A. HEADS UP ONTARIO NOT-FOR-PROFIT CORPORATIONS – YOUR NEW ACT HAS ARRIVED AT LAST!
On May 12, 2010, the Ontario Government introduced Bill 65, the new Not-for-Profit Corporations Act, 2010 (the “NFPCA”). The stated purpose of the NFPCA is to modernize the legal framework for Ontario’s 46,000 provincially incorporated not-for-profit corporations (“NFPs”). The proposed legislation follows the federal Not-for-profit Corporations Act which received Royal Assent in June 2009 (not yet proclaimed in force) and which made similar reforms to the legislative scheme applicable to federally incorporated not-for-profit corporations.
If Bill 65 receives Royal Assent, it will remove NFPs from the ambit of the present Ontario Corporations Act (the “OCA”). The NFPCA will affect every existing NFP in Ontario. Directors, officers, and executives should start thinking now about what actions they will need to take to ensure that their organization’s governance structure and documents comply with the new legal framework.
This article provides a short synopsis of some of the main features of the NFPCA that may be of interest to an existing Ontario NFP and its directors, officers, and executives.
B. TOP TEN FEATURES OF THE ACT
1. Continuing Under the NFPCA
If and when the NFPCA receives the approval of the Legislature and is proclaimed in force, NFPs currently incorporated under the OCA will have three years to file articles of amendment to amend their letters patent, supplementary letters patent, by-laws, or special resolutions to bring them into conformity with the NFPCA. If no such action is taken after three years, the necessary amendments will be deemed to have been made.
Failure to act and letting amendments be deemed to have been made will inevitably lead to ambiguity and uncertainty. The resulting questions, issues, and confusion may create more headaches and work than if articles of amendment had been filed properly within the three year window. Once the NFPCA is approved and the three-year clock starts ticking, Ontario NFPs would be wise to undertake a proactive governance review to assess whether their corporate governance documents and practices need to be updated or changed.
2. Commercial Activities Are Now Specifically Permitted & the Ultra Vires Doctrine Has Been Abolished
Currently, a NFP is limited to acting within the “objects” set out in the corporation’s letters patent. Actions outside of these boundaries may be found to be ultra vires by the courts and declared null and void.
Under the NFPCA, NFPs will still be required to set out “purposes” in their articles of incorporation. Corporations will be permitted to have any purpose that is within the province’s legislative authority. The NFPCA explicitly authorizes a corporation to have commercial purposes provided that these are to advance or support the corporation’s non-profit purposes.
Additionally, under the NFPCA, a corporation’s actions will no longer be declared invalid (i.e. ultra vires) simply because they are contrary to the NFPCA or the corporation’s articles or by-laws. For example, if a corporation enters into a transaction that is contrary to the corporation’s articles, the transaction will no longer be declared invalid simply because it was contrary to the articles.
3. Public Benefit Corporations
The NFPCA differentiates between public benefit corporations and non-public benefit corporations.
A public benefit corporation is defined as (a) a charitable corporation (a corporation incorporated for a religious, educational, charitable, or public purpose) or (b) a non-charitable corporation that receives more than $10,000 in a financial year either as donations/gifts from persons who are not members, directors, officers, or employees of the corporation, or as grants or similar forms of financial assistance from the federal government or a provincial or municipal government or an agency of any such government. As explained below, public benefit corporations are treated differently with regards to, for example, audit requirements.
A non-public benefit corporation is any corporation that is not a public benefit corporation.
4. More Flexibility Has Been Provided to Directors and Members When Planning Their Meetings
Under the OCA, directors may meet at any place in or outside of Ontario (if allowed in the by-laws) and may meet electronically. Members, on the other hand, are restricted to holding meetings within Ontario (unless stated otherwise in the letters patent) and must do so in person. Members may appoint proxies; directors may not.
Under the NFPCA, both directors and members will be able to meet outside of Ontario and may meet electronically (unless stated otherwise in the articles or by-laws). However, directors will still be prohibited from appointing proxies to attend meetings in their stead.
5. Directors: New Specifics
Currently, an Ontario NFP must have at least three directors and must provide for a fixed number of directors in its by-laws. Directors may be elected for terms of up to five years but at least three directors' terms must expire each year. Every director must be a member. Members may remove directors by special resolution (i.e. a 2/3rds vote).
Under the NFPCA:
- a corporation must continue to have at least three directors but may provide in its articles for a set number of directors or a minimum and maximum number of directors;
- directors may not hold office for a term longer than three years;
- not all directors need be elected for the same term and there is no requirement that there be an election each year;
- at least two-thirds of the directors must be members of the corporation;
- directors may be removed by ordinary resolution of the members (i.e. a majority vote);
- by-laws may provide for ex-officio directors and ex-officio members; and
- not more than one-third of the directors of a public benefit corporation may be officers or employees of the corporation or of any of its affiliates.
