1. Introduction and Overview
2. The Nature of a Not-For-Profit Charitable Corporation and the Need for Control
(1) The Relevancy of the Not-For-Profit Corporation
(2) The Lack of Equity in a Not-For-Profit Corporation
and the Need for Control
3. National Charitable Structures
(1) The Nature of a National Charitable Organization
(a) The Basic Character
(b) The Distinction Between a National Chapter Model
and a National Association Model
(i) The National Chapter Model
(ii) The National Association Model
(c) Confusion Existing Between the National Chapter Model
and the National Association Model
(d) The Pros and Cons of the National Chapter Model
(i) The Pros
(ii) The Cons
(e) The Pros and Cons of the National Association Model
(i) The Pros
(ii) The Cons
(f) Observations Concerning the Two Models
(2) The Structure of a National Association Model
(a) Internal Structure of the National Governing Association
(i) Federal vs. Provincial Incorporation
(ii) Letters Patent Considerations
(iii) By-Law Considerations
(b) Control Considerations
(i) The Need for Control
(ii) Ex Officio Control Model
(iii) Franchise Control Model
(c) The Specifics of the Franchise Control Model
(i) Association Agreement
(ii) Incorporating Documentation for Member Organizations
(iii) Trade-Mark Considerations
(iv) Copyright Considerations
(d) Decentralization Through Utilization of the National Association Model
(i) What is Meant by Decentralization
(ii) Considerations Involving Decentralization
(e) Piercing the Corporate Veil
(3) The Structure of the National Chapter Model
(a) The Internal Structure
(i) Preliminary Considerations
(ii) Federal vs. Provincial Incorporation
(iii) Letter Patent Considerations
(iv) By-Law Considerations
(b) Establishing the Structure of a National Chapter Model
(i) Utilizing a Chapter/Charter Agreement
(ii) Licensing Considerations
(c) Liability Considerations
(d) Utilization of a Parallel Foundation for the National Chapter Model
4. International Charitable Structures
(1) The Lawyer’s Role in Advising on International Charitable Structures
(2) The General Nature of an International Charitable Organization
(a) The Challenge of Operating in Multiple Jurisdictions
(b) The Dichotomy Between National and International Operations
(c) Funding Issues with Revenue Canada Involving the
Transfer of Monies Outside of Canada
(3) Options in Structuring an International Organization
(a) International Multiple Association Model
(b) International Subsidiary Model
(c) Separate International Organization Model
(4) The Structure of an International Corporation
(a) Where to Incorporate
(b) Letters Patent Considerations
(c) By-Law Considerations
(5) Implementing Effective International Control Provisions
(a) The Importance of Developing International Control Provisions
(b) Utilizing the Franchise Control Model
(c) The Specifics of the Franchise Control Model
on an International Basis
(i) The International Association Agreement
(ii) Incorporating Documents of the Domestic Charity
(iii) Trade-Mark Licensing Considerations
(iv) Copyright Considerations
(v) Enforcing Control Provisions
(6) Liability Issues in International Operations
(a) Exposure to Liability
(b) International Risk Management Considerations
5. Conclusion
Appendixes
A. Excerpt from the Federal Information Kit on the Creation and Amendments for a Non-Profit Corporation
B. Outline from "Avoiding Wasting Assets: Trade-Mark Protection for Charities"
C. Overview of "Copyright Law in Canada"
D. Outline of "Key Considerations for U.S. Charities Commencing Operations in Canada"
1. Introduction and Overview
Why prepare a paper on national and international charitable structures? The reason is that many charities operate as part of a national or international charity as either member organizations or as governing bodies but have little understanding of the legal nature of what those structures involve. For this reason, it is important for lawyers providing legal counsel to a charity to be familiar with the relevant issues and the legal consequences that flow from the involvement of a charity in a larger organizational structure.
The lawyer may become involved in these issues when the charity is initially being organized or when it is in an expansionist mode and requires legal assistance in developing a long term structural plan. The lawyer may also become involved when asked to provide advice during the restructuring of an existing national or international charity. In addition, the lawyer may be called upon to give advice when a disagreement develops between a local branch of a charity and the parent organization, or when legal action is being threatened or commenced by a third party where more than one level of the charity is involved. When such situations arise, the lawyer will need to review the legal structure of the charity to determine the lines of authority and the methods, if any, of exercising control in an effort to reduce the exposure of the charity to liability at the national and international level, if applicable.
