is entitled to a vote. In other States members can vote on the basis of patronage, or on the basis of the productive units owned, such as the number of cows, trees, or acres.

Although voting by proxy is permitted in a number of States, the practice is not generally regarded with favor, since it tends to concentrate voting control in the hands of a small group. Proxy voting should either be prohibited or restricted so that one person may not cast more than a limited number of proxy votes as, for example, three or five votes.

Voting by mail, authorized by law in many States, has been found practicable, particularly in the case of associations operating over a wide area. In this way, an opportunity is given for a larger percentage of the members to participate than would normally attend a meeting.

In the case of a marketing association, a marketing contract between the member and the cooperative defining the rights and the obligations of the member and the association should be entered into.35 It should specify the kind, amount, and source of products to be handled by the association. In addition to authorizing the association to make deductions for all costs and expenses, provision should be made for the capital that will be supplied by the member, including the method for determining the amount. Unqualified title to this capital should be in the association. The capital thus supplied should be evidenced annually by issuing either common stock, nonvoting preferred stock, revolving-fund certificates, or written advice which discloses to each patron the dollar amount of the capital he has supplied. Provision also should be made for returning such capital to member-patrons.

If reserves are to be set aside, provision should be made in the bylaws for a method of showing the interest of patrons in the reserves. This should be done, usually by years, so that the amount attributable to the patronage of each patron might be ascertained at any time. If the reserves are other than nominal in amount, individual book credits should be set up.

Farm supply associations, generally handle supplies at prices not less than the going market prices. Capital accumulations and reserves, if any, should be handled in the same manner as has just been explained for marketing associations. Suitable provisions should be made in the bylaws for accomplishing these purposes.

35 See "Sample Legal Documents," infra, page p. 550.

In most instances, it is desirable to have the compensation of directors, if any, determined by the members of the association.36 The bylaws should also provide that directors shall be barred from holding the office of manager. Normally, directors should also be restricted in the amount of special work they may do for pay for the association in any given year.

It is sometimes desirable to include in the bylaws provisions setting forth the qualifications for directors37 and officers, and to provide further that in the event a director or officer ceases to be eligible for office, the board of directors may require that he cease to be a director or officer. In a number of States, special statutory provisions provide a means for removing officers and directors.

In order to assure rotation in office, and thus obtain the benefit of new directors, some bylaws provide that no person may be eligible for the office of director for more than two consecutive terms. 38 To foster democratic control of the association, the bylaws should provide that there be at least two candidates nominated for each director to be elected.39

In stock associations, restrictions relative to the stock should be printed on the certificates so as to give notice to all concerned of the limitations to which the stock is subject. Where an association adopts restrictions for the purpose of confining its voting membership to producer-patrons, such restrictions are binding on all new members and on old members who voted in favor of their adoption.40

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 defects have included failure to

36 See Triplett v. Grundy Electric Cooperative, 389 S. W. 2d 401 (Mo. 1965); 19 C.J.S. Corporations, § 968.

37 Rust, Creating Training Programs for Cooperative Directors, FCS Ed. Cir. 22, Farmer Cooperative Service, U.S. Dept. Agr. (1965); Rust, Recognizing the Ideal Cooperative Director, FCS Educ. Cir. 26, Farmer Cooperative Service, U.S. Dept. Agr. (1966).

38 Ward, Strengthening Democratic Control and Member Participation, 12 Cooperative Journal 121-125 (1938).

39 Rust, Assuring Democratic Election of Cooperative Directors, FCS Educ. Cir. 21, Farmer Cooperative Service, U.S. Dept. Agr. (1965).

40See "Reorganization of Associations," infra, p. 112.

file the articles of incorporation with the proper authority, failure to comply with 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.41 Moreover, in a number of instances, actions have been brought by various States to forfeit the charters of associations which were defectively organized.

When cooperatives are being incorporated under cooperative marketing acts, necessarily the charter and bylaws and the methods of their adoption and filing should conform to these acts. Of course, every statutory requirement should be strictly observed. In addition, ordinarily it is necessary to examine the general corporation laws of the State, since some statutes authorizing the incorporation of cooperatives provide that the general corporation law of the State, except where inconsistent with the cooperative statute, is also applicable to such associations.42 Provisions of the State constitution may also be applicable.

In the preparation of the marketing contract, 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 will sustain as reasonable.

