In Pruner v. Ottawa Hunt and Golf Club, Inc. (released September 2015), the Ontario Divisional Court affirmed a lower-court ruling in favour of a share capital social club formed under the Ontario Corporations Act in its refusal to allow a transferring member to retain his voting rights.
1. Facts and Background on Share Capital Social Clubs
The Ottawa Hunt & Golf Club, incorporated in or about 1920, is one of only about 180 share capital social clubs left in Ontario. No such clubs have been formed since 1971. Because of their unique status, they were not made subject to the Ontario Business Corporations Act, when it first became law in 1971.
Therefore, share capital social clubs like the Ottawa Club continue to be governed by the Ontario Corporations Act. Once the Ontario Not-For-Profit Corporations Act (ONCA) is proclaimed into force (which will not be before 2018), these clubs will be phased out - each club will have five years after proclamation to elect whether to become a for-profit corporation subject to the Ontario Business Corporations Act, a non-share capital corporation subject to ONCA or a co-operative corporation subject to the Ontario Co-operative Corporations Act.
The Ottawa Club had a complex membership structure, consisting of three classes and 32 membership categories. In simple terms, there were 5,000 Class B voting shares and 44,900 Class A non-voting shares.
Three categories of members were qualified to hold Class B voting shares, one of which was a fully privileged golfing member (FPG). Mr. Pruner, the plaintiff in this case, had been a member of the club since 1981 and was admitted as an FPG in 1984. As a result of becoming an FPG, he was issued one Class B voting share, which he continued to hold thereafter,
However, in 2012, Mr. Pruner's health prevented him from continuing to play golf. He therefore requested a permanent transfer to another category of social membership. This category would not enable him to golf (which he could no longer do) but would much less expensive to the member than the FPG category. In 2014, an FPG paid $5,260 in annual dues plus a $110 golf course levy (for a total of $5,370). In the same year, a social member paid $560 in dues and no golf course levy, a differential of $4,810 in that year.
However, in response to his request, the club advised him that the board had instituted a policy whereby it no longer permitted a member to transfer from a golf category (full privileges, voting rights, full dues) to a social membership (full voting rights with reduced annual dues). Instead, the club advised that he would first be required to resign as a Class B member and reapply as a non-voting member. Upon resignation, his Class B shares would be cancelled.
The club's concern was that, if voting shareholders were permitted to transfer out of golfing categories while retaining their voting rights, they could have an influence on the future of the club that would be disproportionate to their financial contribution.
2. Lower Court Decision
The application court judge, Justice Beaudoin:
- The board had the lawful power to make policies respecting the management of the club so long as these policies are in the best interests of the club.
- The court should apply the business judgment rule (BJR), which accords deference to business decisions so long as they lie with a range of reasonable alternatives.
- The club's new policy prohibiting transfers reflected a genuine concern that non-golfing members who pay a significant lower portion of the overall costs of the club cold affect its future direction.
- The board took into account the long-term interests of the club as a whole while balancing the interests of various stakeholders and that its policy lies within a range of reasonable alternatives available to it.
3. Appeal Jurisdiction
Pruner appealed the judge's decision to the Ontario Court of Appeal. However, s. 329 of the Corporations Act required the appeal to be made to the Divisional Court. The problem was that this not detected until after the hearing by the Court of Appeal panel. However, showing tremendous dexterity and wishing to save the parties the expense and inconvenience of having to reargue the appeal, the Court of Appeal applied to the Chief Justice of the Superior Court to constitute the judges of the Court of Appeal as justices of the Divisional Court for the purposes of this appeal. Having received that designation, the panel was reconstituted as the Division Court and was thus able to rule on the appeal.
4. Appeal Decision
The issue on appeal was whether the board's new policy imposed a variation, condition or restriction on the Class B voting shares (which would require super-majority approval and an application for supplementary letters patent under s. 34(4) of the Corporations Act).
The court found that:
- The board's policy cannot fairly be characterized as imposing a variation, condition or restriction on the Class B shares (which the by-laws clearly link to high annual-dues paying categories of members).
- The club was simply insisting that, if Mr. Pruner wishes to keep his voting share, he remain a due-paying member at the appropriate level.
- The policy was within the board's lawful authority and it is reasonable for the board to adopt a policy that would prevent members with the least stake in the affairs of the club from making decisions affecting the club's future.
5. Key Observations
Pruner is another illustration of the importance of the BJR even in the context of decisions of a corporation that is not for-profit. It also demonstrates that protecting the corporation's revenue base is a legitimate corporate concern and that boards will be entrusted with these types of decisions so long as they fall within the range of reasonable business decisions open to it.