On October 25, 2010, Ontario's Bill 65, An Act to revise the law in respect of not-for-profit corporations, 2010 ("Bill 65") received Royal Assent. It is anticipated that the Bill will be proclaimed in force within approximately two years. Once in force, the Not-for-Profit Corporations Act, 2010 (Ontario) as it is to be known (the "New Ontario Act") will replace the Corporations Act (Ontario) (the "Existing Ontario Act"), which currently regulates Ontario's not-for-profit corporations. The New Ontario Act will signal the dawn of a modern era for Ontario's not-for-profit corporations, providing a regulatory framework similar to that available to Ontario for-profit corporations under the Business Corporations Act (Ontario) (the "OBCA"). It will free Ontario's not-for-profit corporations from many of the oft-not observed restrictions contained in the Existing Ontario Act (which has not been substantially changed for the last 50 years). In these ways, the New Ontario Act follows in the footsteps of the Canada Not-for-Profit Corporations Act (the "New Federal Act"), which received Royal Assent on June 23, 2010.
This bulletin highlights a number of key features of the New Ontario Act. It is necessarily summary in nature and for precise details of the various provisions in the New Ontario Act, please contact any of the authors at the numbers/address listed at the end of this Bulletin.
Application of New Ontario Act
The New Ontario Act will apply to companies without share capital and remove them from the governance of the Existing Ontario Act. The Existing Ontario Act will continue to apply to insurers (within the meaning of the Insurance Act (Ontario)) and, for five years, to companies with objects of a social nature. Corporations with share capital currently governed by the Existing Ontario Act and having objects in whole or in part of a social nature have five years from the coming into force of the New Ontario Act, to apply, pursuant to a special resolution, to be continued under the New Ontario Act as a corporation without share capital or as a co-operative corporation under the Co-operative Corporations Act (Ontario) or as a corporation under the OBCA. If a corporation is unable to obtain the necessary quorum to pass the special resolution authorizing such a continuance, it may apply to the court for an order waiving the need for such a resolution. A corporation that is required to continue under one of these three Acts and that fails to do so will be dissolved, subject to certain saving provisions available after the fact.
It is important to note, however, that if there is a conflict between the New Ontario Act or a regulation made under it and a provision of any other Act or regulation under any other Act applying to a body corporate without share capital or with any law applicable to a charitable corportion, the other Act, regulation or law prevails.
Incorporation and Continuance under the New Ontario Act
Like the New Federal Act, the New Ontario Act will institute a procedure by which applicants may incorporate as of right on submission of articles of incorporation and other required information and applicable fees, rather than at the discretion of the Minister of Government Services.
Corporations under the New Ontario Act must set out their purposes in their articles; however, subject to any restrictions in the regulations (not yet drafted), the purposes may be any purposes within the legislative authority of Ontario and corporations have the capacity and, subject to the New Ontario Act, the rights, powers and privileges of a natural person. If any such purposes are commercial, the articles must state that the commercial purpose is intended only to advance or support one or more of the non-profit purposes of the corporation.
Nature of Corporations
Like the New Federal Act, the New Ontario Act distinguishes between two basic categories of corporation; however, the nomenclature and precise lines of demarcation are not exactly the same. A corporation may be a "public benefit corporation" (similar to the concept of a "soliciting corporation" under the New Federal Act) or not a public benefit corporation (what the New Federal Act terms a "non-soliciting corporation"). Not surprisingly, public benefit corporations are subject to more stringent controls in a number of key areas than are non-public benefit corporations.
