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A Case of Usurping the Board of Directors

In Ahmed v. Hossain (released September 2017), the Ontario Superior Court of Justice held that the actions of a charitable corporation's board of trustees in purporting to dissolve the board of directors and assume their powers were not in accordance with the corporate constitution and, therefore, were invalid; and likewise that the board of trustees' purported suspension of the rights of certain members for 10 years also violated the constitution and was, therefore, also invalid.

1. Facts

Danforth Community Center ("DCC") was a charitable corporation incorporated under the Ontario Corporations Act ("OCA") in 2008 as a community centre and mosque for Bengali speaking members of the Sunni Muslim faith.

DCC's general by-law served as its constitution. The by-law created both an elected board of trustees and an elected board of directors. DCC had between 50 and 60 voting members.

Under the by-law, the trustees held the property of DCC in trust for the members and were required to monitor the performance of the board of directors.

The board of directors was responsible for managing the daily operations of the DCC, including hiring employees and managing the financial affairs of the centre.

The by-law provided that the trustees could, for not more than a month, act as a board of directors if the board of directors was dissolved or ceased to exist for any reason, until such time as a new board of directors was elected. Acting under cover of this provision, the board of trustees purported to unilaterally dissolve the board of directors and took over as the directors. The trustees then purported to exercise the power of the directors to suspend the rights of two members for periods of 10 years each.

2. Rulings

(a) Invalid Usurpation of the Board of Directors

Justice Myers of the Ontario Superior Court of Justice found that there was nothing in the OCA or the by-laws of DCC that allowed a board of trustees to dissolve the board. The by-laws only allowed the trustees to step in as the directors if there was a temporary vacuum due to a lack of directors. But the trustees could not create the very vacuum to be filled by terminating the directors.

Accordingly, Justice Myers ruled that the board of directors had not been dissolved, that the directors were still in office and that the actions of the trustees in dissolving the board of directors were invalid.

(b) Suspension of Member Rights

Under the by-law, only the directors had the power to suspend the rights of any member and suspensions were limited to two years. The trustees had no power to suspend members. Accordingly, the actions of the trustees in suspending two members was also unlawful and of no effect.

3. Key Observations

Justice Myers had sufficient grounds, based on the language of the DCC's own by-law, to set aside both the purported dissolution of the board of directors and the suspension of member rights by the board of trustees. He did not, therefore, need to decide the deeper question about the validity of the bifurcated governance structure that DCC purported to adopt in its by-law in the first place.

Several observations can be made, however. The OCA contemplates a board of directors, who (other than in the case of ex officio directors) are directly elected by members. Only members can remove and replace elected directors. Furthermore, the OCA gives the residual power within a corporation to the board of directors. Finally, the OCA is silent with respect to the legal status or place of a board of trustees.

Even if the by-laws had purported to confer wide powers on the trustees, trustees could not under the OCA terminate directors or assume the powers of directors (even to fill a vacancy). The OCA provides that directors, if constituting a quorum, can fill vacancies on the board. If the number of directors has fallen below the quorum requirement, the board cannot act to fill vacancies but it can call a meeting of members to fill the vacancies. Members can also requisition a meeting to fill vacancies where there is no quorum of directors in office.

At most, a board of trustees can hold legal title to property such as title to land, and act in an advisory capacity to the board of directors. A board of trustees cannot be given any authority that is not contemplated under the OCA.

As it turned out, rather than solving a possible governance problem (a vacuum at the board level), the purported adoption of a bifurcated governance structure in the DCC by-law created an array of potential governance problems, some of which manifested themselves. The trustees purported to oust the directors and take over their functions. The trustees conceived themselves as some type of government in waiting, ready to displace the elected directors should the trustees disagree with any decisions of the directors.

The type of bifurcated governance structure adopted by DCC in this case is a model for what to avoid.

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