NOT-FOR-PROFIT LAW UPDATE IN THIS ISSUE

Transcription

1 F ALL 2006 NOT-FOR-PROFIT LAW UPDATE IN THIS ISSUE I. YOU MAY BE ACTING BEYOND YOUR LEGAL AUTHORITY Anna Naud II. STRUCTURING THE EXPANSION OF THE ACTIVITIES OF A (NON-CHARITABLE) NOT-FOR-PROFIT ORGANIZATION Sylvie Lalonde III. WHEN THE RELATIONSHIP SOURS: MEMBER EXPULSIONS William McLarkey IV. THE POWER OF ASSOCIATIONS TO DISCIPLINE AND TERMINATE MEMBERS Do-Ellen Hansen V. THE FINAL WORD VI. NOTES I. YOU MAY BE ACTING BEYOND YOUR LEGAL AUTHORITY Anna Naud , anaud@blgcanada.com A. THE SCOPE OF A CORPORATION S POWERS Most charities and associations are operated as corporations. Was the corporation incorporated many years ago? Has the scope of its activities changed? If the answer is "Yes" to either of those questions, a serious legal problem may exist. Most not-for-profit organizations, including charities and associations, are incorporated under the Canada Corporations Act or a similar provincial statute. Their letters patent or charter include a list of "objects". A few other organizations are incorporated by Special Act of the federal or provincial government. Their "objects" are set out in the Special Act. A corporation can only act in accordance with its objects and any ancillary powers set out in such legislation. As time passes, many corporations expand the scope of their actions and, inadvertently, act beyond the scope of their objects. Potentially serious consequences can result from such ambition. B. THE COMMON LAW DOCTRINE OF ULTRA VIRES Any action by a corporation that is beyond the scope of its objects is deemed to be ultra vires and, consequently, rendered ineffective (i.e. null and void).

2 2 F ALL 2006 Every corporation... without shareholders... is restricted... to perform only the actions... conferred on it by its enabling documents. Example: Corporation A is an Ontario not-for-profit corporation created by Special Act. Corporation A s enacting statute provides for the following object: to raise money to supply food to, and awareness about, starving children in East Asia. However, for the past several years, Corporation A has been acting on behalf of starving children in Africa as well. Although such actions fall under Corporation A s general mandate to raise awareness and money for starving children they are beyond the specific actions and powers permissible under Corporation A s enacting statute and are therefore ultra vires. The common law doctrine of ultra vires has been abolished in most Canadian jurisdictions (including Ontario) for corporations created under business corporation legislation. In other words, most corporations with shareholders do not have to worry about their actions and powers being deemed ultra vires by a court and struck down. Every corporation which is incorporated without shareholders, including virtually all charities, trade and professional associations, etc., is restricted under statute to perform only the actions and powers conferred on it by its enabling document (usually its Letters Patent). In addition, certain statutes, such as the Canada Corporations Act, provide incidental powers that each applicable corporation possesses in addition to the powers set out in its letters patent. Any act or use of a power by a

3 3 NOT-FOR-PROFIT UPDATE corporation that is not specifically conferred by its letters patent, or statute is illegal. Example: Corporation B is an Ontario charity created under the Corporations Act (Ontario). Its objects, as set out in its letters patent, are to raise adult literacy levels in Canada. If Corporation B decides to also combat the illiteracy of Canadian children, this may be considered to be beyond the scope of its objects and powers conferred by the Corporations Act (Ontario) and its letters patent, and therefore illegal. The actions of both Corporation A and Corporation B could be challenged in a court of law with potentially severe consequences. For example, contracts entered into could be deemed ineffective. Even if a court decides not to inflict substantial consequences on Corporation A or Corporation B, the potential negative publicity surrounding the problem could be detrimental. Canadian corporations without share capital, whether created by Special Act or under the Canada Corporations Act or similar provincial legislation, are limited as to what actions they can take and what powers they can use to perform such actions. C. WHAT CAN A CORPORATION DO IF IT IS ACTING BEYOND ITS SCOPE? Every corporation should regularly review its Special Act, letters patent, or other charter document as applicable, to determine and clarify what actions it can and cannot take and what powers it has. If a corporation is acting beyond the scope of permissible actions and powers, it has several options: (1) cease all such actions; (2) continue with the status quo and hope that its actions and powers are never challenged in a court of law;

