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Scope of the Rule against Fettering the Discretion of the Board

Kwantlen University College Student Assn. v. Canadian Federation of Students (released October 2015) involved the procedure for disaffiliating a local undergraduate student association incorporated under the Society Act (British Columbia) from its membership in the national association of which the local association had been a member.

1. Facts

Kwantlen (KSA) is a society incorporated in B.C., the membership of which consists of all undergraduate students who are enrolled at Kwantlen University.  KSA had become a member of the Canadian Federation of Students (CFS) in 1981 and had remained a member continuously thereafter.

At the time that it joined CFS, the CFS by-laws included a provision to the effect that, once a local student association has become a member, that association may only withdraw its membership if its students approve withdrawal in a subsequent referendum.  Later, CFS adopted a more elaborate procedure on calling for a vote on disaffiliation from CFS.

In February 2015, the directors of KSA voted to terminate its membership in CFS despite not submitting the issue of withdrawal to a vote of the members of KSA as required under the by-laws of CSA.

The issue of whether KSA had validly withdrawn its membership in CFS then came to court.

2. Ruling

The issue before the court turned on whether, in joining CFS in 1981, the board of directors of KSA had fettered its own power and discretion to manage the activities of KSA, including the board's power to withdraw from CFS and whether this was a violation of the rule against fettering the board's discretion and therefore invalid. If, as argued by KSA, the board could not validly fetter its own discretion, they still had the discretion to withdraw from CFS and did not require a vote of KSA's own members as provided for under the CFS by-laws.

Justice Steeves in the Supreme Court of British Columbia articulated well the tension between the obligation of directors to come to a decision on each matter placed before them and the effect of contracts that they authorize the corporation to enter into, which is necessarily to restrain the manner in which the activities and affairs of the corporation are conducted in future.  Virtually every contract that the corporation forms will to some extent restrain the freedom of the directors to manage the activities and affairs of the corporation.  It would scarcely be possible to conduct the corporation's activities if were not possible to restrain the directors to some degree.

As a general rule, if the directors cause the corporation to enter into some future obligation in exchange for some present benefit to the corporation (which includes a promise of future performance by the contractual counterparty), the directors are not fettering their own discretion but exercising a present discretion with respect to the matter.  Directors of a corporation cannot circumvent what they later determine to be a disadvantageous contract by merely alleging that it fetters their discretion.

Justice Steeves stated that it is reasonable to conclude that it is the by-laws of the organization from which disaffiliation (or withdrawal) is sought (here, CFS) that apply to the disaffiliation process.  The requirement of a referendum of KSA student members in the CFS by-laws was not imposing on KSA a foreign regulatory scheme.  Justice Steeves rejected the argument that the KSA directors invalided delegated their authority over their discretionary or general policymaking functions in 1981 when joining the CFS.  Accordingly, withdrawal from membership in CFS required compliance with the applicable CFS by-laws on disaffiliation.  Hence, the directors of KSA did not have the unilateral authority to withdraw KSA from membership in CFS but had to put the matter to the vote of the KSA membership for its approval.

3. Key Observations

It makes sense for CFS to make it more difficult for a local student association to withdrawn its membership in the national federation by requiring the association to obtain the approval of its own membership as a whole.  This was especially true when KSA became a member in 1981 because, until 2014, local students were also direct members of CFA.  A withdrawal or disaffiliation of a local student association from CFA would have had a destabilizing effect on CFA and its membership.

Taken too far and out of context, the doctrine prohibiting a board from fettering its own discretion would give corporations a convenient argument for repudiating almost any contract that was now seen to be disadvantageous to the corporation.  A corporation could enter into long-term contracts, keep the advantageous contracts and try to resile from the losers.  Such a unilateral exist right would significantly destabilize contract-making whenever there was a corporate party.  One corporation's good bargain is another's bad bargain and vice versa.

The sensible decision on the disaffiliation process in Kwatlen has much wider significance across the entire spectrum of corporate activities involving forward contracting and long-term planning.  Boards cannot fetter their own discretion but they also need the discretion to forward-plan by entering into long-term contracts that to some degree will always restrict the freedom of action of a subsequent board.

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