DIRECTOR LIABILITY AND NON-PROFIT HOUSING ORGANIZATIONS 14 th ANNUAL BC NON-PROFIT HOUSING ASSOCIATION CONFERENCE HOUSING MATTERS Monday November 20, 2006 HYATT REGENCY HOTEL VANCOUVER, BC KEN VOLKENANT De Jager Volkenant & Company
De Jager Volkenant & Company Charity & Non-Profit Organization Law Wills and Estates Corporate and Commercial Law Real Estate Development Employment and Human Rights Law Litigation and Mediation Suite 310, London Station, 10362 King George Highway Surrey, British Columbia, V3T 2W5 Tel: (604) 953-1500 Fax: (604) 953-1501 kvolkenant@dvclawyers.com
INTRODUCTION - WHY ARE WE TALKING ABOUT DIRECTOR LIABILITY? Increase in Complexity Increase in Litigation Insurance Limitations Litigants and Their Lawyers Looking for Deep Pockets
OVERVIEW Duty of Care & Standard of Care Disclosure and Accountability Personal Liability of Directors in Specific Situations What Can a Director Do to Lower Risks What Can the Board Do to Lower Risks Corporate Due Diligence Special Considerations for Charities Board Management Issues Insurance Considerations Property Issues Strategic Alliance Issues Employment & Volunteer Issues Fiscal Management Issues Asset Protection Strategies
Duty of Care & Standard of Care Duty of Care act honestly and in good faith and in the best interests of the society Standard of Care a director must exercise the care, diligence and skill of a reasonably prudent person, in exercising the powers and performing the functions as a director Minimum standard Standard tied to personal knowledge and expertise
Disclosure and Accountability Disclosure A director of a society who is, directly or indirectly, interested in a proposed contract or transaction with the society must disclose fully and promptly the nature and extent of the interest to each of the other directors. Accountability A director [who is, directly or indirectly, interested in a proposed contract or transaction with the society] must account to the society for profit made as a consequence of the society entering or performing the proposed contract or transaction
Disclosure and Accountability unless the director discloses the interest, after the disclosure the proposed contract or transaction is approved by the directors, and the director abstains from voting on the approval of the proposed contract or transaction, or unless the contract or transaction was reasonable and fair to the society at the time it was entered into, and after full disclosure of the nature and extent of the interest in the contract or transaction it is approved by special resolution Director can not be included quorum of meeting approving contract unless bylaws specifically allow this
Personal Liability For Certain Acts and Omissions directors and officers may be personally liable for acts and omissions of the Society in certain circumstances. These include: Personal involvement in, or approval of, non-payment of income tax deductions and other amounts due under federal and provincial tax laws Non-payment of employee's wages or salaries, subject to statutory limitations Personal participation in any criminal or fraudulent act of the Society.
What Can an Individual Director Do to Lower the Risks? Attend Meetings Ask Questions Record Objections Resign? Transfer Personal Assets?
What Can a Board Do to Lower the Risks to Directors? Corporate Due Diligence Special Considerations for Charities Board Management Issues Insurance Considerations Property Issues Strategic Alliance Issues Employment & Volunteer Issues Fiscal Management Issues Asset Protection Strategies
BASIC CORPORATE ISSUES Identify the existence and location of key organizational documents Develop an inventory of key documents Maintain central location for key documents Key organizational documents for an incorporated non-profit organization Constitution, Certificate of Incorporation, Letters patent and supplementary letters patent, if applicable All amendments to Constitution and Bylaws Membership covenant or mission statement, if applicable By-laws and resolutions Directors and members registers Copies of government filings Correspondence with the Registrar or Industry Canada
BASIC CORPORATE ISSUES Other key legal documents Leases, deeds and mortgages Agency, association and joint venture agreements License agreements Business name, trade-marks and domain names Policy statements Insurance policies Financial Statements Communications with Members - newsletters etc. Other governance, financial and business records as applicable
BASIC CORPORATE ISSUES Review of Certificate of Incorporation and Constitution- is the name in the Certificate the name used by the nonprofit organization? Proper Use of Corporate Name: ABC Housing Society Per: (Signature of Officer) followed by the Signatory's title, such as "Director and Secretary".
BASIC CORPORATE ISSUES Are the objects in the Constitution appropriate for a non-profit organization Are the activities of the non-profit organization authorized by its objects? Is the dissolution clause complementary to the objects Does the Dissolution clause provide for distribution to its members?
