with stock, only stockholders at the time of the dissolution are entitled to share in the net assets of the association. In a nonstock association, at common law the distribution is made on a pro rata basis, whereas in a stock association the distribution is made on a stock basis.58

In associations that have preferred stock, the preferred stockholders by express provision are frequently given preference over the common stockholders in the distribution of the assets of an association on its dissolution.

Before the assets of a cooperative may be distributed among the members or stockholders, the claims which the member and others have against the association as creditors thereof should first be met, if funds are available. For instance, if the association has issued certificates of indebtedness to its members, these should be paid before any distribution is made among members or shareholders because of the fact that they are members or shareholders.

It should be kept in mind that under normal conditions indebtedness of an association arising from marketing contracts, or evidenced by certificates of indebtedness, certificates of interest, or any other similar instrument, is not to be considered as a part of the property rights and interests of members but simply as indebtedness, subject though it may be to certain conditions. 59 In view of this fact the property rights and interests of members would ordinarily be determined only after deducting obligations of the association due its members and others. In an association operating on a revolving-fund basis, it may be that the property rights and interests of members will be nothing, or merely a nominal sum.

Dissolution

Associations are formed by the State, and the charter represents an agreement between the State and the incorporators.60 Because of the manner in which corporations are created, the State has control over their dissolution. There are State statutes with respect to this matter. Through unanimous consent on the part of the members of an association, it may be dissolved.61

The right of a majority of the stockholders or members at common law to force dissolution of a corporation against the opposition of the minority is not so well established. Some authorities hold that the majority can force a dissolution,62 whereas a contrary doctrine has been laid down.63 Of course, if there are statutory or charter provisions on the subject, they control.64

and activities of the nonstock consumer cooperative involved in this case were essentially of a charitable and public character, the members of the corporation had no rights, vested or contingent, in its assets upon dissolution, and such assets must be distributed in accordance with the doctrine of cy pres.

58 Krebs v. Carlisle Bank, 14 Fed. Cases 856, Fed. case No. 7932; Central Sav. Bank v. Smith, 43 Colo. 90, 95 P. 307.

59

60

See Revolving-Fund Plan of Financing, p. 223.

Syrian Antiochean St. George Orthodox Church v. Ghize, 258 Mass. 74, 154 N. E. 839.

61 Mobile & Ohio R. R. Co. v. The State, 29 Ala. 573, 586.

62

State ex rel. Majority of Stockholders of Chilhowee Woolen Mills Co. v. Chilhowee Woolen Mills, 115 Tenn. 266, 89 S. W. 741, 2 L. R. A. (N. S.) 493, 112 Am. St. Rep. 825.

63 Polar Star Lodge v. Polar Star Lodge, 16 La. Ann. 53; Stockholders of Jefferson County Agr. Association v. Jefferson County Agr. Association, 155 Iowa 634, 136 N. W. 672; Theis v. Spokane Falls Gaslight Co., 34 Wash. 23; 74 P. 1004.

Farmers Union Cooperative Brokerage v. Palisade Farmers Union Local No. 714, 69 S. D. 126, 7 N. W. 2d 293.

In many States the directors of a corporation at the time of its dissolution continue for some time thereafter to act as trustees with reference to the payment of obligations of the corporation and the proper distribution of its assets. 65

Expiration of Charter

A corporation may cease to exist through the expiration of its charter if the duration of the corporation is limited, or its charter may be forfeited by the State for unauthorized or unlawful action or conduct,66 or the charter may be repealed through the reserved power of the State.67 A charter also may be canceled by the State for fraud in its procurement.68

The dissolution of a corporation is not effected by its failure to elect officers or by a sale or assignment of all its corporate property and by a cessation of all corporate acts.69

It has been held that the failure of the corporation to file its annual reports with the secretary of state does not ipso facto forfeit the corporate charter or revoke its right to do business. Until the State takes some action based on the default, the corporate rights are unaffected.7o

71

The fact that an association is placed in the hands of a receiver does not effect a dissolution; nor does the bankruptcy of an association result in its dissolution." 72

If those interested in an association continue to do business in its name after the expiration of the charter, or after the dissolution of the association, they may incur personal responsibility and liability.