In many of the States, an association must comply with the blue sky laws before engaging in the sale and issue of capital stock, memberships, or other types of securities.43

The incorporators are frequently called the charter members of an association. By virtue of being the incorporators, they are, generally speaking, members. Nearly all the cooperative statutes specify the percentage of members 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.

41 See "Subscriber. Stock. Capital Stock." infra, p. 72.

42 Sagness v. Farmers' Cooperative Creamery Company, 67 S.D. 379, 293 N.W. 365 (1940); Schoenburg v. Klapperich, 239 Wis. 144, 300 N. W. 237 (1941). 43 See "Blue Sky Laws,” infra, p. 45.

In many instances, for convenience, bylaws are adopted by the incorporators and the persons who compose the first board of directors, all of whom at the time are regarded as the only members of the association. Even though bylaws for a cooperative are adopted in the manner outlined, it would be desirable for as many of the prospective members as possible to 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 mentioned, the attorney who assists in the organization of a cooperative usually advises it regarding its State and Federal tax liability, applicable statutes with which it must comply, and reports it must file; and procures licenses and permits for it if any are required.

After a cooperative is organized and in operation, its success will depend upon a number of factors, and one of the most important of these is management.44 The selection of a manager is an important function that a board of directors must perform. There is no magic in cooperation. Members must be willing to work together.45 Unless a cooperative can effectively carry out for its members with their help the functions it was set up to perform, it will never achieve success.

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 other factors that will affect its success.

The problems cooperatives must face are essentially business problems. Informed and willing members, an energetic and harmonious board of directors, able management, and sound business policies will go a long way toward assuring success.46

44Gardner, Managing Farmer Cooperatives, FCS Ed. Cir. 17, Farmer Cooperative Service, U.S. Dept. Agr. (1963).

45 Angevine, Working Together Is the Answer, News for Farmer Cooperatives, Farmer Cooperative Service, U. S. Dept. Agr. (Feb. 1968).

46 Manuel, Improving Management of Farmer Cooperatives, FCS General Report 120, Farmer Cooperative Service, U.S. Dept. Agr. (1964). See also Rust, What Cooperative Members Should Know, FCS Ed. Cir. 24, Farmer Cooperative Service, U.S. Dept. Agr. (1965); Rust and LeBeau, Strengthening Cooperative Member Interest and Support, FCS Ed. Cir. 30, Farmer Cooperative Service, U.S. Dept. Agr. (1966); Recruiting, Training, and Developing Workers for Farmer Cooperatives, FCS Information 77, Farmer Cooperative Service. U.S. Dept. Agr. (1971).

Incorporated Cooperatives

Nature and Characteristics

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. Incorporated cooperatives are a particular type of corporation, just as other incorporated business concerns or charitable organizations are particular types.

It is, as a rule, highly desirable that all farmer cooperatives be incorporated. Since nearly all are, the greater part of this publication is devoted to them. Whenever the words "cooperative" or "association" are used, unless otherwise specified, incorporated cooperative is meant.

an

The characteristics discussed pertain to incorporated cooperatives, stock and nonstock as well as other corporations. The term "incorporation" is used with reference to corporations which do not have capital stock as well as those which do. It describes the act of creating a corporation. A corporation is an artificial entity created by the law; it is a creature of the law.

The generally accepted definition of a corporation in this country is that given by Chief Justice Marshall in the Dartmouth College case, 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."3 Just as Smith and Jones are different persons, so a corporation as a legal entity is distinct from its agents, officers, stockholders, or members.4

In a case arising under the Fair Labor Standards Act, it was

'Meikle v. Wenatchee North Central Fruit Distributors, 129 Wash. 619, 225 P. 819 (1924); In re Mt. Sinai Hospital, 250 N. Y. 103, 164 N.E. 871, 62 A.L.R. 564 (1928).

2 Dartmouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629, 635 (1819). 3 Lange v. Burke, 69 Ark. 85, 61 S.W. 165 (1901); Aiello v. Crampton, 201 F. 891 (8th Cir. 1912); McCaskill Co. v. United States, 216 U.S. 504 (1910); McCarroll v. Ozarks Rural Electric Coop. Corp., 201 Ark. 329, 146 S. W. 2d 693 (1940).

4 Rutledge Cooperative Association, Inc. v. Baughman, 153 Md. 297, 138 A. 29, 56 A.L.R 1042 (1927).

$29 U.S.C. 201 et. seq.