precedent to organization have not been complied with, the question arises whether the association will be able to enforce its marketing agreement, as well as whether it will be able to hold the subscriber for his subscription to capital stock. Cases involving the right of an association to enforce its marketing agreements because of some defect in the organization procedure are considered elsewhere.69

How Stock Is Paid For

Stock, as a rule, may be paid for with cash, other property, or labor. In most States there are statutory provisions relative to paying for stock otherwise than with cash, and these should be ascertained and carefully followed. In some States the cooperative statutes provide substantially as follows:

No association shall issue stock to a member until it has been fully paid for. The promissory notes of the members may be accepted by the association as full or partial payment. The association shall hold the stock as security for the payment of the note; but such retention as security shall not affect the member's right to vote.70

In the absence of charter or statutory provisions, stock may be issued in payment for property, but the property should be worth the par value of the stock received for it. It is the general rule that for a payment for stock to be good against the corporation or creditors thereof, it must be paid for in money or what may fairly be considered the equivalent of the money value.1

Stock and Nonstock Associations

A stock corporation is a corporation that has capital stock. As evidence of these shares certificates of stock are usually issued. The owners of these certificates of stock, by acquiring them, become the shareholders or stockholders, and thus become the "owners" of the corporation.

Capital stock and stock certificates are generally regarded as characteristics of a business corporation. That is, business corporations usually have capital stock and usually issue certificates of stock. This is not necessarily true. For corporations are creations of the legislature and it can, within constitutional limitations, endow them with such powers and limitations as seem advisable. The State, then, can create business corporations without the elements mentioned. This is not generally done, but the power to do so undoubtedly exists. In short, the legislature has complete control, within constitutional limitations, of the creation of corporations. It may make no provision for their creation, or it may grant to those created closely limited or very wide powers.

Nonstock corporations do not have capital stock and, aside from agricultural and other cooperatives, usually are not commercial organizations. They generally issue to their members certificates of membership evidencing the right of the members in the corporation. Some of the more common types of corporations of this class are incorporated churches, clubs, or social organizations.

In the early history of business corporations having capital stock, certificates of stock evidencing the shares into which the capital stock of the corporation has been divided were not issued, but as time went on some corporations issued certificates of stock evidencing the interest of shareholders in the corporation.

69 See When Marketing Contracts Become Effective, p. 99.

70 See sec. 14 of Bingham Cooperative Marketing Act of Kentucky, p. 304 of Appendix.

In re Manufacturers' Box & Lumber Co., 251 F. 957.

The convenience and desirability of stock certificates which could be readily transferred from hand to hand were so apparent that it soon came to be looked upon as a right of a member of a business corporation to have certificates of stock issued to him. And now purchasers of stock may generally require the corporation to issue certificates of stock.72

From an early date stock certificates were assigned and transferred, and this assignability is generally regarded as one of their leading qualities. In general, the policy of the law is opposed to restraint on the disposition or sale of property. The courts, however, have upheld restrictions on the right of members to transfer shares of stock. At common law, shares of stock are regarded as personal property capable of sale, transfer, or succession in any of the ways by which personal property may be transferred.73

On the other hand, the interest which a member has in a nonstock corporation, which is usually evidenced by a certificate of membership, is not transferable at common law. In a certain case the plaintiff acquired a certificate of membership from one who was formerly a member of a nonstock corporation, but it was held that this did not constitute the plaintiff a member of the corporation. Certificates of membership may be made transferable by statute, by charter, or by authorized bylaws, but in the absence of specific provisions on the subject they are not transferable. Fundamentally, therefore, certificates of membership are not transferable, whereas shares of stock fundamentally are transferable.

Churches were among the first organizations to be incorporated. It is obvious that church membership, from its peculiar personal quality, is essentially nontransferable. This personal element, which is so apparent in the case of church organizations and in social clubs and kindred organizations, may have been responsible for the establishment of the concept, both in the decisions of the courts and in the minds of the people, that membership in a nonstock corporation is not assignable. This principle is basic, and in the absence of special provision on the subject, is applicable. In view of the foregoing, it is apparent that fundamentally a nonstock association can control its membership better than can a stock association.

At common law the stock of a member of a corporation cannot be forfeited and the member expelled from the corporation, whereas nonstock corporations possess the inherent right to expel members for cause.75 This right was recognized from an early date as one of the inherent powers of a nonstock corporation. Without any charter or statutory provisions on the subject, a nonstock corporation may for cause expel members, but this is not true with respect to a stock corporation. If the charter of a nonstock corporation is silent on the power of expulsion and there are no statutory provisions on the subject, the decided weight of authority is that a member may be expelled for only three reasons: (1) Offenses of an infamous nature indictable at common law; (2) offenses against the member's duty to the corporation; (3) offenses compounded of the two.76 Unless otherwise provided by law, the right of expulsion is in the membership."

72 Mutual Telephone Co. v. Jarrell, 220 Ky. 551, 295 S. W. 865.

732 Cook on CORPORATIONS, 8th ed., sec. 331; Mobile Mut. Ins. Co. v. Cullom, 49 Ala. 558; Boston Music Hall v. Cory, 129 Mass. 435.

American Live-Stock Commission Co. v. Chicago Live-Stock Exchange, 143

Ill. 210, 32 N. E. 274, 18 L. R. A. 190, 36 Ann. St. Rep. 385.

75

8 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed., sec. 5696.

76 State ex rel. Graham v. Chamber of Commerce, 20 Wis. 68.

State ex rel. Boldt v. St. Cloud Milk Producers' Association, 200 Minn. 1, 273 N. W. 603.

In the absence of restrictions in the charter, contracts, or bylaws of a nonstock corporation or of a statutory provision on the subject, a member may withdraw at any time, and no acceptance is required." On the other hand, shareholders of a corporation having capital stock cannot, strictly speaking, withdraw from the corporation."

79

This brief sketch on the differences between stock and nonstock corporations explains why a stock corporation is generally thought of as a commercial organization; that is, as an organization in which money, rather than the personnel of the membership, is the dominant factor. By appropriate charter or statutory provisions a stock corporation may exercise control over its membership resembling that exercised by nonstock corporations. Indeed, no reason is apparent why the legislature could not endow stock corporations, at least at the time of their creation, with as complete control over their membership as that possessed by nonstock corporations. In many jurisdictions at this time statutes providing for the incorporation of cooperatives with capital stock exist which authorize charter and bylaw provisions conferring on associations control over their stockholders comparable with that fundamentally possessed by nonstock corporations.

Frequently the phrase "nonprofit, nonstock" is used with reference to an association, as though the organization would be one for profit if it were formed with capital stock. This is a mistake. An association is not nonprofit because it is formed without capital stock, but because of the manner in which it operates. In other words, an association formed with capital stock may operate on a nonprofit basis just as well as an association formed without capital stock. An association must have capital, and if it is not raised through the sale of stock it must be obtained in some other way. Indeed capital stock is frequently sold at a price comparable with that ordinarily paid for a certificate of membership in a nonstock association; so that it would be possible in theory to raise as much money through the sale of certificates of membership as it would be through the sale of stock certificates. It is the way that an association operates that determines whether it is a profit-making institution rather than whether it is formed. with or without capital stock.

It has been said "that the members of a nonstock cooperative stand in substantially the same relation to the corporation as do the members of a cooperative with capital stock or other business corporation with capital stock." 80 However, this should not be construed to mean that the terms “member” and "stockholder" are synonymous.

In many of the agricultural association acts, the term "member" is defined so as to include common stockholders in associations formed with stock and the members of nonstock associations. This has led to some confusion. For example, in a case involving the question as to whether the board of directors of an electric cooperative organized on a membership basis without capital stock had been duly authorized to borrow under the Rural Electrification Act, the chairman of the meeting ruled that the resolution had not passed. This ruling was based on a section of the Kentucky statute which required approval by a "majority of the common stockholders." The chairman apparently had overlooked other provisions of the statute which permitted action by a majority of the members present and voting at the meet

18 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; Finch v. Oake, 73 L. T. R. (n. s.) 716.

80

Picalora v. Gulf Cooperative Co., 123 N. Y. S. 980, 68 Misc. Rep. 331. State ex rel. Boldt v. St. Cloud Milk Producers' Association, 200 Minn. 1, N. W. 603, 607.

273

ing in membership corporations. The Supreme Court of Kentucky, after examining the Rural Electrification Act of Kentucky, reached the conclusion that the statutory provision which required obligations of a cooperative to be authorized by a majority of the common stockholders had no application to a nonstock cooperative, and that an obligation of the nonstock electric cooperative was sufficient when authorized by a majority of a quorum of the members, although this was less than a majority of the members.81

Restrictions as to Transfer of Stock

May an incorporated cooperative or any other corporation restrict the transfer of its stock so as to prevent its being held by nonproducers? The answer is "Yes," if appropriate statutory authority exists in the State in which the association is incorporated. Many of the statutes providing for the incorporation of cooperatives contain provisions restricting the issuance of common stock, or its transfer to nonproducers. Associations formed under statutes that contain such provisions are thereby prohibited from issuing common stock to nonproducers, and in the event of a member's attempting to transfer his stock to a nonproducer, the association could refuse to recognize the transfer.

The courts have recognized the importance of allowing a cooperative to restrict the transfer of its stock so as to prevent its purchase by those who would be antagonistic to it, and thereby defeat the purpose for which the association was formed.8% 82

In the North Dakota case just cited the court said:

If stock in cooperative corporations could be sold and transferred the same as corporate stock in ordinary business corporations, to any person whom the stockholder saw fit, then it would be possible for persons whose interests were antagonistic to the cooperative association to become members therein, and thereby defeat the very purpose for which the corporation was formed. So it seems not only proper, but necessary, in order that such corporations may continue and accomplish the purpose for which they are organized, to permit restrictions to be placed upon the right to transfer and own stock therein.

