Canada: Ontario Not-For-Profit Companies Need To Act Now

Last Updated: November 8 2011
Article by Roxanne E. McCormick

The recent coming into force of the Canada Not-for-profit Corporations Act (the "Canada Act") is a reminder to not-for-profit companies formed under the Ontario Corporations Act (the "Current Act") that the coming into force of the new Ontario Not-for-Profit Corporations Act, 2010 (the "Ontario Act") will not be far behind.  In fact, it is expected that the Ontario Act will be in force by this time next year.

Unlike the Canada Act, where companies will be required to take positive steps in order to be governed by the new Act, the Ontario Act will apply, without the need for any further action, to most not-for-profit companies incorporated under the Current Act as soon as the Ontario Act is proclaimed in force. 

This means that companies who fail to take action before the coming into force of the Ontario Act could find themselves subject to new requirements that may affect the ease with which they can make changes to their letters patent (articles under the Ontario Act) and by-laws.  It is important, therefore, for such companies to complete their analysis and implementation of the pro-active changes that need to be made to their letters patent and by-laws now so that the coming into force of the Ontario Act will not create difficulties in their governance that could have been avoided had such analysis and implementation been carried out prior to that date.

Chief among the provisions in the Ontario Act that could cause unforeseen difficulties once the Ontario Act is in force are those relating to the rights of different classes of members to vote separately, as a class, on various matters, even if the conditions attached to their class of membership would not otherwise give them a vote. Non-voting members are given a right to vote in certain circumstances if the matter being voted on is considered to affect them in a unique way. For example, a resolution to exchange or cancel all or part of the memberships of a class, to remove rights attached to a class, to increase rights of other classes having equal or superior rights or to increase rights of other classes that are inferior to make them equal or superior to the affected class, would require the approval, not only of members generally having a right to vote on resolutions placed before the membership, but also of members of the particular class so affected, voting separately as a class.

Members not otherwise entitled to vote are also given the right to vote, along with other members who do generally have voting rights, on certain fundamental changes such as an amalgamation or a sale, lease or exchange of all or substantially all property of the company other than in the ordinary course of business.  If these fundamental changes affect members of a particular class differently, then they could also get to vote on them separately as a class, again whether or not their membership otherwise carries a voting right.

The existence of these additional rights should cause Ontario not-for-profit companies to consider very carefully their membership structure.  Even if they have several classes of members, each of which is entitled to vote generally, these new rights could give a particular class of those members a veto right on something that the majority of members in number (representing the other classes in the company) would otherwise want to approve.  Conversely, depending on the nature of the matter under consideration, a small class of non-voting members could have a veto right over all the members who normally have the voting rights in the company.

It may no longer be appropriate to provide for different classes of members given the potential impact of these and other similar  requirements under the Ontario Act. If a company wants to make changes in its membership structure that would affect a class differently, it needs to do so before the Ontario Act is proclaimed in force in order to ensure that those changes will in fact receive the requisite membership approval.

While the need for a review of its membership structure is perhaps the most pressing imperative, each Ontario not-for-profit company also needs to review its letters patent and by-laws carefully in light of the numerous provisions of the Ontario Act that allow companies to choose to vary the default position under such Act. For example, unless the by-laws otherwise provide, directors will no longer need to be members. Since the Current Act requires that all directors be members, it is likely that some companies' by-laws do not explicitly require that they be members as it was not necessary to state that fact since the law required it.  If they do not and the company wants its directors to be members, then it must so provide in its by-laws.  Conversely, if the company's by-laws currently repeat the legal requirement under the Current Act and require that its directors be members, and the company would prefer the flexibility of having non-member directors, then it will have to change its by-laws to reflect this desire. 

The necessary review of a company's letters patent and by-laws cannot be completed in a day.  A painstaking analysis of what those constating documents now provide in comparison to what the Ontario Act (a) requires, (b) prohibits or (c) makes optional, must be undertaken.  Companies should also use this opportunity to review their letters patents and by-laws against their current governance structure and practices to ensure that the former properly reflect the latter. Discussion must then ensue and decisions must be made at the board level about what changes are to be recommended for consideration by members.  Membership meetings must then be called and held to consider the changes.  If any of those changes affect members of one class differently than another, they may trigger the class voting requirements if they are not made until after the Ontario Act is proclaimed in force.  Even if they do not, the time required to complete the analysis and the drafting of any proposed changes that can be deferred until after the Ontario Act is proclaimed in force will be considerable.

Section 207(2) of the Ontario Act provides that provisions in letters patent and by-laws that are valid immediately before the coming into force of that section and that have not been amended to be brought into conformity with the Ontario Act, will be deemed, on the third anniversary of the day the section comes into effect, to be amended to the extent necessary to bring them into conformity.  While most believe that the intention of this section is to say that even provisions that would be contrary to the Ontario Act will continue to apply for that three year period, there are some who argue that this is not clear from the language of the section.  In any event, it is apparent that considerable uncertainty could arise from having to read fundamental constating documents of a company with amendments "to the extent necessary to bring them into conformity" with the Ontario Act, especially given the opportunity under the Ontario Act for choices to be made in the letters patent or by-laws to avoid the default provisions that would otherwise apply.

It is clear that the time to act is now.  Ontario not-for-profit companies are urged to undertake a detailed analysis of their membership and governance structure, their letters patent and their by-laws and to ensure that they have taken the necessary steps to allow their corporate activities to continue as they want them to once the Ontario Act is proclaimed in force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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