By-laws set out the governance rules of a not-for-profit ("NFP") corporation. The by-laws of a corporation incorporated, continued or amalgamated under the Canada Not-for-profit Corporations Act may include any provision relating to the activities or affairs of the corporation or the rights and powers of the corporation, its members, directors and officers. The following blog post describes the rules for making, amending and repealing by-laws under the Act.
1. General Rules
The best way to cut through the complexity of the rules governing the making, amending and repeal of by-laws is to set out the general rules, followed by the specific exceptions and qualifications.
First, however, to simplify the discussion, no distinction will be made between creating, amending or repealing a by-law. Each type of by-law change is subject to the same rules. Therefore, for simplicity, reference will be made only to by-law amendments (on the understanding that the same rules apply to the creation of a new by-law or the repeal of an existing by-law).
The general rule, then, is that the board of directors, by simple majority vote, may pass by-laws or amend or repeal by-laws, with immediately effect. The by-law change will remain in effect unless the members fail to confirm such by-laws or amending by-laws at the next ensuing meeting of members. At that time, the members may, by ordinary resolution, confirm, reject or amend the by-law or by-law amendment, which then continues in effect in its amended form (if applicable).
If the directors fail to submit the by-law to the members at the first ensuing meeting of members, the by-law ceases to have any further effect after the meeting. If the by-law is submitted but not confirmed (with or without amendment), again, the by-law ceases to have any further effect. In either case (failure to submit or non-confirmation by members), no subsequent resolution of the directors to make, amend or repeal a by-law having substantially the same purpose or effect is effective until it is confirmed or confirmed as amended. This later rule, then, constitutes the first exception to the general rule on by-law amendments.
There are several exceptions to the general rule stated above.
(a) By-laws Requiring Membership Approval by Special Resolution
Certain by-laws can only be amended or repealed by special resolution of the members. The directors have no power to amend them. These are:
(i) conditions required for being a member (member eligibility);
(ii) provisions respecting the transfer of memberships (sale or gift of membership interests);
(iii) manner of giving notice to members entitled to vote at a meeting of members (notice of membership meetings); and
(iv) methods of voting by members not in attendance at a meeting of members (absentee voting, of which proxy voting is one such method).
The foregoing take effect only if amended by special resolution of the members.
(b) By-laws that Can No Longer be Unilaterally Made by the Directors
As discussed above, if a by-law or by-law amendment (BL1) made by the directors is not presented to the next ensuing meeting of members or, if presented, is not confirmed by the members at that meeting, BL1 not only ceases to have any effect after the meeting of members but a by-law having substantially the same purpose or effect as BL1 (BL2) cannot take effect unless it is confirmed by the members. Without this rule, the directors could always prevail over the members by simply passing the same BL1 every time it was rejected by the members.
(c) By-law Amendments Initiated by the Members
Rather than wait for the directors to initiate a by-law or by-law amendment, any member can submit a proposed by-law or by-law amendment to be included in the notice of annual meeting of members. If passed by ordinary resolution of the members (or, for the by-laws described at Part 2(a) above, special resolution of members), the by-law would take effect when passed. No board approval is needed.
Not less than 5% of the members may also requisition a meeting of members to, among other things, consider approving a by-law or by-law amendment. If the directors do no call the requisitioned meeting, then, subject to certain exceptions, any member who requisitioned the meeting may call it.
(d) Articles and Unanimous Member Agreements
It is possible for the articles to impose additional rules on by-law changes. For example, the by-laws could specify that all by-laws and by-law amendments require membership approval or membership approval by special resolution. This would avoid the complexity resulting from the creation of one type of by-law amendments that can only be made by special resolution of the members. All by-law amendments would be subject to the more stringent requirements. If considering this approach, consideration may be given to providing an exception so that the directors may unilaterally change the quorum requirement for meetings of members. Without reserving flexibility to the directors to relax the quorum requirement, the members may find themselves handcuffed in amending the quorum requirement when they need it most. In that situation, the only viable remedy may become a court order to order a meeting of members (with a relaxed quorum requirement), which is time-consuming, excessively expensive and, therefore, something to be avoided.
In some cases, a unanimous member agreement ("UMA") can also set out additional rules for amending by-laws. Only non-soliciting corporations may have a UMA. If the corporation has a UMA in place, it must adhere to the rules of the Act as well as those applicable under the UMA.