Earlier this year, the Province announced that implementation of the Ontario Not-For-Profit Corporation Act, 2012 (the “Act”) will be delayed until at least January of 2014. The delay was designed to permit the Ministry to complete written resources to help the not-for-profit sector transition to the new Act and to consider additional amendments to the Act.
Written resources are now available on the Ministry’s website, including a draft precedent by-law. More significant was the introduction this summer of Bill 85, which carries the descriptive name: An Act to Amend Various Companies Statues and to amend Other Statutes Consequential to the Not-For-Profit Corporations Act, 2012.
Bill 85 is more than just a response to the issues brought to the Ministry’s attention about the current version of the Act. It imposes consistency of practice in the administration of corporate entities across most, if not all of the Ontario statutes that deal with different types of corporations and partnerships. The amendments also provide future proofing to a number of aspects of the Act and impose new transition requirements for share capital social clubs which were incorporated under the current Corporations Act.
CHANGES TO THE TRANSITION PROCESS
What was perhaps the area of greatest concern with the Act to many not-for-profit corporations was the introduction of significant rights for all members of these corporations. Some of those rights were given to members who are not intended to have a real role in the governance of the corporation: those specifically not granted any voting rights. The current version of the Act (Bill 65) gave all classes of members (whether voting or non-voting) the right to vote, as a separate class, on fundamental changes to the corporation. These changes include entering into an extraordinary lease, sale, exchange of all or essentially all the property of the corporation, an amalgamation, any change to the rights or conditions attached to those members or any change to the rights of other classes of members which would change the relative rights of the non-voting members (up or down). The effect is to give the non-voting members the potential to veto changes which could have been carried out without any input from them. Organizations with non-voting members were advised to consider amending their by-laws and if necessary, obtain supplementary letters patent, to eliminate any classes of members which they did not want to give this right to.
Several months ago, we commented in an update article that the Act’s provisions did not clearly line up with what appeared to be the Ministry’s intent. The Ministry had indicated in its online resources that their intent was that corporations would be able to eliminate a class of non-voting members without getting their approval in accordance with the new provisions after the Act came into force and during the three-year transition period. Our article commented on the fact that the actual provisions in the Act did not clearly reflect this intent and that to be safe, corporations should proceed with eliminating unwanted non-voting membership classes before the Act comes into force.
Shortly after our article was posted, the Ministry deleted that statement from its website. Bill 85 was then introduced, amending the Act to ensure that the provisions instituting the right to separate class votes on fundamental changes (subsections 105(2), 111(3), 116(3) and 118(4)) would not come into force until after the three-year transition period has run its course. On the assumption that Bill 85 is adopted and comes into force before or contemporaneously with the Act, it should now be possible for corporations to address the issue of unwanted non-voting membership classes at the same time they make the changes necessary to properly transition to the new Act within the three year transition period.
However, it is important to note that this does not mean the separate class vote provisions for members who already have a vote are delayed. Those provisions come into force immediately. Corporations wishing to eliminate a voting class of members without the need to potentially have 2/3rds of them consent should do that before the Act comes into force, likely in January.
The transition section of the Act, section 207, has been significantly augmented. Previously only three subsections long, section 207 is now seven subsections long. Subsection 207(1) now states explicitly that any provisions in the letters patent, supplementary letters patent, by-laws or special resolutions which were valid immediately before the day the Act into force remains valid until that provision is amended or the third anniversary of the Act coming into force. This is precisely what was previously missing from the Act which, coupled with the unqualified and immediate creation of the separate class voting rights led to our position that it was safest to amend the articles and by-laws prior to the Act coming into force in 2014.
Subsection 207(2) adds an additional requirement for corporations looking to amend its letters patent or supplementary letters patent during the three-year transition. The former subsection 207(1) permitted the corporation to amend any provision in its letters patent, supplementary letters patent, by-laws or special resolutions to bring the provisions in conformity with the Act without any limitation except that found in subsection 207(3). Subsection 207(3) prohibited the corporation from restating its articles in their entirety under section 109, unless the articles fully conform with the Act. Separate and smaller amendments were thus notionally possible as there was no explicit requirement that the letters patent, supplementary letters patent or by-laws be comprehensively revised to conform with the Act. Section 207(2) no longer refers to amending “provisions” of its letters patent but rather to amending the letters patent or other incorporation documents directly. It also adds the condition to amending the letters patent or supplementary letters patent: that amendment must be made along with “any amendments … that may be necessary to bring [the letters patent or supplementary letters patent] into conformity with [the] Act.” The only exception to that requirement is an amendment is permitted provide it adds a provision which previously could have been the subject of a by-law provision only, but is under the Act now required to be placed in the articles.
