INTRODUCTION OF A NEW STATUTORY REGIME FOR FEDERAL NOT-FOR-PROFIT CORPORATIONS

Virtually all existing federal not-for-profit corporations are incorporated under, and subject to, Part II of the Canada Corporations Act. This legislation has not been significantly amended since 1917 and does not reflect modern standards regarding corporate operations and corporate governance.

On June 13, 2008 the federal government introduced legislation in the House of Commons which, it hopes, will eventually replace the Canada Corporations Act and apply to most federal not-for-profit corporations. Readers of this bulletin may recall that the previous government introduced similar legislation in 2004; however, that legislation did not proceed past consideration by a House of Commons committee. The new legislation largely tracks the concepts and language in the previous Bill and one can hope that, whatever the problems may be in the new Bill C-62, it does eventually become law.

In its background material, the government has emphasized that the Bill will reduce the paperwork required from federal not-for-profit corporations, provide improved financial accountability, clearly set out a standard of care for directors and enhance the rights of members.

TRANSITIONAL PERIOD

When the legislation passes and is proclaimed in force, it will give each existing federal not-for-profit corporation (with certain relatively minor exceptions) a period of three years within which to comply with the new legislation (by way of a “continuance”). As a result existing not-for-profit corporations will have a significant period of time to adapt their legal practices to the requirements of the new law. Unfortunately, if history is any guide, most corporations will not begin the process of complying with the new legislation until relatively late in the three-year period. (A similar arrangement for business corporations in the 1970s gave those corporations five years to make the transition to the new legislation and led to a flood of continuance applications at the last moment).

TWO TYPES OF CORPORATIONS

The legislation will divide not-for-profit corporations into two basic types and various provisions of the legislation will apply to one or the other of the two types. The two types of corporations are “soliciting corporations” and “non-soliciting corporations”.

The criteria for “soliciting corporations” were a controversial part of the 2004 Bill and significant modifications have been made to those criteria. A soliciting corporation is one that, during the current year (or another time period that the government may set by regulation), has received donations from the public or received financial assistance from any level of government in excess of an amount fixed by regulation. The amount fixed by regulation is to be $10,000 and the time period is three years. While this amount appears low it does not include donations from members. A non-soliciting corporation is simply any other not-for-profit corporation.

The federal government clearly continues to consider that the funding received by soliciting corporations gives the public a right to know about these corporations and means that additional requirements should apply to them. As a result, the government filing requirements for these corporations will be expanded.

POWERS OF THE CORPORATION

Traditionally not-for-profit corporations have had only those powers that are set out in Part II of the Canada Corporations Act as those powers may be limited by the corporation’s Letters Patent (the current incorporating document). The more modern concept is to give corporations all the powers of a natural person (except as those powers may be limited by the corporation’s Articles – the new form of incorporating document). This more modern concept will be applied to not-for-profit corporations and should lead to fewer questions about whether they have the corporate power to take certain actions.

CORPORATE RECORDS

The legislation will specifically require each federal not-for-profit corporation to maintain records that include the minutes of its members’ meetings, a list of its directors, a list of its officers and a list of its members as well as adequate accounting records and minutes of the meetings of its directors and committees of directors. Depending on the record involved, either members or directors will have access to those records subject to certain conditions set out in the legislation.

DEBT OBLIGATIONS

The legislation contains an elaborate set of provisions to deal with debt obligations of not-for-profit corporations. These have been modelled on the provisions that apply to business corporations with regard to their shares. The provisions appear to be directed toward corporations that have borrowed money from their members and will be of interest and relevance to corporations that may solicit loans from their members.

BY-LAWS

At the moment the Canada Corporations Act requires that the by-laws of a corporation cover certain specific matters and provides that the by-laws must be approved by Industry Canada before they come into force. Under the new legislation, no approval by Industry Canada will be required for a by-law to come into force. By-laws will be required to be passed by the directors (and will come into force at the time of such passage) and then be ratified by the members. The by-laws will be required to deal with the conditions of membership. They may also deal with a wide variety of other matters, but that will be up to the corporation in question.

CLASSES OF MEMBERS

Many existing not-for-profit corporations have different classes of members either because the rights of one group are enhanced (for instance by a right to elect some or all of the directors) or because the rights of another group are diminished (for instance because members of that group do not have a right to vote).

Such classes of members will continue to be possible but must be established by the articles. If voting rights are to be established on any basis other than one member – one vote, that must also be set out in the articles. Many not-for-profit corporations currently have non-voting classes of members and, if that is to occur after the new legislation is applied to a corporation, it would have to be provided for in the articles and would be subject to the important qualifications set out below.

ANNUAL AND OTHER MEETINGS

Corporations will be required to hold annual meetings of their voting members and may hold other meetings from time to time. The legislation will be much more flexible than the existing legislation as to how a meeting may be held. It will specifically permit electronic meetings of directors and also permit resolutions signed by all members to replace a meeting. In addition, absentee voting by members who are unable to attend a meeting will be permitted and decision-making by consensus by directors and members will be authorized. Members may vote electronically at meetings. These changes should greatly simplify the holding of meetings (both of directors and members) and will formalize practices that have been followed by many corporations in any event.

