become ineligible to be directors have been held to be de facto directors.62 When a corporation in pursuance of action taken by a de facto board of directors entered into a contract with a person who was acting in good faith, the contract was binding on the corporation.63

Ordinarily, it would appear to be better practice and procedure for the bylaws of an association to provide that a person ceases to be a director upon action being taken either by the board of directors or by the membership.

64

A director or officer of an association at common law may resign at will, and a statute providing that directors shall hold office for 1 year and until their successors have been elected and qualified does not prevent resignation during the year.65

A director of a cooperative, like the director of any other corporation, is not by reason of this fact an agent of the cooperative, insofar as transactions with third persons are concerned, and where the maker of a note held by an association paid one of its directors, this did not constitute payment to the association.66

It has been held that a contract entered into by a corporation under which its management and control is turned over to another and the power of its board of directors is in effect suspended is invalid, as against public policy.“

A cooperative was authorized by its charter to buy and sell grain. It was held that this might be done on a board of trade operating under the Federal Grain Futures Act 68 and the fact that losses resulted from such transactions did not render the directors personally liable.69

62

In re Ringler & Company, 204 N. Y. 30, 97 N. E. 593, Ann. Cas. 1913c, 1036; Richards v. Farmers' & Mechanics' Institute of Northampton County, 154 Pa. 449, 26 A. 210, 35 Am. St. Rep. 848.

6 Richards v. Farmers' & Mechanics' Institute of Northampton County, 154 Pa. 449, 26 A. 210, 35 Am. St. Rep. 848.

Ewald v. Medical Society, 130 N. Y. S. 1024, 70 Misc. 615, reversed on other grounds 128 N. Y. S. 886, 144 App. Div. 82.

63

Briggs v. Spaulding, 141 U. S. 132, 11 S. Ct. 924, 35 L. Ed. 662.

66 Hudson Co-operative Loan Association v. Horowytz, 116 N. J. L. 605, 186 A. 437.

Sherman & Ellis v. Indiana Mutual Casualty Company, 41 F. 2d 588. See also Continental Oil Company v. Jones, 26 F. Supp. 694.

Clark v. Murphy, 142 Kan. 426, 49 P. 2d 973. See also South Carolina Cotton Growers' Co-op. Ass'n v. Weil, 220 Ala. 568, 126 So. 637; Burch v. South Carolina Cotton Growers' Co-op. Ass'n, 181 S. C. 295, 187 S. E. 422.

Compensation of Directors

The directors of an association have no inherent power to fix their own compensation as directors or, if they are officers, their salaries or other compensation as officers.70 In other words, unless the statute under which an association is formed, its articles of incorporation, or an authorized bylaw, permits directors to fix their own compensation, they do not have such authority, but in some instances authority to determine the salaries of officers is placed by statute in the board of directors. This authority is possessed by the members of an association, who may, through appropriate bylaws or otherwise, either fix the compensation of the directors of an association or authorize the fixing of such by the board of directors. Both the directors and the officers of a corporation are presumed to act without compensation in performing the duties of their offices unless provision for compensating them has been made, but if any of them are working regularly for the corporation with respect to matters not involving their duties as directors or officers, it will be assumed that reasonable compensation will be made by the corporation for such services.72

71

Many of the cooperative statutes state that "an association may provide a fair remuneration for the time actually spent by its officers and directors in its service." In this language, or in language similar thereto, the word association 7 means members; and under such language the directors or officers are not authorized to fix their own. salaries or compensation. The bylaws should contain suitable provisions on this subject.

Meetings of the Board

How must the directors who compose the board act to bind the association? 66* * * in order to bind the corporation, the board must act and act as a board either in a regular session or in a special session called for the purpose." In other words, the rule is established that in matters affecting the property or policies, or involving the exercise of discretion, the directors can bind the association only when acting as a board in a properly convened meeting. A director merely by virtue

70 Bennett v. Klipto Loose Leaf Co., 201 Iowa 236, 207 N. W. 228; Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516; Security Savings & Trust Company v. Coos Bay Lumber & Coal Company, 219 Wis. 647, 263 N. W. 187.

