May 1, 2012 By: Kimberley Cunnington-Taylor
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Introduction

We are entering a new era in corporate law for non-share capital corporations in Ontario as the Not-for-Profit Corporations Act, 2010 (the 'ONCA') is nearly upon us1.

While there are many new concepts and rules for non-share capital corporations to learn, there have been no significant changes to the well-developed fundamental concepts underpinning the governance structure of a non-share capital corporation. One such fundamental concept is the division of powers as between the directors and members and the scope of each group's authority in respect of the governance of a non-share capital corporation.

In this article, I will discuss one discrete issue: the legal authority to elect and remove directors.

In order to undertake this discussion, it is important to take a quick look back at the history of the legislation applicable to non-share capital corporations in Ontario, as the last big change in the structure of the legislation took place with the enactment of The Corporations Act, 19532. By tracing the provisions relating to the election and removal of directors in the legislation from 1907 to the ONCA, I will illustrate that there has never been any change in the legislature's intent in this regard: the legal authority to elect and remove directors in an Ontario non-share capital corporation has always been solely within the authority of the members of the corporation.

'Framework' of the ONCA

The Ontario Ministry of Consumer Services stated in a press release issued May 12, 2010 that the ONCA will provide, among other things, a 'modern legal framework to enhance corporate governance and accountability …'. This modern legal framework includes moving to an 'as-of-right' system3, which is the system in place for business corporations in Ontario. In addition, the majority of the rules governing not-for-profit corporations will be set out directly in the ONCA itself, which means that an extensive set of by-laws to structure the corporation will not be as vital to a corporation as it currently is.

At this time it is important for all individuals involved in not-for-profit corporations in Ontario, and those advising not-for-profit corporations and their boards, to become familiar with the ONCA in order to learn the new rules. Many not-for-profit and charity law practitioners have been providing educational seminars and writing articles over the past few years to inform their clients, and the public, about the upcoming changes.

What Role Should Members Play?

Throughout the consultation process with the Ontario Ministry in connection with the drafting of the ONCA, the importance of the role that members play in a not-for-profit corporation was highlighted. The role assigned to members of not-for-profit corporations has not significantly changed over time, and essentially involves the members’ oversight of the directors. The members are able to exercise their control over the corporation through their ability to vote for the election of directors, as well as the removal of directors, if necessary. As such, the ONCA not only maintains the status quo of the statutory authority provided to members, one way the Ontario Ministry has attempted to enhance corporate governance and accountability is to expand the rights and remedies available to members. Such issues have been the focus of previous articles published in Charitable Thoughts4 and other publications and seminars provided by the Ontario Bar Association and others.

The Issue Surrounding Termination of Directors

In the February 2011 edition of Charitable Thoughts, I contributed an article entitled Non-share Capital Corporations must Comply with Corporate Law5. The article was based upon a recent court case involving the directors of an Ontario not-for-profit corporation6. As a reminder, the board of directors removed a fellow director from the board prior to the expiry of that director's term of office, and without taking the matter to the members for consideration, contrary to the provisions of the Corporations Act (Ontario)7 (the 'OCA'). The removed director successfully applied to the Court for an order quashing the decision of the board and reinstating him as a director of the corporation, on the basis that only the members have the right to take such an action.

In reviewing case law on this issue, it seems that arguments in favour of allowing directors to oust one of their own include: non-share capital corporations should not be held to strict compliance with the legislation; it is an internal matter; it is inconvenient to call a special meeting of members; and, well, the majority of the members don't come to members' meetings anyway.

On the eve of the implementation of the ONCA, there really should be no debate about the legal authority to elect and remove directors. The removal of a sitting director validly elected by the members is a very serious matter. In my view, often corporations do not fully appreciate the seriousness of the matter and the important oversight role the members are called upon to play in the governance of the corporation. And, there remains a lack of understanding of the corporate legislation itself, and the limits on the board's authority.

While the courts will allow not-for-profit corporations some leniency in respect of corporate compliance, the election and removal of directors is one area where the courts have time and again stated that the corporate law must be strictly complied with8. It is not a valid argument to suggest that the corpration be given a pass simply because the directors might be volunteering their time and 'they can&'t possibly be expected to know the law', or that the directors manage the operations of the corporation so they should be free to do so as they see fit regardless of what the legislation provides.

The law on this point in Ontario has remained the same for over a hundred years. The following is a brief summary of the law since the enactment of the The Ontario Companies Act9 in 1907 and shows, in table format in Schedule 'A' attached to this article, the language in the various revisions to this legislation.10

The 1907 Act

On April 20, 1907, The Ontario Companies Act11 (the “1907 Act”) was assented to.

