Originally published Fall 2005
B. How Many Members Should You Have?
C. The Law Relating To "Members"
D. Classes Of Members
E. Need For A Legal Audit
F. Corporate Records Nightmares
Members are essential. Almost all not-for-profit organizations and charities are incorporated under legislation which requires them to have members, directors and officers. Members elect the directors and directors elect or appoint the officers. Members are therefore the most powerful group, yet there is little written about them. There are very few legal cases dealing with members.
On the other hand, there are many legal cases dealing with directors’ duties. There are dozens of articles written about directors’ responsibilities. The Spring 2004 Not-For-Profit Alert from Borden Ladner Gervais deals specifically with directors’ duties.
This Fall 2005 Alert turns its attention to the importance of those who hold the status of "member" under the applicable legislation.
According to Statistics Canada, in 2003 Canadians took out 139 million memberships in non-profit and volunteer organizations or about four per person. That may seem like a large number, but once you start thinking about professional groups, religious groups, sporting groups, ratepayers groups, airline points collecting groups, purchasing clubs, social agencies, etc., most Canadians will discover that they are members of several groups.
Many charities and not-for-profit organizations are incorporated under the Canada Corporations Act. Unless their by-laws require it, this statute does not require that directors be members of these corporations. Some other legislation, including the Ontario Corporations Act, requires all directors to be members.
B. HOW MANY MEMBERS SHOULD YOU HAVE?
Non-share capital corporations all have members. However, the number of members and their power and authority vary.
- A federally incorporated organization may have 1 member and 12 directors. This could not work for an Ontario incorporated organization, which must have at least 3 directors and therefore at least 3 members.
- An organization may have, for example 12 members who also are the 12 directors. This is sometimes called a "closed membership". Most private foundations and some operating charities are organized this way.
- An organization may have 12 directors with 100-300 members. This is an "open membership". There is a possibility of a "take-over" of control of the board, but the organization is considered to be quite democratic since anyone interested can become a member.
- An organization may have 12 directors and 50-10,000 members all of whom have the right to vote. This is the typical structure for a professional or trade association where the focus is regulating or providing services to a large number of members of the profession or industry.
- Some corporations may have 12 directors and 12 voting members with 50-500 nonvoting members. Sometimes these nonvoting members must pay a "membership fee". In other cases, if they make a large donation they are rewarded by being called a "patron member", which is a nonvoting class of member.
When establishing a non-share capital corporation, the type and number of members and their relationship, if any, with the directors should be very carefully considered.
It is difficult for an organization with a large group of voting members to move to a "closed membership" structure where many of those people lose their right to vote, even if they never exercised it. As confirmed by the Court in the Toronto Humane Society case, this is difficult to do without a legal challenge. By contrast, it is relatively easy for a corporation with a "closed membership" to change its by-laws so that it becomes an "open membership" corporation.
For fund raising purposes, directors often wish to give donors something in return and sometimes it is a "membership". The charity’s lawyers will recognize that if the term "member" is used, it may create a new type of membership. This will cause confusion since there are existing members. Even if a new class of membership is established in the by-laws as a separate class which does not have a vote, the terminology still can be a problem. Charities often have trouble finding a suitable synonym for the word "member".
C. THE LAW RELATING TO "MEMBERS"
The word "member" is referred to hundreds of times, directly or indirectly, in the Canada Corporations Act and other similar legislation. The Canada Corporations Act requires that each corporation’s by-laws contain the "conditions of membership", "whether or how members may withdraw from the corporation", etc.
The recently proposed Canada Not-For-Profit Corporations Act sets out expanded rights for members including the right to vote, the right to call a meeting of members, the right to advance proposals for consideration at members’ meetings and the right to access corporate records. Clauses dealing with "members" form a major portion of a typical corporation’s by-laws.
Some legal commentators have determined that the relationship between a corporation and its members is contractual in nature. Although this relationship is very important, there are very few legal cases examining the relationship. In one 1980 case, Senez v. Montreal Real Estate Board, Mr. Justice Petz stated:
"When an individual decides to join an organization like […] he accepts its constitution and the by-laws and he undertakes to observe them."
This case suggests that when someone joins an organization as a member, he or she must comply with its constitution and by-laws.
