Discussions about By-laws will rarely generate much enthusiasm or interest. That is, until a situation arises where they must be consulted and you realize that the By-laws contain gaps, inconsistencies and simply do not work. When there is a challenge to procedures relating to the conduct of meetings, the By-laws are the first place to turn to and should serve as a guide for how to deal with the issue. Often such problems arise just as the organization is approaching its annual meeting of members, leaving insufficient time to properly deal with and correct any problematic provisions of the By-laws. Conducting a review of your By-laws on a regular basis will ensure that the organization is well prepared when unexpected events occur. Below are a few common examples of By-law issues that can cause problems or create ambiguity.
Compliance with governing legislation
When drafting a new By-law or conducting a review, be aware of applicable statutory requirements. Avoid using another organization’s By-laws as the basis for a new By-laws since the legislative requirements, restrictions and default provisions of the jurisdiction applicable to the other organization may be and often are different. For instance, the Canada Not-for-profit Corporations Act (“CNCA”) contains a number of by-law related rules that differ from those of the Ontario Corporations Act (“OCA”). As an example, under the OCA, directors are required to also be members of the corporation, whereas the same rule does not apply under the CNCA.
Notice of meetings
The By-laws should provide what the notice periods are for meetings of the Board and of members. The governing statute will usually prescribe what the minimum number of days is for providing notice of a members’ meeting. The CNCA provides that at least 21 days’ notice is required for a meeting of members, while the OCA prescribes a minimum of 10 days. For greater flexibility, it is best to keep the notice period at the statutory minimum. Although neither of those Acts prescribe a minimum number of days for notice of a Board meeting, organizations may find that a shorter notice period for Board meetings is preferable (e.g. 24-48 hrs) so that the Board can convene quickly and respond promptly to any urgent matter that may require the Board’s intervention. Even though it is a good idea to have a shorter notice period for board meetings (in case the Board needs to meet urgently), it is nonetheless good practice to provide as much notice as reasonably possible and provide the directors with an agenda in advance and any documents that the Board will be asked to consider at the meeting.
Financial year end
If making reference to the financial year end in the By-laws, also include language that allows the Board to change it without having to amend the By-laws. For example, “Unless otherwise changed by resolution of the Board, the financial year end of the corporation shall be December 31st in each year.”
List of officers
For greater flexibility, do not set out an exhaustive list of officers in the By-laws. Instead, the By-laws should allow the Board (or the Members, as the case may be) to designate additional officers from time to time as deemed necessary or appropriate. This will enable the organization to adapt more easily to change and modify the composition of its executive as the organization evolves, without having to go through the by-law amendment process.
A quorum is the minimum number of persons who must be present for official decisions to be made at either a meeting of directors or a meeting of members. When quorum is fixed too high, it is more difficult to achieve and can prevent important business from getting done. The By-laws should therefore set the quorum at achievable levels, particularly for members’ meetings. In addition, “presence” for the purposes of establishing quorum should include attendance in person, by electronic means and by proxy (for member meetings only). When setting the quorum for meetings of directors, the By-laws should provide that quorum is based on the number of directors “in office,” rather than on the “fixed” number of directors. That way, the Board is not left scrambling to meet quorum when vacancies on the Board occur.
Directors cannot vote by proxy
Many organizations mistakenly believe that directors are permitted to vote by proxy. The By-laws of some organizations actually include a clause that allows directors to appoint a proxyholder to act and vote on their behalf if they are unable to attend a meeting; that is not permitted at law.
It is well-established under the common law, that the rules of fiduciary duty applicable to directors prohibit a director from delegating his or her right to vote to another individual. The common law rule has now be formally prescribed in some non-profit corporate statutes, such as the CNCA, which provides, “No person shall act for an absent director at a meeting of directors.” An identical clause is found in the yet-to-be enacted Ontario Not-for-Profit Corporations Act, 2010 (ONCA). Since this important rule appears to be commonly misunderstood or ignored, the statutory language that prohibits another person from acting for an absent director should be reproduced in the By-laws. That will serve as a useful reminder to the organization that directors are not permitted to act or vote by proxy.
This brief article only scratches the surface of common issues that arise with By-laws. In short, the By-laws should be reviewed regularly to ensure they are current, statutorily compliant and consistent with the desired governance structures and practices of the organization. With recent changes to the federal statute governing not-for-profit organizations and similar changes coming to other provincial non-profit legislation (such as the ONCA), organizations are encouraged to coordinate any internal by-law review with a legal adviser; particularly one who is experienced with non-profit law. It is best to involve your lawyer early in the process, not after all of the internal work has been completed, at which point it can be more difficult and costly to start over.