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The High Cost of Battles for Control

In Ottawa Humane Society v. Ontario Society for the Prevention of Cruelty to Animals (decided September 2017), Justice Beaudoin of the Ontario Superior Court of Justice upheld the conversion of a prominent Ontario charitable corporation into a closed-membership corporation in which the directors were the only voting members. The court found that the adoption of a closed membership was a corporate best practice and fell within the proper exercise of the board's business judgment. In his reasons, the judge ordered the members who had challenged the adoption of a closed membership to pay a portion of the costs of the embattled corporation.

1. Facts

The Ontario Society for the Prevention of Cruelty to Animals (the "SPCA") was incorporated under the Ontario Society for the Prevention of Cruelty to Animals Act (the "Act"). It has been Ontario's animal welfare charity since 1873. It is the only body charged with investigative and enforcement powers under the Act.

For over a decade, the SPCA had faced governance-related challenges. In April 2016, the board sought to amend the by-laws by, among other things, creating a new class of voting membership reserved for the SPCA directors and extinguishing the class A memberships (which the affiliated societies had held for 22 years). In effect, the SPCA changed its governance model from an open membership to a closed membership, with voting rights exclusively in favour of the board of directors.

A majority of the affiliate members voted in support of this change in the governance model. Five affiliate members opposed the change. Three affiliates brought court proceedings challenging the validity of the change.

In September 2017, Justice Beaudoin upheld the governance change. In subsequent reasons released in December, he addressed the issue of awarding costs in the litigation.

2. Rulings

While the court has the discretion to order costs of an application, the usual rule is that the losing party pays the costs of the winning party on a partial indemnity basis. Here, despite their failure to reverse the SPCA's adoption of a closed membership, the applicants claimed they were successful with at least a part of their other claims and, furthermore, that they had raised public interest issues. Public interest litigants are ordinarily excused from the loser-pays costs principle.

Justice Beaudoin accepted that, up to the point of the meeting of members, each side should bear its own costs. However, he held that the SPCA was successful in the subsequent application argued before him and that it was entitled to its costs for that part of the battle.

His reasons may be summarized as follows:

● The vote at the annual general meeting ("AGM") should have brought the litigation to an end. The continued attack on the SPCA by the applicants after the AGM was unreasonable.

● The applicants were not engaged in public interest litigation and, therefore, protected from an adverse costs award because:

● while the applicants were themselves charities, which is a relevant consideration, that was insufficient to qualify them as public interest litigants;

● the dispute did not involve charitable services provided to the public or a question of animal protection. Instead, it was a challenge to the governance of the SPCA;

● no issue of public importance was engaged by the litigation. The validity of the closed governance model for charities was recognized by the Ontario Law Reform Commission in its 1996 Report on the Law of Charities; and

● there was a high degree of self-interest on the part of the applicants in their pursuit of a governance model that favoured their control of the SPCA.

Accordingly, Justice Beaudoin ordered the applicants to jointly pay $100,000 of the SPCA's litigation costs, which still amounted to less than 25% of the SPCA's total legal expenses.

3. Key Observations

Respect for the will of the majority lies at the heart of corporate law - regardless of whether the corporation's purposes are charitable, member-beneficial or profit-driven. Challenging a governance structure chosen by a majority of the members is a difficult and expensive avenue of pursuit. In this case, the applicants incurred costs of over $320,000 (including the $100,000 required to be paid to the SPCA). The SPCA's net costs were something more than this.

It is lamentable that charitable funds were spent on such litigation. For the SPCA, however, it can be seen as the one-time price of moving from an open governance structure (which had long suffered governance-related challenges) to a closed governance structure. Once the SPCA has completed the adoption of a closed governance model, there should be no further challenges from disaffected members seeking to control the corporation.

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