In Trow v. Toronto Humane Society (decided 2001), the Ontario Superior Court of Justice set aside by-laws purportedly passed at a meeting of members on the grounds that the notice for the meeting was materially misleading.
In December 2000, the Toronto Humane Society, a charitable corporation incorporated under the Ontario Corporations Act, held an annual meeting at which the members purported to pass a new by-law. The by-law reclassified the members of the society as either active or sustaining and provided that only active members would be entitled to vote at future meetings of members.
After the by-law was passed, the board met to confirm 12 individuals as active members and all other members as sustaining members. The result was to take away the right to vote from more than 1,000 members of the Society.
The notice of the annual meeting at which the by-law was considered included a copy of the proposed new by-law, a form of proxy and a cover letter from the Society's president.
The president's letter stated that the new by-law was meant to bring the Society's by-laws into conformity with best practices under the Act. It described the by-law as standard and highlighted that the board size would be reduced from 15 to 12, with two consecutive terms of three years and that a board quorum would be reduced from 10 to 8.
Nowhere in her letter was there any reference to the reclassification of members with the ensuing loss of votes by those classified as sustaining members.
Mr. Justice Rivard of the Ontario Superior Court of Justice found that the omission of the membership reclassification and loss of voting rights from the list of highlights would have led members to conclude that the new by-law dealt with technical issues such as the number of directors and quorum for board meetings. A reading of the draft by-law enclosed with the notice would not have led members to the conclusion that their right to vote was being taken away.
A member of a corporation is entitled to receive not only notice of meetings of members, but a notice that provides sufficient information to permit the member to come to a reasoned decision as to whether or not the member should support the proposal under consideration.
Because insufficient information accompanied the notice to enable a member to know why he was being asked to support a by-law that would ultimately take away his right to vote, the resulting by-law was declared to be invalid.
3. Key Observations
This case illustrates the need for disclosure of material facts in a notice to members - particularly facts that negatively affect the existing voting rights of members (or, in the case of non-charities, existing rights to residual property on liquidation). A notice (together with the accompanying material) must be viewed from the vantage point of the voting members. Does it put a reasonable member on sufficient notice that his existing rights may be negatively affected and that he may want to vote against the resolution?
To highlight changes in the rules governing board composition, director terms, term limits and quorum at board meetings but, at the same time, to say nothing about the reclassification of members into voting and non-voting classes exacerbated the misleading character of the notice package.
A reasonable summary of the principal by-law changes (particularly those matters that affected the rights of members to retain their status as members, to vote and, in the case of non-charities, to participate in any residual assets of the corporation on liquidation) should have accompanied the notice. The lack of material disclosure meant that the purported adoption of the by-law by the members who voted remained vulnerable to attack.