Canada: Societies Act Comes into Force: Indepth Analysis

Bill-24, the Societies Act (the "New Act"), received Royal Assent on May 4, 2015 and comes into force today, November 28, 2016. Every society incorporated under the predecessor to the New Act (the Society Act, the "Old Act") must transition under the New Act before November 28, 2018 (2 years from the coming into force of the New Act, the "Transition Deadline"). The New Act, save certain exceptions discussed below, will apply to societies in British Columbia, whether they have transitioned or not, as of today.  As such, some societies' bylaws may contain provisions that are of no effect under the New Act, and therefore must make decisions about amending certain provisions in their bylaws to comply with, or to supersede (where possible), the New Act after their transition.

Transitions

Simple Transition

A society may perform a simple transition on or after November 28, 2016. In order to transition, a society must prepare a "word-for-word" version of their constitution in electronic format (Word format) listing only the name and purposes of the society. Any other parts of the constitution (namely, previously unalterable provisions) must be relocated to the society's bylaws, word-for-word, followed by the phrase: "This provision was previously unalterable." The society must also prepare a word-for-word version of their bylaws in electronic format. These documents must be filed with the BC Registry's new "Evergreen" system. These "changes" to the society's constitution and bylaws do not require approval from the members.

No other changes can be made to the bylaws while effecting this simple transition unless such amendments are approved by a special resolution of the members of the society. As of today, no changes to a society's bylaws or constitution, other than the ones required under this simple transition, may be made until the society has transitioned. Therefore, until a society effects its transition and then amends its bylaws, a society may have provisions in it's bylaws that are of no effect under the New Act.

One of the advantages of the simple transition is that once the society has transitioned, it may then amend its bylaws by special resolution (2/3 vote as opposed to 3/4 under the Old Act, unless its bylaws state otherwise). Further, this simple transition does not require member approval. The disadvantage is that until the society has transitioned and approved a bylaw change by special resolution, it may go through a period where its current bylaws are inconsistent with the New Act. The filing fee for a special resolution to amend a society's bylaws must be paid ($50) after the transition has occurred.

This simple transition is best suited to a society that does not need or wish to change any provisions of its bylaws, and whose bylaws are consistent with the provisions of the New Act.

Transition with Bylaw Amendment

A society may amend its bylaws at the time of transition on or after November 28, 2016. The society may change its bylaws by special resolution (2/3 vote unless its bylaws state otherwise) and submit its new bylaws along with its transition documents (electronic format constitution and bylaws). The new bylaws must, however, still include the unalterable provisions from the constitution (if any) followed by the phrase: "This provision was previously unalterable."

The advantage of amending bylaws at the time of transition compared to waiting until after the society has transitioned, is that the society will avoid having to pay the extra fee for filing the obligatory special resolution which amends the bylaws. Another advantage, it that the special resolution required to amend the bylaws will be 2/3 as opposed to 3/4 (if the society's bylaws do not stipulate the vote required to pass a special resolution). The disadvantage is that the society may have a period where its current bylaws are inconsistent with the New Act, if it is not prepared to transition on November 28, 2016 or soon thereafter.

Societies that have not amended their bylaws to comply with the New Act before its coming into force that wish to amend their bylaws in any event and wish to avoid the extra filing fees, or who wish to enjoy the lower special resolution voting-threshold of 2/3 should amend their bylaws at the time of transition.

Changes under the New Act

Member-funded Societies

The New Act provides an option for societies to become "member-funded" societies at the time of transition (subject to member approval by special resolution), or after transition (subject to member approval AND court order). Member-funded societies are societies that are primarily funded by their members (i.e. they are not primarily funded through public donations or government funding) to carry on activities for the benefit of their members (e.g. professional associations, sports clubs, golf courses, etc.). A society may become a member-funded society if it has received less than $20,000 in public funding, or, if it has received more than $20,000 from the public, that $20,000 must constitute less than 10% of its gross income over the previous two financial years.