First National Bank of Allen v. Daugherty, 122 Okla. 47, 250 P. 796.

72 Navco Hardwood Co. v. Bass, 214 Ala. 553, 108 So. 452.

73 Railway Company v. Allerton, 85 U. S. 233, 21 L. Ed. 902.

74 Jackson v. Bonneville Irr. Dist., 66 Utah 404, 243 P. 107, 111; Honaker v. New River, H. & W. R. Co., 116 Va. 662, 82 S. E. 727; Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122; Raish v. Orchard Canal Co., 67 Mont. 140, 218 P. 655.

of his office has no authority to act for or bind an association except in meetings of the board of directors; and if a director by virtue of his office should attempt, for instance, to release a member from his contract the act would be void.75

Even a majority of the board acting as individual directors or in a "board meeting," illegal for any reason, cannot bind the association.76 In an Arkansas case" a cooperative association executed a general assignment but as it was "authorized" at an illegal meeting of its directors the assignment was void as against an attaching creditor. This was in accordance with the general rule under which a stockholder director, officer, the corporation itself, or a creditor may question the validity of transactions based on action taken at a meeting of a board of directors which was illegal for any reason.

It is highly important, therefore, for the officers of cooperative associations to be authorized by their boards of directors at legal meetings to transact the business in which they engage; and, likewise, associations in dealing with other corporations should satisfy themselves that the officers of such corporations are legally authorized to act.78 Action by directors at an illegal board meeting may be adopted and ratified at a later legal meeting of the board, but directors who were not notified of a board meeting cannot later, as individuals, waive the failure to give notice or concur in the action taken at the illegal meeting so as to bind the association. It appears that a director may waive notice of a board meeting prior thereto,80 but this cannot be done subsequently so as to validate the action taken. If a director has notice, and fails to attend the board meeting, his absence does not affect action taken, provided a qualified quorum was present.

Quorum

79

What constitutes a quorum of the board of directors? At common law and in the absence of a statutory, charter, or bylaw provision changing the rule, the general rule is that a majority of directors of a corporation who are not personally interested in the subiect before

75

California Canning Peach Growers v. Harris, 91 Cal. App. 654, 267 P. 572; see Annotation "Informality of meeting of directors as affecting action taken thereat," 64 A. L. R. 712.

76 United States v. Interstate R. Co., 14 F. 2d 328.

"Simon v. Sevier County Co-operative Association, 54 Ark. 58, 14 S. W. 1101. 78 See also Red Bud Realty Company v. South, 96 Ark. 281, 131 S. W. 340; Annotation "Informality of meeting of directors as affecting action taken thereat," 64 A. L. R. 712, 726.

79

80

United States v. Interstate R. Co., 14 F. 2d 328.

Holcombe v. Trenton White City Co., 80 N. J. Eq. 122, 82 A. 618; United States v. Interstate R. Co., 14 F 2d 328.

the board, and who are otherwise qualified, is necessary to constitute a quorum of the board of directors for the transaction of business.81 Thus, if a majority of qualified directors or the number, if any, specified in the statute, the charter or the bylaws, do not attend a duly called board meeting, any business transacted by the minority at such meeting is at least voidable. Directors cannot vote by proxy.82 It has been held that a transaction may not be successfully attacked by one who is not a party thereto because a quorum of the board of directors was not present at the meeting of the board at which it was "authorized.” 83

If a qualified quorum is present at a properly convened board meeting, a majority thereof at common law may exercise any powers vested in the board of directors.8 84 There ceases to be a quorum when a director who is necessary to a quorum withdraws from a meeting. It has been held that the failure of a director to vote upon a proposition before the board, if his vote is necessary in order to consitute a quorum, results in no quorum with respect to that matter.85 On the other hand, in some States a director present but not voting is counted for the negative. If a statute or bylaw requires, say a two-thirds vote of the members present, the failure of members present to vote renders the action taken a nullity if two-thirds of those present do not vote therefor.87