Section 5 of the 1907 Act provided for the incorporation of companies and associations that had formerly been incorporated under The Act respecting Benevolent, Provident and other Societies, R.S.O. 1897, ch. 211 (the '1897 Act'). Essentially, the 1907 Act brought together in one place the corporate law applicable to both share capital and non-share capital corporations.

The 1907 Act, at subsection 5(3), provided that a memorandum of agreement must accompany the petition for incorporation (Schedule 'D'). Schedule 'D' set out 33 separate matters that could be included in the memorandum of agreement. The petitioners were permitted to adopt all or any of the provisions of the memorandum of agreement set out in Schedule 'D' or to substitute others in lieu of the provisions in Schedule 'D'. The memorandum of agreement was intended to be the regulations for the operation of the corporation and included provisions dealing with the following matters: (1) the selection of members, trustees, directors and officers; (2) the holding of meetings of members, trustees and directors; (3) the establishment of branches, (4) the payment of directors, trustees, officers and employees, (5) the control and management of the affairs of the corporation, and (6) the removal of directors by the members.

The election of directors was dealt with in section 80 of the 1907 Act, which provided that the directors were to be elected by the members of the corporation.

The 1907 Act went through a number of revisions over the years, notably in 1912, 191412 and 1927. The language of the sections dealing with the election and removal of directors changed slightly over time, but the legal authority in this regard did not change.

1953 Act

On April 2, 1953, The Corporations Act, 1953 was assented to (the '1953 Act'). The structure of the 1953 Act changed considerably and its structure has remained the same to the present day. In the 1953 Act, one piece of legislation was drafted and applied to a variety of types of corporations, including share capital and non-share capital corporations.

Part I of the 1953 Act applied to both share and non-share capital corporations, among others; Part II applied specifically to share capital corporations, and Part III applied specifically to non-share capital corporations. However, subsection 115(1) of the 1953 Act set out the specific provisions of Part II that also applied to Part III corporations. Part VIII contained general provisions applicable to both share capital and non-share capital corporations, among others. The memorandum of agreement at Form 4 was eliminated. This is the structure that most not-for-profit and charity law practitioners are used to working with today.

The provision in respect of the election of directors was moved to section 299 (in Part VIII – general application), and section 29 of Form 4 of the 1927 Act became subsection 66(1) of the 1953 Act (in Part II).

While the structure of the legislation changed to accord with the legislative intent at the time, the authority in respect of the election and removal of directors of non-share capital corporations did not change: this authority remained solely within the scope of authority of the members.

One question that may be asked is this: it is understandable that the provision relating to the election of directors was moved to the general application part of the statute (Part VIII) because the provision applied to both share capital and non-share capital corporations, but why would the removal of directors provision, a provision formerly applicable only to non-share capital corporations, be included in Part II, which part specifically applied to share capital corporations?

What is important is this: in the 1953 Act, the concept of cumulative voting for the election of directors was introduced. However, cumulative voting only applied to share capital corporations. This rule was set out in section 6413 of the 1953 Act in Part II. Section 6514 of the 1953 Act provided the procedure for the removal of directors prior to the expiry of their term of office where cumulative voting had been included in one of the corporation's governing documents identified in section 64. And, subsection 66(1)15 was included to provide the procedure for the removal of directors prior to the expiry of their term of office where cumulative voting was not provided for.

Because subsection 66(1) applied to both share capital and non-share capital corporations alike, and given that the conditions under which the members could remove directors had always been available to non-share capital corporations, it makes sense that this provision was included in Part II of the 1953 Act. And, because the legislators used section 115(1) to specifically state which provisions of Part II were applicable to non-share capital corporations, it made drafting sense to utilize one provision for both types of corporations.

1927 Act – Section 29 of Form 4 – Memorandum of Agreement. 1953 Act – Subsection 66(1)
The corporation, in general meeting, by a resolution, of which notice has been given in the notice calling the meeting, may remove any director before the expiration of his period of office, and may, by resolution, appoint another person in his stead; the person so appointed shall hold office during such time as the director in whose place he was appointed would have held the same if he had not been removed. R.S.O. 1914, c. 178, Form 4. Where the letters patent, supplementary letters patent or by-laws of a company do not provide for cumulative voting under section 64, the letters patent, supplementary letters patent or by-laws may provide that the shareholders may, by resolution passed by at least two-thirds of the votes cast at a general meeting of which notice specifying the intention to pass such resolution has been given, remove any director before the expiration of his term of office and may, by a majority of the votes cast at that meeting, elect any person in his stead for the remainder of his term.