In a 2004 decision, the Ontario Court of Appeal considered whether the Progressive Conservative Party of Canada could merge with the Canadian Reform Conservative Alliance without the consent of all of the members. The Court decided that, because the Party was a registered political party, the Canada Elections Act applied and the usual legal principle that all members must consent to a merger or dissolution did not apply. If it had not been a political party but an unincorporated voluntary organization, a 1970 case would have required unanimity. Incorporated organizations are subject to the requirements of their statute of incorporation.
The letters patent and by-laws of a corporation form the major basis for the contractual terms between the corporation and its members. This contractual relationship places some obligations on the members. The corporation has a right to expect that its members will comply with the terms of this "contract" and therefore may, in certain circumstances, be able to discipline the members or suspend or terminate them in accordance with its own rules and the rules of natural justice. This right of the corporation is subject to the rights of members when the members’ civil rights, human rights, or property rights are affected or the rules of natural justice are not being followed. 4
D. CLASSES OF MEMBERS
A recent survey determined that about 45% of non-profit organizations have only one class of member who therefore has the full rights to vote, obtain notice of meetings, etc. An additional 45% have between two and five classes of members with 10% having more than five classes of members.
Members of a class may or may not have voting rights. Membership is not transferable and membership lapses on the death or resignation of a member and upon termination of the membership.
Trade associations often have separate classes of members to reflect the different constituency groups within the organizations who represent different provinces or different sections of the profession or business which the organization serves. Sometimes these different classes of members have rights to elect a certain number of the directors.
Not-for-profit organizations which run activities for their members, such as clubs, sometimes have one class of voting member and other classes of associate members, honorary members, senior members, junior members, etc. Some of these organizations provide that anyone who uses the facilities on a regular basis becomes a member and at the same time provide membership for anyone who contributes money on a regular basis and, in a few circumstances, anyone who provides a specified number of volunteer hours in a month. It is also possible to have people become members of an organization because they are members of a sister or parent organization or are members of a committee appointed by the board.
Finally, many charities have classes of members such as "subscribing member", "benefactor member", "sustaining member", "patron member" and "honorary lifetime member", etc.
When there are several classes of members, it is important to determine who has the right to notice of meetings and who has the right to vote. That should be directly related to those interested in having the rights and responsibilities of voting and those who, because of their financial commitment, should be entitled to such rights.
E. NEED FOR A LEGAL AUDIT
Experience shows that in over 75% of the instances in which a lawyer who is a member of BLG’s Not-For-Profit Group completes a legal audit of the letters patent, by-laws, corporate registers, minutes of annual meetings and minutes of directors meeting, serious issues are discovered. When the issues are discovered during a legal audit, there usually is a way to rectify the problems and time to do so. When a technical corporate law problem is raised by an unhappy third party or director, it is often too late. Sometimes the problems can lead to a dysfunctional organization which suffers from financial problems, unhappy board members who may resign and ultimately the termination of senior management’s employment. In the worst cases, it can result in the dissolution of the organization.
F. CORPORATE RECORDS NIGHTMARES
The following situations exemplify a few of the many "Corporate Law Nightmares" discovered recently by lawyers in Borden Ladner Gervais’ Not-For-Profit Group while completing "legal audits". The dates, names etc., have been changed.
1. Open Membership Allows a Takeover!
A broadly-based organization followed the practice of many organizations in permitting an unlimited number of "members". Anyone who paid a $10.00 fee could become a member and therefore become entitled to vote at the annual meeting. The organization did not keep an accurate register of all these members as the payments were small and they came in at various times during the year. 6
Consequently, the organization could not follow the legal requirement of giving formal notice of its annual meeting to all of the members. In most years, about 50 individuals including the incumbent directors, their families and past directors, paid the fee to become a member. One year, they had 2,000 individuals who paid the fee and, therefore, were entitled to be members. Unknown to the president and the board of directors, a group of 150 individuals, who had paid the $10.00 fee and had become members, appeared at the annual meeting. They nominated their own slate of directors from the floor and easily outvoted the 50 "loyal" members who showed up at the annual meeting to vote in favour of those nominated by the nominating committee. As a result, there was a complete change in the board of directors. The organization took a different approach to its mission and the president’s employment was terminated. A small group had, in fact, used corporate law principles to hijack the organization in order to advocate its particular agenda.