4 4 F ALL 2006 (3) in the case of a Special Act Corporation, apply for an amending statute that provides for broader objects and powers; amended Special Act, for supplementary letters patent or an amended charter can be a lengthy and potentially complicated process, but should be achievable. With broadly stated powers and objects which reflect its (4) in the case of all other corporations, apply for supplementary letters patent or amended charter document to vary the objects; or actual activities, a corporation will be able to adapt throughout the years, confident in the knowledge that all of its actions are permissible under law. (5) establish a separate corporation to carry out the new activities (see Article II below). The third, fourth and fifth options are obviously of most benefit to any corporation and to the public it serves. Applying for an

5 5 NOT-FOR-PROFIT UPDATE II. STRUCTURING THE EXPANSION OF THE ACTIVITIES OF A (NON-CHARITABLE) NOT-FOR-PROFIT ORGANIZATION Sylvie Lalonde , slalonde@blgcanada.com A INTRODUCTION Over time, many not-for-profit organizations review their mission and mandate and consider whether they can or should expand their activities beyond their current operational mandate. This article addresses some of the issues that may arise if a trade or professional association or another noncharitable not-for-profit organization wishes to broaden the scope of its activities beyond the "spirit" and intent of its current objects. All not-for-profit organizations have an operational mandate that limits the overall activities of the organization. That operational mandate is described generally fall within the scope of the objects described in its letters patent. Any activity carried on that falls outside the scope of those objects is deemed to be unlawful or ultra vires. For example, if the organization contracts to carry out activities for purposes not permitted in its objects, the contract is at risk of being declared null and void in the future. This could potentially result in a claim being made by a third party injured by the nullity of the agreement. In such circumstances, directors might also be exposed to personal liability. B. THE EXISTING OBJECTS OF THE CORPORATION in the organization s constitution (e.g., letters patent or charter) or Special Act, as the "objects" of the corporation. For example, a federally incorporated not-forprofit corporation without share capital is only empowered to carry on activities that The first step is for an evolving organization to determine whether any newly proposed activities fall within the scope of the corporation s existing objects or Special Act. If they do, then it may not be necessary to

6 6 F ALL 2006 amend the corporation s constitution. However, the organization must consider what impact, if any, those new activities will have on the operations of the organization. For example, (provided its objects are amended as required) or by a newly created corporate entity controlled and/or funded by the organization. To the extent an activity is carried on by an entity distinct from the organization, the organization s liability with who will be responsible for overseeing the new activity? does the organization need to hire new staff or reassign existing staff to new respect to that activity is reduced significantly. While there exist other types of entities, the following corporate vehicles are likely the most appropriate ones to consider: tasks? could the organization benefit from the creation of a new committee or can an existing committee take on some responsibility for the new activity? would it be more appropriate to subcontract a portion or all of the responsibilities related to the new activity? C. CORPORATE ENTITIES OR VEHICLES (a) not-for-profit corporation; (b) charitable corporation; and (c) business corporation. 1) Not-for-Profit Corporation If a corporation chooses to incorporate a new not-for-profit organization for the purpose of carrying on new activities, it will want to consider whether it has control over the decision-makers of the new entity. In the absence of adequate control provisions, the Any new activity that a not-for-profit entity wishes to include in its mandate, regardless of whether or not the activity falls within the scope of its current objects, can either be carried on directly by the organization itself new organization may, over time, head in a direction that is inconsistent with its original purpose or with the organization s objectives. Typically, control can be achieved by including appropriate control provisions in