73

In some of the States there are statutes providing for the renewal of charters of corporations that are about to expire, or after they have expired, provided that an application for renewal is filed, usually with the secretary of state, before a certain date.74

Merger or Consolidation

There are statutes in most States providing for the merger or consolidation of corporations, including cooperative corporations. In any instance. in which it is proposed to merge or consolidate cooperative corporations, these statutes should be followed strictly. The Federal antitrust laws 75 place certain limitations on mergers or consolidations and these, also, require consideration.

65 Kansas Wheat Growers' Association v. Markley, 132 Kan. 156, 294 P. 885. 06 Tobacco Growers' Coop. Association v. Jones, 185 N. C. 265, 117 S. E. 174, 33 A. L. R. 231.

67

Swan Land & Cattle Co. v. Frank, 148 U. S. 603, 13 S. Ct. 691, 37 L. Ed. 577; State ex rel. Sheilds v. Farmers Union Cooperative Brokerage, 70 S. D. 14, 13 N. W. 2d 809.

68 State ex rel. Southerland v. U. S. Realty Imp. Co., 15 Del. Ch. 108, 132 A. 138. 69 Brock v. Poor, 216 N. Y. 387, 111 N. E. 229; Belle City Malleable Iron Co. v. Clark, 172 Minn. 508, 215 N. W. 855. See also Hendrickson v. Bloom, 159 Ore. 428, 80 P. 2d 868.

70

Indianapolis Dairymen's Cooperative, Inc. v. Bottema, 226 Ind. 237, 79 N. E. 2d 399; 226 Ind. 260, 79 N. E. 2d 409.

72

Riverside Oil & Refining Co. v. Lynch, 114 Okla. 198, 243 P. 967.

State ex rel. McCoy v. Farmers' Coop. Packing Co., 50 S. D. 627, 211 N. W. 602; Haynes v. Central Business Property Co., 140 Wash. 596, 249 P. 1057; Petrogradsky Mejdunarodny Kommer chesky Bank v. National City Bank of New York, 253 N. Y. 23, 170 N. E. 479.

13 Burks v. Weast, 67 Cal. App. 745, 228 P. 541.

74 Missouri Slope Agricultural & Fair Association v. Hall, Secretary of State, 46 N. D. 300, 177 N. W. 369; Terrell v. Ringgold County Mutual Telephone Co., 225 Iowa 994, 282 N. W. 702.

75 15 U. S. C. A. 18.

If there are statutory provisions for merger or consolidation at the time a person becomes a stockholder in a corporation, these provisions become a part of his contract with the corporation. Where the consolidation provisions are fair and reasonable, the stockholders of the associations entering into the consolidation are required to accept them.76

Reorganization of Associations

Frequently it is desired to reorganize a corporation handling agricultural commodities, so that it will be an agricultural cooperative in organization and operation. Generally, such a reorganization involves restriction of the voting rights to producers, restriction of the returns on capital to not more than 8 percent per annum, provision for the payment of patronage dividends, and elimination of the voting rights of nonproducers. It may also be deemed advisable to limit the number of shares which any stockholder

may own.

In this connection attention is called to the fact that, for a cooperative to be eligible to borrow from a bank for cooperatives, or to be eligible for an "exempt" status under the Internal Revenue Code, it is necessary that substantially all the voting rights in an association be vested in actual producers. As indicated, one of the problems arising in most reorganization cases is how to achieve this result. If the nonproducer members are willing to accept nonvoting preferred stock, revolving-fund certificates, or some other form of certificate that does not carry a vote, then little difficulty should be encountered. On the other hand, if some of or all the nonproducer voting members are unwilling to make such an exchange, an association is confronted with the problem of how such persons may be eliminated from the organization. Generally speaking, if neither the statute under which an organization is incorporated, nor its charter, bylaws, or stock certificates provide for doing so, then an amendment to the articles of incorporation or bylaws may not be adopted to accomplish this purpose, which is binding on the nonproducer members who do not consent thereto.

