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Revising the Ontario Corporations Act:
Part 2 of 3 – Boards, Directors and Officers
The Ontario Ministry of Government and
Consumer Services is conducting consultations regarding reform of the
Ontario Corporations Act, the legislation that governs the creation, governance,
and dissolution of Ontario not-for-profit corporations. In
Part 1 of this series on proposed reforms to the Act, we provided background
on the consultations and the
Ontario Nonprofit Network (ONN) Expert Working Group, which is providing
assistance to the nonprofit sector in deliberating on the issues, as well as a
summary of the Ministry’s Consultation Paper #1 and the ONN’s response. Among
the ONN recommendations is that new, separate legislation is required to
recognize and address the unique qualities, functions and purposes of Ontario’s
public benefit sector, distinct from legislation governing other forms of
non-profits (ONN 2008c, 3).
Parts 2 and 3 of this Community Dispatch series summarize the issues
covered in Consultation Papers #2 and #3, respectively, and the ONN’s response.
More comprehensive discussion is contained in the Ministry’s Consultation
Papers, and the ONN’s full briefing papers. We encourage all nonprofits to
engage in this process and to submit their own comments to the Ministry of
Government and Consumer Services. The deadline for submissions is May 31,
2008. The ONN briefing papers contain directions for submitting your
response to the Ministry. The Ministry consultation papers, ONN briefs, as well
as submissions by Imagine Canada and
the United Ways of Ontario Council are found at
http://ontariononprofitnetwork.ca/resources/all. Additional explanation and
discussion on many of these issues are in the Supplementary Materials at
www.gov.on.ca/mgs/en/AbtMin/STEL02_047145.html
Joey Edwardh, Executive Director
Consultation Paper #2 recognizes that many of the provisions in the
Corporations Act related to directors and officers may be outdated, and lack
provisions common in other corporate statutes that would provide flexibility.
Some matters related to boards, such as whether the revised Act should
include default by-laws, and measures to prevent self-perpetuating boards, are
covered in Consultation Paper #3.
ISSUE: Number of Directors
Current provisions stipulate that an organization have a fixed number of
directors (with a minimum of three), and that a change to the number of
directors requires a special resolution of members. The consultation is
examining whether a minimum should be required and, if so, what the minimum
should be, possibly depending on the nature of the organization (MGS 2007b,
6-7).
ONN Recommendation: The ONN recommends that, regardless of the type of
not-for-profit, organizations be able to specify a minimum (no less than
three) and maximum number of directors, rather than a fixed number, which
could be changed to suit changing realities through amendments to the
corporation’s articles (ONN 2008b, 3).
ISSUE: Qualifications of Directors
Current provisions require that a director be a member of the corporation,
eighteen years of age or older, and not an undischarged bankrupt. The
consultation is examining the membership requirement and whether other
qualifications should be required: as an example, the Ontario Business
Corporations Act stipulates that directors not be ‘incapable’ (MGS 2007b,
8-9).
ONN Recommendation: The ONN recommends that “only individuals (as
opposed to other organizations) should qualify to be directors. Directors
should not be under 18 years of age, bankrupt, or ‘incapable,’ “ but notes:
“ We agree with the note of caution in this regard from the United Ways of
Ontario’s response to Consultation Paper #2 – “If a person was found
to be ‘incapable’ in the past but is no longer deemed to be so, are they now
eligible to serve as a director? …if not, we would have concerns about
unreasonable impediments to, for example, consumer/ survivors of mental
health services on non-profit boards” (ONN 2008b, 3).
The ONN also states that legislation should not require that directors
be members of the corporation, and that at least two of the required three
directors should not be officers or employees of the corporation.
ISSUE: Term of Office
The Act does not stipulate a maximum length of term for directors. The
consultation is examining whether Ontario’s Corporations Act should
include a maximum term of office, as is the case in some other jurisdictions
(MGS 2007b, 10). Additional discussion is contained in Consultation Paper #3
(MGCS 2008, 33-36).
ONN Recommendation: The ONN recommends that the maximum time for a
director to remain in office before an election is required should be three
years, unless a lesser term is specified in the organization’s by-laws, and
that there should be no maximum limit on consecutive terms of office, unless
restricted by the organization’s by-laws (ONN 2008b, 4).
ISSUE: Directors’ Meetings
The Act makes provisions only on matters of quorum, place and
electronic or telephone meetings. The consultation is examining whether there
should also be stipulations regarding notice and resolutions in lieu of a
meeting, i.e., written unanimous resolutions that allow directors to transact
business without meeting (MGS 2007b, 11-13).
