the limitations to which the stock is subject. Where an association adopts restrictions for the purpose of confining its voting membership to producerpatrons, it is believed that such restrictions are binding on all new members and on old members who voted in favor of their adoption.'

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.77 Moreover, in a number of instances, actions have been brought by various States to forfeit the charters of associations which were defectively organized.

Since cooperatives are incorporated under State cooperative marketing acts, necessarily 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 cooperatives provides that the general corporation law of the State, except where inconsistent with the cooperative statute, is also applicable to such associations. 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.

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.79

The incorporators are the charter members of an association. By virtue of being the incorporators, they are, generally speaking, members.80 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

76 See Reorganization of Association, p. 62.

77

78

See Subscribers, Stock, Capital Stock, p. 42.

Sagness v. Farmers' Cooperative Creamery Company, 67 S. D. 379, 293 N. W. 365; Schoenburg v. Klapperich, 239 Wis. 144, 300 N. W. 237.

79 See Blue Sky Laws, p. 26.

80 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, 6 Abb. N. C. 258; Kardo Co. v. Adams, 231 F. 950; Beck v. Stimmel, 39 Ohio App. 510, 177 N. E. 920.

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 usually advises it regardits 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 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 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 directors 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 an 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 cooperatives must face are essentially business problems and 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, 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 cooperatives are a particular type of corporation, just as incorporated commercial concerns or charitable organizations are particular types. As nearly all farmer 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 cooperatives, stock and nonstock,81 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 cor

81

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.

poration 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 is that given by Chief Justice Marshall in the Dartmouth College case,82 in which he defines a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of the law." "A corporation is an artificial being, separate and distinct from its agents, officers, and stockholders." 83 Just as Smith and Jones are different persons, so a corporation is normally a legal entity distinct from its agents, officers, stockholders, or members.84 In a case arising under the Fair Labor Standards Act,85 it was held that a cooperative association was not a farmer just because its members were. 86 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.87 They cannot transfer the legal title thereto, although all of them join in the execution of papers purporting to transfer the property.

88

90

It can be done only through the proper officers or agents of the corporation. A corporation can act only through its officers or agents,89 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.90 Neither can he if not an attorney, it has been held, represent the corporation in court. A stockholder as such is not an agent of the corporation.9 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 of a certificate of membership or of stock, whether common or preferred, is not evidence of indebtedness 93 but merely of ownership. It has been said that "the stock

91

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

83

92

Lange v. Burke, 69 Ark. 85, 61 S. W. 165; Aiello v. Crampton, 201 F. 891; McCaskill Co. 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. Rutledge Cooperative Association, Inc. v. Baughman, 153 Md. 297, 138 A. 29, 56 A. L. R. 1042.

84

85 29 U. S. C. A. 201 et seq.

86

Walling v. McCracken County Peach Growers Association, 50 F. Supp. 900.

87 Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69, 46 S. Ct. 256, 70 L. Ed. 475, 43 A. L. R. 1374; Wabash Ry. Co. v. Amer. Refrigerator Transit Co.,

7 F. 2d 335; Adams v. Farmers' Gin Company, 114 S. W. 2d 583 (Tex. Civ. App.).

88

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

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

90

Button v. Hoffman, 61 Wis. 20, 20 N. W. 667, 50 Am. Rep. 131; City of Winfield v. Wichita Natural Gas Co., 267 F. 47.

91

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

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

93

Sternbergh v. Brock, 225 Pa. 279, 74 A. 166, 24 L. R. A. (N. S.) 1078; Wineinger

v. Farmers & Stockmen's Loan & Investment Association, 278 S. W. 932 (Tex. Civ. App.), affirmed in 287 S. W. 1091 (Tex. Com. App.).

9 94

96

holders are the beneficial owners of the assets of the corporation.' Normally, if one corporation owns all the stock of another corporation, a subsidiary, the courts regard the two corporations as separate and distinct.95 One organization is not responsible for damages caused by another where the latter, although chartered by the former, functions independently." It has been held that a claim against one corporation cannot be used as a setoff in a suit brought by another corporation, although both have common officers, directors and agents and one is alleged to be a subsidiary of the other.97

However, if the subsidiary is not in all respects carried on as a separate, distinct, independent corporation, and if it appears that it is simply acting as agent for the parent corporation, the latter may be held liable on contracts entered into by the subsidiary with third persons.98 In a Montana ,99 the corporate entity of the subsidiary was said to be in "abeyance," when all the stock was owned by one parent corporation, and the parent was taxed on the subsidiary's property.

case,

If the corporate form is being used as a cover or medium for effecting a fraud or working an injustice, the courts will disregard the separate entity of the corporation and will hold the persons interested therein liable or responsible.1

Under some circumstances the courts disregard the corporate fiction. In a proceeding instituted by the Federal Trade Commission, it was held that where retail dealers had formed a cooperative corporation all of whose stock was held by them, which corporation acted as their agent for purchasing purposes, this did not operate to cause the corporation to be a wholesaler.2

The courts are unwilling to allow one corporation to use another corporation for the purpose of evading its legal obligations. In an Oregon case 3 it was said:

The formation of the later corporation was a subterfuge resorted to by the older corporation only for the purpose of evading the agreement of said older corporation to purchase its entire requirement of said commodity from plaintiff, and that said later corporation is but a continuation of the former, under a slightly different name.