7 7 NOT-FOR-PROFIT UPDATE the letters patent or by-laws. For example, the new not-for-profit organization could either have a board that mirrors the organization s board of directors or could be constituted such that the members of the new entity consist of the directors or The objects of a charitable corporation must provide for all of the proposed activities that the organization intends to carry on. An activity will generally be deemed of a "charitable" nature if it falls under one or more of the following categories: executive committee members of the original corporation. In the alternative, the new organization s by-laws may provide that the original organization has rights to appoint a specified number or percentage of the directors or members. Sometimes an agreement between the two parties will provide better and more permanent protection for the original corporation. 2) Charitable Corporation If the organization is not a registered charity and wishes to continue carrying on its notfor-profit (non-charitable) activities, but also wishes to carry-on activities of a charitable nature, the organization could consider incorporating a separate charitable corporation. That is because the objects of a charitable organization must be exclusively charitable in order to maintain its tax-exempt status and to have the right to issue charitable (a) Relief of poverty; (b) Advancement of education; (c) Advancement of religion; and (d) Other purposes beneficial to the community. Each object set out in the letters patent of a charitable corporation must fall exclusively and wholly under one of the above categories or heads of charity. A corporation s charitable status may be compromised where the organization attempts to carry on both charitable and non-charitable activities. It is therefore preferable to have separate entities that each carry on one or the other type of activities. By creating a separate charity, the organization could transfer its charitable activities out of the organization into that entity. Once registered as a charity, the two organizations would operate in tandem. tax receipts under the Income Tax Act.

8 8 F ALL 2006 The comments made previously with respect to the organization having control over the new entity apply equally to the creation of a charitable corporation. The not-for-profit organization should be the sole or majority owner of all the issued shares of any such business corporation to ensure it maintains control over the business corporation at all times. This would ensure 3) Business Corporations that it retains control over appointments to the board of directors. Note that the law in Since a not-for-profit corporation cannot be constituted for the purpose of making a Ontario limits the ability of a charity to own shares of another corporation. profit, the main reason it will set up a separate corporation to carry on business activities is to protect its tax-exempt status. Unlike a non-profit or charitable corporation, the business corporation is not limited by the types of activities it is authorized to carry on and it can operate for any purpose, including for making profit. In the event the non-profit organization is already carrying on ancillary business activities that it wishes to transfer to the newly-created business corporation, there are various other issues that should be considered. For example, will employees of the not-for-profit organization be transferred to the business entity? What impact, if any, If a not-for-profit corporation wants to pursue "for-profit" activities, the organization should consider incorporating a business corporation, either federally or provincially. By setting up a separate business corporation, the organization will protect its tax-exempt status as a not-forprofit corporation. Of course, the business corporation would be subject to tax and will such a transfer have on employee benefits or severance or termination pay? If any assets of the not-for-profit organization are transferred to the new business corporation, there may be sales tax issues to consider. It should be noted that some of the foregoing issues might also arise when setting up nonprofit and charitable corporations. therefore, less of the profit may be ultimately be available to the not-for-profit organization.

9 9 NOT-FOR-PROFIT UPDATE D. CONCLUSION The foregoing commentary illustrates that much thought and planning must be devoted to the process of expanding the activities and/or objects of a not-for-profit corporation. There are many ways of undertaking new activities. It is often the nature of the particular activity that will dictate which vehicle can and/or should be used. In every case the not-for-profit organization should seek professional advice (e.g., legal, tax, accounting, etc.) to avoid spending valuable time and resources on an initiative that will not be the most advantageous to the corporation and its stakeholders. III. WHEN THE RELATIONSHIP SOURS: MEMBER EXPULSIONS William McLarkey , wmclarkey@blgcanada.com Membership organizations sometimes need to bring the relationship with a particular member to an end. The individual may have breached express rules of member conduct or engaged in behaviour "unbecoming" of a member. In either case, an organization membership should be aware of certain procedural requirements that need to be met before the membership is terminated. This article reviews the basis for terminating a membership and the procedural steps that should be followed when doing so. wishing to terminate the individual s

10 10 F ALL 2006 A. RULES AND BY-LAWS B. PROCEDURAL REQUIREMENTS When an individual joins and becomes a member of a not-for-profit organization, such as a professional body, golf club, fitness club or social club, the individual typically is required to abide by certain rules as a condition of membership. These rules may be set out expressly in the membership agreement, various policies, or the organization s by-laws. Such rules of conduct are generally viewed as contractual in nature, and a member s breach of these rules may, The courts have confirmed that where an organization expels a member pursuant to its rules or by-laws, the courts will not review the merits of the expulsion but rather will limit its review to determine whether the termination was carried out in a fair manner. In other words, the court will not consider whether the member s conduct warranted expulsion, but rather whether the decision was made in accordance with "procedural fairness" or "natural justice". depending on the seriousness of the breach, entitle the organization to terminate the individual s membership. To allow for flexibility in determining what conduct by a member warrants expulsion, organizations generally include as a condition of membership that members not engage in conduct "unbecoming" of the organization s The phrase "natural justice" has its roots in the Latin maxim audi alteram partem, which translated literally means, "hear both sides" or "hear the other party". Natural justice therefore requires that before a decision is made which adversely affects a party, that party is given an opportunity to be heard. members. What is required by natural justice differs in each case and can range from simply

