Canada: Court-Ordered Non-Compliance: How To Get Out Of A Corporate Bylaw Trap

It is uncommon, but occasionally a corporation, society, or similar organization may find itself in a position where it is impossible or impractical for it to obey its own bylaws. Corporations and similar organizations can "live" a long time, far longer than the people that operate them. As a result, the bylaws these organizations use to govern themselves are often written to address different circumstances from a different era, including different enabling legislation. Changes to bylaws over years or decades and changes to the circumstances they operate in can result in unintended consequences.

Occasionally, these changes will result in a key bylaw rule becoming impossible to comply with. This can have significant consequences for an organization and its operation. For instance, a high quorum requirement for meetings of shareholders or members can go from a reasonable safeguard to an onerous mandate if the ownership or membership of an organization changes significantly. Rules written for an organization with small, closely related ownership or membership may require that all or most shareholders/members attend meetings. This can be a reasonable way of ensuring that all such people are substantially in agreement about how the organization should run to help ensure that its business runs smoothly, and disputes are avoided.

However, if the organization expands significantly as it develops, such a rule can suddenly become difficult or impossible to comply with. Mandating that all shareholders be present for a closely held corporation may be easy to obey, but such a mandate for a newly public corporation with hundreds of shareholders scattered across Canada may make such a rule effectively impossible to comply with. As a result, such an organization may in practice no longer be able to hold a validly constituted meeting of its shareholders or members, and so all decisions made at such meetings can be subject to question.

There is no easy fix in this situation because these meetings and shareholder/member votes at them are required to amend an organization's bylaws. Accordingly, the organization cannot simply make this change and then hold a meeting after.

The best way to avoid this is to ensure that an organization's bylaws are periodically reviewed to ensure that they are compatible with the organization's current status or with any proposed changes to the organization, like an expansion of its shareholders or membership.

However, in practice, this often is not done. What happens when an organization finds itself in a bind like this? Is it stuck? Can the law help in any way?

Organizations, like corporations and societies, are created under legislation, like the Business Corporation Act or the Societies Act of a given province/territory. These laws can provide rules to help organizations deal with problem situations, but they do not resolve every problem an organization could potentially encounter.

When an organization finds itself in a bind and legislation does not give it a way out, it can often get help from the courts. Every province and territory has a court of "general jurisdiction", or a court that can hear and decide on cases across all fields of law. In the provinces, these courts are the "Superior" Courts. In the Northwest Territories and Yukon, these are the "Supreme" Courts. In Nunavut, this is the Nunavut Court of Justice.

Because these courts have "general" jurisdiction, they have "inherent jurisdiction" to hear and grant remedies for questions of law that are not clearly or cleanly handled anywhere. "Inherent jurisdiction" is intentionally vaguely defined by the courts, but it can be thought of as the ability of the courts to intervene when there is no or an inadequate legal solution for someone and that person has a real need for assistance. As the courts put it, if someone has a "justiciable right", there is no statutory authority to help them, and it would be "just and equitable" to do so, the court has broad authority to intervene and grant remedies for them.¹

Among many other things, courts use their inherent jurisdiction to fill gaps in legislation, especially including corporate legislation.² This allows corporations to get the assistance of the courts when they would otherwise find themselves in a situation where they would not be able to function or to do so legally.

Returning to the example of an impossible quorum requirement discussed above, corporations and societies are required by law to hold meetings of their shareholders/members to make certain decisions. If such an organization effectively cannot meet its quorum requirement, it cannot hold a properly organized meeting to make these decisions, despite such meetings being not just a right but a legal requirement. This can leave an organization either hamstrung or operating with decisions that could be challenged in court. The enabling legislation of these organizations provides them with no relief in these circumstances. To plug this gap in the law and to give effect to these organizations' rights/legal requirements, courts are willing to issue orders that give these organizations the ability to fix their problem. This can include court orders granting quorum temporarily so that an organization can hold a meeting to amend its bylaws to fix its problematic quorum requirement.

Problems like these can be of particular concern to Indigenous governments and organizations ("IGOs"). As IGOs' relationships with Canadian governments evolve, modern treaties and financing arrangements are created, and some IGOs take charge of their memberships, existing rules of IGOs' internal governance (and corporations and societies they own or control, like their development corporations) may become incompatible with their new legal realities, leading to this type of legal gridlock. An IGO that finds itself in such a situation may be best advised to go to court to get legal relief that allows it to legally retool its rules to make them compatible with their new realities.

There is no strict limit to the range of awkward situations that an organization could face, so there is no strict limit to the kinds of situations that this kind of court intervention can manage. Any organization in a situation where it may be practically impossible for it to take a necessary or important action in full compliance with the law should consider this as a potential solution.

Footnotes

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.