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Valid Notice of Meeting but Invalid Rejection of Membership Applications

In London Humane Society, Re (decided 2010), Justice Granger of the Ontario Superior Court of Justice held that a notice of a special meeting of members, while less than conspicuous, was sufficient to put recipients on notice that the corporation was replacing its open membership with a closed membership. However, he went on to find that the board had arbitrarily rejected eight applications for membership and that this amounted to bad faith.

1. Facts

The London Humane Society, a charitable organization, was incorporated in 1899 and is governed by the Ontario Corporations Act.

Starting around 2003, the Society's directors passed a resolution granting automatic membership to any individual who paid the annual membership fee of $30, which was renewable annually on payment of the same fee. However, in October 2009, the board resolved to require an application for membership as well as the payment of the annual membership fee. Notice of this requirement was given to donors (of which the Society had more than 1,600). A second notice was included as part of the tax donation receipt in January 2010.

In the ensuing months, the board approved 109 new memberships and declined 8. No reasons were given for declining these applications.

2. Rulings

Mr. Justice Granger of the Ontario Superior Court of Justice made several rulings, some in favour of the Society and one against it:

● Moving from a wide membership to a more closed membership policy was within the board's scope of authority.

● As long as the change in membership policy was carried out with the best interests of the Society in mind, the directors should not be faulted for the decision.

● The notices that were given, while not highly conspicuous, were sufficient, even though they did not specify that the membership process had changed. The first notice was small and located in the middle page of the society's quarterly newsletter. The second notice was included in a tax receipt and sent to less than 50% of the donors.

● However, the board's decision to decline certain memberships must be made in good faith. Arbitrariness alone may ground a decision that the board acted in bad faith, and here the court found that the board's decision to decline the memberships was arbitrary.

● The court had jurisdiction to deem the eight applicants to be members of the Society for voting and all other purposes, even though none of the eight applicants had applied to court to have their applications accepted by the board.

3. Key Observations

No quarrel can reasonably be taken with the first two rulings (that changes in membership lay within the board's authority). This is an application of what is now better known as the business judgment rule (according to which courts pay significant deference to the informed business decisions of the directors of corporations if made within a range of reasonableness).

The third ruling implies that there is a duty on the part of the directors to inform the donors that there has been a change in membership policy. However, the court does not identify the source of this duty. It is submitted that, unless there is a specific duty to notify members in the by-laws, there was no legal obligation on the board to notify members that there was a change in membership admission policy. Individuals interested in the affairs of a non-profit corporation have some responsibility to keep informed. If a corporation tightens its admission process, those interested can make inquiry and comply with the new process. A duty to give notice arises when the corporation requires members to pass a resolution (such as a by-law amendment) but not a change in board policy.

While a board should always act in good faith, good faith should be presumed in the absence of evidence of bad faith. Requiring directors to have reasons (or to give those reasons) for refusing to admit an application as a member shifts the onus onto the directors. Here, the court inferred bad faith because the board could not articulate reasons for rejecting eight applications. The court then deemed these rejected applicants to be members for all purposes - in effect making itself the final decision-maker in the membership admission process. The fourth ruling (overriding board decisions to not admit or renew memberships if found to be arbitrary) detracts from the autonomy of the corporation's board and could spawn more expensive litigation over the non-admission of applicants and the non-renewal of memberships. Finally, the fifth ruling (deeming individuals to be members even if they had not applied to court) seems to overstep the bounds of the court's role in the adjudication of the private rights of parties who seek justice. Also, the purposes of pleadings and discovery are defeated if the court can vindicate the rights of parties not before the court.

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