On the other hand, it appears that a bylaw which restricts the right to transfer stock to bona fide producers at least would be effective against all members of the association who voted in favor of its adoption and producers who became members subsequent to its adoption and, in general, against third persons who might have knowledge thereof. In this connection it was said in a Michigan case:

77

The contention is made on behalf of appellants that this bylaw is void for various enumerated reasons. The authorities upon this point are not uniform, and though the question is one of interest, we have found it unnecessary to pass upon it in this case, for the reason that whether valid or void, considered strictly as a bylaw, it can be sustained as an agreement entered into between all the parties in interest. It should be noted that we are not called upon here to determine the effect of such a bylaw upon a stockholder who had not given his assent to its adoption, or upon a transferee of stock, who in good faith, for value, and without notice had become an owner of shares in the corporation. We are now dealing only with stockholders who themselves, voluntarily and for their own benefit and protection, enacted the bylaw.

76 Pearson v. Clam Falls Cooperative Dairy Association, 243 Wis. 369, 10 N. W. 2d 132.

"Weiland v. Hogan, 177 Mich. 626, 143 N. W. 599, 601. See also Falcone v. Societa, 61 N. Y. S. 873, 30 Misc. 106; Farrier v. Ritzville Warehouse Co., 116 Wash. 522, 199 P. 984; Bank of Atchison County v. Durfee, 118 Mo. 431, 24 S. W. 133, 40 Am. St. Rep. 396; Kent v. Quicksilver Mining Co., 78 N. Y. 159, 12 Hun. 53; Bessette v. St. Albans Cooperative Creamery, 107 Vt. 103, 176 A. 307; Searles v. Bar Harbor Banking & Trust Company, 128 Me. 34, 145 A. 391, 65 A. L. R. 1154.

Again if a bylaw is adopted restricting the membership to producers who patronize the association, this would operate to prevent the association from admitting to membership persons who do not possess the requisite qualifications. In addition, it should be of help in preventing the transfer of voting stock by members, who voted in favor of the adoption of the bylaw, to ineligible persons. Thus, under such a bylaw an association over a period of time should be able materially to increase the percentage of its voting stock held by producers. Moreover, no reason is apparent why such a bylaw, in the case of a stock association, should not require the stock certificates issued subsequent to its adoption to carry on their face the restrictions on the right to own and transfer shares of stock evidenced thereby.

If an association is financially able to do so and the rights of creditors will not be adversely affected, it may be possible to purchase the stock of nonproducer members at prices which are mutually agreed upon. If stock may not be acquired in this way it may be found practicable to form a new association, the voting membership of which is restricted to producers, and then to have the new association acquire the assets of the old one. It is not always possible to do this if stockholders protest, particularly if the corporation is a successful one. Moreover, there are statutes in probably all States which deal specifically with the sale of all the assets of a going corporation and these should be strictly followed. A rule which, with some variations, exists in many States is one to the effect that a corporation may not dispose of all its assets unless it is in a failing condition, without the consent of a specified percentage of its stockholders. It has been said 78 that

At common law neither the directors of a corporation nor a majority of its stockholders had the right, power, or authority to sell and convey all the property of a going and prosperous corporation capable of achieving the objects of its creation as against the objections of a single stockholder.

In many instances, however, it will be found possible to form a cooperative and effect a sale to it of all the assets of the old organization. This must be done on a basis which is fair and just. Ordinarily, in such situation the members of the old organization who are desirous of becoming members of the new one, take stock certificates, or certificates of some other character, equal in amount to their interest in the old organization. Only producers who are to patronize the new association are given certificates carrying voting rights; the certificates given to others would not carry a vote. This would mean, in the last analysis, that the only persons who would receive cash for their interests in the old organiation would be those persons who were unwilling to accept some form of certificate or obligation of the new organization.

If the organiation papers of a corporation that is being reorganized provide for the distribution of earnings on a stock basis, it may not be possible to provide for the distribution of all earnings on a patronage basis without the consent of all stockholders. In a Nebraska case 79 in which this was attempted the court said:

The original articles and the laws then in force made dividends on stock the means of distributing profits. On this basis plaintiffs bought stock and invested money.