BASIC CORPORATE ISSUES Review of Amendments to Certificate of Incorporation and Constitution Has there been a change of corporate name? Has there been a change of corporate objects? Overview of Bylaws Do provisions conflict with Constitution? Do provisions reflect changes to applicable corporate legislation? Are basic provisions of Bylaws adequate?
BASIC CORPORATE ISSUES Bylaw Review Member qualification requirements Removal procedures for members and directors Directors roles, offices and roles of officers & executive authority Indemnification of Directors Directors and Officers liability insurance provision Restrictions on inspection of documents
BASIC CORPORATE ISSUES Formation and Re-Organization Issues Was the initial corporate organization (or a subsequent re-organization) of the organization properly done? Was there a documented transfer of assets and liabilities on incorporation (or re-organization)? Are the records of board decisions and/or membership meetings complete? Was there adequate board and/or members authorization for indebtedness? Has there been proper maintenance of corporate records?
BASIC CORPORATE ISSUES Corporate filings and registrations BC Society Annual Reports Amendments to Constitution and Bylaws Change of Directors and Official Address Federal Non-Profit Corporation: Annual Summary (Form 3) Canada Does the non-profit organization operate in any other provinces? If so, there may need to be registration as an extra-provincial corporation in other provinces. Has there ever been loss of corporate status for failure to maintain government filings?
SPECIAL CONSIDERATIONS FOR CHARITIES Are Objects Charitable? Housing as a Charitable Purpose The provision of housing, even on a purely not for profit basis, is not considered by CRA in and of itself to be a charitable purpose. The term charitable purpose has a relatively narrow definition at law, Where the provision of housing is sufficiently connected to an accepted charitable purpose, CRA will grant charitable status to the housing provider
Provision of Housing as a Charitable Purpose CRA issued Policy Statement CPS - 020 effective April 30, 2003 that applies to organizations established to relieve poverty by providing rental housing for low-income residents. www.ccra-adrc.gc.ca/tax/charities/policy/cps/cps-020-e.html The Policy relates to the required degree of connection between the provision of housing and the relief of poverty Other housing providers may be eligible for charitable status if there is a sufficient connection between the housing being provided and other charitable purposes such as assisting persons with disabilities, or relieving suffering arising out of the symptoms of old age or from threats of violence
Provision of Housing as a Charitable Purpose There are two distinct issues description of the charitable purpose the objects of the organization must identify its beneficiaries (people the organization is serving) in terms which clearly indicate the purpose of relieving poverty. the objects must refer to a class of poor, needy, necessitous, underprivileged, low-income, in financial need, of small/limited means, or an acceptable synonym ( Beneficiaries )
Provision of Housing as a Charitable Purpose Operational requirements a housing society must demonstrate the following in order to establish that it is or will be operating as a charitable organization: 1. Beneficiaries must pass a screening mechanism to be eligible to receive housing 2. Screening must take place at least annually and there must be policies in place to address continued housing for persons or households whose income rises above the level established to define Beneficiaries 3. Tenants who are not Beneficiaries must pay market rents 4. Not more than 10% of the units may be occupied by persons paying market rents; and
Provision of Housing as a Charitable Purpose 5. The organization must itself relieve poverty, that is there is strong evidence that the organization s overriding focus is to relieve poverty. A list of characteristics which create such evidence include: 50% of the residents fall into a deep core need classification Beneficiaries are taken from a hard-to-house list maintained by a government agency the project is in a neighborhood with high core housing need ; or the project includes free or affordable counseling and other services helping tenants overcome limitations contributing to poverty
Provision of Housing as a Charitable Purpose Mixed Housing Projects the Policy includes an acknowledgment that there may be situations where up to 33% of the units may be occupied by market-rent tenants and the organization will still be considered charitable. limited circumstances where this would be the case: the regeneration of depressed neighborhoods where there is a desire to both retain existing residents and to attract new residents, the inclusion of market tenants to prevent social isolation from the rest of the community partnerships with municipalities where the market rents cover carrying costs to assist in the reduction of welfare costs.
