Canada: When Good Directors Go Bad: Removing Directors Of Not-For-Profit Corporations

Getting rid of an absent, undedicated, or counterproductive director is a delicate task, especially when he or she has a number of years left on their term. While "putting up" with a disruptive director may be possible, it becomes impractical when other directors threaten to resign as a result, and is further complicated if the director refuses to resign him or herself. A disjointed board can be a "nail in the coffin" of an otherwise functional organization.

While it is always possible for the rest of the board to vote against a disruptive director, sometimes it is prudent to resort to formal removal procedures. Generally, the removal process for directors is set out in an organization's by-laws, but to the extent that such by-laws are silent on this issue, an organization seeking to remove a director must look to its governing statute.

For federally incorporated organizations, section 130 of the Canada Not-for-profit Corporations Act (S.C. 2009, c. 23) (the "CNCA") provides for the removal of directors by members, specifying that members may by ordinary resolution at a special meeting remove any director or directors from office. Importantly, under the CNCA a director that was elected by a specific class or group of members that had the exclusive right to elect such director, may only be removed by an ordinary resolution of the members of that particular class or group.

Since the board (or any officer specified in an organization's by-laws) can convene a special meeting of the members at any time, the main avenue for removing a director is to call a special meeting of the members and put the removal of the disruptive director to a vote. The ability for members to remove a director is generally understood as being absolute, with members being able to remove directors at any time and for any reason.

Notwithstanding this absolute right, it may be prudent to apply certain principles of procedural fairness to any removal process, particularly one initiated by fellow board members. This regard to procedural fairness stems from Canadian case law and can generally be satisfied by:

  1. disclosing to members the reasons behind the request to have the director removed;
  2. allowing the director in question an opportunity to respond to the allegations against him or her; and
  3. permitting the director in question to be present at the meeting where removal is voted on by the members.

Unless prohibited specifically by an organization's by-laws, section 131 of the CNCA allows a director who is the subject of a removal vote to provide a written statement to the members, giving reasons for opposing his or her removal. The board is required, at law, to circulate this written statement to the members immediately and is also required to follow all of the relevant procedures set out in the CNCA for calling a special meeting of members (e.g. notice requirements). The board must be sure to follow any additional removal procedures that may be set out in the organization's by-laws or discipline policy.

Notably, although a corporation's by-laws may contain provisions facilitating the removal of a director, given section 130 of the CNCA (described above), any provision in a by-law that allows the directors to remove another director would be considered invalid. The by-laws may, however, contain provisions which provide for a director's automatic removal in certain circumstances. For instance, absenteeism is a common problem and a corporation's by-laws may lawfully provide that a director who is absent from a certain number of board meetings is deemed to have resigned or is otherwise disqualified from serving on the board.

Once a director is validly removed from the board, subject to the organization's by-laws, the resulting vacancy may be filled either by: (i) the members (either at the same or a subsequent meeting);or (ii) the directors. Again, if the removed director was elected by a particular class or group of members, then the resulting vacancy must be filled by the members of that class or group.

Finally, boards of not-for-profit corporations should, when dealing with issues surrounding the potential removal of a fellow director, be mindful not only of the applicable legislation governing their organization, but also of any other provincial legislation that may be relevant to consider based on the particular province in which they operate. If, for instance, certain allegations of impropriety are made against a director, the board should consider whether they or the corporation could be exposed to a claim for defamation by the relevant director. In this example, it would also be important to keep in mind that the law of defamation varies between Quebec and Canada's other provinces. In all cases, the lawyers in Miller Thomson's Social Impact Group can help navigate the relevant rules and develop an appropriate strategy for addressing the situation.

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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