Inappropriate Use of a Plan of Arrangement

In its 2010 decision in Ovarian Cancer Awareness & Treatment in Saskatchewan Corp., Re., the Saskatchewan Court of Queen's Bench refused to allow a plan of arrangement to be used to exempt a corporation from the requirement to convene a meeting of members to approve an amendment to its articles of incorporation.

1. Facts

Ovarian Cancer Awareness & Treatment in Saskatchewan Corp. was incorporated under the Saskatchewan Non-profit Corporations Act. The corporation was seeking to become a registered charity under the Income Tax Act so that it donors would be entitled to receive tax credits for donations made to the corporation. To become registered, the corporation first had to change its articles to conform to the charitable registration requirements of the Canada Revenue Agency.

Under the Saskatchewan Act, articles of amendment ordinarily require the approval of the members by special resolution at a meeting of members duly called for the purpose. The corporation had a membership of approximately 78 members.

However, as a purported cost-saving move, the corporation, instead of calling a special meeting of members, applied to amend its articles under the arrangement provision, which requires a court order. The applicant corporation argued that it would incur inconvenience and expense in holding a meeting of members.

2. Rulings

Justice Zarzeczny of the Saskatchewan Court of Queen's Bench had little trouble dismissing the corporation's application, which was opposed by the Saskatchewan Director of Business Corporations.

Zarzeczny, J. observed that any corporation incurs inconvenience and expense in conducting a meeting of members and stated that it was no more impracticable for the corporation to proceed with a special meeting to approve articles of amendment than it would be for any other corporation similarly situated. He was concerned in setting a precedent in all future cases resulting in dispensing with the regular requirements of the legislation if there is mere inconvenience or expense to the applicant.

It is for the members of the corporation, not the court, to decide whether to make fundamental changes in the corporation's structure and operations. Members should have the opportunity to consider and vote on such a change.

The arrangement provision is not intended to address circumstances of simple inconvenience or commonly incurred expense. According, the application to circumvent the requirement for member approval was dismissed.

3. Key Observations

The application in Ovarian Cancer was seriously misconceived.

There is no precedent for amending the articles of a corporation under a plan of arrangement without an interim order, approval at one or more meetings of the appropriate stakeholders and court approval at a fairness hearing. Courts will only dispense with a meeting of members where the corporation is insolvent.

Furthermore, non-profit corporations are required to hold annual meetings at least once every 15 months. As the court pointed out in Ovarian Cancer, since an annual meeting of the corporation would be required at some point, a special resolution to amend the articles could have been including on the agenda of business to be considered at the annual and special meeting. No incremental expense would be incurred in combining the optional special meeting with the mandatory annual meeting.

Sadly, instead of reducing expense, those behind the ill-fated application in Ovarian Cancer incurred both the unavoidable expense of a holding a meeting plus the entirely avoidable added inconvenience and expense of applying to court for approval of an arrangement. Arrangement applications are typically complex undertakings. Usually they entail an initial order to set the process in motion, approval by special resolution of the members (and, if applicable, holders of not less than two-thirds of outstanding debt obligations) and sanction by the court at a fairness hearing. The expenses entailed in a plan of arrangement process are ordinarily several-fold greater than the costs of holding a special meeting - especially when the number of members is modest (such as 78 members in this case).

Use of electronic notices to members and various forms of absentee voting can also help reduce the inconvenience and expense of calling and holding meetings of members.

Finally, as a general comment, corporations that adopt a self-perpetuating board structure (also called a board-driven structure) in which all directors are members and there are no members apart from the directors, do not incur any incremental inconvenience or expense. Since the composition of the membership is the same as that of the board of directors, calling and holding a meeting of members is no more trouble, and entails no more expense, than calling and holding a board meeting. Corporations looking to eliminate the trouble and expense of holding meetings of members should consider adopting a self-perpetuating board structure.

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