The recent decision of the Ontario Superior Court of Justice in Re London Humane Society serves as a useful reminder to charities, not-for-profits, and their directors about the rules and considerations applicable to a decision to change membership policies and to refuse membership to persons in such an organization.

In this decision, the London Humane Society (the “Society”) sought the direction of the court concerning the composition of its membership for the purposes of an upcoming special meeting of its members. Over the course of a number of years, the Society had made numerous changes to its membership policies. In 2003, the Society’s board of directors passed a resolution that granted automatic membership to any individual who donated $30 or more (which was the yearly membership fee). At this time, the Society also began granting an automatic right of renewal to any individual who was an existing member and then made a donation in the following year of an amount equal to or greater than the yearly membership fee. In 2007, the by-laws were amended to provide as follows:

The members of the Corporation shall be those persons who are approved by the Board of Directors and who pay to the Corporation the dues or fees determined by the Board of Directors.

The by-laws also provided that memberships expired on December 31st of each year.

In late 2008, the board of directors passed a resolution to remove the automatic membership grant to donors. In 2009, the board of directors resolved to require members to complete an application form for membership. The Society’s membership was notified of this change in the Society’s Fall 2009 quarterly newsletter. The notice itself was contained on the middle page of the newsletter, in a box roughly the size of a business card. A second notification was given in early 2010 when tax receipts were mailed out to the Society’s 800 or so monthly donors.

By the time this second notice was mailed out, all of the Society’s memberships had expired. The application form was not available to existing and new members until January 14, 2010. Of the new applications received after January 14, 2010, eight were denied. The board of directors did not give any reasons for declining these applications.

The Court addressed two main issues arising out of these facts:

  1. Whether sufficient notice of the new application form policy was provided to members; and
  2. Whether the decision to reject eight applications for membership was valid.

Was there sufficient notice of the policy change?

With respect to the first issue, the Court held that the board of directors gave sufficient notice of the new application form. The Court held that this membership policy change was not a by-law change and that there were no statutory notification or confirmation requirements for such policy decisions. As well, the Society’s by-law was silent on the issue of notification for policy changes. The court also considered the directors’ common law duty of good faith, fiduciary duties, and the duty to avoid conflicts of interest. The Court held that none of these duties had been breached by the directors in giving notice of the membership policy change in the manner that they did. However, the Court did comment that the notice was not highly conspicuous and that the notice sent with the tax receipt was “underwhelming”. The Court noted that the directors owe their duties to the corporation and not to the membership and that as such, despite its weaknesses, the notices were held to be sufficient.

Were the membership rejections proper?

The issue for the Court here was whether the Society’s board of directors acted in bad faith or contrary to the rules of natural justice in deciding to reject eight of the membership applications. The Court noted that the Corporations Act (Ontario) permits the directors to pass bylaws related to the admission of members and that the by-laws were equally broad. The Court also found that there was no evidence that the board had placed their personal interests above the interests of the corporation and as such had not breached their fiduciary duties to the corporation.

The Court held that the board’s decision to deny membership to the eight applicants was arbitrary. While the court noted that arbitrariness is not itself part of the definition of bad faith, the arbitrary exercise of discretion has been associated with bad faith in a number of cases. The Court found evidence that the decision to deny one of the applicants was founded in political or ideological divisions. The Court held that it was improper for the board to reject an application for membership on this basis. As such, it held that it appeared “likely” that the eight rejected applicants, if not rejected arbitrarily, were refused membership because of possible ideological differences. The eight refused members were deemed to be members of the Society by the Court.

The conclusion of the court in this case is somewhat surprising and leaves us with more questions than answers concerning how a court will interpret restrictions on the admittance of members to a corporation. It is not clear whether the evidence before the court disclosed that the board applied set criteria for refusal or whether the decisions were in fact arbitrary. In our experience, it is quite common for charities and not-for-profit organizations to restrict membership to individuals with beliefs and ideologies that align with the organization. We would recommend that any such restrictions be clearly set out by the organization in its policies and its by-laws. Any such restrictions should be consistent with the mission of the organization. These policies and the by-laws should make clear that individuals can be refused membership without cause, in the discretion of the board, if this is desired. It is unclear whether courts will accept such a policy, however, an organization that applies its policies in a consistent and fair manner will help to protect itself against court intervention. Organizations should also keep in mind the protections afforded by human rights legislation and should ensure that its policies are not discriminatory.

Application of the new Not-for-profit Corporations Act (Ontario)

Organizations will want to look ahead to the new Ontario Act and how its provisions may apply to restrictions on membership. Pursuant to section 49 of the new Ontario Act, the directors may issue memberships in accordance with the articles and any conditions set out in the by-laws. As such, there is a broad power given to a corporation to set out the conditions for membership.

Section 51 of the new Ontario Act allows a corporation to set out, in its articles or by-laws, powers and procedures applicable to the termination or discipline of a member. Subsection (2) of that section specifically requires that any disciplinary action or termination be done in good faith and in a fair and reasonable manner. Subsection (3) of that section specifies when a procedure will be considered to be fair and reasonable. Aggrieved members may apply to court under subsection (5). Although this provision would not apply where a member is denied admission to the corporation, it is a good idea for corporations to familiarize themselves with these rules prior to the coming into force of the new Ontario Act.

Please note that the new Ontario Act is not yet in force and thus the provisions of the Corporations Act (Ontario) still apply. It is anticipated that the new Ontario Act will come into force sometime in 2012.