A member-funded society has certain advantages in terms of reporting and oversight compared to non-member-funded societies, which are outlined below. Societies contemplating becoming a member-funded society should carefully consider the pros and cons of such decision before effecting any transition under the New Act. Societies should also carefully review their bylaws, and if they so happen to decide to become a member-funded society, do so at the time of transition (not afterwards, so as to avoid having to seek a court order).

Key differences between member-funded and non member-funded societies are summarized as follows:

Member-funded Societies:

  • No restrictions on distribution of assets on winding up (can go to members)
  • One director is sufficient (no residency requirements)
  • No restrictions on number of board members who are also employed by society
  • No public rights to obtain copies of financial statements
  • No disclosure of remuneration paid to directors, contracts, and employees required
  • Can convert to a corporation

Non Member-funded Societies:

  • Assets can only be distributed to other societies, charities or community service cooperatives, at dissolution
  • Requires at least 3 directors (one of whom must be a resident of BC)
  • A majority of the board must be independent (not employed or under contract)
  • Public has rights to obtain copies of financial statements
  • Remuneration of directors, highly paid employees and contractors must be stated in financial statements
  • Cannot convert to a corporation

Financial Statements, Financial Assistance, and Financial Reporting

As of November 28, 2016, directors of societies will have to present financial statements and auditors' reports on the financial statements, if any, to the members of the society at each annual general meeting. There are no regulations setting out how financial statements must be prepared and therefor societies may wish to amend their bylaws to require that financial statement be prepared in a particular fashion or by particular persons (e.g. accountants or auditors).

Financial statements must now include:

  • information on remuneration paid by the society to directors during the financial statement's reporting period, for being a director and for acting in another capacity;
  • information on remuneration of employees and persons under a contract for services with the society who were paid $75,000 during the financial statement's reporting period (and if there are together more than 10 employees and contractors who were paid $75,000 in a reporting period, only the 10 highest remunerated persons need to be noted); and
  • information that sets out the nature and any amount of any financial assistance given by the society (including the provision of loans, guarantees, indemnities, security) in the reporting period, except for financial assistance given in the ordinary course of the society's activities in furtherance of the purposes of the society.

Information on the remuneration of directors, employees, contractors, as well as information on any financial assistance does not need to (but may, in the case of directors, employees, and contractors) identify the recipients of such remuneration or financial assistance by name. Information on remuneration of directors must include a list of all directors paid which includes: (i) the position or title of the director; (ii) the amount of remuneration for being a director; and (iii) the amount of remuneration for acting in another capacity and a description of the capacity.

Information on remuneration of employees and contractors must either have a list which includes (a) the employee's position and title or the nature of the contractor's services, respectively; and (b) the amount of remuneration paid to those persons in the reporting period; or (c) the total number of those persons and the total amount of remuneration paid during the reporting period to those persons.

Accounting records for each of the society's financial years including a record of each transaction materially affecting the financial position of the society must be kept for a period of 10 years from the (i) date the record was created, or (ii) if the record was altered, date the record was last altered. Additionally, any person who requests a copy of the financial statements of a society has a right, subject to a maximum fee of $10 and $0.10 for each page provided by email or $0.50 per hard copy page, to a copy of the statements within 14 days of a request for such copies.

Investment of Funds and Borrowing of Funds

A society may invest its funds in any "investment in which a prudent investor might invest" as long as such investment is in accordance with the bylaws. Societies may restrict or expand upon what a "prudent investment" constitutes in its bylaws and may, for example, restrict or expand upon the types of investment vehicles or types of companies, industries, or endeavours in which the society is permitted to invest.

A society may borrow money and issue securities (bonds, debentures, notes or other types of debt securities) as long as such borrowing is in accordance with the bylaws. The bylaws may restrict or prohibit the society's directors from causing the society to borrow money or issue securities, and restrict the amounts that may be borrowed as well as the types of securities that may be issued.

Disbursement of Funds

As of November 28, 2016, societies must not distribute any of their money or property other than:

  1. for valuable consideration;
  2. in furtherance of the society's purpose;
  3. to a qualified recipient;
  4. in accordance with the society's dissolution; or
  5. for a distribution authorized by and made in accordance with the Regulations (of which there are currently none).