Again, it is no surprise that "charitable corporations" are automatically considered public benefit corporations. The definition of "charitable corporation", which spawned much discussion prior to Bill 65 at the Third Reading stage, is a corporation incorporated for "the relief of poverty, the advancement of education, the advancement of religion or other charitable purpose". Presumably, the "other charitable purpose" will be defined by common law and allows for the evolution of the concept of a charitable corporation. A non-charitable corporation (i.e., any corporation that is not a charitable corporation) will be considered a public benefit corporation if it receives more than $10,000 in a financial year in the form of donations or gifts from persons other than its members, directors, officers or employees or in the form of grants or similar financial assistance from the federal, provincial or municipal government or an agency thereof. Since the categorization of a corporation as a public benefit corporation will affect numerous matters relating to its corporate governance, for a non-charitable corporation whose status would otherwise shift during the course of a financial year from non-public benefit to public benefit, a saving provision was added just prior to the Third Reading of Bill 65 deeming it not to change its status during the financial year, but only in the next financial year as of the date of the first annual meeting in that financial year.
The head office of every corporation incorporated before the New Ontario Act comes into force is deemed to be the registered office of the corporation. The registered office must be in Ontario in a place specified in its articles, subject to change within the municipality or geographic township in the articles by the directors and outside of that area by special resolution. A "special resolution" is one that is submitted to a special meeting of members called for the purpose of considering it and passed by at least two-thirds of the votes cast at that meeting or consented to in writing by each member entitled to vote at the meeting.
Generally, records of the corporation required to be maintained by it must be retained at the registered office or at another location in Ontario designated by the directors. In certain circumstances, provided they remain available for inspection, including by technological means, at the registered office and the corporation provides the necessary technical assistance, the records may be kept outside of Ontario. Directors are to be given access to all mandated records, while members are entitled, on payment of a reasonable fee, to take extracts from certain records only (members are entitled free of charge to one copy of the articles and by-laws, including amendments). Members also have rights, on satisfaction of certain conditions, to access to member registers and lists of members, provided the information or list is not used otherwise than in connection with an effort to influence member voting, requisitioning a member meeting or another matter relating to the affairs of the corporation. The New Ontario Act contains provisions that allow both the corporation and members to apply to court for orders limiting or denying access to records or information required to be kept by the corporation.
Directors and Officers
One of the most welcome changes from the Existing Ontario Act is the elimination of the requirement that a specified percentage of the directors of the corporation must be members (unless the by-laws otherwise provide). However, every corporation must have a minimum of three directors and not more than one-third of the directors of a public benefit corporation may be employees of the corporation or any of its affiliates (they may, however, be officers, as long as they are not also employees). Directors are elected by ordinary resolution for a term of not more than four years, as provided in the by-laws of the corporation. Staggered terms of office for directors are permitted. In a departure from the New Federal Act, ex officio directors are also permitted. Except for ex officio directors, directors may be removed from office by ordinary resolution at a special meeting; provided that if a group or class of members is exclusively entitled to elect that director, only they may remove him or her.
The New Ontario Act permits existing directors to appoint additional directors until the close of the next annual meeting without any special authorization of the members, provided the total number so appointed does not exceed one-third of the number elected at the previous annual meeting. While consent is required to be validly elected or appointed as a director, like the OBCA, the consent can be given retroactively outside the 10 day consent period and is not required for a director who is re-elected or reappointed without any break in his or her term of office.
Unless the articles or by-laws otherwise provide, directors may meet at any place and on any notice that the by-laws require and a majority of directors constitutes a quorum for directors' meetings. As long as a quorum remains, despite any vacancy in the board, the directors may continue to exercise all of the powers of directors.
Subject to the articles or by-laws, the directors may designate offices, appoint them and specify their duties and may delegate their powers to them, subject to certain limitations. There is no longer a requirement that the President of a corporation be a director (there must, however, be a director who is appointed as chair of the board of directors). Thus the most senior executive officer of a corporation governed by the New Ontario Act need no longer be a director.
Like the OBCA, the New Ontario Act expressly sets out the standard of care by which directors and officers are to abide in exercising their powers and carrying out their duties. They must act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A reasonable due diligence defence is included in the New Ontrio Act entitling directors to rely in good faith on certain financial information and reports of officers or employees of the corporation in certain circumstances and on reports of ecertain experts.