In practice, few charities are able to give adequate consideration to legal organizational issues involved in structuring a national charity and even less consideration to developing an efficient international structure for member organizations in different countries. This lack of attention to planning may be a result of the charity having originated as a small local charity that has expanded over the years on a provincial, federal and possibly international basis without being able to take the time necessary to develop and implement a strategic organizational structure. The day to day challenges caused by large operations and the constant demand to raise funds to pay for those expanding operations will normally take precedent over creating a well thought out organizational structure for the charity. As a result, the seeds for potential confusion and even conflict within a national or international charitable organization may be planted in the early development of the charity and remain dormant for years, only to come to the surface when a crisis develops.
As liability issues involving charities become more of a concern and as there is an increasing need to protect and control the goodwill of charities, it is incumbent upon lawyers who assist charities to become cognizant of the various legal issues involved in national and international structures. These concerns will often provide the lawyer with the opportunity to suggest that a charity consider developing an effective structural plan as circumstances require.
The lawyer can play a significant and often pivotal role in either initiating or participating in key planning discussions on structural matters. Often, neither the executive director nor the board members of a charity will have had an opportunity to fully study the issues or options that are available in establishing an effective structural plan for a charity. In accordance with the need for lawyers who deal with charities to provide pro-active legal risk management advice when advising clients 1, there is now more of an onus placed on lawyers to take the initiative and raise organizational and structural issues with their charitable clients in situations when the lawyer becomes aware of deficiencies.
While this paper will have particular relevance to religious charities that operate on a denominational basis across Canada as well as internationally, it will also be relevant to any charity that operates at more than one level or in more than one province. Similarly, although international structural considerations will have the most relevancy for international parent organizations, they will also be relevant to member organizations, particularly those located in Canada, since those charities will need to be familiar with the legal implication of being a part of an international structure and the legal obligations that flow from it. Canadian charities that are part of an international charitable structure should have a clear understanding how they legally fit into that structure and if the position of the Canadian charity has been prejudiced by being a part of it.
The various issues discussed in this paper concerning structure, control and liability issues are intended to provide a practical overview of these factors for lawyers, board members, and executive staff of a charity. As such, the paper is not intended to be an academic treatise, although a number of the issues referred to in this paper could form the basis of interesting subjects for a more thorough academic analysis. Given both the quantum and the breadth of issues involved in discussing national and international charitable structures, the comments that are contained in this paper are by necessity brief and reflect the fact that the paper is very much a "work in progress". Due to the limitations involved in undertaking a paper on such a broad range of issues, the contents of the paper can most effectively be used as part of an initial discussion point for the lawyer, board member or executive staff as opposed to being an authoritative analysis.
To make the paper as practical as possible, the contents have been organized into multiple headings and subheadings. In addition, footnote references have been kept to a minimum, partly because of the practical nature of this paper, as well as the limited nature of legal commentary on this topic.
The paper commences with a brief explanation of the basic nature of the not-for-profit corporation and then proceeds to analyze national charitable structures as part of either a Chapter Model or an Association Model. The paper then outlines different types of international organizational structures and how those structures can be co-ordinated with the requirements placed on Canadian registered charities transferring monies outside of Canada. A common theme throughout the paper for both national and international charitable organizations is the need to focus on reducing exposure to liability and the need to implement meaningful control provisions involving member organizations, whether it be through a contractual relationship or by licensing intellectual property.
2. The Nature of a Not-For-Profit Charitable Corporation
and the Need for Control
(1) The Relevancy of the Not-For-Profit Corporation
Although a registered charity in Canada can be established as a trust, an unincorporated association, or a corporation, the charitable structure that is the primary focus for discussion in this paper is that of the not-for-profit corporation, also referred to as a non share capital corporation. Although every charitable corporation is a not-for-profit corporation, not every not-for-profit corporation is a charity. For instance, trade unions, golf courses, or service clubs can all be organized as not-for-profit corporations. However, since none of them have charitable purposes, they cannot be recognized as charities at either common law or pursuant to the Income Tax Act R.S.C. 1985, c.1 (5th Supp.).