Societies must ensure that, unless and until director remuneration is provided for in their bylaws, money paid to directors and officers falls within one of the allowable exceptions to distributions of money above.

As of November 28, 2016, directors who vote for a resolution passed at a meeting of directors or otherwise consent to a consent resolution of directors authorizing distribution of money or property contrary to the Act or their bylaws, are jointly and severally liable to restore the money or other property to the society that was distributed but not recovered by the society.

Directors' Remuneration

After the Coming Into Force, directors of newly incorporated societies may be paid for being directors and may be provided reimbursements for reasonable expenses, only if the society's bylaws provide for such remuneration and reimbursement of directors. However, the bylaws may impose restrictions and conditions on such payment. Further, even if the bylaws of the society allow remuneration and reimbursement of directors, a majority of the directors of the society must not receive remuneration from the society under contracts of employment or contracts for services, other than remuneration for being a director (i.e. the majority of the board of directors must be "independent directors").

Societies incorporated under the Old Act will not be subject to the requirement that a majority of the directors not be remunerated under contracts of employment or contracts for services, nor will they be subject to the provisions under the New Act restricting the remuneration and reimbursement of directors unless provided for in the society's bylaws until the Transition Deadline.

Disclosure of Conflicts

As of November 28, 2016, directors and "senior managers" (see below) who have a direct or indirect material interest in a contract or transaction (current or proposed) of the society or a matter that is the subject of consideration by the directors (if that interest could result in the creation of a duty or interest that materially conflicts with the director or senior manager's duty to the society) ("Conflict of Interest"), must fully disclose to the other directors the nature and extent of the interest and abstain from voting on the resolution in respect of the matter. A director or senior manager who is subject to a Conflict of Interest must also leave a directors' meeting when the matter is being discussed unless asked by the other directors to be present to answer questions concerning the matter, and must not be present when the directors vote on the matter.

Conflicts of Interest must be evidenced in at least one of the following records:

  1. minutes of the meeting of directors;
  2. a consent resolution of directors; or
  3. a record addressed to the directors delivered to the society from the conflicted director.

The conflict of interest provisions do not apply to matters in respect of:

  1. payments to directors by the society for being a director or reimbursements to directors for reasonable expenses incurred by directors;
  2. indemnification payments allowed pursuant to the New Act; and
  3. the purchase of insurance for the benefit of directors.

Access to Records by Members

As of November 28, 2016, societies must provide access to the society's records to members in order for members to inspect the records required to be kept under the New Act. However, a society's bylaws may restrict who may have access to accounting records and records of directors' proceedings.

Governance

Societies must now have three directors and at least one of whom must be ordinarily resident in British Columbia. Directors must consent in writing to being directors of the society unless the director is designated, elected or appointed at a meeting at which the director is present (and does not refuse to act as a director). Directors must be qualified to be directors according to the requirements of the New Act and the bylaws of the society (if applicable).

Directors must:

  1. be at least 18 years old (or 16 or 17 years old, only if specified in the bylaws);
  2. capable of managing their own affairs;
  3. not an undischarged bankrupt; and
  4. not have been convicted of an offence involving fraud within the last 5 years or unless a pardon has been granted.

Under the New Act, societies may appoint one or more "senior managers" of the society to exercise the directors' authority to manage the activities or internal affairs of the society as a whole or in respect of a principal unit of a society. Senior managers must be qualified in the same way as directors, and must disclose Conflicts of Interest in the same way as directors (see above). Unless the bylaws state otherwise, a director of the society may also be the society's senior manager. A person in a society who, before today held a position in the society which carried authority to exercise the directors' authority in a similar fashion as a senior manager under the New Act, will be deemed to be a senior manager as of today.

Luckily, societies incorporated under the Old Act will not be subject to the changes to qualifications of directors and senior managers above until the Transition Deadline.

Conclusion

The New Act changes many rights and duties of members and directors of societies. Pre-existing societies will have to carefully consider their actions going forward and before transitioning under the New Act to ensure compliance with the requirements of the New Act that are in force. A detailed review of the societies' current bylaws, in order to assess compliance before transitioning and to begin the process of preparing for bylaw amendments, is crucial for the directors' of societies to undertake.

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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