The New Ontario Act, like the New Federal Act, however, does not immunize directors from liability they may suffer as a result of serving as a director of a not-for-profit corporation. Corporations may provide indemnification to their directors and officers, former directors and officers and individuals acting in that or a similar capacity of another entity at the corporation's request similar to that allowed for corporations incorporated under the OBCA. The corporation may also purchase insurance for the benefit of those for whom indemnification is available, except that charitable corporations may not do so unless they also comply with the Charities Accounting Act or a regulation under that Act permitting that purchase or there is a court order permitting the purchase.
Conflicts of interest are dealt with by a disclosure and refraining from voting regime similar to that under the OBCA. Significantly, the New Ontario Act now expressly recognizes a conflict in circumstances where a director is a director or officer of, or has a material interest in, any other person who is party to a material contract or transaction with the corporation. If all of the directors are conflicted and unable to vote on a proposed material contract or transaction as a result of that conflict, the New Ontario Act specifically authorizes the members to approve the matter, thus recognizing a practice that many corporations with overlapping boards having transactions between them have adopted. Conflicted directors may be counted in the quorum for the directors' meetings at which the material contract or transaction is to be considered, but may not vote on that matter, subject to certain limited exceptions similar to those in the OBCA.
Subject to the articles or by-laws, directors may fix their remuneration and that of the officers and employees of the corporation and directors, officers and members may receive reasonable remuneration and expenses for any services to the corporation in another capacity.
Although significant discussion focused on the extent to which members of a not-for-profit corporation without share capital should be able to exercise voting control over the activities of the corporation, the New Ontario Act gives extensive voting rights and remedies to members of not-for-profit corporations very similar to those existing for shareholders under the OBCA and for members under the New Federal Act. Unlike the New Federal Act and the OBCA, however, there is no mechanism for a unanimous shareholder agreement that would otherwise remove the powers of the directors and give them to the members.
However, any member entitled to vote at an annual meeting may submit a proposal concerning any matter he or she may wish to raise at a meeting and discuss any matter at the meeting which he or she would have been entitled to submit in a proposal. The proposal, and a statement in support thereof with the member's name and address, must be included in the notice of the meeting if the member requests, provided the member pays the costs associated therewith. Like the OBCA, the New Ontario Act contains certain exceptions from these member rights to guard against abuses in its use. Members holding at least 10% of the votes that may be cast at a meeting, or such lower percentage as may be set out in the by-laws, may requisition the calling of a meeting of members and the directors must comply with that requisition, subject to certain standard exceptions, failing which, the requisitioning members may call the meeting themselves. The New Ontario Act also includes a provision allowing a court to order that a meeting of members be held, on application by a director or a member entitled to vote.
Subject to the by-laws, the quorum for a members' meeting is a majority of those entitled to vote at the meeting, present in person or by proxy. Unless the articles otherwise provide, each member is entitled to one vote at member meetings. Voting is by show of hands, unless the by-laws otherwise require or a ballot is demanded. A corporation may also provide in its by-laws for voting by mail or by telephonic or electronic means, in addition to or instead of voting by proxy. However, voting by mail or by telephonic or electronic means may only be used if the votes may be verified as having been given by members entitled to vote and the corporation is not able to identify how each member voted.
Proxies must be made available to members concurrently with or before the giving of notice of the meeting. Generally, proxy holders have the same rights as the members appointing them to speak at the meeting, to vote by ballot and, except where they have conflicting instructions from more than one member appointing them, to vote by show of hands.
Even members not normally given voting rights have the right under the New Ontario Act to vote on certain matters affecting them differently from others and on certain other fundamental changes relating to the corporation (see discussion below under Fundamental Changes).