Further, the removal of directors prior to the expiry of their term of office has always been a permissive provision. From the 1907 Act until the enactment of the 1953 Act, the members had this authority only if section 29 of the memorandum of agreement was adopted by the corporation upon incorporation. From the 1953 Act to the OCA, the members have had this authority only if the provision is included in the corporation's letters patent, supplementary letters patent or by-laws. The intent, however, never changed: if a corporation wanted to provide its members with this authority, it had to take positive steps to grant such authority.

The ONCA

As noted at the outset, we are moving to a new era of corporate law for not-for-profit corporations in Ontario. The ONCA is a rules-based model built upon the foundation of the business corporations legislation, but designed specifically for not-for-profit corporations. Because of the model of the legislation, the ONCA contains most of the rules for the governance and operation of the not-for-profit corporation. It is this rules-based model that allows corporations to modify their by-laws and include therein only essential matters not dealt with in the ONCA, or matters in which the default rule contained within the ONCA is not suitable or desirable to the particular corporation16.

Both the rules for election of directors and removal of directors are mandatory rules. Subsection 24(1) of the ONCA provides for the election of directors by the members17; and section 26 provides that the members may remove a director prior to the expiry of that director's term of office by passing an ordinary resolution at a special meeting of members18.

The introductory note to the ONCA states:

Directors may be removed by ordinary resolution of the members (i.e. majority vote), while the Corporations Act requires a two-thirds vote to do so. They may also resign from office.19

While a corporation will no longer need to take positive steps to provide the authority to members in a corporation's by-laws in order for the members to remove a director from office, the essential rule itself, the underlying logic of the rule, and the authority ascribed to the members has not significantly changed.

Conclusion

The argument that the board of a not-for-profit corporation should get a pass in respect of the removal of directors simply because the directors may not know the rules very well, has never been very strong. The courts consider the removal of a director validly elected by the members to be a very serious matter and routinely overturn the decision of the board when they attempt to usurp the authority of the members. And, as the above has illustrated, the law in respect of the election and removal of directors of an Ontario not-for-profit corporation has remained consistent throughout the history of corporate legislation in Ontario applicable to not-for-profit corporations.

It is important to properly guide our clients and not-for-profit corporations in respect of the changes about to take effect through the ONCA. However, it should be remembered that many provisions of the ONCA are rooted in the history of corporate law as it applies to not-for-profit corporations in Ontario, and essentially, when looking at the fundamental concepts, the more things change, the more they stay the same.

Schedule “A”

Election of Directors of Ontario Not-for-Profit Corporations
1907 1914 1927 1953 OCA ONCA
80. The affairs of the company shall be managed by a board of not less than three directors, who shall be elected by the shareholders in general meeting of the company. R.S.O., c. 191, s. 40, amended. 84. The affairs of the company shall be managed by a board of not less than three directors, who shall be elected by the shareholders in general meeting. 2 Geo. V. E. 31, s. 82.
85. The persons named as provisional directors in the special Act or in the letters patent shall be the directors of the company until replaced by the same number of others duly elected in their stead by the shareholders in general meeting, which shall be held not later than six months after the coming into force of the special Act or the date of the letters patent, and they shall be eligible for election. R.S.O. 1914, c. 178, s. 83; 1916, c. 35, s. 5.
 
86. The affairs of the company shall be managed by a board of not less than three directors who shall be elected by the shareholders in general meeting. R.S.O. 1914, c. 178, s. 84.
299(1). The directors shall be elected by the shareholders or members in general meeting and the election shall be by ballot or in such other manner as the by-laws of the corporation prescribe. R.S.O. 1950, c. 59, s. 84, part; s. 89, cl. (b), amended. 287(1). The directors shall be elected by the shareholders or members in general meeting and the election shall be by ballot or in such other manner as the by-laws of the corporation prescribe. R.S.O. 1990, c. C.38, s. 287 (1). 24(1). At the first meeting of the members and at each succeeding annual meeting at which an election of directors is required, the members shall, by ordinary resolution, elect directors to hold office for a term expiring not later than the close of the fourth annual meeting of the members after the election, as provided in the by-laws. 2010, c. 15, s. 24 (1).

 

Removal of Directors by Members of Ontario Not-for-Profit Corporations
1907 [Schedule 'D'] 1914 [Form 4] 1927 [Form 4] 1953 OCA ONCA
S. 27.
The corporation in general meeting may, by a special resolution, remove any director before the expiration of his period of office, and may, by an ordinary resolution, appoint another person in his stead; the person so appointed shall hold office during such time only as the director in whose place he was appointed would have held the same if he had not been removed.
 
