Shining a Light on the Unknown
by Joel Secter

With the Canada Not-For-Profit Corporations Act ("CNCA") presumably coming into force next year, not-for-profit corporations are turning their minds to continuing under the new legislation. Though applying for a certificate of continuance is a straightforward process - i.e. existing corporations will be required to submit their articles of incorporation together with a notice of registered office and notice of directors - the transition raises some interesting questions for organizations large and small.

As a practical matter, corporations have the option of amending their articles before, at the same time as, or after continuance. Though by-laws need not be submitted together with the articles of continuance, they must be sent to the government within twelve months of filing. However, given the CNCA's broad (and new to the sector) provisions detailing members' rights and remedies and new processes for by-law amendment, corporations will want to review and likely change their bylaws prior to coming under the aegis of the CNCA.

Many corporations will understandably want to avoid making changes to their bylaws (if for no other reason than avoiding the tedious and often political process of a review). Despite such inertia, it is important to ensure that the by-laws accord with the requirements of the new law. For example, the statute stipulates that a soliciting corporation must not have fewer than three directors, at least two of whom are not officers or employees of the corporation. As a result, an existing corporation with three directors, two of whom are also officers, would be off-side with the statute. Familiarity with the CNCA will ensure that by-laws do not inadvertently contravene the legislation.

One feature of the CNCA is that it speaks where the by-laws are silent. In such cases, corporations will want to decide if they like what the CNCA has to say. For example, much attention has been paid to the rights and remedies afforded to members under the CNCA; a corporation will not be able to alter the rights or conditions of any class of membership without the support of a two-thirds majority of that class. This is significant because it is not uncommon for not-for-profit corporations to have more than one class of members with different rights attached to each. Under the new regime, the more classes of members there are, the more groups there will be who have an effective veto over fundamental changes. If this is a foreseeable problem, one solution would be to change the membership status of certain classes of members before continuing under the CNCA.

Whereas corporations under the Canada Corporations Act ("CCA") were essentially required to have comprehensive by-laws, this is not the case under the new legislation. In fact, only a handful of clauses must be included in a corporation's by-laws, such as membership conditions. The CNCA requires that the by-laws must set out the conditions required for being a member of the corporation, including whether a corporation or other entity may be a member. In addition, unless the by-laws otherwise provide, a membership may only be transferred to the corporation. The CNCA also introduces rules on the manner and timeframe for giving notice to members for members' meetings. For example, giving notice by electronic means, i.e. email, is an option, however it must be provided for in the by-laws and coupled with a non-electronic alternative manner of notice if a member requests. The prescribed period for giving notice electronically is 21 to 35 days before the day on which the meeting is to be held.

In order to differentiate between the roles of members and directors, the CNCA also creates standard provisions defining the responsibilities of directors. Though obviously not an exhaustive list, the following examples are illustrative of what happens by default unless the by-laws otherwise provide:

• A director of a corporation is not required to be a member of the corporation.
• A simple majority of the number of directors or minimum number of directors required by the articles constitutes a quorum at any meeting of the directors, and, despite any vacancy among the directors, a quorum of directors may exercise all the powers of the directors.
• The directors of a corporation may fix the reasonable remuneration of the directors, officers and employees of the corporation.

• The directors can borrow money on the credit of the corporation without authorization of the members.
• The directors may require members to make an annual contribution or pay annual dues and may determine the manner in which the contribution is to be made or the dues are to be paid.
• A corporation may invest its funds as its directors think fit.

It is not uncommon for vacancies to arise on the board of directors. While a quorum of directors may fill a vacancy among the directors, there are caveats. For example, a quorum of directors may not fill a vacancy if it results from an increase in the number of directors provided for in the articles or a failure to elect the minimum number of directors provided for in the articles. Furthermore, if any class or group of members has an exclusive right to elect one or more directors and a vacancy occurs among those directors, the remaining directors elected by that class or group may fill the vacancy. If there are no remaining directors, any member of the class or group may call a meeting of the class or group to fill the vacancy. That said, the by-laws may provide that a vacancy among the directors must be filled only by a vote of the members.  

Certain by-laws can be amended by directors' resolutions, in which case the members have the right to confirm, reject or amend any by-laws. Other by-laws require a special resolution of the members, or, in certain circumstances, such as changing the rights or conditions attached to the memberships of a class or group, of each applicable class or group of members. Whereas by-laws and any amendments to them needed to be approved by the Minister under the CCA, the CNCA simply requires a corporation to send a copy of them to the government. Furthermore, some by-laws will require a special majority to amend. This may lead to the passing of by-laws that are not validly in force if they are passed by a simple majority. Corporations may want to consider grouping the by-laws that will require a special majority to amend together, or for that matter, in a separate by-law altogether. That way it will be clear to successors which by-laws require a two-thirds vote to amend.

For the reasons outlined above, now is an opportune time for not-for-profit corporations to consider reviewing and, if necessary, replacing their by-laws. Considering that existing by-laws may not be suitable to meet an organization's needs once it leaves the jurisdiction of the CCA, it may be simpler to accomplish certain objectives before applying for continuance. Depending on the nature of their corporate structure and its complexity, consulting a lawyer specializing in charity law would be advisable.