ONN Recommendation: The ONN recommends that “the reformed legislation
should permit meetings of directors to be called on the notice provisions
required in the organization’s by-laws” and that directors “may waive the
notice of a meeting, and attendance at a meeting fulfills the requirements
of waiving notice.” It also recommends that the reformed Act “should
provide for a resolution to be signed by all directors in order to be
considered as a resolution passed at a meeting of directors” (ONN 2008b, 4).
ISSUE: Resignation and Removal of Directors
Currently, corporations may remove a director prior to the expiry of the term
by a two-thirds vote (selecting a replacement director for the remainder of the
term requires a majority vote). In case of a resignation, directors may, if
there is a quorum, fill the vacancy for the remainder of the term of office. If
there is no quorum, a members’ meeting is required to fill the vacancy. The
consultation is examining whether it should be permitted that directors be
removed through an ordinary resolution (i.e., majority of votes cast, rather
than two-thirds), the rules regarding their replacement, as well as whether
certain rights should be allowed to directors who resign or are removed, such as
the right to submit a written statement to the corporation (MGS 2007b, 14-15).
ONN Recommendation: The ONN recommends that organizations be allowed to
remove directors by majority vote of the class of members that elected the
director, and that “if a replacement director is not elected by the members
(or class of members) at the time of removal, the remaining directors should
decide whether to replace the resigned director before the next election of
directors.” It also recommends that directors be permitted to resign at any
time and submit written reasons for their resignation, but that the minimum
required number of directors not be allowed to resign until their successors
have been elected/appointed (ONN 2008b, 4).
ISSUE: Officers
Currently, the Act requires only that a president be elected and a
secretary be appointed. By a special resolution, a corporation may elect a chair
of the board to be assigned any or all of the duties of a president, and
additional officers may be appointed. Officers need not be directors or members,
with the exception of the president and chair, who must be both. The
consultation is examining whether the Act should provide for the appointment of
other specific officers, and whether officers should be required to be directors
(MGS 2007b, 16).
ONN Recommendation: The ONN recommends that a corporation have, at
minimum, a president (who is also a director) and a treasurer (ONN 2008b,
4).
Consultation Paper #2 notes that the Corporations Act “lacks
provisions that set out the duty of care, standard of care, and defences against
liability applicable to directors and officers. Directors may be personally
liable to account for losses from breach of fiduciary duties, conflict of
interest, fraud, negligence, or criminal behaviour. Directors may also be
personally liable for unpaid wages, taxes, and pension contributions owing by a
corporation when the corporation becomes insolvent” (MGS 2007b, 23). The
following issues deal with this area of concern.
ISSUE: Duty of Care and Loyalty
Consultation Paper #2 notes that, in actual legal application, what
constitutes standard of care may differ between different directors, such that,
for example, a director who has legal training may be held to a higher standard
than one who does not (MGCS 2007b, 17).
Recognizing the difficulty in recruiting and retaining qualified directors
and officers of not-for-profit corporations, the disincentive that such lack of
clarity regarding liability provides, and the suggestion that it is inherently
unfair to allow those who volunteer their time in order to provide a valuable
public service to face liability, the consultation asks a number of questions
regarding how this issue can be addressed.
ONN Recommendation: The ONN recommends that the revised Act
“require the same duty of care and loyalty required of directors of
for-profit organizations: to act honestly and in good faith, with a view to
the best interests of the corporation; and to exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable
circumstances. This objective test is more appropriate than a test that
involves subjectivity and a higher standard of care required of some
directors” (ONN 2008b, 5).
ISSUE: Due Diligence Defence
A due diligence defence “would restrict liability to circumstances where the
director did not perform as he or she could reasonably have been expected to
perform” (MGS 2007b, 19). Currently, the defence exists in common law, but the
inclusion of such a provision in a revised Corporations Act would clarify
that it is also specifically applicable to directors of not-for-profit
corporations (MGS 2007b, 19-20).
ONN Recommendation: The ONN recommends that the reformed Act
“mirror other legislation, including the Ontario Business Corporations
Act, that absolves directors from liability if they relied, in good
faith, on information from experts such as accountant, lawyers, engineers,
appraisers and others, whose profession confers credibility. Such
information and advice can also serve as a defence if it comes from staff of
the organizations” (ONN 2008b, 5).