S. 29. The corporation, in general meeting, by a resolution , of which notice has been given in the notice calling the meeting, may remove any director before the expiration of his period of office, and may, by resolution, appoint another person in his stead; the person so appointed shall hold office during such time as the director in whose place he was appointed would have held the same if he had not been removed. 2 Geo. V. C. 31, Form 4.
 
S.29.
The corporation, in general meeting, by a resolution, of which notice has been given in the notice calling the meeting, may remove any director before the expiration of his period of office, and may, by resolution, appoint another person in his stead; the person so appointed shall hold office during such time as the director in whose place he was appointed would have held the same if he had not been removed. R.S.O. 1914, c. 178, Form 4.
 
Ss.66(1). Where the letters patent, supplementary letters patent or by-laws of a company do not provide for cumulative voting under section 64, the letters patent, supplementary letters patent or by-laws may provide that the shareholders may, by resolution passed by at least two-thirds of the votes cast at a general meeting of which notice specifying the intention to pass such resolution has been given, remove any director before the expiration of his term of office and may, by a majority of the votes cast at that meeting, elect any person in his stead for the remainder of his term.
 
Ss. 67(1).
Where the letters patent, supplementary letters patent or by-laws of a company do not provide for cumulative voting under section 65, the letters patent, supplementary letters patent or by-laws may provide that the shareholders may, by a resolution passed by at least two-thirds of the votes cast at a general meeting of which notice specifying the intention to pass such resolution has been given, remove any director before the expiration of his or her term of office, and may, by a majority of the votes cast at that meeting, elect any person in his or her stead for the remainder of the term.
 
Ss. 26(1).
The members of a corporation may, by ordinary resolution at a special meeting, remove from office any director or directors, except persons who are directors by virtue of their office. 2010, c. 15, s. 26 (1).
 
Ss. 26(2).
A director elected by a class or group of members that has an exclusive right to elect the director may only be removed by an ordinary resolution of members of that class or group. 2010, c. 15, s. 26 (2).
 
Ss. 26(3).
A vacancy created by the removal of a director may be filled at the meeting of the members at which the director is removed or under section 28. 2010, c. 15, s. 26 (3).
 

 


1 Note that the ONCA uses the term “not-for-profit corporation”.
2 R.S.O., 1953, c. 19.
3 Which means, in essence, that a corporation will be incorporated as long as the articles contain the prescribed information and the filing fee is paid.
4See, for example: “An Update on Bill 65, the Ontario Not-for-Profit Corporations Act”, by Linda J. Godel, Volume 14, No. 1, October 2010; and “Introduction of Bill 65, the Ontario Not-for-Profit Corporations Act”, by Jane Burke-Robertson and Terrance S. Carter, Volume 13, No. 4, June 2010.
5 Cunnington-Taylor, Kimberley A., Non-share Capital Corporations must Comply with Corporate Law, in Ontario Bar Association, Charity and Not-for-profit Law Section, Charitable Thoughts, Vol. 14, No. 2 – February 2011.
6 Pearson v. Eganville and District Senior Citizens’ Needs Association (25 November 2010), Ottawa, Court File No. 10-49107 (Ont. Sup. Ct.) (unreported).
7 R.S.O., 1990, c. C38.
8 Lee v. Lee’s Benevolent Association of Ontario, 2005 CarswellOnt 180, 136 A.C.W.S. (3d) 465, [2005] O.J. No. 194 (Ont. Div. Ct. Jan 10, 2005) affm’g [2004] O.J. No. 6232.
9 R.S.O., c. 191.
10 It is outside the scope of this article to include all revisions of the legislation from 1907 to the present time.
11 The long title of the 1907 Act was An Act respecting Joint Stock and other Companies.
12 The Memorandum of Agreement set out as Schedule “D” in the 1907 Act became Form 4 by 1914 and remained Form 4 until the enactment of the 1953 Act.
13 Section 65 in the OCA.
14 Section 66 in the OCA.
15 Subsection 67(1) in the OCA.
16 The ONCA contains both default rules and mandatory rules. A default rule may be changed according to the procedure in the ONCA, whereas a mandatory rule may not be changed.
17 Note that there are limited exceptions. See, for example, subsection 23(4) – ex officio directors, and subsection 24(7) – the appointment of additional directors by the directors.
18 Note that the authority of the members to remove directors does not apply to ex officio directors and if one or more directors are elected by a class or group of members, only that class or group of members is entitled to remove that director or directors.
19 Bill 65, An Act to revise the law in respect of not-for-profit corporations, (S.O. 2010, Ch. 15), p. ii.

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