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Revising the Ontario Corporations Act:
Part 3 of 3 – Membership and Corporate Finance
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
ISSUE: Membership Lists
Under the current Corporations Act,” any person may obtain a list of
the corporation’s members if it is to be used for purposes in connection with
the corporation. In practice, it is normally only members who are provided with
these lists since those outside of the corporation are not always able to show
that they will be using the list for purposes in connection with the
corporation” (MGCS 2008, 4).
ONN Recommendation: The ONN recommends that access to membership lists
should be restricted to members, and only then in connection for the purpose
of connection with the corporation, in order to increase the privacy of
members, reduce potential for illegitimate requests for the list and reduce
confusion regarding access. It recommends that a signed affidavit be
required for acquiring the list. In regard to the type of information
provided on the list, the ONN recommends that each corporation decide what
contact information is appropriate (ONN 2008c, 4-5).
ISSUE: Transferability of Membership
The current Corporations Act provides that, “subject to a contrary
provision in the letters patent, membership interests are not transferable and
membership ceases on the death of a member” (MGCS 2008, 8).
ONN Recommendation: The ONN recommends that memberships not be
transferable, but highlights that this topic is indicative of the need for
separate legislation to govern public benefit corporations, as distinct from
other not-for-profit organizations, such as private clubs, in which
membership may have significant monetary value (ONN 2008c, 5).
ISSUE: Termination of Membership and Disciplinary Measures
The current Corporations Act “does not establish any rules in respect
of discipline of members or termination of membership. It only states that a
membership interest terminates upon the death or resignation of a member.
Directors may designate rules on termination and suspension of membership in the
by-laws” (MGCS 2008, 5).
ONN Recommendation: The ONN notes that disciplinary measures do not
apply to public benefit corporations and that this area, too, underscores
the need for separate legislation. Regarding termination of membership, ONN
recommends that “rights should be guaranteed in the reformed Act in
order to ensure members are entitled to a minimum level of rights in the
event of a termination” and that “articles or by-laws may provide that
directors have the power to terminate a membership interest in circumstances
described in the articles or by-laws” after a fair hearing and with the
ability to apply for relief to a court under the oppression remedy (ONN
2008c, 5).
ISSUE: Quorum at Members’ Meetings
Consultation Paper #3 notes that “Directors may pass by-laws in
respect of quorum requirements, but, where no such by-laws exist, a corporation
is left without any quorum rules as these are not set out” in the
Corporations Act (MGCS 2008, 10).
ONN Recommendation: The ONN recommends that quorum rules are not needed
in a reformed Act, and must be set by corporations in their by-laws.
It also makes recommendations in regard to proxies (see ONN 2008c, 6).
ISSUE: Members’ Voting Agreements
“Voting agreements allow members to exercise their power to vote on a basis
different from the votes they have according to their membership interest (where
different classes of membership carry different voting rights)” as with pooling
of votes. The Corporations Act “does not contain any provisions dealing
with voting/pooling agreements. However, there is nothing preventing members
from entering into these agreements privately, either orally or in writing,
although the enforceability of such agreements is not clear in the absence of a
statutory provision authorizing them” (MGCS 2008, 6).
ONN Recommendation: The ONN recommends that the reformed Act not
refer to voting/pooling agreements, and that such agreements should be
discouraged, “as they tend to result in colluding groups, which can override
the wishes of members” (ONN 2008c, 6).
ISSUE: Member Remedies, Compliance Orders and Oppression Remedy
As explained in Consultation Paper #3, “remedies refer to the means
available to members to protect themselves and achieve redress for an injustice
caused by an act of a corporation or its directors.” They may include “the right
to apply to the court for a compliance order when the corporation, or one of its
directors, officers or employees fails to perform the duty imposed by the Act,
or for the appointment of an inspector to investigate the management of the
corporation, or a person to audit its books” (MGCS 2008,13).
The Corporations Act provides for additional remedies that do not
require court involvement, such as removal of a director by a two-thirds vote;
requiring the directors to call a general meeting of all members for any purpose
connected with the affairs of the corporation; or requiring that a resolution be
presented at a general meeting of members” (MGCS 2008, 13).
The consultation is investigating, among other issues, what members’ remedies
should be allowed; whether the criteria for compliance orders should be
broadened; and whether the Corporations Act should include a right to
require mediation or binding arbitration in cases of this kind. Further
discussion is included in Consultation Paper #3 (MGCS 2008, 13-19).
ONN Recommendation: The ONN notes that “compliance orders are available
to members or other complainants in cases of non-compliance not only with
the Act, but also with the public benefit corporation’s articles and
by-laws. However, compliance orders do not cover a public benefit
corporation’s purpose” (ONN 2008c, 6). It recommends that the revised
Corporations Act should “extend the availability of compliance orders to
cases where a corporation fails to comply with duties in addition to those
set out in the Act such as those imposed by the articles or by-laws of the
corporation” (ONN 2008c, 7), and that compliance orders should also be
available, at the discretion of the courts, to other complainants, such as
former members.
Further, ONN “is not persuaded that there is a need to provide for an
oppression remedy in the reformed Act” but suggests there is a need
for member protection by such means as allowing by-laws to take effect only
after approval by a majority of members (ONN 2008c, 7).
