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Antiquity of Corporations

The idea of a corporation is an old one. It is said to have been originated by the Romans, although there is not entire agreement among law writers on this point. Corporations were known to the Greeks and Romans centuries before the Christian era. Before the Norman conquest (1066) there existed in England organizations having many of the elements of corporations. Churches were among the first of these organizations. It was not until the middle of the seventeenth century that the large trading corporations of England came into existence. Chief among these was the Hudson's Bay Company, which is in active business today.

Power To Create Corporations

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The power of creating corporations resides in the sovereign. In England they were originally created by the King; later they were created by acts of Parliament with the express or implied assent of the King.11 In this country the power to create corporations belongs to each State and the Federal Government. A State legislature may create a corporation or provide for its creation for any proper purpose and may confer upon it such powers as it sees fit, subject only to such restrictions as are found in the State and the Federal Constitutions.1 Congress may create corporations whenever they are necessary or proper agencies for carrying into execution any of the powers conferred by the Constitution upon the Government of the United States.13 Congress, because it has exclusive jurisdiction over the District of Columbia, has the same power to create corporations within the District that a State has to create corporations within its borders.1

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Formerly all corporations in this country were created by special enactments; that is, a special act was passed by the legislature of the State every time a corporation was created. It was believed that this practice led to favoritism and unjust discrimination,15 and practically all the States now have in their constitutions provisions prohibiting, with certain exceptions in some States, the creation of corporations by special acts.

Every State now has general statutes which authorize and provide for the formation of corporations. The statutes of some States are broad and permit the formation of corporations to engage in practically every form of lawful activity. Some statutes, however, permit only the incorporation of particular types of corporations or of corporations to engage in certain lines of business. Even though a business is lawful, if provision is not made for the formation of corporations to engage in that business, they cannot be incorporated in that State.

Those who wish to form a corporation must meet the terms and conditions prescribed by the State. The power of the State in this matter is supreme.16 The legislature can grant just as little or just as much power to corporations, within constitutional limits, as it desires. A cooperative

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12 New Orleans Gas Co. v. Louisiana Light Co., 115 U. S. 650, 6 S. Ct. 252, 29 L. Ed. 516; Northern Securities Co. v. United States, 193 U. S. 197, 24 S. Ct. 436, 48 L. Ed. 679.

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McCulloch v. The State of Maryland, 4 Wheat. 316, 4 L. Ed. 314.

Georgetown v. Alexandria Canal Co., 12 Pet. 91, 9 L. Ed. 1012.

15 Wells, Fargo & Co. v. Northern Pac. Ry. Co., 23 F. 469.

16

City Properties Co. v. Jordan, 163 Cal. 587, 126 P. 351.

17 Kansas Wheat Growers' Association v. Schulte, 113 Kan. 672, 216 P. 311; Rifle Potato Growers' Coop. Association v. Smith, 78 Colo. 171, 240 P. 937.

412528°-58-3

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was incorporated under a statute of Pennsylvania which, among other things, provided that all business of associations incorporated under it, except certain enumerated types, should be for cash, and that all persons who extended credit to such associations except for specified purposes should forfeit the amount of the credit thus extended. The statute required that notice to this effect be published on the letter and billheads, advertisements, and other publications of associations incorporated thereunder. Debts for purposes not contemplated by the statute were incurred by an association, and the creditors sought to throw the association into bankruptcy, but failed, as the court held that they had no claims which could be recognized in bankruptcy, owing to the provision in the statute referred to.

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In a California case, the validity of a statute providing for the forfeiture of the charters of all corporations which failed to pay a certain tax by a specified date was upheld.19 A State can determine upon what conditions corporations formed in other States may do an intrastate business within its borders.20 A corporation engaged in interstate commerce may enter any State for all the legitimate purposes of such commerce without the leave or license of the State.21

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At one time the various States did not have statutes which were peculiarly adapted to the formation of associations, but during the last three decades many statutes have been passed by the State legislatures to provide for the formation of cooperatives." Each State now has one or more such statutes. The right of States to enact statutes providing for the formation by farmers of cooperatives and containing no authority for those engaged in other occupations to organize under them appears to be established. The Supreme Court of the United States has said: "Undoubtedly the State had power to authorize formation of corporations by farmers for the purpose of dealing in their own products." 23 Although corporations are now, as a rule, formed under general statutes, the act involved in bringing them into existence is regarded as a legislative one, and the rules relative to statutes are applied by the courts in construing charters.24

Blue Sky Laws

A cooperative should ascertain if any plan which it intends to follow in obtaining capital is subject to the blue sky laws of a State in which sales or contracts will be made. "Blue Sky Law" is a popular name for an act providing for the regulation and supervision of investment securities sold to the public.