Since the comments contained in this paper about corporate structural issues are not dependent upon whether a not-for-profit corporation has charitable purposes, the commentary that follows will have application to not-for-profit corporations that are non-charities as well as to not-for-profit corporations that are charities. As a result, the reference to "charities" in this paper is intended to include not-for-profit corporations unless the context dictates otherwise, such as where there is a reference to compliance requirements under the Income Tax Act for registered charities.
(2) The Lack of Equity in a Not-For-Profit Corporation and the Need for Control
Fundamental to establishing a multiple national or international charitable structure is the concept that a not-for-profit corporation does not permit equity ownership and therefore cannot be controlled through the usual means of share ownership. With a profit making share capital corporation, effective control can be maintained over a multiple corporate structure by the parent corporation owing a majority of the shares in subsidiary corporations. Variations on this relationship can involve a parent/subsidiary corporate model or a holding/operating company model. However, with a not-for-profit corporation, there are no shares that can be bought or sold and therefore no ability to control the corporation through the means of equity ownership.2
Instead of having shareholders or owners, a not-for-profit corporation has only members, whether the corporation is incorporated at the federal level in accordance with the Canada Corporations Act, R.S.C. 1970, c. C-32 or at the provincial level in accordance with the applicable provincial legislation, which in Ontario is the Corporations Act, R.S.O. 1990, c. C.38. However, corporate members are not the owners of the not-for-profit corporation or its assets. Instead, a not-for-profit corporation has no legal owner, equitable or otherwise, except itself. It is its own self contained legal person that cannot be bought or sold. In this context, a not-for-profit corporation is akin to a "freemen" in comparison to a share capital corporation that can be owned as the "slave" of another corporation.
However, since there is no ability to "own" a not-for-profit corporation in the normal meaning, it is essential that there be effective mechanisms implemented to control member organizations by establishing either integrated corporate structures or expedient contractual relationships. "Although control is not ownership, it can be as effective as ownership. Control can be best be defined as a reserved right to have the final say in certain enumerated corporate affairs".3
3. National Charitable Structures
(1) The Nature of a National Charitable Organization
(a) The Basic Character
There are many charities that operate nationally. They include religious denominations, such as the Anglican Church, national health care charities, such as The Canadian Red Cross, The Canadian Cancer Society, and The Heart and Stroke Foundation, as well as national community help organizations such as Birthright, among others. Charities may be national in scope because they have offices located in more than one province, or they carry on operations in more than one province, or they fundraise in more than one province. The national scope of a charity can also result from participation by interested individuals across Canada at the membership level, on the board of directors, or at the committee level. The characteristic that is common to all national charitable organizations is that their operations extend beyond the boundaries of only one province.
(b) The Distinction Between a National Chapter Model and a National
Association Model
A national charity is generally organized based on either a Chapter Model or an Association Model, both of which models are described below.
(i) The National Chapter Model
The National Chapter Model involves one legal entity acting as a single charitable organization across Canada, normally involving multiple divisions at either the provincial level, the regional level, or at the local level. Those divisions are often referred to as chapters or branches. However, none of the chapters or branches are themselves separate legal entities. Instead the chapters or branches are a part of a single monolith legal entity, as is the case with The Canadian Red Cross, The Canadian Cancer Society, or Registered Canadian Amateur Athletic Associations.4
(ii) The National Association Model
The National Association Model involves multiple legal entities, as opposed to only one corporation, that are organized at various levels, such as incorporated provincial associations or incorporated local organizations. The Association Model will have a governing body, normally established as a federal corporation, to act as the umbrella body over its member organizations, whether those members are corporations or unincorporated associations. An example would be local churches of a large national denomination. A member organization will normally have either a name or charitable purpose that is similar to that of the governing national association.
The terminology of "Association Model" is utilized in this paper because the word "association" is generally defined as meaning distinct legal entities that work in cooperation with each other.5 In the context of the Association Model, the national governing body is often referred to as "the parent corporation", "the national body", "the national association", or sometimes "the head office". For the purpose of this paper, the terminology that is utilized is the "governing body" or the "governing association".