6. Protections for Directors and Officers
The NFPCA sets out directors’ and officers’ liabilities, as well as the standard of care to which directors and officers will be held accountable. This objective standard of care mirrors the standard of care set out in modern corporate statutes across Canada - to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors are given a reasonable diligence defence and both directors and officers are entitled to be indemnified by the corporation so long as the individual acted honestly and in good faith with a view to the best interests of the corporation and had reasonable grounds for believing that his or her conduct was lawful.
7. Enhanced Rights for Members
Under the NFPCA, the rights of dissenting members of a non-public benefit corporation are quite broad. For example, if a corporation resolves to amend its articles to add, remove, or change the activities that the corporation may carry on or the powers that the corporation may exercise, a member entitled to vote may dissent. If such resolution passes, the dissenting member will be entitled to be paid by the corporation the fair value of the membership interest, including any capital contribution, held by the member.
Additionally, a member entitled to vote may initiate proposals (a) to make, amend or repeal a by-law; (b) regarding any matter that is significantly related to the activities or affairs of the Corporation; or (c) to amend the articles to make certain fundamental changes. Such proposals will be required to be placed before a members' meeting. A proposal may also include nominations for the election of directors if such proposal is signed by not less than 5% of the members of a class of members entitled to vote.
Under the NFPCA, the rights of non-voting members are also expanded. If a NFP is to have more than one group or class of members, the articles must provide for such multiple groups or classes and must provide at least one class or group with the right to vote. Otherwise, each member of each class or group will be entitled to one vote. Even if the articles specify that the members of a class or group of members are not entitled to vote, such members will nevertheless be entitled to vote on certain resolutions that affect the rights or conditions of that class or group of members or another class or group of members.
When contemplating filing articles of amendment, a NFP should therefore consider whether to add specific language to its articles limiting the rights of certain classes or groups of members, including the right to vote. The NFPCA sets out other standard rules regarding members that may also be changed by a corporation if set out in its articles. For example:
- A membership is transferable only to the corporation unless stated otherwise in the articles or by-laws.
- A non-public benefit corporation may distribute the fair value of a membership to a member upon termination of that member’s membership, unless stated otherwise in the articles.
8. Appointing an auditor and conducting audits
Currently, the members of an Ontario NFP must appoint an auditor annually and such auditor must conduct annual audits.
Under the NFPCA, most corporations will have to annually appoint either an auditor or a person to conduct a review engagement. However, recognizing that annual audits or review engagements may be financially onerous, the proposed legislation provides exemptions from such requirements for corporations with a certain annual revenue and member approval.
A public benefit corporation may pass an extraordinary resolution (requiring at least 80% membership approval) to (a) have a review engagement instead of an audit of a particular financial year if the corporation had an annual revenue in that financial year of more than $100,000 (or such other prescribed amount) and less than $500,000 (or such other prescribed amount); or (b) not appoint an auditor and not have an audit or review engagement of a particular financial year if the corporation had an annual revenue in that financial year of $100,000 or less (or such other prescribed amount).
A non-public benefit corporation may pass an extraordinary resolution to (a) have a review engagement instead of an audit of a particular financial year if the corporation had an annual revenue in that financial year of more than $500,000 (or such other prescribed amount); or (b) not appoint an auditor and not have an audit or review engagement of a particular financial year if the corporation had an annual revenue in that financial year of $500,000 or less (or such other prescribed amount).
The NFPCA provides the Superior Court of Justice with the authority to order an investigation of a corporation or any of its affiliates when allegations of misconduct are brought by a member or creditor of the corporation. At the conclusion of an investigation, the investigator appointed by the Court must give a report to the Director who, unless ordered otherwise by the Court, will make the report available for public inspection.
10. Incorporating Under the NFPCA
The Minister of Government Services currently has the discretion to refuse a request for incorporation as an Ontario NFP, but under the NFPCA, an organization applying for incorporation may do so as “as of right”; in other words, so long as articles of incorporation and other required documents and fees are submitted correctly, an organization will be incorporated under the NFPCA.
If a by-law is not passed by a corporation within 60 days of the date of incorporation under the NFPCA, the corporation will be deemed to have passed the standard organizational by-law approved by the Director. A corporation will be able to amend, repeal, or replace such standard by-law at any time.
If enacted, Bill 65 will finally give Ontario not-for-profit corporations their own corporate legislation. At this time, executives, directors, and officers should view the proposed legislation as an incentive to start thinking about what changes may need to be made to ensure that their corporation’s documents conform with the NFPCA and whether their organization’s governance arrangements need to be updated and improved.