Non-share capital corporations must comply with the corporate law. This statement seems simple and logical. Unfortunately, sometimes non-compliance can be an issue.
Whether the reason for non-compliance rests with lack of knowledge, confusion of the roles and authority of the directors and members, or some other reason, the consequences of non-compliance can be severe and could expose the corporation and potentially its directors to liability.
The purpose of this article is simply to remind directors of non-share capital corporations of the importance of corporate compliance. A recent case can be used to illustrate.
In Pearson v. Eganville and District Senior Citizens' Needs Association (25 November 2010), Ottawa, Court File No. 10-49107 (Ont. Sup. Ct.) (unreported) ('Pearson'), a dispute among some of the directors of Eganville and District Senior Citizens' Needs Association (the 'Association') arose and it was decided that one of the directors of the Association should be removed from the board prior to the expiry of his term. The board of directors took it upon themselves to remove the director by passing a resolution to this effect at a meeting of the board of directors.
The Association is governed by the Corporations Act (Ontario) (the 'Act').
The removed director brought an application to the Superior Court of Justice requesting that the decision of the board of the Association be declared ultra vires because in Ontario, under the Act, the law is clear: the authority to elect and remove directors rests with the members, not the directors.
On this issue there can be no doubt: subsection 287(1) of the Act provides the members with the statutory authority to elect directors, and subsection 67(1) authorizes the members to remove a director prior to the expiry of that director's term of office, as long as this authority is provided for in the corporation's by-laws.
No such provision was included in the Association's by-laws and the members were never made aware of the board’s intentions.
The Association, like many other non-share capital corporations, has a wide membership but very few of the members, aside from the directors, ever attend members' meetings. The Association argued that for this reason, the directors ought not to be strictly held to comply with the corporate statute because the result was essentially a foregone conclusion, and the Association should not be put to great expense to reach a result that was all but certain. The Court did not accept this argument and said, in essence, that the democratic rights of the members cannot be ignored simply because of past practice.
The board of the Association initially took the position that Bourinot's Rules of Order provided the necessary authority. This position was later abandoned. It is important to understand, however, that while rules of order may be helpful in conducting meetings, they should be regarded only as 'helpers'. Rules of order cannot authorize an act that is contrary to the corporate statute. The corporate statute takes precedence over all other governance documents. The Court agreed that the rules of order were not helpful to the board of the Association on the issue of the election and removal of directors.
The Association also argued that the dispute in question was an internal matter and that the Court should not intervene. This is an important point and one that should be carefully considered.
As with business corporations, the Courts are not likely to intervene if the dispute relates to a matter to which the business judgment of the directors applies, or where the matter is an internal issue. However, if the issue is one of non-compliance with the corporate statute, the Court will, quite rightly, intervene. In Pearson, the Court held that there are minimum corporate requirements and those requirements were not followed by the directors in this case.
In the result, the declaration requested by the Applicant was granted, the action of the board of the Association declared ultra vires and the director in question returned to the position he was in prior to the invalid action of the board.
The message from this case is clear: non-share capital corporations must comply with the corporate law.
The Association is no further ahead. The by-laws must be amended, a meeting of the members called and held, and the matter put before the members. The result is not a foregone conclusion. Had the corporate law been followed in this instance, the matter would have been resolved long ago and while there would undoubtedly have been ill feelings on the part of one or more parties, the procedure would likely have withstood a legal challenge.
Awareness of the corporate law is important. Understanding how the governance documents of a non-share capital corporation work together, and the priority of those governance documents, is important. A regular compliance audit (a review of the governing statute, letters patent, and by-laws) can keep a corporation on track and may be invaluable to the corporation and its directors in the unfortunate circumstance of a legal challenge.