Stacking Memberships as an Exercise in Bad Faith Conduct by Directors

In Singh v. Sandu (June 2013), Justice D.M Brown of the Ontario Superior Court of Justice set aside the admission of 23 new members of a Ontario-Sikh temple, the election of one-third of the directors at a special meeting and the purported election by the invalidly-elected directors of a new slate of directors, finding that a faction on the board had acted deceptively and in bad faith.

1. Facts

The Sikh Spiritual Centre of Toronto was a religious corporation formed under the Ontario Corporations Act (the "OCA"), serving approximately 10,000 congregants in the Sikh community.  The corporation had a staggered board, seven directors being elected each year to a three-year term.

At the time of the annual meeting in June 2012, the corporation had 64 members.  The pivotal issue in the case became how a faction on the board attempted to stack the membership by the addition of 23 new members all of whom supported that faction.

No election of directors took place at the 2012 annual meeting because there was confusion as to whose terms expired at that meeting. As a result, the meeting adjourned without an election.

One faction on the board (the "Deol faction") requisitioned a special meeting.

The two almost-evenly divided factions on the board engaged in a mediation on July 23, 2012.  However, while a meeting of the board had been called for 4:00 p.m. on that day, the mediators advised certain members of the other faction (the 'Singh faction") that the board meeting had been cancelled.  As a result, the Singh faction was unrepresented at the board meeting.

As well, the notice calling the meeting was found to be misleading because it did not adequately disclose that the Deol faction was proposing to add 23 new members of the corporation.  Contrary to the by-laws and a previous decision of the Court involving the same corporation, the names of the proposed nominees and their applications were not circulated to all directors in advance of the meeting.

At the requisitioned meeting, the meeting of members splintered into two camps corresponding to the two rival factions.  The Deol faction purported to hold the meeting with 50 members present (including the 23 newly admitted members), while in an adjoining room at the temple, the Singh faction held a parallel meeting with 34 members present.  Each parallel meeting purported to elect a separate slate of seven directors to a three-year term.  Each rival board then purported to elect its own slate of officers.

2. Ruling

Justice Brown used strong language to the members of both factions, stating that courts should not baby-sit the affairs of non-profit corporations.  The directors needed to take a hard look in their collective mirrors and either reform their ways, step aside to allow members unencumbered by the baggage of past factionalism or wind-up the temple with the different factions parting ways and setting up separate temples.

Justice Brown reiterated that informed consideration of applications for new memberships cannot occur if directors are not told, in the notice calling the board meeting, that it is proposed at the meeting to consider the admission of new members.  Each director must be satisfied that the proposed nominee meets the corporation's qualifications for membership as set out in the by-law before voting on the admission of a new member.  Applying that standard, he found that the notice of the board meeting at which the 23 new members were admitted was misleading in the extreme.

Instead, the Deol faction proceeded with their plan to add a significant number of new members in the face of contrary advice from corporate counsel to the effect that no new members should be added before the election of directors at the adjourned annual meeting was concluded.  Justice Brown found that, by turning their back on the sound advice of corporate counsel, the leaders of the Deol faction crossed the boundary in the realm of bad faith misconduct.

He found, therefore, that the board's action in admitting the new members was invalid.  As a result, the meeting of members run on August 5, 2012 by the Deol faction lacked a quorum (since only 29 out of 64 members were present). It followed that the seven individuals purported to be elected by the Deol meeting was null and void, as was the state of officers elected by that improperly-formed board.

Before convening a court-ordered meeting under an independent chair, Justice Brown imposed various preliminary conditions - including the appointment of a monitor, the appointment of an independent auditor, delivery of audited financial statements and a freeze on the admission of any new members.  He further ordered that all directors attend a mandatory one-day training session on basic corporate governance provided by a recognized corporate governance organization.

3. Key Observations

In an otherwise largely sound analysis, there was an important oversight in Justice Brown's reasons.  While most of the reasons are devoted to the reasons why the August 5, 2012 meeting of members run by the Deol faction was invalid, the learned judge devoted only one sentence to this parallel meeting, stating that it was held in another part of the temple but was held without notice and was therefore invalid.

Arguably, however, it was a valid meeting.  It was held pursuant to the same notice as the meeting held by the Deol minority. Once the disputed 23 members are struck out, the total membership of the corporation was 64 individuals.  That left 35 members attending the parallel (or true meeting of members) pursuant to the same notice, which exceeded the quorum requirement of 51% (33 members).

Unfortunately, this meant that a further meeting of members was ordered by the court when the majority had already exercised their franchise and elected a slate of directors.  The election of the slate of directors at the parallel meeting run by the Singh faction would have given the Singh faction a majority of the directors as well as having a majority of the members.  The result, therefore, that is that the court may have exacerbated and prolonged the factionalism rather than giving effect to the will of the majority as expressed at the requisitioned meeting of members.

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