86

All the foregoing is based upon the theory that each director who attends the meeting is qualified to act because "All of the directors constituting a quorum must be qualified to act. If one of the directors whose presence is necessary to constitute a quorum, or whose vote is necessary to constitute a majority of a quorum, is disqualified by reason of his personal interest, any act done by the body is invalid," 88 or at least voidable. Some courts apparently hold that

81 In re Webster Loose Leaf Filing Co., 240 F. 779; Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620; Cardin Bldg Co. v. Smith, 125 Okla. 300, 258 P. 910.

82 Haldeman v. Haldeman, 176 Ky. 635, 197 S. W. 376; In re Acadia Dairies, Inc., 15 Del. Ch. 248, 135 A. 846.

83 Robertson v. Hartman, 6 Cal. 2d 408, 57 P. 2d 1310.

84

In re Webster Loose Leaf Filing Co., 240 F. 779.

85

86

North Louisiana Baptist Ass'n v. Milliken, 110 La. 1002, 35 So. 264.

Commonwealth v. Wickersham, 66 Pa. 134; Stephany v. Liberty Cut Glass Works, 76 N. J. Law 449, 69 A. 967.

St James R. Kirby Post No. 50 v. American Legion, 258 Mass. 434, 155 N. E. 462. 88 In re Webster Loose Leaf Filing Co., 240 F. 779, 785; Smith v. Los Angeles I. & L. Co-op. Ass'n, 78 Cal. 289, 20 P. 677, 12 Am. St. Rep. 53; Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516; Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620.

a director who is personally interested in a proposition may be counted in determining if a quorum was present at the time the proposition was voted upon, leaving its validity, after subjecting it to severe scrutiny, to depend upon its fairness toward, and effect upon, the corporation, with the burden of showing its fairness on the director.89

Conflicting Personal Interests

If a resolution is adopted on a vote of interested directors, the resolution generally is voidable at the option of the association, if timely action with respect thereto is taken, and at least in some jurisdictions the "rule is equally applicable where the interests of other persons, not directors, are affected by the resolution." 90

In fact, in some jurisdictions, if a member of a board of directors votes upon a proposition which is adopted and in which he has a personal interest, the action of the board may be set aside by the corporation, although the resolution would have been adopted apparently without the vote of the interested directors, and in some States, a resolution of the type in question may be set aside by nonconsenting members of the corporation.

95

92

91

As illustrating matters that would disqualify directors of an association from voting, if personally interested, or would at least bring the validity of the transaction into question, may be mentioned the sale of property of a director to the association, the giving of a mortgage on association property to a director,94 the execution of association notes to him, or any transaction in which the personal interests of the director would be adverse to those of the association 96 "In such cases, the court will not pause to inquire whether a director or trustee has acted fairly or unfairly; being interested in the subject matter, he may not as a trustee or director deal with himself and thus be subjected to the temptation to advance his own interest." 97

89 Nicholson v Kingery, 37 Wyo. 299, 261 P. 122.

90 Consumers' Ice & Coal Co. v. Security Bank & Trust Co., 170 Ark. 530, 280 S. W. 677, 684.

93

Dean v. Shingle, 198 Cal. 652, 246 P. 1049, 46 A. L. R. 1156.

In re Webster Loose Leaf Filing Co., 240 F. 779.

95 Smith v. Los Angeles I. & L. Co-op. Ass'n, 78 Cal. 289, 20 P. 677, 12 Am. St. Rep. 53.

9 Wardell v. Railroad Co., 103 U. S. 651, 26 L. Ed. 509.

97 In re Webster Loose Leaf Filing Co., 240 F. 779, 785; Shakespear v. Smith, 77 Cal. 638, 20 P. 294, 11 Am. St. Rep. 327.