New federal law governing not-for-profits may spark disputes

publication date: Mar 28, 2012
 | 
author/source: Joel Secter

Since the Canada Not-for-Profit Corporations Act (“NFP Act”) came into force on October 17, 2011, we have been advising federally incorporated not-for-profits on continuing under the new legislation. We have already written on the nuts and bolts of continuance, which entails filing the required forms and submitting a new general by-law for the corporation. Here we would like to explore some of the issues that may arise internally as corporations move from the Canada Corporations Act (“CCA”) to the NFP Act.Joel Secter photo

Ultimately, having a firm grasp of what is permissible under both statutes is necessary to ensure that the corporation’s continuance is uncontested.  

First, a members’ meeting

Beginning with the end in mind, a meeting of the members will generally need to be held as part of the transition process. This meeting will need to be held in accordance with the corporation’s existing by-laws since those are the rules governing the affairs of the corporation until a certificate of continuance is obtained.

However, regardless what the voting rules stipulate in the corporation’s CCA by-laws, the NFP Act requires that the articles of continuance be approved by two-thirds of the votes cast by the members of the corporation who are entitled to vote.

It is important to keep in mind that the members may not make any amendments that affect a particular class of members unless the members of that class approve the amendment by way of a separate class vote. This applies whether or not the members of that affected class normally have the right to vote.

Verify incorporation, active status

At the outset of the transition process, we usually recommend searching the database of federal corporations to ensure that the organization is in fact incorporated and its status is active. Sometimes clients believe they are incorporated when in fact they are operating as an unincorporated entity or as a trust. On other occasions, corporations incorporated by Letters Patent have been dissolved unbeknownst to their representatives.

The most reliable way to verify the corporation’s current status and documents is to obtain copies of the Letters Patent, Supplementary Letters Patent (if any) and by-laws from Corporations Canada.

Check validity of by-laws

The by-laws have traditionally set out the everyday rules governing the corporation. It is important to ensure that the by-laws of the corporation were validly adopted, and received both the approval of the members and the Minister. (Under the CCA, by-laws need to be approved by Industry Canada.)

For corporations operating without an approved by-law, it will be necessary to adopt a valid one prior to continuing under the NFP Act. By way of example, how can a board bring a resolution for continuance before the members if the conditions of admission for membership were never established?

Are membership records accurate?

In addition to reviewing the by-laws of the corporation, it is important to examine the contents of the corporate minute book. While many corporations maintain good records, poor record keeping is at the root of many conflicts that arise in the sector. Verify that the members were properly admitted, and the register of members is up-to-date. Obviously these are matters that should be addressed before taking concrete steps to get the members’ approval.

Is the board valid?

Other issues that may arise for a corporation continuing under the NFP Act relate to the board and its meetings. For example, does the corporation have the required number of directors, and were they elected in accordance with the by-laws? What if the board was elected at a meeting of the members without a quorum present? How about a board that conducts business by written resolution in lieu of holding meetings, which is not permitted under the CCA?

Not surprisingly, these kinds of problems can lead to disputes at members’ meetings. The approach to resolving contentious board issues will depend on the facts of each case. It is advisable to deal with them before continuing under the NFP Act.     

In conclusion, we recommend reviewing the statutory and by-law requirements under the CCA, as well as the NFP Act, to assess if the corporation has been operating in compliance with the existing legislation and Industry Canada policies. Only then can the corporation ensure that it is duly authorized to proceed with continuance.

Joel Secter is a lawyer with Drache Aptowitzer LLP in Ottawa. He can be reached at jsecter@drache.ca.

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