May 2008
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 terminatio” 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
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