(c) Confusion Existing Between the National Chapter Model and the National Association Model
Although it is not difficult to draw a distinction in practice between the National Chapter Model involving a single corporation and the National Association Model involving multiple corporate entities, distinguishing between the two in practice is not always as easy. In fact, many national organizations currently operate without knowing whether they are a single corporation operating through local chapters or an association made up of separately incorporated members.
This potential for confusion is most apparent when seen in the context of religious denominations. While the Catholic Church has historically organized itself in Canada by having separate episcopal corporations for each Diocese, with the local Bishop being incorporated as a "corporation sole" 6, this simplicity in organization and operation is not always duplicated in the organizational structure of other religious denominations. For instance, many within the United Church of Canada would describe that denomination as a single legal entity. This perception flows from their interpretation of the wording of the 1925 incorporating statutes for the United Church of Canada.7 However, the United Church of Canada is actually organized based on a highly structured Association Model with the national church corporation acting as an umbrella organization for separately organized unincorporated pastoral charges that form the basic building blocks for membership within that denomination.
Other denominations which have utilized the 1925 statute incorporating the United Church of Canada have encountered similar confusion concerning whether they are a single national church or an umbrella organization overseeing a multitude of independently organized congregations. This confusion in the organizational structure can lead to problems in ownership of property when it is not clear whether a local congregation is the beneficial owner of its building or whether the local church building is beneficially held by local trustees in trust for the national denomination.8
Even organizations that are not religious denominations often encounter difficulties in understanding the basic nature of their charitable structure. A national charity that does not know whether it is organized as an Association Model or a Chapter Model will often perpetuate the confusion by on the one hand encouraging local organizations to apply to become a chapter of the national organization, while at the same time creating a functional dichotomy by permitting or even encouraging member organizations to become separately incorporated.
Even when it is clear that member organizations need to be separately incorporated as part of an Association Model, it may not be evident how those member organizations are to relate to the larger national structure. This is often the case with religious denominations that have seminaries, bible colleges, camps, or other related ministries that are expected to operate functionally "in sync" with the national denomination but without any corporate or contractual documentation in place to set out what that relationship is to consist of.
For example, if the board of directors of a member organization was to strongly disagree with the direction being dictated by the national denomination, the board of the denomination might be surprised to find that it has no legal means to stop the board of directors of the renegade member organization from adopting a policy or course of action that was totally contrary to what was acceptable to the denomination as a whole. When this happens, it will normally be too late for the denomination to do anything about the lack of control over the renegade religious organization. The time to do something to avoid the loss of control is before the disputes arise with a member organization by developing and implementing an effective structural plan.
(d) The Pros and Cons of the National Chapter Model
(i) The Pros
The most significant benefit of the Chapter Model is that by requiring only one corporation, it is much easier to maintain a higher degree of control over chapters or branches without the necessity of contract or licence agreements that are otherwise required with the Association Model. In addition, by utilizing only one corporation to carry on operations on a national basis, there is generally more symmetry and coherency over day to day operations and control of personnel.
A Chapter Model also does not run the risk of losing its assets, goodwill, donor base, or trade-marks to a "renegade" member organization, since legally everything is owned by the single national corporation. A chapter or branch would have no legal right to take any assets on its own if it was to leave the national organization.
(ii) The Cons
The most fundamental problem inherent in the Chapter Model is that by having only one corporation, the liabilities that occur in the operations of one chapter will expose all of the assets of the national organization to claims arising out of activities of that one chapter even though other chapters may have had nothing to do with the incident in question. Similarly, even if the incident involves a national program involving all chapters, there is no ability to protect specific assets of the national organization, since all assets are owned by the national organization. This problem has most recently and graphically been seen involving protection sought by The Canadian Red Cross as a result of hundreds of millions of dollars in claims arising out of the tainted blood scandal.