ISSUE: Indemnification and Insurance
Currently, the Act allows not-for-profit corporations to indemnify
their directors and officers for costs, charges and expenses arising out of
legal actions, and to purchase liability insurance. However, a charitable
corporation may purchase insurance for its directors only if it complies with
the Charities Accounting Act (or regulation), or obtains a court order
authorizing the purchase. The consultation is asking whether not-for-profit
corporations should be permitted to indemnify and/or purchase liability
insurance for their officers and directors (MGS 2007b, 20-21).
ONN Recommendation: The ONN recommends that not-for-profit organizations
continue to be allowed to purchase liability insurance to cover the
indemnification of people acting in their capacity of directors or officers
(ONN, 2008b, 5).
ISSUE: Limiting Liabilities of Directors and Officers
Currently, the Act contains no provisions capping the liabilities of
directors and officers. The consultation is examining whether directors and
officers should “be shielded, in whole or in part, from personal liability, or
provided with caps on personal liability” (MGS 2007b, 24) and whether
distinction should be made between those who are remunerated and those who serve
on a volunteer basis. One example noted is that used in the
Saskatchewan Non-Profit Corporations Act, under which “directors and
officers are not personally liable in any civil action that arises out of an act
or omission connected with the responsibilities of a director or officer, as
long as he or she acted in good faith. The general immunity does not extend to
loss caused by fraud or criminal misconduct. Directors remain liable for certain
statutory liabilities” (MGS 2007b, 22-23).
ONN Recommendation: The ONN recommends that the Ontario follow the
Saskatchewan model (ONN 2008b, 5).
ISSUE: Conflict of Interest
Currently, the Act provides a process for directors to disclose direct or
indirect interest in a contract with the corporation, and stipulates that a
director (but not an officer) be liable to a fine if the conflict of interest
makes the contract subject to being declared void. The consultation is examining
whether conflict of interest provisions should be amended; should be applied not
only to contracts but to other matters as well; and should apply to both
directors and officers (MGS 2007b, 25-27).
ONN Recommendation: The ONN recommends that “the reformed Act should
mirror other frameworks, such as the Saskatchewan Non-Profit Corporations
Act, in defining conflict of interest on the part of directors and
officers, and requiring certain action in those cases. A director or officer
should be required to disclose, in writing, the fact that he or she is party
to a contract, has a material interest in a contract, or has an interest in
any other material transaction of the corporation. Furthermore, directors or
officers with a conflict of interest should not be permitted to vote on
resolutions dealing with such transactions” (ONN 2008b, 5).
References
Ministry of Government Services (MGS, 2007a). Consultation paper:
Modernization of the legal framework governing Ontario not-for-profit
corporations. [Toronto]: May 7, 2007.
www.gov.on.ca/mgs/en/AbtMin/STEL02_047145.html
Ministry of Government Services (MGS, 2007b). Consultation paper #2:
Modernization of the legal framework governing Ontario not-for-profit
corporations. [Toronto]: August 22, 2007.
www.gov.on.ca/mgs/en/AbtMin/STEL02_047145.html
Ministry of Government and Consumer Services (MGCS, 2007c). Supplementary
materials to May 7, 2007 consultation paper: Modernization of the legal
framework governing Ontario not-for-profit corporations. [Toronto: Dec
2007].
www.gov.on.ca/mgs/en/AbtMin/STEL02_047145.html
Ministry of Government and Consumer Services (MGCS, 2008). Consultation
paper #3: Modernization of the legal framework governing Ontario not-for-profit
corporations. [Toronto: February 28, 2008].
www.gov.on.ca/mgs/en/AbtMin/STEL02_047145.html
Ontario Nonprofit Network Expert Working Group (ONN, 2008a). Revising the
Corporations Act: A brief to the sector from the Ontario Nonprofit Network
Expert Working Group regarding Consultation Paper #1.
http://ontariononprofitnetwork.ca/resources/all
Ontario Nonprofit Network Expert Working Group (ONN, 2008b). Revising the
Corporations Act: A brief to the sector from the Ontario Nonprofit Network
Expert Working Group regarding Consultation Paper #2.
http://ontariononprofitnetwork.ca/resources/all
Ontario Nonprofit Network Expert Working Group (ONN, 2008c). Revising the
Corporations Act: A brief to the sector from the Ontario Nonprofit Network
Expert Working Group regarding Consultation Paper #3.
http://ontariononprofitnetwork.ca/resources/all
PDF: 105k (Community Dispatch)
Produced by Community Development Halton
860 Harrington Court
Burlington, Ontario L7N 3N4
(905) 632-1975, (905) 878-0955; Fax: (905) 632-0778; E-mail:
office@cdhalton.ca
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