11 11 NOT-FOR-PROFIT UPDATE affording the member an opportunity to be heard, wherein the member can explain his or her conduct, to a formal, court-like proceeding. Generally speaking, what is required in a particular case is determined by the importance of the decision for the individual and the nature of the members, the organization will no doubt want to remove the member from the organization as quickly as possible. In this scenario, it is best to immediately suspend the member pending an investigation and "hearing", after which the organization may then decide to expel the member. organization. Putting in place a procedure for expelling Where a member s employment or property interest is at stake, the requirements of natural justice are more stringent. Conversely, in the context of sporting or social clubs, the courts have required a less members, which includes an opportunity for the member to be heard, will give an organization its best chance of having the expulsion upheld, should it be challenged in court. rigorous standard of natural justice. At a minimum, however, natural justice generally requires that a member be given an opportunity to explain him or herself before the expulsion decision is made. An issue that arises in affording a member an opportunity to be heard is safety concerns. Where a member has engaged in alleged conduct that threatens the safety of other

12 12 F ALL 2006 IV. THE POWER OF ASSOCIATIONS TO DISCIPLINE AND TERMINATE MEMBERS Do-Ellen Hansen dhansen@blgcanada.com One of the raisons d être of many associations is to ensure the integrity and ethics of their members; another is to foster good relations A. WHAT IS THE SOURCE OF AN ASSOCIATION S POWER TO DISCIPLINE ITS MEMBERS? with members of the public who are served by the members of such associations. When members conduct raises concerns, a professional association may want to investigate the matter and, where appropriate, impose penalties or other consequences for the dual purposes of protecting the public and educating its membership about professional standards and best practices. This article provides an overview of some of the issues facing voluntary professional associations that want to ensure their ability to discipline their Some self-regulatory professional organizations are created under the auspices of a regulatory statute. Examples include provincial law societies, provincial colleges of physicians and surgeons or teachers, and provincial institutes of chartered accountants. In such instances, membership in the organization is often required for members of the pertinent profession to be entitled to practice their profession. The statute often confers jurisdiction on the organization to discipline members and sometimes also former members. members and, sometimes more importantly, their former members. Other associations of members with common professional interests are voluntary and membership is not required by law (although membership may be prudent and beneficial

13 13 NOT-FOR-PROFIT UPDATE from a business perspective). Such associations may be incorporated under federal or provincial not-for-profit corporate legislation. There is generally no legislation that articulates the scope of such an association s disciplinary functions and powers over its members and former members and provides a framework against which the conduct and outcome of disciplinary proceedings against members and former members can be measured. For such voluntary associations, the law is clear that the essence of the relationship between the association and its members is contractual, albeit one where members do not individually have the ability to negotiate the terms of such contracts. The constituting documents (i.e., the documents by which the association is incorporated or formed) and its by-laws and rules, if any, are the source of the contractual terms that govern the relationship between a voluntary association and its members. In these circumstances, voluntary associations have an obligation to observe their own bylaws in all respects, as a matter of contract. Correspondingly, a member of an association agrees to be bound by and to comply with that association s by-laws insofar as they affect individual members. B. THE IMPORTANCE OF THE BY-LAWS TO THE POWER TO DISCIPLINE MEMBERS AND FORMER MEMBERS An essential element of the authority to discipline is that the disciplinary tribunal has jurisdiction over the person it purports to discipline. In the absence of a statute that confers disciplinary jurisdiction, there will be no such jurisdiction unless the contract between the association and its members permits such disciplinary action. A voluntary association may discipline its members only in conformity with its own rules: to do otherwise is a breach of contract and negates the jurisdiction to discipline that it derives