78

8 Voigt v. Remick, 260 Mich. 198, 244 N. W. 446, 449, certiorari denied, 289 U. S. 756, 53 S. Ct. 787, 77 L. Ed. 1500; Michigan Wolverine Student Cooperative, Inc. v. Wm. Goodyear & Co., 314 Mich. 590, 22 N. W. 2d 884. A sale of all of a cooperative's assets by unanimous consent of the members is, of course, permissible. Autauga Cooperative Leasing Association v. Ward, 250 Ala. 229, 33 So. 2d 904. Allen v. White, 103 Neb. 256, 171 N. W. 52; Hueftle v. Farmers Elevator, 145 Neb. 424, 16 N. W. 2d 855. See also 10 Cyc. 355.

79

They thus entered into a contract of which the original articles of incorporation and the laws applicable thereto were by construction material parts. *** In this way plaintiffs acquired the contractual right to share the net profits in the form of dividends on stock. * * * In 1916 there was an attempt to amend the articles of incorporation by changing the Farmers' Elevator Co. to a cooperative association within the meaning of the statute cited. Later defendants planned to distribute profits under the amendment. Such a course, if pursued, would deprive plaintiffs of dividends to which they were entitled under their contracts as original stockholders and would destroy their contractual rights. This, neither the legislature nor the defendants can lawfully do.

On principle it would seem that the holding in the case last cited would apply to an attempt to restrict the amount that might be paid as dividends on stock unless all stockholders consented thereto or acquiesced therein. The cooperative marketing acts of many States contain provisions reading substantially as follows:

Associations heretofore organized may adopt the provisions of this Act.-Any corporation or association, organized under previously existing statutes, may, by a majority vote of its stockholders or members, be brought under the provisions of this act by limiting its membership and adopting the other restrictions as provided herein. It shall make out in duplicate a statement signed and sworn to by its directors to the effect that the corporation or association has, by a majority vote of the stockholders or members, decided to accept the benefits and be bound by the provisions of this act and has authorized all changes accordingly. Articles of incorporation shall be filed as required in K. S. section 883f-8, except that they shall be signed by the members of the then board of directors. The filing fee shall be the same as for filing an amendment to articles of incorporation. The Supreme Court of Minnesota expressed doubt as to the constitutionality of a similar statutory provision.81

80

In a North Dakota case 82 in which the Secretary of State refused to accept an amendment to articles of incorporation prepared in pursuance of a statutory provision similar to that quoted above, the court held--

that the secretary of state cannot be heard to assert in this proceeding that the rights of nonconsenting stockholders have been or may be violated.

and ruled that the amendment must be filed by him.

In a Kansas case, ,83 it was held that a private stock corporation could bring itself under the provisions of the Cooperative Marketing Act of Kansas, which contained a provision similar to that quoted above, but "that cannot be construed as a grant of power to the majority to do as they pleased with the property and property rights of the minority." The effect of the court's decision was to require the issuance to minority stockholders of securities at least equal to the book value of the stock which they held in the old corporation. The reorganization plan sought to compel the minority stockholders to take certificates of indebtedness worth less than half the book value of the stock in the old corporation.

It appears clear that, until an association elects to come under the prosions of a particular cooperative act, it continues to operate and to be subject to the statute under which it was organized.84

In a Florida case in which the successor to a cooperative took over all its assets, it was held that the new association was bound to carry out the

80

See sec. 25 of Bingham Cooperative Marketing Act of Kentucky, p. 306 of Appendix.

si Maclaren, as Receiver of Goodhue County Cooperative Company v. Wold, 168 Minn. 234, 210 N. W. 29, 55 A. L. R. 321, 172 Minn. 334, 215 N. W. 428.

82 Mohall Farmers' Elevator Company v. Hall, 44 N. D. 430, 176 N. W. 131, 133. See also Equity Cooperative Packing Company v. Hall, 42 N. D. 523, 173 N. W. 796.

83 Hill v. Partridge Cooperative Equity Exchange, 168 Kan. 506, 214 P. 2d 316. 84 State ex rel. Koski v. Kylmanen, 178 Minn. 164, 226 N. W. 401, 14a C. J. 74.