18 In re Wyoming Valley Coop. Association, 198 F. 436. See also Sterling v. Trust Co. of Norfolk, 149 Va. 869, 141 S. E. 856.

19 Kaiser Land & Fruit Co. v. Curry, 155 Cal. 638, 103 P. 341.

20

Burley Tobacco Growers' Cooperative Association v. Rogers, 88 Ind. App. 469, 150

N. E. 384.

21 Dahnke-Walker Milling Co. v. Bondurant, 257 U. S. 282, 42 S. Ct. 106, 66 L. Ed. 239; Nebraska Wheat Growers' Association v. Norquest, 113 Neb. 731, 204 N. W. 798; Dark Tobacco Growers' Coop. Association v. Robertson, 84 Ind. App. 51, 150 N. E. 106.

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Copies of the statutes of a particular State on this subject can be obtained usually by writing to the secretary of state of that State. Good examples of recent revisions are the short form statute enacted in New York in 1950 and the more detailed statute enacted in Wisconsin in 1955.

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Liberty Warehouse Co. v. Burley Tobacco Growers' Coop. Association, 276 U. S. 71, 48 S. Ct. 291, 72 L. Ed. 473, affirming 208 Ky. 643, 271 S. W. 695.

24 Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N. W. 754; Lord v. Equitable Life Assurance Soc. of United States, 194 N. Y. 212, 87 N. E. 443, 22 L. R. A. (N. S.) 420.

In a number of States the securities issued by marketing and farm supply 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.2 25

In Oregon it was held that the blue sky law of that State, by its terms, did not apply to certain transactions involving cooperatives. 26

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.27

Some of the blue sky laws apply to unincorporated as well as incorporated associations and some apply to nonstock corporations.28 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.29

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 least voidable in the hands of any person who is not a bona fide holder.30

In Illinois, as the blue sky law of the State had not been complied with, a purchaser of stock in a cooperative recovered the sale price of the stock from the agent of the cooperative after it became insolvent.31

Where a corporation issued stock without complying with the blue sky 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 from asserting that he was not a stockholder.32

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

25 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. In State ex rel. Arn v. Consumers Coop. Association, 163 Kan. 324, 183 P. 2d 423, it was held that common stock, preferred stock, and securities entitled "certificates of indebtedness" issued by the cooperative had to be registered under the Kansas "Blue Sky Act," but that "Deferred Patronage Refund Certificates" issued to patrons did not have to be registered since their issuance for savings did not constitute a "sale" of a security.

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

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

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

29

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

30 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.

31 Morrison v. Farmers' Elevator Co., 319 Ill. 372, 150 N. E. 330.

32

Winfred Farmers' Company v. Smith, 47 S. D. 498, 199 N. W. 477.

those who would purchase its stock in reliance upon some of its provisions." 33

It has been held that, where a cooperative 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.34

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,35 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.

Name of Association

It is essential that a corporation have a name under which it will transact its business. This is necessary for purposes of identification. Generally speaking 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 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.36

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 37 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."

A number of State statutes providing for the incorporation of farmer cooperatives contain provisions requiring the use of the word "cooperative"

National Cooperative Farm Loan Company v. Hirning, 40 S. D. 448, 167 N. W. 1055.

34 Howard v. Corn Belt Farmers' Cooperative Association, 225 Ill. App. 449. See also Coe v. Portland Farmers' Elevator Company, 236 Mich. 34, 209 N. W. 829. Farmers' Union Cooperative Royalty Co. v. Little, 182 Okla. 178, 77 P. 2d 33. See also Farmers' Union Cooperative Royalty Company v. Southward, 183 Okla. 402, 82 P. 2d 819.

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

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.

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in the corporate name. Many others permit the use of that word but do not require it. 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 that State statute. Some of these laws include a provision which permits corporations, organized under similar laws in other States, to use a corporate name with the word "cooperative" when admitted to do business in the State. Others have no such provision and in some cases the law is interpreted as prohibiting a cooperative, organized in another State and having the word "cooperative" in its name, from being admitted to do business in the State.3 Accordingly, in organizing a cooperative, it may be advisable to omit the word "cooperative" from the name if the State statute permits, particularly if the corporation being organized plans to do business on a national scope. 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 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."

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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,11 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;

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See sec. 22 of Bingham Cooperative Marketing Act of Kentucky, p. 306 of the Appendix. The Oregon Supreme Court, construing the 1913 cooperative law of that State, held that a provision forbidding the use of the term "cooperative" by a corporation already organized was unconstitutional as an impairment of the obligation of contracts. Lornstsen v. Union Fishermen's Coop. Packing Co., 71 Ore. 540, 143 P. 621.

39 Cf. Tool Owners Union v. Roberts, 76 N. Y. S. 2d 239, 190 Misc. 577.

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

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