A cooperative association is generally controlled by the Board of Directors. The mode of appointment of directors may be stipulated in the statute, charter, or bylaw of the association. The directors are given considerable independence and are authorized to make decisions without obtaining the consent of the members. For instance, the directors can enter into a compromise settlement in a dispute involving the cooperative if the association benefits from such an agreement.
The directors may delegate discretionary powers to the subordinates and have a duty of general supervision and control over their subordinates. Courts will not interfere in the day-to-day administration of an association in the absence of allegation of fraud, corruption, or ultra vires activities.
In the case of an incorporated association, directors are not liable for the acts or omissions of officers or agents, other than co-directors, unless he/she has participated in those acts, or has failed to exercise ordinary and reasonable supervision over such subordinates.
“Courts will treat directors with more leniency with respect to a single isolated act of fraud on the part of a subordinate officer or agent, than where the practice appears to have been so habitually and openly committed as to have been easily detected upon proper supervision[i].” Hence, stockholders cannot sue the corporation and its directors before seeking remedy from the directors for any alleged malpractice.
The actions of the board of directors are subject to test of good faith. Directors cannot bypass the byelaws and charter of the association and the members have a right to challenge the actions of a director in the event of any violation of by laws. In certain instances, stockholders can recover personal judgments against the directors for non compliance with the bylaws[ii]. Courts have held that “bylaws must be given a reasonable construction and, when reasonably susceptible thereof, they should be given a construction which will sustain their validity[iii].
[i] Lowell Hoit & Co. v. Detig, 320 Ill. App. 179, 182 (Ill. App. Ct. 1943)
[ii] Driver v. Producers Cooperative, Inc., 233 Ark. 334 (Ark. 1961)
[iii] Sanchez v. Grain Growers Ass’n, 126 Cal. App. 3d 665, 672 (Cal. Ct. App. 1981)