Canada: Pending Legislative Changes Affecting Ontario Special Act Non-Share Capital Corporations

Late last year, the Ontario legislature enacted the Not-for-Profit Corporations Act, 2010 (the "New Act"). The New Act has not yet been proclaimed in force. Proclamation is expected to be in late 2012.

The New Act will replace Part III of the Ontario Corporations Act ("Old Act"), the current general law governing the incorporation of non-share capital corporations in Ontario. While much has been written on the effect that the New Act will have on the 46,000 corporations currently formed under Part III of the Old Act, much less attention has been devoted to the many non-share capital corporations that are formed by various general and special acts of the Ontario Legislature, including the many non-share capital corporations that have been formed over the years by private act (collectively, the "Special Act Corporations").

relationship between Special Act Corporation and Old Act (or New Act)

Special Act Corporations are currently governed by a combination of the special or private act that created or continued the corporation (the "Primary Act") and the Old Act. Those involved in the affairs of a Special Act Corporation may tend to look to the Primary Act as the source of corporate law without much regard to the Old Act. However, as will be demonstrated below, the transition from the Old Act to the New Act raises issues for Special Act Corporations.

There are two basic approaches to the relationship between the Old Act and the Special Act Corporation. One approach is to exclude the Old Act except to the extent that specific provisions of the Old Act are made applicable to the Special Act Corporation ("Specific Adoption"). However, the more common approach is to adopt the Old Act except to the extent that the Primary Act excludes specific provisions ("Specific Exclusion"). Under the Old Act, the default rule is that the Old Act applies to every Special Act Corporation except to the extent otherwise provided (i.e., Specific Exclusion approach).

With respect to non-share capital corporations, the New Act takes the same approach as the Old Act (i.e., Specific Exclusion), stating in s. 4(1) that:

As well, s. 5(1) of the New Act sets out an explicit paramountcy rule that was only implicit under the Old Act:

Again, while most Special Act Corporations will be subject to the New Act to the extent that specific provisions are not excluded, several others will adopt the Specific Adoption approach – typically, in regulations made from time to time under the Primary Act. The power to choose those provisions of the New Act that will apply to the Special Act Corporation in regulations made under the Primary Act is designed to make the process of implementing and fine-tuning the Specific Adoptions easier.

what are the areas of possible concern to Special Act Corporations?

It will be prudent for most Special Act Corporations to conduct a review of the provisions of the New Act that should, or should not, apply to the Corporation. In general, there may be four areas of concern: (1) identifying possible gaps; (2) adopting desirable provisions; (3) avoiding undesirable provisions; and (4) minimizing ambiguities. We will look at each of these concerns.

1. identifying possible gaps
   
   Gaps are most likely to arise in two circumstances. First, where a Special Act Corporation's Primary Act takes the Specific Adoption approach, then, without more, the replacement of the Old Act with the New Act will create legislative gaps. Suppose, for example, that the Primary Act adopts s. 297 of the Old Act so that, if otherwise insurmountable difficulties are encountered in holding a meeting of members in accordance with the rules of the Primary Act, the Corporation can seek the assistance of the court in holding a validly constituted meeting. Unless the Primary Act is amended to replace the reference to the Old Act with a reference to s. 61 of the New Act, the Corporation will lose the right to invoke this useful procedural remedy.
   
   Second, where a Special Act Corporation's Primary Act has followed the Specific Exclusion approach under the Old Act but will be following the Specific Adoption approach under the New Act, gaps will likely be created. Suppose, for example, that the Old Act generally applies to the Special Act Corporation and, thus, its directors have the benefit of s. 80 of the Old Act, which provides for the Corporation to indemnify its directors and officers ("D&O") in specified circumstances. Unless the regulations to the Primary Act make s. 46 of the New Act applicable to the Corporation, its D&O will lose the benefit of a statutory indemnity.
2. adopting desirable provisions
   
   Whether the Primary Act takes the Specific Adoption or Specific Exclusion approach, there are many provisions of the New Act that a Special Act Corporation should consider making applicable, including: abolition of ultra vires doctrine (s. 15); indoor management rule (s. 19); general duty of directors to manage or supervise management (s. 21); qualifications of directors (s. 23); right of directors to attend meetings of members (s. 33); director participation in board meetings by electronic means (s. 34(6)); written board resolutions (s. 35); conflict of interest regime for D&O (s. 41); statutory duties of loyalty and care of D&O (s. 43); director's due diligence defence (s. 44); director's exculpation if he or she exercises timely dissent (s. 45); D&O indemnification and insurance, including advance of defence costs (s. 46); court-ordered meetings of members (s. 61); rules in relation to the qualifications, appointment, remuneration and removal of auditors (ss. 68-82); financial disclosure to members (ss. 83-84); borrowing powers of directors (s. 85); immunity of members for liabilities and obligations of the Corporation (s. 91(1)); corporate records and access (ss. 99 and 100); abrogation of constructive notice doctrine (s. 102); and compliance and restraining orders (s. 191).
   
   Many of these provisions of the New Act represent the state of the art in Canada. They should be considered as useful additions (and, indeed, as possibly superior) to the provisions of the Corporation's Primary Act.
3. avoiding possible undesirable provisions
   
   However, some of the provisions of the New Act may not fit the governance structure of the Special Act Corporation. Special Act Corporations may wish to consider the merits of the following provisions of the New Act in their particular governance structure:
   
   
   • ss. 17(1) and 103(1) – by-laws that can only be amended by members;
   • s. 40 – imposing liability on directors for unpaid wages, vacation pay and other debts owing to employees;
   • s. 56 – member proposals;
   • s. 96 – provision of membership lists;
   • s. 105 – membership class voting rights;
   • s. 136 –court-ordered winding up;
   • ss. 150(1) and 167(1) – limiting distributions of surplus assets of public benefit corporations on liquidation/dissolution to other Ontario public benefit corporations;
   • ss. 169-171 – involuntary dissolution of the Corporation;
   • Part XIII (ss. 174-180) – investigation of the Corporation; and
   • the appraisal right applicable to members of non public benefit corporations.
     
     
4. minimizing ambiguity
   
   Finally, while the paramountcy provision (s. 5(1) of the New Act set out above) will be useful in many cases, it will, in borderline cases, raise interpretative issues that are entirely avoidable. For example, instead of leaving it for the courts to determine the extent that a specific provision of the Primary Act prevails over an inconsistent provision of the New Act, the ambiguity can be avoided entirely if the regulations to the Primary Act make it clear that the specifically enumerated inconsistent provisions of the New Act do not apply to the Special Act Corporation (e.g., listing the inapplicable provision as a Specific Exclusion).

conclusion

This Bulletin cannot tell a Special Act Corporation precisely how to dovetail the New Act with its Primary Act to best fit its needs. The purpose of this Bulletin is simply to alert Ontario non-share capital corporations to the issues and to encourage them to consult with qualified legal counsel at an early stage to ask: How might the Special Act Corporation take advantage of some of the attractive features of the New Act while, at the same time, exclude those provisions that do not fit and avoid gaps and ambiguities?

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP