A. INTRODUCTION
On November 12, 2010, the Ontario Superior
Court of Justice released its decision in London Humane
Society (Re) (“the Decision”), which discusses fiduciary
duties of directors of charitable corporations and their
relationship with corporate members.
The Decision relates to an application for direction from
the court by the directors of the London Humane Society,
(“LHS”) regarding who should constitute the membership of
the charity for the purposes of a special meeting of members.
LHS intended to significantly alter the voting privileges
of its members pending the outcome a special meeting of
members for the purpose of approving a new by-law. This
Charity Law Bulletin provides an overview of the
Decision, as well as a commentary concerning the outcome
of the Decision.
B. THE DECISION
The following provides an outline of the
background facts in the Decision, as well as the issues
and conclusion of the court.
1.
Background Facts
LHS is a registered charity organized
for the purposes of animal welfare. The dispute in the case
arose concerning the constitution of the membership under
the LHS by-law. In 2003, the LHS directors passed a resolution
granting automatic membership to anyone who donated $30
or more, as well as granting an automatic renewal to any
member who made a donation in the following year of $30.
However, the procedure for the admittance of members into
LHS had changed throughout its history, as initially, there
was no automatic membership, nor was there any automatic
right to renewal. Starting in the late 90’s, prospective
members were required to fill out an application form. In
2007, the by-law of LHS was amended to grant discretion
to the directors concerning the approval of new members.
On November 27, 2008, the resolution of the LHS board of
directors granting automatic membership for donations of
$30 or more was revoked. In September of 2009, the LHS Membership
Committee recommended to the board that any member, whether
new or renewing, should be required to fill out a membership
application, which recommendation the board adopted at their
October 1, 2009 meeting.
The court found that because the LHS
by-law gave the board the discretion to approve members,
an approval process was implied, and therefore an application
form was warranted despite their being no requirement for
one in the by-law. Since the requirement that new and renewing
members in 2010 complete an application form was not a change
to the by-law per se, but rather a change of policy, the
court found that no notice of that change to LHS members
was warranted. Despite finding that no notice was required,
the court went on to evaluate the notice LHS provided to
its members. The first notice of the application form requirement
was contained in the Fall 2009 newsletter for LHS, which
was distributed to the LHS membership. The second notice
was distributed in early 2010 when LHS sent out their 2009
tax receipts to 800 monthly donors. The court noted that
these 800 donors, “constituted less than half the total
membership of LHS.”
The court noted that by the time the
second notice was sent out, all LHS memberships had expired,
as membership in LHS automatically expires on December 31
of each year in accordance with the LHS by-law. However,
the membership application form was not available until
January 14, 2010 at 5:11p.m. Consequently, in 2009 no one
had the ability to renew or apply as a member, since the
form was not available until mid-January 2010.
Eventually, 117 applications were received.
Of these 117 applications, 109 were approved and 8 were
rejected. No reasons were given for the rejection, other
than that the rejected applications may have been ideologically
opposed to the LHS board of directors
2.
Issues and Decision of the
Court
The court determined that the issues
in the case at bar were as follows:
a) Was there sufficient notice
of the new application form requirement to the members of
the LHS? and
b)
Was the Board of Directors’
decision to reject eight applications for membership valid?
In determining the sufficiency of the
notice of the new application form to the LHS members, the
court distinguished the case at bar from a case involving
the Toronto Humane Society (“THS”). In the Trow decision,
the directors sent notice of a
by-law change to members of THS but did not mention that
the membership of THS was changing so that most members
would no longer have a vote. The Trow decision was
distinguished, however, since the “membership policy change
by the LHS Board of Directors was not a bylaw change and
there were no statutory notification or confirmation requirements
for such policy decisions.”
The court
then went on to recognize the contractual nature of the
relationship between members of charitable corporations
and their directors, which is, “governed by statute, the
creational documents of the corporation, its by-laws and
fiduciary obligations and duties of good faith.” The court
affirmed that directors of corporations, both for-profit
and non-profit, are in a fiduciary relationship to the corporation,
and not its shareholders or members. Therefore, the court
found that the notices sent to LHS members were sufficient
to fulfil the interests of the corporation, despite the
court recognizing that both notices were deficient in some
regards.
The respondents,
who acted on behalf of persons who had applied for
membership in LHS and were rejected, argued that the court should exercise its inherent jurisdiction
to direct and control the administration of charities, asserting
that the insufficient notices constituted a breach of the
director’s fiduciary duties. However, the court found that
there was “no plausible ground for declaring the notice
insufficient and providing memberships to those donors who
have not applied for membership.”
The court
also went on to state that since the directors of LHS owe
a fiduciary duty to the corporation, they are required to
act in good faith. The court followed the decision in Chu
v. The Scarborough Hospital Corporation,
which had stated that the court will intervene in decisions
made by non-share capital corporations in accordance with
their by-laws where the corporation has acted in bad faith
or contrary to principles of natural justice. In this regard,
the court found that the eight applicants for membership
who had their membership applications rejected by the board
had been refused based on ideological differences with the
board of directors. The court, therefore, found that the
applicants had their applications denied for improper purposes
and should therefore be deemed as members.
In responding
to the request for directions from the court, the court
concluded that the membership of LHS, for the purposes of
voting at the special meeting of members and all other purposes,
were those who the directors approved as part of the new
application process requiring a membership application form
from new and renewing members.
C. COMMENTARY
The Decision affirms
that directors of charitable and not-for-profit corporations
are fiduciaries to the corporation, and must act in good
faith in accordance with their by-law. The Decision also
provides protection to directors who adjust the process
for membership approval or renewal, without necessarily
making an amendment to the corporation’s general operating
by-law. It is important to note from the Decision, however,
that when members take a different philosophical approach
to that of the board, particularly with organizations which
have varying ideologies, as in animal welfare organizations,
the board cannot act arbitrarily with respect to approval
of membership.
The outcome of this
decision means that more than 800 former members of LHS
will not be permitted to vote on proposed by-law changes,
which will significantly change the voting privileges for
members in LHS. It is interesting that the court took the
“cost effectiveness” of the notices into account when determining
that the LHS board had not breached its fiduciary duties
or acted contrary to natural justice. It is also interesting
to note that the court found that the failure of the board
to give notice to all members of LHS about the change in
the application form process did not affect the validity
of the membership application process.
While the court found
in the case at bar that the applicant directors had complied
with their statutory and common law duties to the corporation
to the detriment of the respondent members, directors of
charitable and not-for-profit organizations with large memberships,
such as LHS, will need to be aware that the new Canada Not-for-profit
Corporations Act, as well as the Ontario Not-for-profit
Corporations Act, will provide new remedies to their
members, such as the oppression remedy, which could lead
to a different result.