2. Meetings of Members are Critical!
An exclusive independent school in Ontario had never appointed members. They had no annual meetings of members to elect directors. Therefore, all of the individuals who thought they had been directors over many years, did not, in fact, hold that status and all of their actions were potentially subject to challenge and criticism. After a legal audit, the school now follows the proper procedures for the holding of meetings of directors and its annual meeting of members is attended by a lawyer experienced in the law of nonshare capital corporations.
3. Doing Things the Same Old Way!
A large private foundation, with all of its directors being members of one family, had over the years complied with the requirements in the Income Tax Act with respect to completion of forms, returns and filing. However, they had never held an annual meeting of members and the financial statements had not been approved by the directors. In addition, the "meeting" they had held did not meet the requirements of their by-law with respect to notice, quorum, etc. There were millions of dollars involved. Happily the lack of proper members’ registers, members’ meetings and members’ minutes were discovered in a routine "legal audit" before the matter was discovered by someone unhappy with the foundation.
4. The By-Laws Should Be Clear!
A social club with about 3,000 members had several different classes of members with about 2,200 being full voting members. The club had not had a "legal audit" for some time. A controversial issue came up at a meeting held with 600 members in attendance. The meeting became "non-functional" and the deficiency in the by-law was obvious. The club leadership including the chair, board members and the executive director were embarrassed in front of several hundred people. Needless to say the by-laws and corporate procedures were much better in the following years.
5. Do You Know Your By-Laws?
A large healthcare organization was approached by an intelligent member of the community with a list of 20 items which the individual claimed had not been properly addressed by the board of the organization. The executive director was in a panic and felt that since these items were raised just before the annual meeting, the individual might try to take control of the organization by gathering proxies from members.
Only after a review by the organization’s lawyer of the charter and by-laws was it noted that the only people with a vote at the annual meeting of members were the limited number of people who were directors. In other words, it had a "closed membership".
Much concern could have been eliminated if the executive director had taken the time to have a proper and thorough understanding of the concepts of membership and how it relates to the organization and its by-laws.
6. Nobody Read the Letters Patent!
A trade association was very successful in changing its focus which led to a large increase to over 5,000 members. It became financially successful, hired more staff and successfully took on new projects.
A lawyer familiar with the corporate law applicable to associations completed a legal audit and reviewed the letters patent. The objects set out in the letters patent on incorporation did not cover the new projects. Many of the acts taken by management with the approval of the board of directors were "ultra vires" (beyond the authority of) the association. Fortunately, this was discovered before some other rival, jealous association or an unhappy director or member discovered it. Supplementary letters patent were obtained and the problem was solved for the future.
During the legal audit of this trade association, it was noted that the letters patent contained many of the clauses which are usually found in the letters patent of a charity. Despite the fact that the association was not registered as a charity, it was discovered that any removal of the charity wording by supplementary letters patent might have led to all of the assets of the association being taken by the Crown.
7. Who Really Runs the Organization?
During a legal audit in 2005, it was discovered that a by-law of a charity provided that the Chairperson of the board was the CEO. However, business cards of the Executive Director suggested that she was the CEO and in fact she acted as CEO and the directors were happy with this.
A careful review of the applicable corporate law and the by-laws of the organization suggested that there should also be a President who was a director.
The corporation’s by-law, the Corporations Act and the business cards completely confused the titles of CEO, Chairperson and President. The problem was easily fixed by amending the titles and duties in the by-law. This clarified the authority of the Executive Director. She was embarrassed when the board realized that she had not even read the by-law carefully enough to note that the person holding her position of Executive Director was not the CEO.
Members typically do not meet regularly; often only once a year. However they do make very important decisions including electing of directors, receiving financial statements, appointing auditors, confirming by-laws and approving changes to the charter.
A great deal is written and discussed about directors’ duties and obligations. There is only one class of director and each director has equal rights and responsibilities.
Members, on the other hand, often are divided into different classes with different rights and responsibilities. Directors, members and senior management of each not-for-profit organization should be aware of the typical rights and obligations of a member and in particular those of their organization. Failure to do so can lead to confusion, distrust and failure of the organization to carry out its mission.
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.