SPECIAL CONSIDERATIONS FOR CHARITIES Are Activities Charitable? Are Filings with Charities Directorate Current? Disbursement Quota Compliance Related Business Issues Political Activities Issues Directors as Trustees
BOARD MANAGEMENT ISSUES Which group is in charge? does the defacto control of the non-profit organization lie with the board, a committee or executive staff? is board authority recognized by the membership? Establish clearly defined lines of control between the board and the executive staff Hold board meetings on a regular basis and ensure that directors regularly attend
BOARD MANAGEMENT ISSUES Consider establishing an independent audit committee to review financial statements and the auditor s report Ensure adequate communication of board responsibilities to existing and future board members Create a board binder of all corporate documents, as well as an explanation of the general operations of the corporation as a non-profit organization and the board of directors legal duties and liabilities Provide regular updates on changes in the law to board members
BOARD MANAGEMENT ISSUES Ensure that remuneration paid directly or indirectly to directors is fully disclosed to the full board of directors Ensure that the non-profit organization has adequately indemnified its directors and officers Board should consider authorizing the non-profit organization to acquire directors and officers liability insurance Be careful that the board does not delegate too much responsibility to executive staff by restricting itself to establishing policy decisions only without careful and ongoing monitoring and review
BOARD MANAGEMENT ISSUES Consider reducing the size of the board to limit the number of people who are exposed to liability as directors Make effective use of committees as an alternate to a large board of directors Consider implementing an advisory board to complement the board of directors without a corresponding exposure to liability Establish a comprehensive due diligence review process by creating and utilizing appropriate legal risk management checklists Consider establishing a risk management committee of the board
INSURANCE CONSIDERATIONS Maintain a historical record of insurance coverage in the event of a future claim Provide full disclosure of all risks to insurer to avoid denial of coverage and to raise the shield of insurance Request regular reports from insurance broker on existing coverage, exclusions from coverage and recommendations to enhance coverage Regularly review the adequacy and extent of general liability coverage and property insurance Ensure that there is directors and officers liability coverage in place and that it is reviewed on a regular basis
PROPERTY ISSUES Use of Property by Third Parties Consider potential liability exposure in permitting third parties to use its property Develop and implement a third party property use agreement with appropriate indemnification provisions Require evidence of liability insurance from third party users of facilities Charge appropriate fair market rental fees to third parties (charity requirement)
PROPERTY ISSUES Real Property Properly register interests in real property Identify and evaluate the extent of liability exposure for toxic property Consider property tax exemption opportunities Intellectual Property Consider registering any key names and/or logos as trade-marks Identify trade-marks Protect trade-marks by registration Ensure that any third parties using trade-marks enter into a trade-mark licensing agreement
Strategic Alliance Issues Strategic Alliances A strategic alliance is the collaboration of two or more organizations to accomplish a more effective and efficient outcome or result than could be accomplished independently Board must be vigilant to prevent the organization from using its property for activities outside its permitted objects Conduct Preliminary Assessment determine purpose of alliance and role of each party in it confirm that the objects of each organization permit the interaction; ensure the proposed activities are not ultra vires the objects of either organization determine impact of alliance on the mission and programs, donors, employees, facilities, legal commitments and obligations, governmental funding agencies, donor designated funds and legislative compliance
Strategic Alliances Due Diligence Review 1. Review constating documents of all parties to determine if proposed arrangement is permitted and the nature of any restrictions 2. Review policies of organizations to ensure they are compatible 3. Assess financial status of other parties 4. Assess and evaluate reputation of parties to arrangement 5. Conduct a human resources audit consider possible severance/termination or constructive dismissal claims 6. Assess compliance with federal and provincial legislation Trustee Act; Income Tax Act; Society Act; Employment Standards Act; Gaming legislation 7. Material Contracts Review 8. Insurance Review
EMPLOYMENT AND VOLUNTEER MATTERS Ensure that appropriate hiring policies and practices are in place for employees Ensure that written employment contracts are in place with key employees Review policy statements and/or manuals for employees as well as volunteers Establish discipline procedure for employees and/or volunteer members Be aware of comply with applicable statutory requirements, such as pay equity, employment standards, human rights legislation, privacy legislation and occupational health and safety prerequisites
FISCAL MANAGEMENT ISSUES Ensure that all salaries, benefits and statutory deductions are being paid by the non-profit organization on a timely basis Consider Audited Financial Statements and ensure that Auditor s reports are acted upon Ensure full compliance with legislative requirements where investments are being offered to the public Ensure that investment policy is it in compliance with the bylaws and legislative requirements?
Asset Protection Strategies Operational Due Diligence Insurance Incorporation Multiple Incorporations Consider separating particularly risky aspects of operations Consider separating independent operations within a single entity Consider legal separations where there are multiple locations
Thanks for Attending! QUESTIONS & DISCUSSION kvolkenant@dvclawyers.com