Members are also given certain protective rights under the New Ontario Act, similar to those available to shareholders of for profit corporations under the OBCA:
- A member or debt obligation holder of a corporation may apply to the court for an investigation of a corporation or its affiliates and the court may make a broad variety of orders if it appears that the corporation's activities or those of its affiliates have been carried on with intent to defraud, the activities or powers of the directors have been carried on or exercised in a way that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the member or debt obligation holder, the corporation or its affiliates were formed or dissolved for a fraudulent or unlawful purpose or persons associated with formation, activities or affairs of the corporation or its affiliates have acted fraudulently or unfairly.
- A "complainant" may apply to court for leave to bring a derivative action on behalf of a corporation. A "complainant" includes a member, officer or director of the corporation or its affiliates, a person who ceased to be a member, officer or director within the last two years and any other person who, in the discretion of the court, is a proper person to make an application. An order in respect of the commencement of a derivative action may not be made if the court is satisfied that the corporation is a religious corporation.
- On compliance with stipulated procedural requirements, members of a corporation that is not a public benefit corporation are given rights of dissent and the right to be paid fair value for their membership interest if the corporation resolves to effect certain types of fundamental changes, such as amending its articles in a way that affects restrictions on its activities or powers, amalgamating, continuing or selling, leasing or exchanging all or substantially all of its assets.
- A complainant or creditor of the corporation may apply to court for a compliance or restraining order against the corporation, any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of the corporation in respect of compliance/breach with the New Ontario Act, any regulations thereunder, the articles or by-laws of the corporation.
Conversely, the articles or by-laws of a corporation may provide that the directors, the members or any committee of directors or members have the power to discipline a member or to terminate their membership. If they do so provide, they must also set out the circumstances and the manner in which that power may be exercised. Any such disciplinary action or termination must be done in good faith and in a fair and reasonable manner, and the New Ontario Act provides some guidance on what kind of procedure is considered to be fair and reasonable.
Subject to members passing an extraordinary resolution to have a review engagement instead of an audit or not to appoint an auditor and not to have either an audit or review engagement, at each annual meeting, members must appoint an auditor meeting the requirements under the Public Accounting Act, 2004 and being independent of the corporation, any of its affiliates and the directors and officers of the corporation and its affiliates. The thresholds that permit corporations not to have an auditor differ for public benefit corporations and other corporations. For a public benefit corporation, a review engagement may be used if annual revenues for the financial year were more than $100,000 (or an amount yet to be prescribed by regulation) and less than $500,000 (or such prescribed amount) or it may dispense with an auditor and not have either an audit or review engagement if annual revenue is equal to or less than $100,000 (or such prescribed amount). For other corporations, the threshhold for a review engagement is annual revenue of more than $500,000 (or such prescribed amount) and for no auditor, audit or review, is annual revenue equal to or less than $500,000 (or such prescribed amount). Consideration of such an extraordinary resolution, while not considered special business at an annual meeting, requires that the resolution passes by at least 80% of the votes cast at the meeting (or by written consent of all those entitled to vote at the meeting), a much higher threshhold than the special resolution threshhold used elsewhere in the New Ontario Act.
Should a corporation choose to have an audit committee, a majority of its members must not be, employees or officers of the corporation or any of its affiliates.
Members are entitled to financial statements on an annual basis which, after approval by the directors (and prior to that, the audit committee, if any), must be placed before the members at the annual meeting.
Unless the articles or by-laws provide otherwise, directors are given powers similar to those given under the OBCA to borrow money on the credit of the corporation, to issue debt obligations, to give guarantees on behalf of the corporation and to grant security on the corporation's assets. Like the New Federal Act, the New Ontario Act recognizes that corporations own property transferred or vested in them and do not hold the property in trust unless it was transferred expressly in trust for specific purposes.
No part of the corporation's profits or its properties may be distributed to a member, director or officer except in furtherance of the corporation's activities or as otherwise permitted by the New Ontario Act. Subject to the articles and by-laws, a corporation that is not a public benefit corporation may distribute the fair value of a membership to a member on termination of that member's membership. Members are not liable, as members, for any liability of the corporation or any act or default of the corporation, except as otherwise provided. The articles may provide for a lien on the membership for a debt owing by a member which may include an unpaid amount in respect of that membership.