Even if the national organization was to set up individual charitable trusts to fund specific programs, the assets contained in those charitable trusts could still be subject to claims by those who were able to establish a causal connection between the trust fund and the incident that allegedly led to the injury or abuse that they had suffered.9
Given the increased exposure to liability faced by charities arising out of claims associated with sexual abuse, every national organization that is currently organized on a Chapter Model should carefully review whether or not it can afford, from a risk management context, to remain as a single legal entity. For national charities that have programs involving low exposure to liability, such as a medical research charity, there will understandably be less reason to change from a Chapter Model Structure.
(e) The Pros and Cons of the National Association Model
(i) The Pros
There are a number of advantages in utilizing the Association Model over that of the Chapter Model. The benefits in this regard are summarized below as follows:
· The primary benefit is that of reduced liability exposure for the charity by containing the liability attributable to each member organization within a separate corporate entity so that the claims made against a member organization does not effect the assets of other member organizations or that of the governing body.
· In the event that one member organization owns real estate that is subject to toxic contamination, the cost associated with the clean up of the contamination will generally be limited to the incorporated member organization as opposed to affecting the assets of other member organizations or of the governing body of the national association.
· In the event that a member organization was to become involved in activities that result in its deregistration as a registered charity with Revenue Canada, only the charitable status of that member organization would be at risk instead of risking the charitable status of other member organizations or the national association itself.
· For national charities that carry on operations in Ontario, the creation of a separate charitable corporation in Ontario to oversee Ontario activities would mean that the jurisdiction of the Public Guardian and Trustee in Ontario would generally be limited to only the assets of the Ontario charity instead of affecting those of the national association or member organizations in other provinces.
· Another benefit of establishing a separate corporation in Ontario is that the operations of the national organization that are carried on outside the province of Ontario through separate corporations in other provinces would not be subject to the provisions of the Charities Accounting Act R.S.O. 1990, c. C. 10., and in particular section 6 (8) of the said act which permits an individual to apply for an ex-parte order to require a Public Inquiry by the Office of the Public Guardian and Trustees in the event of complaints concerning the solicitation of funds and the manner in which those funds are utilized.
· For a national organization that did not want to be subject to the restrictions of the investment powers set out in the Trustee Act R.S.O. 1990. c. T.23., (soon to be amended by Bill 25), the establishment of a separate corporation to coordinate activities in Ontario would generally limit the application of the investment powers under the Trustee Act to only those investments held by the Ontario corporation.
(ii) The Cons
The disadvantages of utilizing the Association Model are summarized below as follows:
· The most obvious problem is that a governing body can easily loose control over its separately incorporated member organizations if appropriate steps are not implemented to ensure that the member organizations are subject to appropriate contractual and/or licensing control mechanisms. The techniques used to ensure effective control in this regard are discussed later in this paper. However, few charities that are organized based on the Association Model have established adequate control mechanisms, and if they have, they are often poorly enforced, if at all.
· Often a member organization will need to utilize the name or trade-marks of the national association. However, if the name and/or logos of the national association have not been protected by obtaining trade-mark registration, or the usage of the trade-marks by member organizations is not properly documented through trade-mark licence agreements, then the ability of the national organization to protect and enforce its trade-mark rights may be seriously prejudiced due to unintentional infringement of trade-marks by member organizations as well as others.
· With member organizations that have names that are similar to that of their national associations, there is frequently confusion that occurs in gifts given to the wrong charity, particularly where testamentary gifts fail to properly describe whether the national association or the member organization is the intended beneficiary. This confusion could result in the estate having to apply for a cy-pres court application to determine which charitable organization is legally entitled to the testamentary gift.
· Effective utilization of the Association Model requires the creation of multiple corporations and the implementation of numerous and sometimes complex control provisions. The complexity in the relationship could result in serious confusion unless the control mechanisms are carefully crafted and consistently applied. Failure to take appropriate steps in this regard could result in a state of confusion that might be even more problematic than the liability risks associated with the Chapter Model.
(f) Observations Concerning the Two Models
Notwithstanding the complexities that are involved in utilizing the Association Model, since the Association Model is able to contain liability within separate corporations and protect the assets of member organizations, the utilization of the Association Model is an attractive alternative for national charitable organizations. This is not to suggest that there is not a place for the Chapter Model for national charities, particularly where the exposure to liability risk is low. However, the heightened litigious environment faced by many charities necessitates that the enhanced liability protection available through the Association Model be carefully studied and evaluated.