If a statute of the State expressly restricts the transfer of stock except under certain conditions, the matter is clear. This was the situation in a Minnesota case 83 where the statute under which the association was incorporated provided that "no person shall be allowed to become a shareholder in such association except by the consent of the managers of the same." The court said: "We have no doubt of the validity of such a restriction on the transfer of shares." If the statute of the State under which the association is incorporated authorizes the inclusion of a provision in the articles of association or the certificate of incorporation, or the bylaws, restricting the transfer of stock, there would seem to be no doubt concerning the right of an association to adopt such a restriction and it would be binding on innocent third persons, as one is charged by law with notice of the law under which an association is formed and of what it permits.84

81 Warren Electric Cooperative Corporation, Inc. v. Harrison, 312 Ky. 702, 229 S. W. 2d 473. Cf. Autauga Cooperative Leasing Association v. Ward, 250 Ala. 229, 33 So. 2d 904.

82

Chaffee v. Farmers' Coop. Elevator Co., 39 N. D. 585, 168 N. W. 616, 618; Carpenter v. Dummit [Burley Tobacco Growers' Cooperative Association], 221 Ky. 67, 297 S. W. 695; Farmers Union Coop. Gin Co. v. Taylor, 197 Okla. 495, 172 P. 2d 775; Thomason v. Clark County Farm Bureau Tobacco Cooperative, Inc., 259 S. W. 2d 64 (Ky.).

83

Healey v. Steele Center Creamery Association, 115 Minn. 451, 133 N. W. 69, 72. 4 Longyear v. Hardman, 219 Mass. 405, 106 N. E. 1012, Ann. Cas. 1916D 1200; Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N. W. 754.

It has been held that when the charter of a cooperative, in pursuance of statutory authority therefor, limits eligibility to own its common stock to producers, a pledgee of such stock is charged by law with notice of such restrictions, and even as against such a pledgee the association may cancel the stock on account of indebtedness due by the stockholder to the association.8

85

From the cases that have come before the courts it is apparent that the required statutory authority need not expressly authorize restrictions on the transfer of stock, but general language dealing with this subject would seem to be enough. A few illustrations from decided cases will shed light on this matter. In a New York case the certificates of incorporation of each of the three corporations involved, "*** provided that no stock should be transferred until it was first offered for sale to the other stockholders on terms and conditions to be fixed by the bylaws or by an agreement between the stockholders, but, in case the offer to sell were refused, the stock would be no longer subject to the conditions." The court held this provision and the bylaws and the agreement connected therewith valid and enforceable. Notice of the restrictions on the sale of stock was stamped on each certificate of stock.86 Section 13 of the General Corporation law of New York provides that "The certificate of incorporation of any corporation may contain any provision for the regulation of business and the conduct of its affairs, and any limitation upon its powers, or upon the rights of its stockholders or upon the powers of its directors and members, which does not exempt them from the performance of any obligation or duty imposed by law." It was apparently in pursuance of this provision that the restrictions on the right to transfer the stock were included in the certificates of incorporation.

A statute may authorize associations incorporated under it to adopt bylaws restrictive of the right to transfer stock. This was the situation in a North Dakota case. 87 The statute empowered associations incorporated under it "to regulate and limit the right of stockholders to transfer their stock" and "to make bylaws for the management of its affairs, and to provide therein the terms and limitations of stock ownership." It was held that a bylaw which provided that "No stockholder shall transfer his stock without first giving the corporation 90 days' notice and option to purchase said stock at par, plus the accrued and undivided dividends, which are payable per share * * *” was valid. The bylaw was referred to on the face of the certificates of stock.

88

A similar conclusion was reached in an Ohio case involving an analogous statutory provision. If the statute under which an association is incorporated authorizes the inclusion in the articles of association or the certificate of incorporation, or in the bylaws, of a provision restricting the transfer of its stock, such a provision will be enforced by the courts of the State where suit is brought, although the association was incorporated in another State. These were the facts in the case last mentioned. In that case the corporation was incorporated in Delaware, but the transactions. relative to the stock took place in Ohio, where the corporation had its principal place of business, and the suit was brought there.

85

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.

86

Bloomingdale v. Bloomingdale, 177 N. Y. S. 873, 874, 107 Misc. Rep. 646. Compare, Evans v. Dennis, 203 Ga. 232, 46 S. E. 2d 122.

87

88

Chaffee v. Farmers' Coop. Elevator Co., 39 N. D. 585, 168 N. W. 616.

Nicholson v. Franklin Brewing Co., 82 Ohio St. 94, 91 N. E. 991, 137 Am. St. Rep. 764, 19 Ann. Cas. 699.