14 14 F ALL 2006 from contract. If a voluntary association s by-laws or rules do not explicitly provide for disciplinary jurisdiction over former members of the association, then there is no jurisdiction to discipline a former member, even where the conduct giving rise to the disciplinary proceedings occurred when the pursuant to the powers conferred by the bylaws, must clearly and comprehensively set out the scope of such powers, including whether former members can be disciplined in respect of conduct occurring while still a member, the manner in which the powers are to be exercised, and the penalties or other sanctions that can be imposed. person being disciplined was still a member. If the rules or by-laws do not provide otherwise, and no legislation controls resignation, then the common law rule that a member is free to resign at any time applies. This rule may enable a member who is alleged to have violated the association s code of conduct to avoid disciplinary action by simply resigning. Accordingly, if a voluntary profession association wants to be able to discipline its members and/or former members, then its by-laws must confer that power on an appropriate body within the association (such as a disciplinary committee). The by-laws should also establish a code of conduct or ethics that is clearly made binding on members of the association, so that there is a known standard against which alleged misconduct can be objectively measured. The by-laws should address termination of membership: e.g., how is it effected, what is the effective date of termination for each method of termination, and what rights and obligations as between the association and former members continue, and for how long, after membership is terminated. The by-law provisions dealing with members conduct, disciplinary proceedings, and termination of membership must all work together In addition, the by-laws, or rules made consistently. It should be clear when membership will cease automatically or

15 15 NOT-FOR-PROFIT UPDATE otherwise, whether members and/or former members can be disciplined, and in respect of what conduct or omissions. advice and assistance in the drafting of the by-laws to ensure that they are legally effective as intended. By-laws that do not specifically confer the power to discipline former members and that C. COURT REVIEW OF DISCIPLINARY PROCEEDINGS provide for automatic and immediate termination of membership on the happening of a certain event involving a member are unlikely to be found effective to permit disciplinary proceedings against an individual whose membership has been automatically terminated in accordance with the by-laws where disciplinary action is not commenced prior to the date of automatic termination. Considerable care needs to be taken in drafting a voluntary association s by-laws, rules, and codes of conduct not only to ensure that they properly reflect the objectives and intention of the association and its members, but also because ambiguity will likely undermine the association s jurisdiction to discipline, particularly in cases where the association seeks to discipline a former member. It is advisable to have professional Judicial review is often thought of as available only in respect of the exercise of a statutory power. However, even though a voluntary association s disciplinary tribunal or committee may be acting pursuant to the contractual consensual authority to discipline articulated in the association s bylaws, various Canadian courts have held that the decisions of such consensual tribunals are reviewable by the courts pursuant to the court s jurisdiction to interpret and enforce contracts between parties. It has been held in Alberta that a pragmatic and functional analysis should be performed to determine the standard of review for consensual tribunals, with the purpose of the analysis being to determine what the parties intended in entering into the contract that governs

16 16 F ALL 2006 and/or the voluntary association may also risk being sued for damages by the disciplined member/former member, based on such causes of action as defamation, interference with economic interests, breach of contract, or breach of privacy. their relationship. Nonetheless, questions involving interpretation of a voluntary association s by-laws or rules to determine whether they confer jurisdiction on a disciplinary tribunal are reviewable by the courts on a standard of correctness. Furthermore, if a disciplinary tribunal has not complied with the requirements of natural justice, its actions will be open to challenge for breach of natural justice requirements. The courts may intervene in a dispute between a member and an association if the These litigation risks can be much reduced by careful and informed preparation of the bylaws and rules governing the relationship between the voluntary association and its members. member s property or civil rights are at issue and natural justice has not been followed. If a disciplinary tribunal imposes penalties or other sanctions, such as publication of its findings against a member or former member in publicly accessible media, in some circumstances it may be found that the tribunal acted without or in excess of its jurisdiction. In addition to the risk of judicial review proceedings, the tribunal

