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Who May Initiate By-law Amendments under the Ontario Corporations Act?

In Vaughan Community Health Centre Corp. v. Annibale (released April 2015), Justice DiTomaso found that a meeting of members of a non-share capital corporation governed by Part III of the Ontario Corporations Act (the "OCA") to reduce the number of directors and amend the by-laws was invalid because it contravened the provisions of the OCA and the corporation's by-laws.  The result in Annibale may be sharply contrasted with the result that would have obtained had the corporation been governed instead by more modern not-for-profit corporate legislation such as the Canada Not-for-profit Corporations Act (the "CNCA") or the still un-proclaimed Ontario Not-for-Profit Corporations Act, 2010 (the "ONCA"), which, once proclaimed, will replace the OCA.

1. Facts

Vaughan Community Health Centre (the "corporation" or "VCHC") was incorporated in 2006 under the OCA.  The members of the corporation consisted of both ex officio voting members and ex officio non-voting members.  The board of the corporation consisted of 15 directors, one ex officio director and 14 elected directors.  Five of the 15 directors consisted of the five ex officio voting members of corporation.

Following a governance review arranged by the five ex officio voting members, they requisitioned a meeting of the members to reduce the number of number of directors from 15 to 10, to remove three elected directors and to amend the corporation's by-laws to exclude members of municipal or provincial elected office or candidates for such office from becoming members of the board.

The board refused to call the requisitioned meeting of members on the grounds that it was inconsistent with the corporation's existing by-laws.  The requisitioning members then called the meeting.  However, the corporation obtained an interim and interlocutory injunction enjoining the voting members from passing the resolutions pending the final outcome of the corporation's application seeking a declaration as to the validity of the requisition.

2. Rulings

Justice DiTomaso framed the issues as two-fold:  (1) are the voting members authorized to unilaterally make or amend by-laws? (2) must the voting members comply with the by-laws when removing directors.  Finally, Justice DiTomaso discussed the overall validity of the member-requisition in light of his answer to the first two questions.

Justice DiTomaso held that the voting members were not authorized under the OCA or the existing by-laws to initiate by-law amendments.  He read s. 129(3) of the OCA as requiring the board to initiate all by-laws and by-law amendments and as the role of the members being limited to confirming, rejecting, amending or otherwise dealing with any by-law passed by the directors and submitted to the meeting for confirmation.  Justice DiTamaso did not deal with the argument that, once the board has passed a by-law, the members are authorized under s. 129(3) to amend the by-law "at the general meeting or the annual meeting mentioned in subsection [129(2)]" and that s. 129(2) refers not only to the next ensuing annual meeting but also to a general meeting held after that annual meeting.  Stated differently, once the board has initiated a by-law and presented it to the members, the members arguably have the power under s. 129(3) to make amendments to the by-law not only at the next ensuing annual meeting and a general meeting held before that annual meeting but also at any general meeting held after that annual meeting.  The power of members to control the content of the by-laws does not terminate at the next ensuing annual meeting.  In another case where there was not an obvious power struggle between the voting members who formed a minority of the board and the board as a whole, a court might have been more open to an interpretation of s. 129 that was enabling of the power of members to initiate by-law amendments.

The learned judge also relied on the corporation's existing by-law.   However, if the by-law was inconsistent with s. 129, then it would have to have been read-down so as to remove the inconsistency.  Therefore, the issue of whether members can initiate by-law amendments under the OCA turned on his interpretation of s. 129(3).

The court was on much firmer ground in ruling that the members could not unilaterally reduce the number of directors.  Under s. 285(1) of the OCA, the corporation can only increase or decrease the number of its directors by special resolution, which under the OCA requires approval by a majority of the board followed by the approval of not less than two-thirds of the votes cast at a general meeting of members.  Therefore, the resolution to amend the by-laws to reduce the number of directors was clearly non-compliant with the OCA.

The court was also on solid ground in ruling that, under the OCA, members can only remove directors outside of an annual meeting if the removal complies with the by-laws.

Finally, the court found that the requisition was invalid because, under s. 295(1) of the OCA, the requisitioned meeting must be "for any purpose connected with the affairs of the corporation that is not inconsistent with [the OCA]".  Justice DiTomaso equated that to a matter that was properly within the "purview of the members' role in the corporation", which the proposed resolution was not.

3. Key Observations

Under the CNCA, it is clear that members can, at any time, requisition a meeting of members to amend by-laws unilaterally, amend the articles to change the number of directors or minimum and maximum number of directors and, perhaps most importantly, remove and replace all or any of the directors before the next annual meeting.  Therefore, the CNCA unambiguously makes directors accountable to members and gives members the ultimate authority to institute changes in the corporation's constating documents and board governance.  The same, unambiguous philosophy imbues the ONCA.

The OCA is conceptually inconsistent and it presents traps for the unwary.  Presumably, the successful applicant in Annibale achieved only a hollow victory.  The voting members of VCHC should ultimately prevail because they retain the power at the next annual meeting to elect 14 out of the 15 members of the board of VCHC.  Once the board is reconstituted by the voting members, the by-laws can be amended a board and membership who are on the same page.

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