Democratic Interpretation of By-Law

In Chu v. Scarborough Hospital Corp. (decided 2007), the Ontario Divisional Court interpreted the by-laws of a hospital corporation such that the term of annual memberships extended for a full 12 months and were in effect at the time of the corporation's annual meeting.

1. Facts

The Scarborough Hospital Corp. was formed in 1999 under the Ontario Corporations Act on the amalgamation of two predecessor hospitals.

By-law No. 1 ("BL-1") of the hospital provided for a class of annual members, which consisted of the sitting directors from time to time and individuals who submitted membership applications and paid membership fees as set by the board and as admitted by resolution of the board. BL-1 provided that these non-board members remained members until July 31 following their admission as annual members.

BL-1 did not include a date by which the board must consider and approve the admission of annual members. Historically, membership applications were collected and members were admitted by the board in the spring of each year, with the result that these memberships lasted only a few months until they collectively expired on July 31.

In the spring of 2006, the board decided to change the governance structure of the hospital. However, because the annual meeting had already been set for June 29, 2006, the board decided to call a special meeting of members on September 28, 2006 to approve the by-law amendments.

To give effect to its decision to seek by-law amendments at the special meeting, the board passed By-law No. 3 ("BL-3"), which in effect extended the term of the annual memberships to the end of the special meeting on September 28, 2006. At the special meeting, the annual members would vote on the proposed by-laws amendments and the election of directors. However, as the date of the special meeting approached, the board realized that members wanted more time to consider the proposed by-law amendments. Accordingly, the special meeting considered only the election of directors and not the proposed by-law amendments.

On October 27, 2006, the hospital received a requisition for a special meeting. The hospital took the position that all of the annual memberships (other than those held by sitting board members) had expired on September 28, 2006 and, therefore, that the requisition was invalid. The requisitionists then applied to court for a declaration that all 118 individuals who were approved as members on June 29, 2006 remained as such until at least June 28, 2007 and that the board be ordered to call a special meeting of members to be held by January 31, 2007 for the transaction of the business stated in the requisition.

2. Rulings

(a) Superior Court of Justice

The application judge (Mr. Justice David Brown, now Brown J.A) of the Ontario Superior Court of Justice found that the applicant (and 117 other individuals admitted for membership on June 29, 2006) were still annual members of the hospital. The board's interpretation had the effect of creating a term of membership that last for only four or five months until they all expired on July 31, not 12 months. The result was that, for most of the year, the only members of the hospital would consist of its directors.

This would in turn significantly reduce the corporate accountability of the hospital's board. Annual members could not act as a check on the board, such as by requisitioning a meeting of members to remove and replace any directors. This result reinforced the unreasonableness of the board's interpretation of the hospital by-laws and the unfairness of the result. Justice Brown stated in part:

In addition, the Board cannot on the one hand adopt a by-law amendment that by its very language created a reasonable expectation that the Approved Annual Members would have meaningful input into the governance review process and resulting by-law amendments, and then dash those expectations by removing the item from the agenda and relying on a highly formalistic position that the memberships of the Approved Annual Members had evaporated.

(b) Divisional Court

The Divisional Court agreed that it was unreasonable for the board to determine unilaterally the duration of the annual memberships of non-board members. These members were given to believe that they would be participating in decision-making concerning the board's proposed changes to the by-laws and the hospital's governance review process. It was for this purpose that the term of their annual memberships was extended from July to the close of the special meeting called for September 2006. An annual membership means a full 12 months.

3. Key Observations

On the face of BL-1, one can see why the board found that all non-director memberships expired on July 31. The board's unilateral extension of these memberships to September 28 created an ambiguity in the term of membership. Was BL-3 validly passed? Did the extended term expire on September 28, 2006 or did it extend until all items of business of the special meeting were concluded?

The ambiguity created in the by-laws (including the lack of a date in BL-1 for the board's admission of annual members) and the extension of annual memberships for a purpose that was not fulfilled enabled the courts to rule on the duration of the annual memberships. Both the application judge and the appeal court interpreted the by-laws in a way that was pro-democratic. The membership was to be 12 months in duration so that there were no gaps (especially gaps of more than six months) in the membership. Otherwise, the effect would be a closed membership (consisting of directors only) for most of the year and an open membership for a brief portion of the year.

Both court rulings in Scarborough Hospital involve an interpretation of the hospital's by-laws. If the by-laws contemplate an open membership, the by-laws will be interpreted in a manner that does not frustrate the reasonable expectations of the members. But the rulings should not be misconstrued to mean that open memberships for charitable corporations are judicially mandated.

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