17 17 NOT-FOR-PROFIT UPDATE V. THE FINAL WORD A. OUR GROUP B. KEEPING YOU CURRENT Borden Ladner Gervais is one of Canada s largest law firms with full service offices in Vancouver, Calgary, Toronto, Waterloo Region, Ottawa and Montréal. Through our "Not-For-Profit Law Update" and "Alert" Newsletters and our seminars, we keep our clients and friends in the not-forprofit sector informed of changes in the law as they apply to their organizations. We have a Group established specifically to provide legal advice in an accurate, timely C. OUR LAWYERS PARTICIPATE and cost-effective manner to not-for-profit organizations and charities. Each of our offices has specialists who have expertise and experience dealing with not-for-profit organizations and charities. Our clients in the not-for-profit sector require legal counsel from a law firm which has available when needed, expertise in charity law, employment We are pleased that many lawyers in each of our offices volunteer their personal time and skills by fundraising for, by sitting on boards and committees of, and by volunteering in the front lines with healthcare organizations, social service groups and other communitybased, national and international charities. law, trade-marks, income tax, GST, real property tax, corporate law, by-laws, incorporation, governance, technology, litigation, contract law and other areas of legal specialization. Martin Donner of our Vancouver office has for many years been actively involved in a number of charitable activities including the Canadian Breast Cancer Foundation and the

18 18 F ALL 2006 Canadian Cancer Society. He was given a special award for his efforts during the 2002 Israel New Emergency. Martin helps a shelter for women and children and visits people in hospital after ostomy surgery. He supports different charitable causes, not to gain anything for himself, but to make a difference and to inspire others to do the same. Chris Bredt, a partner in our Toronto litigation group, is board chair of CODE (the Canadian Organization for Development through Education). Chris led his wife, Professor Jamie Cameron of Osgoode Law School, and BLG lawyers Steve Winder and Christina Litt to the summit of Mount Kilimanjaro last summer. The group raised over $100,000 for CODE s children s literacy project in Tanzania. Vern Krishna of our Ottawa office recently was chosen to receive CGA Canada s John Leslie Award for his nationally recognized exceptional service to the accounting profession. Professor Krishna is a past Treasurer of the Law Society of Upper Canada, past President of the Ontario Certified General Accountants and teaches at the University of Ottawa.

19 19 NOT-FOR-PROFIT UPDATE D. DISCLAIMER The "Not-For-Profit Law Update" Newsletter is prepared as a service to management and directors of non-share capital corporations known to the lawyers of Borden Ladner Gervais LLP. It is intended to inform those engaged in this important and growing sector Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. You are urged to consult your legal adviser in cases of specific questions or concerns. of current issues and developments in law affecting not-for-profit organizations. It is not intended to be a complete statement of the law, nor to contain any opinions of our firm on any subject. VI. NOTES Members of Borden Ladner Gervais Not-For-Profit Group National Steering Committee include: Toronto Office Bill Pashby, National Leader Tel: (416) Fax: (416) wpashby@blgcanada.com Cont d on the next page

20 F ALL 2006 Vancouver Office Josephine Nadel Tel: (604) Fax: (605) Calgary Office Ruth Spetz Tel: (403) Fax: (403) Ottawa Office Marc Jolicoeur Tel: (613) Fax: (613) Montréal Office Marilyn Piccini Roy Tel: (514) Fax: (514) Editor: Bill Pashby Tel: (416) Fax: (416) Borden Ladner Gervais LLP Lawyers Patent & Trade-mark Agents C algary 1000 Canterra Tower 400 Third Avenue S.W. Calgary, Alberta, Canada T2P 4H2 tel: (403) fax: (403) Montréal 1000 de La Gauchetière Street West Suite 900, Montréal, Québec, Canada H3B 5H4 tel: (514) fax: (514) Ottawa World Exchange Plaza 100 Queen St., Suite 1100 Ottawa, Ontario, Canada K1P 1J9 tel: (613) legal fax: (613) IP fax: (613) Toronto Scotia Plaza, 40 King Street West Toronto, Ontario, Canada M5H 3Y4 tel: (416) fax: (416) V ancouver 1200 Waterfront Centre 200 Burrard Street, P.O. Box Vancouver, British Columbia, Canada V7X 1T2 tel: (604) fax: (604) Borden Ladner Gervais LLP Waterloo Region 508 Riverbend Drive, Suite 303 Kitchener, Ontario, Canada N2K 3S2 tel: fax: Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership Printed in Canada