terms and conditions of a retain certificate when its holder refused to accept an interest in the new organization in substitution for an interest in the old one under the certificate.85

A creamery association, attempting to operate a nonprofit business cooperative, reorganized and became a nonprofit marketing association. Members, who only had the right under the bylaws of the former association to receive back their membership fee upon withdrawing, were given the option of continuing as members of the new association, if qualified, with their proportionate interest apportioned to them on the association's books, or withdrawing. In the latter case they were paid the membership fee in cash and were credited on the books of the association with an additional amount equal to their share of the net worth, less such fee. The court held that under this plan dissenting members were not deprived of vested rights or any property without just compensation.86

Sometimes some of the members of an unincorporated association, without the consent of all its members, incorporate an association with the thought that it will supersede the old association. If all the members of the unincorporated association, or the number required by its organization papers, have not agreed that a corporation may be formed to take the place of the unincorporated one, serious legal difficulties may result. Under such circumstances, officers of such a corporation act at their peril in using funds derived from the unincorporated association.87

The question is sometimes asked whether a cooperative which has been operating with a number of local units may reorganize by turning over to the members in each locality the assets which it had previously there employed, each local unit to function thereafter as an individual association. While in some instances a plan of this kind may be worked out, this may not be done if creditors of the original association would be prejudiced thereby.88

Board of Directors

EMBERSHIP on the board of directors of a cooperative is ordinarily

looked upon as a post of honor, but the board member who has examined the statutes and court decisions on the subject will also look upon the office as a post of great legal responsibility. Not only does the welfare of the cooperative rest upon the board as a group, but the office of director carries with it the possibility of large personal liability both at common law and under statutes.

In the discussion which follows, the rules and principles stated are the common law rules, unless a statutory provision is referred to; and they are as applicable to directors of cooperative corporations as to directors of corporations of any other type.

First, all the corporate powers of an association, other than those specifically conferred on the members, are in its directors; that is, the directors of an association collectively and primarily possess all the powers that the association has under the law.89 It is true that these powers are executed

85 Merker v. Lake Region Packing Association, 126 Fla. 589, 172 So. 702.

86

De Mello v. Dairymen's Cooperative Creamery, 73 Cal. App. 2d 746, 167 P. 2d 226.

87 See Strong v. Los Nietos & Ranchito Walnut Growers' Association, 137 Cal. 607, 70 P. 734; Hamaty v. St. George Ladies' Society, 280 Mass. 58, 181 N. E. 775; Bentley v. Hurley, 222 Mo. App. 51, 299 S. W. 604.

88

John H. Lebens, as Receiver of the LeSueur County Cooperative Company v. Nelson, 148 Minn. 240, 181 N. W. 350.

89 Elggren v. Woolley, 64 Utah 183, 228 P. 906; Federal Land Bank of St. Louis v. Bross, 122 S. W. 2d 35 (Mo.).

by the officers, agents, and employees of the association, but the authority for their acts is found in the board of directors. They determine either expressly or by implication, directly or indirectly, the acts to be performed and the plans and methods to be followed by the officers, agents, and employees of the association.90 It is the function and duty of directors of an association to direct and supervise in a fundamental way the activities of the association. The members or stockholders of an association, through appropriate bylaws, undoubtedly could prescribe rules which the directors should observe in the conduct of the business of the association, for it will be remembered that a director is an agent and the general rules of agency apply to him in his relation to the corporation.91

The first directors of a cooperative, under the statutes providing for the formation of such associations, are usually named in the articles of incorporation. In general practice they are the incorporators. These directors are sometimes referred to as the incorporating directors, and they are usually authorized to serve until their successors are elected and qualified. The members or stockholders elect the successors to these directors, usually at a special meeting or at the first annual meeting of the association.

93

Unless required by statute, charter, or bylaws, it is not necessary that directors be members of the association.92 Directors are elected for specified periods of service, sometimes prescribed in the law of the State; but usually upon the expiration of the term for which elected, a director does not thereby cease to be a director, but continues as such, barring resignation or expulsion, with all the rights and responsibilities incident thereto until the election and qualification of his successor. Generally speaking, the cooperative statutes specifically authorize associations incorporated under them to adopt bylaws prescribing the qualifications which must be possessed by persons in order that they may be eligible to be directors. Such bylaws, if reasonable, are valid. A bylaw has been upheld providing that, if a person ceases to have the qualifications required for a director, the office of director thereby becomes vacant.94 Persons who become ineligible to be directors have been held to be de facto directors.95 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.96

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.