The by-laws and special resolutions of the corporation can be amended pursuant to subsection 207(4) but are subject to the new requirement that all amendments necessary to bring the by-law or special resolution into full compliance with the Act be also made at the same time. That requirement is explicitly said to include the requirement that any by-law provisions which the Act requires to be placed in the articles, must be placed into the articles at that time.
The last addition to the transition provisions introduced by Bill 85 is somewhat ambiguous in its effect. Subsection 207(6) provides as follows:
(6) Any provision or portion of a provision in a corporation’s by-laws or special resolution that is required by this Act to be contained in the corporation’s articles must be contained in the articles before the third anniversary of the day this section comes into force, failing which those provisions or portions of them become invalid on the third anniversary of the day this section comes into force.
This suggests that an existing by-law provision which may in substance comply with the Act’s other requirements and scheme, but not with the Act’s requirement that this provision be located in the articles rather than in the by-law, must be migrated to the articles within three-year transition period. Failure to do so makes those provisions “invalid” at the end of the transition period, even if substantially there is nothing wrong with those provisions. This seems to conflict with the intent of section 207(5) of the Act which deems all by-law provisions that have not been amended by the end of the transition period to be amended to the extent necessary to achieve conformity of the Act. Subsection 207(5) is consistent with a legislative scheme that there be no gap in the constating documents of a corporation that fails to fully transition its letters patent, supplementary letters patent and by-laws into the new regime and was to our thinking, one of the key positive features of an Act which regulates many small, less sophisticated not-for-profit corporations.
If subsection 207(6) is interpreted strictly, the effect would be to create a technical gap despite subsection 207(5). Substantively “good” by-law provisions would be rendered “invalid” leaving nothing in the corporation’s constating documents at all dealing with those matters. We note that the Act permits the Director to specify what must be placed in the articles so the full extent of the implications of this provision is as yet unknown.
An example of the potential consequences of this provision is the impact on how a not-for-profit corporation’s assets are distributed on dissolution. The new Act requires a non-public benefit corporation to distribute its property amongst its members if there is no distribution direction contained in its articles. An existing corporation with a provision in its by-law requiring distribution to registered charities in Canada would find itself apparently compelled by this Act to distribute its remaining property amongst its members instead. Particularly where those members are no longer the same members who founded the corporation and where the corporation has significant assets, a real injustice could result. Imagining a worst-case scenario, new members, recognizing a potential for individual personal gain, could attempt to voluntarily dissolve the corporation arguing that they do not have to respect the “invalid” distribution provisions of the by-law, but are required by the Act to distribute the corporation’s assets amongst themselves.
Perhaps less morally problematic is the requirement that the articles contain the membership conditions, and if there is more than one class of members, the different conditions. Today, the conditions for multi-class memberships are commonly located in a corporation’s by-laws. Those would become invalid under this provision. Notionally, there would then only be one class of members. In many cases, it will be unclear who is within that class.
We presume that the Ministry wanted to create greater external transparency by forcing these provisions from the (sometimes hidden) by-laws to the (searchable) articles. Unfortunately, this mechanism is inherently incompatible with the legislative scheme that permits the many smaller, less sophisticated not-for-profit corporations it governs to continue without a whole scale continuance exercise.
Introducing a provision to deem any by-law provision that would, but for the fact it is not found in the articles, conform with the Act (and the Director’s requirements), to have been inserted into the articles would be one approach. Another approach might have been to render only those by-law or special resolution provisions which are required to be in the articles and do not substantively conform to the Act’s other provisions to be invalid. Unfortunately, those approaches do not create the greater external transparency this subsection 207(6) seems to press for. Perhaps, all that can be done is to offer incentives for smaller organizations to formally continue. One solution to the dissolution problem discussed above might be to make the default distribution provision the same for both public benefit and non-public benefit corporations.
As a result of this section, every not-for-profit corporation, regardless of whether it intends to update the balance of its constating documents should review its by-laws and letters patent/supplementary letters patent/articles to determine if any provisions need to be relocated from the by-laws to updated articles.