ISSUE: Derivative Action
Derivative action “refers to the right of members to apply to a court to seek
permission to bring an action on behalf of the corporation for breach of the
directors’ and officers’ fiduciary duty to the corporation or for any other
obligation to the corporation where the corporation is not taking action to
pursue its own rights. For example, members may apply to court where directors
pay excessive salaries or give away corporate assets” (MGCS 2008, 20).
Derivative action provisions do not currently exist in the Ontario
Corporations Act, but are common in business corporation statutes, and are
also included in the
Saskatchewan Non-Profit Corporations Act.
ONN Recommendation: The ONN supports including derivative action in the
Act, available to members, current and former directors and officers,
directors appointed by the Minister, or other person who, in the discretion
of the court, is a proper person to make an application (ONN 2008c, 8).
ISSUE: Dissent and Appraisal
This issue pertains to the right to fair payment for membership interests,
where the member dissents on a shareholder vote. Further discussion is contained
in Consultation Paper #3 (MGCS 2008, 23-25). The ONN states that this is
appropriate for private clubs, but again highlights the need for separate
legislation to cover pubic benefit corporations (ONN, 2008c, 8).
ISSUE: Financial Review in Lieu of an Audit
Consultation Paper #3 recognizes that “the cost and administrative
burden associated with undergoing an annual audit can be considerable,
especially for small not-for-profits. To minimize this expense, some
not-for-profit statutes permit corporations to undergo a financial review in
lieu of an audit, if annual incomes fall within a given threshold” (MGCS 2008,
26).
ONN Recommendation: The ONN notes that “a financial review, like an
audit, is performed by a public accountant, but is not as in depth or
extensive as a audit. While not as thorough, a review is much more
affordable, especially for small public benefit corporations.” It recommends
that financial review in lieu of an audit be permitted “for public benefit
corporations with annual incomes under an established threshold” that is set
by regulation and reviewed every five years in consultation with the sector.
It recommends that, for 2008-2013, public benefit corporations with income
less than $500,000 but greater than $100,000 be able to opt for financial
review in lieu of audit, if passed by 80% of members at a members’ meeting,
and that public benefit corporation with incomes not exceeding $100,000
could opt to conduct neither an audit nor a review, with consent of 80% of
members (ONN 2008c, 9).
ISSUE: Financial Disclosure
Under the current Corporations Act, the directors “must present
financial statements to members during the annual meeting. The statements for
the period must include a statement of profit and loss, a statement of surplus,
a balance sheet, and the auditor’s report, if applicable. There is no
requirement for financial statements to be distributed to members in advance of
the annual meeting” (MGCS 2008, 27). There are also stipulations regarding
proper financial record keeping.
ONN Recommendation: ONN recommends that, with the notice of the annual
meeting, directors must provide members with the corporation’s financial
statements, auditor’s report, if any, and any further information required
by the articles or by-laws, and that this information may be delivered
electronically. It further recommends that corporations with an income les
than a threshold set by regulation (it recommends the threshold be $ 100,000
for 2008-2013) may opt out of this obligation (ONN 2008c, 10).
ISSUE: Borrowing and Debt Issuance
The Corporations Act stipulates that directors may not borrow money or
issue debt unless by-laws are in place to allow for these activities, and that,
to be effective, such by-laws must be confirmed by a two-thirds majority at a
general meeting (MGCS 2008, 30).
ONN Recommendation: The ONN recommends that directors have the right to
borrow money on the credit of the corporation and issue, reissue, sell or
pledge debt obligations of the corporation “unless the articles or bylaws
provide otherwise” and that this would simplify the process of borrowing
and/or issuing debt (ONN 2008c, 10).
ISSUE: Standard By-laws
Consultation Paper #3 notes that the drafting of by-laws can be
complex for smaller not-for-profits, particularly those without the resources
acquire legal services. It asks whether the revised Act should include standard
by-laws in its regulations, “which would apply to every not-for-profit
corporation, unless the corporation adopts different by-laws. A corporation is
free to create its own custom set of by-laws that would replace those in the
regulations. If different classes of corporations are created, the by-laws can
reflect these differences” (MGCS 2008, 33).
ONN Recommendation: The ONN recommends that a default by-law, written in
consultation with the sector, be provided for by regulation and reviewed
every five years. It also recommends that a template for by-laws be
incorporated into the Ministry’s Incorporators Guide, but exist
outside the Act itself (ONN 2008c, 11).
ISSUE: Self-perpetuating Boards
A not-for-profit corporation with only three members (the required minimum),
who also constitute the minimum three directors, may continue to re-elect
itself. This raises possible concerns about accountability and transparency in
decision-making. Consultation Paper #3 asks whether the reformed Act
should address this possibility by requiring a minimum number of members who
cannot also be directors (MGCS 2008, 34).
ONN Recommendation: The ONN recommends that the Act should allow
for self-perpetuating boards, which may be preferable for some
not-for-profit corporations. It notes that transparency and responsiveness
are supported by other member and outsider remedies included in the Act
(ONN 2008c, 11).
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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