94 Aransas Pass Harbor Co. v. Manning, 94 Tex. 558, 63 S. W. 627. See also: Pacific Fire Insurance Company v. John E. Morris Company, 12 S. W. 2d 971 (Tex. Com. App.).

95 Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U. S. 333, 45 S. Ct. 250, 69 L. Ed. 634; People v. American Bell Telephone Co., 117 N. Y. 241, 22 N. E. 1057. 96 Farmers' Educational and Cooperative Union of America v. Eakins, 188 Okla. 324, 108 P. 2d 182.

97

Hollingsworth v. Georgia Fruit Growers, Inc., 55 Ga. App., 541, 190 S. E. 802, 185 Ga. 873, 196 S. E. 766.

98 Whitehurst v. FCX Fruit & Vegetable Service, Inc., 224 N. C. 628, 32 S. E. 2d 34.

99 Commercial Credit Co. v. O'Brien, 115 Mont. 199, 146 P. 2d 637.

1

Mosher v. Salt River Valley Water Users' Association, 39 Ariz. 567, 8 P. 2d 1077; McCaskill Co. v. United States, 216 U. S. 504, 30 S. Ct. 386, 54 L. Ed. 590; First National Bank of Chicago v. F. C. Trebein Co., 59 Ohio St. 316, 52 N. E. 834; State Trust & Savings Bank v. Hermosa Land & Cattle Co., 30 N. M. 566, 240 P. 469; Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N. W. 1024, 60 L. R. A. 927. See also: Continental Oil Company v. Jones, 26 F. Supp. 694; Hollywood Cleaning & Pressing Company v. Hollywood Laundry Service, 217 Cal. 124, 17 P. 2d 709.

2

Mennen Company v. Federal Trade Commission, 288 F. 774, 30 A. L. R. 1120, certiorari denied 262 U. S. 759, 43 S. Ct. 705, 67 L. Ed. 1219.

3

Dairy Cooperative Association v. Brandes Creamery, 147 Ore. 488, 30 P. 2d 338, 342, 147 Ore. 503, 30 P. 2d 344. See also Manatee County Growers' Association v. Florida Power and Light Company, 113 Fla. 449, 152 So. 181; Citizens Mutual Fire & Lightning Insurance Society v. Schoen, 105 S. W. 2d 43 (Mo. App.).

The court, therefore, enjoined the successor corporation from violating the terms of a contract entered into by the predecessor corporation with a dairy cooperative obligating the predecessor corporation to obtain all the dairy products needed for meeting its requirements therefrom.

It has been held that a rural electric cooperative can acquire all the securities of an electric utility company and operate the company without violating the provisions of the New Hampshire law. The court did not accept the argument that this permitted the cooperative to do indirectly certain things it could not do directly under the applicable statutes.

The stockholders or members of a corporation, whether stock or nonstock, are not generally liable for its debts. Ordinarily a majority of the stockholders of an association may not obligate nonconsenting stockholders to supply additional capital to an association.5

The fact that stockholders authorize the corporate officers to incur corporate indebtedness and execute corporate obligations does not render them liable for the contribution of proportionate amounts of liability incurred by the directors on behalf of the corporation. In all jurisdictions, however, stockholders or members can be compelled to pay the amount which they have agreed to pay for stock of the corporation or for membership in it. Sometimes, as in New Jersey, the law permits the organization of associations with limited liability by the stockholders or members for debts of the corporation. In Minnesota the constitution formerly imposed double liability on the stockholders of all corporations except those engaged solely in manufacturing.

In every case the constitution and statutes of the State should be examined to determine the exact liability of stockholders or members in that State. The Supreme Court of the United States has held that an organization may be a corporation, although its stockholders are liable for its debts. But, as a general rule, the stockholders of a corporation are not liable for its debts. From this fact results one of the great advantages of incorporation. It enables a man to venture a definite sum of money in a business without risk of losing more in case the business fails. Persons dealing with a corporation are charged with notice of its charter and the statutes of the State regulating its powers and duties.10

Every corporation suggests group effort on the part of those interested. Each of several of the large industrial corporations has more than 100,000 stockholders. The united effort in such organizations consists largely in the pooling of the money paid by stockholders for stock. If each of the original stockholders of one of these corporations had acted singly and independently in attempting to establish and increase the particular business involved, much less progress would probably have been made than was accomplished through the corporation.

4

5

Petition of White Mountain Power Co., 96 N. H. 144, 71 A. 2d 496.

Farmers' Coop. Union v. Alderman, 126 Kan. 299, 267 P. 1110.

6

Fulton v. Farmers' Union Exchange, 207 Iowa 371, 222 N. W. 889.

74 N. J. S. A. 13-25.

8 Lindeke v. Scott County Cooperative Company, 126 Minn. 464, 148 N. W. 459;

In re Farmers' Dairy Company's Receivership, 177 Minn. 211, 225 N. W. 22.

9

10

Liverpool Ins. Co. v. Massachusetts, 10 Wall. 566, 77 U. S. 566, 19 L. Ed. 1029. Sterling v. Trust Company of Norfolk, 149 Va. 867, 141 S. E. 856; Stuttgart Cooperative Buyers Association v. Louisiana Oil Refining Corporation, 194 Ark. 779, 109 S. W. 2d 682.