FINANCIAL DISCLOSURE

Corporations will be required to maintain appropriate financial statements and will be required to send them (or summaries) to each member. For corporations that do not wish to mail these financial statements, the by-laws may provide that the corporation may publish a notice that such statements are available for inspection by the members. It will be important for not-for-profit corporations with numerous members to amend their by-laws to deal with this matter when they become subject to the Act (i.e., when they are continued) in order to avoid the expense of forwarding financial statements to each member.

All soliciting corporations will be required to provide their financial statements to the Director (an official of the federal government) so that they are available for public inspection.

AUDIT OF FINANCIAL STATEMENTS

Proposals to amend federal not-for-profit legislation (including the 2004 Bill) have sparked serious concern as to whether or not all corporations should be required to retain an accountant to review or audit their financial statements. The new legislation deals with this issue by providing for a category called “designated corporation” which would consist of soliciting corporations with annual revenues above $50,000 (a level set by regulation) and non-soliciting corporations with annual revenues above $1,000,000 (again a level set by regulation).

The government has summarized its intentions respecting audit requirements as follows:

“High-revenue, soliciting corporations will be required to be audited. Mediumrevenue, soliciting corporations could resolve, with the consent of two thirds of their members, not to undertake an audit, but to undergo a review engagement, in which the scope of the review is less than that of an audit. Low-revenue, soliciting corporations will also require a review engagement. However, these organizations could resolve, with the consent of all members, not to undertake this process.”

UNANIMOUS MEMBER AGREEMENT

Not-for-profit corporations with very few members which are not soliciting corporations may be interested in a provision that will permit what is called a “Unanimous Member Agreement”. Such agreements can be used where the members wish to control or limit the powers of directors or agree among themselves as to a particular way in which the not-for-profit corporation should be operated. Because such agreements must be signed by all members, they are unlikely to be of any practical use to corporations with more than a few members.

FUNDAMENTAL CHANGES TO THE CORPORATION

The legislation sets out certain fundamental changes that corporations will be authorized to make and how those changes are to be authorized by the directors and members.

The new legislation will expressly deal with the ability of a not-for-profit corporation to amalgamate with another not-for-profit corporation or to transfer to the laws of another jurisdiction.

One portion of the proposed legislation that may concern some corporations is the requirement that certain fundamental changes (e.g., changes to membership rights and a sale of all or substantially all of the assets of the corporation) must be approved by a resolution of the members on which all members (whether normally voting or not) will be entitled to vote. This might make significant transfers of assets difficult to accomplish for not-for-profit corporations which have large numbers of normally non-voting members.

DIRECTORS

The government has stated that the new legislation is intended to more clearly establish the roles and responsibilities of directors.

The legislation will specifically provide that the directors are to manage or supervise the management of the activities and affairs of the corporation. Each corporation will be required to have one or more directors (and a soliciting corporation will be required to have at least three directors of whom at least two must be independent, i.e., no officers or employees of the corporation).

One criticism of the 2004 Bill was that it required the election of all directors. In many not-for-profit corporations some persons are entitled to be directors by virtue of their status in another entity (e.g., the president of a provincial body may automatically be a director of the federal not-for-profit corporation with which the provincial body is affiliated). This Bill would require the election of directors but would also allow those directors to appoint other directors (as long as the appointed directors did not exceed one third of the number of elected directors). Some existing not-for-profit corporations may not find this a satisfactory solution to the problem and may require considerable changes to their existing by-laws to accomplish the same board structure.

Lengthy provisions have been placed in the new legislation to require that directors disclose all conflicts of interest.

The legislation provides a number of duties and responsibilities for directors. Consistent with the standards now applied to business corporations, each director is required to act honestly and in good faith with a view to the best interests of the corporation and each director must exercise the care, diligence and skill of a reasonably prudent person. In one unusual provision each director must verify “the lawfulness of the articles and the purpose of the corporation.”

Directors will be liable for up to six months’ wages owing to employees of the corporation if the corporation fails to pay those wages. Directors who authorize, permit or acquiesce in the commission of an offence by a corporation under the new Act will be equally guilty of the offence. Directors may defend themselves against a charge under the latter provision by demonstrating that they exercised due diligence to prevent the commission of the offence. This type of provision and the existence of this type of defence is expected to encourage directors to pay due attention to the affairs of the corporation and to regularly attend meetings of the board and obtain information on the operations of the corporation.

To offer some additional protection for directors, the legislation entitles a corporation to indemnify a director and officer against liability as long as he or she acted honestly and in good faith. In addition a director will be protected if he or she relies in good faith on financial statements of the corporation or on the report of a professional person (such as an accountant or a lawyer). Corporations will also be specifically authorized to purchase insurance to protect their directors and officers against any liability.

THE FUTURE

Federal not-for-profit corporations should carefully observe the progress of this legislation through Parliament. Once the legislation comes into force, corporations should adopt an action plan to prepare necessary changes to their by-laws and to ensure that they can be continued within the three-year time period.