90 Monterey Water Company v. Voorhees, 45 Ariz. 338, 43 P. 2d 196.

91 Fleischer v. Pelton Steel Company, 183 Wis. 151, 198 N. W. 444; Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122; Holcomb v. Forsyth, 216 Ala. 486, 113 So. 516; Johnson v. York Coal & Coke Company, 182 Ky. 303, 206 S. W. 611; Keenan v. Zemaitis, 4 F. 2d 572. But see Security Savings & Trust Company v. Coos Bay Lumber & Coal Company, 219 Wis. 647, 263 N. W. 187.

92

Wright v. Floyd, 43 Ind. App. 546, 86 N. E. 971; Wight v. Springfield & New London Railroad Co., 117 Mass. 226, 19 Am. Rep. 412; Parsons v. Rinard Grain Co., 186 Iowa 1017, 173 N. W. 276.

93

Lucky Queen Min. Co. v. Abraham, 26 Ore. 282, 38 P. 65; Grant v. Elder, 64 Colo. 104, 170 P. 198; Weil v. Defenbach, 36 Idaho 37, 208 P. 1025.

94

Johnson v. York Coal & Coke Company, 182 Ky. 303, 206 S. W. 611; Chemical National Bank of New York v. Colwell, 132 N. Y. 250, 30 N. E. 644.

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

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

A director or officer of an association at common law may resign at will,97 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.98

It is customary to provide in the bylaws that vacancies on the board may be filled temporarily by action of the remaining board members until the next meeting of the members or stockholders. Such a procedure is usually authorized also by the State corporation law. Such a provision, however, does not confer authority on the board of directors to fill newly created directorships.99

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.1

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.2

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 3 and the fact that losses resulted from such transactions did not render the directors personally liable.*

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. 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.?

6

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.

98

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

99 Automatic Steel Products, Inc. v. Johnston, 31 Del. Ch. 469, 64 A. 2d 416.

1

Hudson Cooperative Loan Association v. Horowytz, 116 N. J. L. 605, 186 A. 437.

2 Sherman & Ellis v. Indiana Mutual Casualty Company, 41 F. 2d 588.

Continental Oil Company v. Jones, 26 F. Supp. 694.

37 U. S. C. A. 1.

See also

See also South Carolina Cotton

* Clark v. Murphy, 142 Kan. 426, 49 P. 2d 973. Growers' Coop. Association v. Weil, 220 Ala. 568, 126 So. 637; Burch v. South Carolina Cotton Growers' Coop. Association, 181 S. C. 295, 187 S. E. 422.

5 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.

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

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 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.

8

Meetings of the Board

How must the directors who compose the board act to bind the association? “* * * 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 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.10

Even a majority of the board acting as individual directors or in a “board meeting," illegal for any reason, cannot bind the association.11 In an Arkansas case 12 a cooperative 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 cooperatives 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.13 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.14 It appears that a director may waive notice of a board meeting prior thereto,15 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.

8

9

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

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.

10

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.

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

12 Simon v. Sevier County Cooperative Association, 54 Ark. 58, 14 S. W. 1101. 13 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.

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

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

Quorum

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 subject before the board, and who are otherwise qualified, is necessary to constitute a quorum of the board of directors for the transaction of business.16 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. 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.” 18

17

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.19 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 constitute a quorum, results in no quorum with respect to that matter. On the other hand, in some States a director present but not voting is counted for the negative.21 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.22

20

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,” 23 or at least voidable. Some courts apparently hold that 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.24

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

16

18 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.

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

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

19

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

20 North Louisiana Baptist Association v. Milliken, 110 La. 1002, 35 So. 264.

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

22

James R. Kirby Post No. 50 v. American Legion, 258 Mass. 434, 155 N. E. 462. 23 In re Webster Loose Leaf Filing Co., 240 F. 779, 785; Smith v. Los Angeles I. & L. Coop. Association, 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.

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