers' Union Co-operative Creamery & Store Association, 130 Kan. 136, 285 P. 523, (rehearing denied, 130 Kan. 522, 287 P. 269). See also Whitney v. Farmers' Co-op. Grain Co., 110 Neb. 157, 193 N. W. 103.

Budd v. Multnomah St. Ry. Co., 15 Ore. 413, 15 P. 659, 3 Am. St. Rep. 169. Costilla Ditch Company v. Excelsior Ditch Company, 100 Colo. 433, 68 P. 2d