This evaluation may necessitate that a national charitable organization, such as a religious organization, currently structured on the basis of a Chapter Model, will need to consider restructuring through the creation of multiple corporations based on the Association Model. Although a structural change of this magnitude would be a daunting challenge for any charity, particularly for an established religious denomination, the consequences of not restructuring could mean the possible insolvency of the whole national charity. While it is not possible to restructure a charity organized on the Chapter Model to avoid existing exposure to liability for past or present claims, it would be imprudent for a charitable organization not to look at restructuring now to reduce liability exposure in the future.
(2) The Structure of a National Association Model
(a) Internal Structure of the National Governing Association
This portion of the paper explores some of the key considerations involved in the establishment of a legal entity to act as a governing association for member organizations across Canada.
(i) Federal vs. Provincial Incorporation
Generally speaking, a governing association should be established as a Federal Corporation under the Canada Corporations Act. This recommendation is made for the following reasons:
· A federal incorporation does not require the review and approval of the Public Guardian and Trustee of Ontario. Although the Office of the Public Guardian and Trustees is often helpful in making suggestions with regards to an application for incorporation in Ontario, the additional step in having to deal with their office can add costs and time to the incorporation process. Industry Canada, which is responsible for administering the Canada Corporations Act, does not have the equivalent of the Public Guardian and Trustee to review the charitable objects before proceeding with federal incorporation.
· There is generally more flexibility in drafting a general operating by-law under the Canada Corporations Act than under the Ontario Corporations Act. For instance, under federal legislation, the number of members of the board of directors can be a variable number, whereas under current Ontario legislation, the number of directors must be fixed. In addition, under Ontario legislation, a corporation must give a corporate member the right to vote by proxy, whereas under federal legislation, such provision is optional and therefore may result in corporate operations that better reflect the actual manner in which the corporation functions.
· Another advantage of the federal incorporation involves the more comprehensive review of the corporate name that is conducted by Industry Canada at the time of incorporation. Although it is generally more difficult to obtain a corporate name when applying for federal incorporation, once obtained, the name of the federal corporation will be available for use across Canada without the necessity of having to obtain a separate provincial corporate name search in each province when an extra provincial licence is applied for, save and except for the province of Quebec, which requires that its own name search be done.
· By incorporating federally, a national association will be entitled to register a domain name with the first level domain designation of "ca". This is generally not available for a provincial corporation.
· A further advantage of federal incorporation is that the Canada Corporations Act generally provides more flexibility in both its legislation as well as in its administrative policies in establishing national structures that involve more than one level of corporate membership or in implementing a process for regional election of directors.
(ii) Letters Patent Considerations
In addition to the usual factors that need to be taken into account in drafting an application for Letters Patent (or an application for Supplementary Letters Patent in the event of a charity being restructured from a Chapter Model into an Association Model), there are certain considerations that are unique to the Letters Patent of a governing association. They are listed below as follows:
· The charitable objects should clearly indicate that the objects are national in scope. Often a provincial corporation that through time has become a national governing body will still have charitable objects that restrict its activity to the province in which it was incorporated. If the geographic jurisdiction of the objects is not expanded to become national, then the board of directors could be exposed to personal liability for allowing the corporation to carry on ultra vires activities beyond the geographic boundaries set out in its corporate objects.
· The letters patent should include as one of its secondary objects the authority to establish and enforce standards for member organizations, as well as the ability to coordinate and facilitate the operations of the national association on behalf of its member organizations.
· For religious charities, particularly those that are part of a religious denomination, it is recommended that the statement of faith or the doctrinal statement for the governing association be included in the letters patent as a special provision and that there be a specific cross reference to that statement of faith or doctrinal statement in the charitable objects of the charity. This should then be supplemented by an additional special provision in the letters patent that requires all directors and members of the governing association to subscribe to the statement of faith or doctrinal statement of the governing association. This requirement would ensure continuity of doctrine and consistency in the character of the governing association in future years so that the religious nature of the charity is not subsequently lost, as is evident with organizations such as the YMCA that was initially a religious organization.
