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Non-profit members and directors must adhere to corporate statutes and by-laws

nonprofitorgThe relationship between non-profit members and directors is sometimes akin to the relationship between parents and their newly-licensed teen-aged drivers. The key to the family car grants the teenager new freedoms, but sometimes, a parent’s only option is to reclaim the key. Members elect or appoint directors, delegating to them the power to manage the corporation. Corporate statutes and by-laws restrict the ability of members to participate in the management of the corporation once the directors hold the reins. Often, the only way for members to effect changes that the board opposes, is to reclaim the reins, by removing existing directors and appointing more amenable ones. Vaughan Community Health Centre Corporation v Annibale (2015 ONSC 2559 (CanLII)), recently examined the roles of members and directors, and the importance of adhering to corporate by-laws and statutes.

Governance structure 

The Vaughan Community Health Centre Corporation (the “Corporation”) is a registered charity and non-share corporation, incorporated by Letters Patent, under Ontario’s Corporations Act (the “Act”).

The membership of the Corporation consisted of five ex-officio Voting Members (the “Voting Members”), as well as non-voting ex-officio members. The non-voting members included the Corporation’s directors. The Corporation had 15 Directors – 14 elected and one appointed by a related entity. Three directors were also City of Vaughan Councillors (the “Councillor Directors”).

Background

In August 2013 the Voting Members advised the Board of Directors that they would be conducting an independent review of the Corporation’s governance practices. They commissioned the review without consultation with, or instructions from the Board. A draft report resulting from the review was never finalized. The draft report recommended that the Councillor Directors resign due to alleged conflicts of interest arising from their positions as city councillors. The report provided no explanations or details of the alleged conflicts of interest.

In August 2014 the voting members wrote to the Board requisitioning a special members’ meeting to consider a resolution to:

  1. Remove the three Councillor Directors immediately;
  2. Amend the Corporation’s by-laws to exclude categories of persons from membership or directorship in the Corporation; and
  3. Amend the by-laws to reduce the number of elected directors from 14 to 10.

In September 2014 the Board passed a motion to reject the voting members’ meeting requisition, on the basis that it did not comply with the by-laws. The voting members ignored the motion and gave the Board a Notice of General Meeting of the Members.

Thus, the Corporation, through its Board of Directors, sought a Court declaration that: (i) the Resolution proposed by the Voting Members and; (ii) any meeting of its Members to pass this Resolution, were contrary to the Corporation’s by-laws and the Act.

The Court’s decision

The Court granted the Corporation the declaration it sought, by resolving two key questions:

  1. Must the Voting Members comply with the Corporation’s by-laws when removing Directors?
  2. Are Voting Members authorized to unilaterally make or amend by-laws?

The answers:

  1. Yes – Voting Members must comply with the by-laws when removing Directors.

Under section 67 of the Act, the letters patent, supplementary letters patent or the by-laws of a corporation can provide for the removal of directors by the corporation’s members.

The Corporation’s by-laws prescribe the processes for removing directors. Directors may be removed by a resolution of the Members. The grounds for removal are: (i) absenteeism, or (ii) non-compliance with the Act, the by-laws, rules, regulations, policies and procedures, including, without limitation, the confidentiality, conflict of interest and standard of care provisions in the by-laws. The by-laws also include procedural and disclosure requirements in the event of actual or alleged conflicts of interest. A simple majority of the Board must determine whether there are conflicts of interest, and its determination is final. The Board made no such determination regarding the Councillor Directors.

As Directors were also ex-officio non-voting members, if they were removed as Directors, they would cease to be Members. Under common law principles of natural justice, members must be given opportunities to respond to allegations that may result in their removal from membership. Under the Corporation’s by-laws, Directors must be provided with opportunities to respond to conflict of interest allegations, or attempts to remove them from the Board.

There was no evidence of conflicts of interest or any other breaches of the by-laws, in the Resolution, the draft report or Court evidence, to justify the removal of the Councillor Directors. There was no substantive evidence of any allegations to which the Councillor Directors could respond.

The Court therefore ruled that the Voting Members did not comply with the by-laws when they proposed the removal of the Councillor Directors.

  1. No – Voting Members are not authorized to unilaterally make or amend by-laws.

Under s.129(1) of the Act, the ability to pass by-laws rests solely with directors. Under s.129(3), members can, at a general meeting or an annual meeting, confirm, reject, amend or otherwise deal with any by-law passed by directors and submitted to the meeting for confirmation. The Corporation’s By-laws contain similar provisions. By-law changes must first be passed by the Board and then presented to the Voting Members, who may approve, reject or amend them.

Section 285(1) of the Act provides that a corporation may increase or decrease the number of its directors by Special Resolution (under section 1 of the Act a Special Resolution is a resolution passed by directors and confirmed with or without variation by at least 2/3rds of the votes cast at a general meeting of members or shareholders, duly called for that purpose, or, in lieu of this confirmation, by the consent in writing of all the members or shareholders entitled to vote at such meeting).

Because the Voting Members were not authorized to unilaterally make or amend By-laws, they lacked authority to change the size or composition of the Board, as proposed in the resolution.

Because the resolution was inconsistent with the Act and the by-laws and therefore outside the purview of the Voting Members’ role, the Voting Members were not authorized to requisition the Board for a members’ meeting, to pass the resolution. Under s.295(1) of the Act, voting members of a non-share corporation may request that directors call a meeting of the members for any purpose connected with the affairs of the corporation that is: (i) properly within the purview of the members’ role and (ii) not inconsistent with the Act. Under s.296(1)(a) of the Act, voting members may requisition directors to give the members notice of any resolutions that may be properly moved and is intended to be moved at the requisitioned meeting.

The Corporation’s by-laws contained similar provisions. Additionally, if the Board, in its sole discretion, finds that a requisition meets the foregoing criteria, it must call and hold the requisitioned meeting.

The resolution was not lawful because it did not follow the proper procedures to remove the Directors, amend the By-laws to exclude certain persons from membership or directorship in the Corporation or, amend the By-laws to reduce the number of voting Directors from 14 to 10. As the Resolution was unlawful, it was inconsistent with the Act and outside the purview of the Members’ role. The Court therefore granted the Corporation a declaration to that effect, and prohibited the Voting Members from passing the Resolution or any part of it, at any meeting of the Members of the Corporation.

The outcome might have been different if the Corporation had been governed by the Canada Not-for-Profit Corporations Act or Ontario’s not-yet-in-force Not-for-Profit Corporations Act. Both allow voting members to make by-law changes, in sections 152(6) and 17(6), respectively.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. Apolone is leveraging 20 years of business and accounting experience to build a commercial litigation practice with an emphasis on construction law. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here

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