The overall impact of these amendments is to, in many or even most cases, require a corporation that wants to update its constating documents to do so comprehensively. While the Act does not force a corporation to update its constating documents and formally continue under the Act or face dissolution like the Canada Not-For-Profit Corporations Act does, these amendments clearly indicate a greater push for Ontario not-for-profit corporations to update their organizational documentation.
FUTURE PROOFING & FLEXIBILITY
A number of the amendments introduced by Bill 85 are designed to ensure that the Act will work effectively for many years to come. For example, one of the triggers for a corporation being considered a public benefit corporation (with its different financial reporting requirements) is the receipt by a non-charitable not-for-profit corporation of more than $10,000 in a financial year of donations from non-members, the public or in the form of government grants. The Bill permits that $10,000 figure to be varied by regulation to keep pace with inflation (or presumably, significant deflation). Another example of future proofing is a change in the definition of what constitutes telephonic or electronic means to more easily encompass future technological developments.
On the flexibility front, the Director is given significantly more discretion to establish requirements for various activities, including incorporation and application requirements, although that discretion is subject to regulation. The greater level of discretion permits the Director to move quickly as events arise and to deal with future developments without the need for legislative or even regulatory involvement.
CONSISTENCY BETWEEN CORPORATE STATUES
As the latest of all the Ontario corporate statutes and beneficiary of a comprehensive reconsideration of how corporate statues should be structured, it represents Ontario’s most current thinking on best corporate practices and approaches. The Bill takes advantage of the Act as a springboard to implement some of those same approaches across Ontario’s other corporate statutes.
For example, the definition of telephonic and electronic means is standardized across the Business Corporations Act, the Business Aims Act, the Corporations Information Act, the Extra-Provincial Corporations Act and the Limited Partnerships Act. The approach of using the Director to establish documentary requirements is extended across the other acts. Commensurate with the greater role the Director can play, the appointment of the Director (or Registrar in some of the other Acts) is made mandatory rather than permissive and the Minister’s regulation making powers are generally increased either supplement or to overrule the Director’s discretion.
A very significant change is the introduction of provisions to better accommodate the filing, retention and searching of corporate documents electronically. The statutes use a new term, “endorse,” to include electronic actions, establish the right for electronic searches of the Director’s records and the Director is given the right to specify how documents are to be executed (other than by physical signing), to issue corrected documents. Particularly important is the rule that the electronic records of the Director will always be the definitive corporate record.
Continuances between Corporate Acts
The Bill’s amendments to the Ontario corporate statutes also establish a greater degree of consistency in the protections provided to minority and other interests when corporations continue from one regime to another. The Bill also builds in assurances that not-for-profit corporations will possess certain not-for-profit attributes. For example, the rights of dissenting shareholders (essentially for a payout) found in the Ontario Business Corporations Act would apply to shareholders of business corporations which are to be continued under the Not-For-Profit Corporations Act. The Bill imposes new conditions, including deletion of any share capital provisions, cancellation of any shares issued, a requirement for unanimous shareholder approval unless all provisions of the other act are complied with and a requirement that the corporation be able to pay its liabilities as they come due to a continuation. The Bill also makes it clear that rights of creditors and others to the incorporation remain after continuation.
The current Corporations Act is amended to bring companies with objects that are either completely or partially of a social nature into the new regime.
Social clubs incorporated with share capital provide their members with a measure of economic interest in the social club’s assets but have been regulated by the current Corporations Act and possess attributes of typical not-for-profit corporations, business and cooperative corporations. This type of hybrid entity is no longer to be permitted. These social club corporations will be required, within a five-year transition period, to either continue as a non-share capital corporation under the Act, a cooperative corporation under the Cooperative Corporations Act, or as a business corporation with share capital under the Business Corporations Act.
The continuation must be approved by every class of shareholders by a separate vote and if a quorum for those approvals cannot be obtained, a court order is available. The Bill would provide for this type of company being dissolved if it is not actively continued within the five years, although it is possible to revive the corporation. Social club corporations will therefore an exception to the normal transition rule for not-for-profit corporations under the new regime; they must be actively continued.
Bill 85 significantly advances the changes which the Act introduced in 2010. It tweaks and consolidates the approaches that the Minister of Government Services has begun to implement, sets up a scheme that is more responsive to change and electronic access and, but for one small aspect, significantly clarifies the transition requirements for most non-share capital not-for-profit corporations.