Unless the articles or by-laws otherwise provide, directors may now make, amend or repeal any by-law regulating the activities or affairs of the corporation, except in respect of the following matters which require a special resolution of members: an addition, change or removal of a provision respecting membership transfer, a change in the persons to whom property of the corporation is to be distributed on liquidation after liabilities are discharged or a change in the method of voting by members not in attendance at a meeting of members. Although by-laws, amendments or repeals passed by directors are effective immediately, they must be put to the next meeting of members for approval. If rejected or if not then put to members, they will cease to be effective.
If the directors do not pass an organizational by-law within 60 days of the date of incorporation under the New Ontario Act, the corporation is deemed to have passed the standard organizational by-laws approved by the Director under the New Ontario Act (although they can thereafter be amended or repealed and replaced in accordance with the New Ontario Act at any time). Those standard by-laws must be published in The Ontario Gazette and made publicly available. They have not yet been published.
The articles of the corporation may include any provisions that may be included in the by-laws, although the by-laws must set out the conditions required for being a member of the corporation. If in the articles, however, a special resolution of members is required to make any amendment to these provisions and a separate vote of a class or group of members (whether or not they normally have a vote) may be required. Non-voting members also have a right to vote in circumstances prescribed by the New Ontario Act which are considered to affect those members in a unique way. Such matters include exchanging or cancelling all or part of the memberships of a class, removing rights attached to a class to reduce or remove a liquidation preference or affect prejudicially voting rights, and increasing rights of classes having equal or superior rights to a particular class of members. Like articles of incorporation, once articles of amendment have been received by the Director with any other prescribed information or documents and the required fee, the Director must issue the certificate of amendment.
Members (including those who would not normally be entitled to vote) must also approve certain other fundamental changes such as amalgamations and the sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of its activities.
The New Ontario Act also provides for continuance of corporations from and into Ontario on satisfaction of certain conditions. A corporation is not permitted to apply for continuance outside Ontario unless the laws of the intended jurisdiction provide in effect that the property rights of the corporation continue, the corporation's liabilities continue, existing causes of action are preserved, proceedings of a civil, criminal, administrative, investigative or other nature may be continued and convictions, rulings, orders and judgments may be enforced notwithstanding the continuance.
Significantly, the New Ontario Act allows corporations obtaining the requisite member approval by special resolution to carry out arrangements, provided that the court approve the arrangement. Like the OBCA, but unlike the CBCA and the New Federal Act, it is not necessary that it be impracticable to effect the fundamental change sought by the arrangement other than by way of arrangement for the court to have jurisdiction to grant such approval. This should prove to be an effective tool for corporations proposing to implement multi-step reorganizations.
Liquidation, Winding-Up and Dissolution
The New Ontario Act contains a comprehensive regime relating to the liquidation, winding-up or dissolution of a corporation. Generally, the property of the corporation must first be applied to satisfy any debts, obligations or liabilities of the corporation. After that, if the corporation is a public benefit corporation, the remaining property must be distributed, if it is a charitable corporation, to a charitable corporation with similar purposes and if it is a non-charitable corporation, to another public benefit corporation with similar purposes, or in either case, to a government or government agency. If the corporation is not a public benefit corporation, the remaining property is to be distributed in accordance with its articles or if there is no such provision in its articles, rateably to its members according to their rights and interests in the corporation.
Certain liabilities may continue post-dissolution of the corporation (e.g. civil, criminal or other proceedings) and property that would have been available to satisfy any judgment or order had the corporation not been dissolved remains available for this purpose. As a result, despite the dissolution of a corporation, a member (including the heirs, trustees, and other legal representatives of the member) to whom any of its property has been distributed is liable to a person claiming for such liabilities to the extent of the amount actually received by that member.