· The inclusion of a statement of faith in the letters patent might also prove to be of assistance in justifying to Revenue Canada that certain activities that might on their own be political and therefore non-charitable, would in fact be charitable because those activities are being carried out as a manifestation of the religious doctrine of the organization.
· The letters patent should also include a broad investment power so that the governing association will have the ability to invest its surplus funds without being unnecessarily limited to the current investment restrictions set out in the Trustee Act of Ontario, or similar provincial legislation.10
· The letters patent should also include a dissolution clause requiring any remaining assets of the governing association be transferred to a registered charity in Canada which has similar charitable purposes. This would ensure that the national scope of the association would be continued even if the governing association, for whatever reason, had to be dissolved or wound up.
(iii) By-Law Considerations
There are numerous considerations that should be taken into account in establishing a general operating by-law for a national governing association.11 A few of the more important considerations that need to be take into account are as follows:12
· Are there to be more than one class of corporate membership, i.e., one class for individual members and another class for member organizations?
· Are there to be different membership rights attached to each class of membership?
· Is each class of membership able to elect a certain predetermined number of directors on a proportionate or regional basis across Canada?
· If so, are the corporate members from the member organization able to elect directors or are those members only to appoint nominees to be elected as directors by the general corporate members of the national governing association?
Careful consideration must be given to drafting the general operating by-law for the governing association, since the ability or inability to exercise control by the national governing association will depend upon the wording that is contained within the general operating by-law at the time that the charity is either initially incorporated or restructured into a national association.
(b) Control Considerations
(i) The Need for Control
Since each member organization within a national association will be a separate legal entity, it is essential that the matter of control over those member organizations be carefully addressed and that it be done in the early planning stages in the creation of a national association or during restructuring. Once member organizations have been created and are operational, it is generally very difficult for the national association to "rewrite the rules" and require that member organizations relinquish some measure of control back to the governing body.
It is important to understand that the national governing association will have little ability to exercise control over member organizations unless those organizations have agreed to operate under the control of the governing association by either amending the internal corporate documents of the member organization or entering into appropriate contractual or licence arrangements.
(ii) Ex Officio Control Model
A frequently used method of indirectly controlling member organizations is the Ex Officio Control Model. This model requires that the by-laws of the member organization provide for ex officio directors who are either directors of the national governing board or alternatively hold officer positions in the national governing board created for the specific purpose of allowing those individuals to become qualified to sit as national representatives on the board of the member organization.13 Both the Canada Corporations Act and the Ontario Corporations Act permit the establishment of ex officio directors in their corporate by-laws.14
Although the utilization of ex officio directors is an effective means of maintaining control, it should not be relied upon as the only means of doing so, since the Ex Officio Control Model does not encompass contractual relationships that can articulate the expectations between a governing association and its member organizations or licensing considerations involving intellectual property.
(iii) Franchise Control Model
An effective parallel can be drawn between the relationship of a franchisor and its franchisees and the relationship between a national governing association and its member organizations. Just as a national governing association cannot control member organizations by owning the "shares" or other equity interest of a member organization, a franchisor, in a business context, is not the owner of shares in the franchisee corporation. As such, the franchisor must establish an alternative means of control over the franchisee. This is done through the contractual relationship of a franchise agreement. There is no reason why the Franchise Model cannot and should not be adopted in the context of establishing effective control mechanism with charitable corporations.
By utilizing the Franchise Model, the governing body of the national association can establish an effective contractual relationship between the governing association and its member organizations involving key factors, such as what are the requirements of membership in the association and the consequences of losing that membership. The Franchise Model can also be used to authorize the licensing of trade-marks and copyrights of the national organization. Further, the Franchise Model can be used in conjunction with the Ex Officio Control Model. As such, the Franchise Model and the Ex Officio Control Model can be used to complement each other or be used independently, depending upon the circumstances.
(c) The Specifics of the Franchise Control Model
The Franchise Control Model can be applied to any type of national charity and in particular to a religious denomination, since it provides an effective tool to ensure compliance by member churches with denominational standards and expectations. The basic components of the Franchise Control Model involves developing an effective association agreement, the inclusion of appropriate control provisions within the incorporating documents of member organizations, and the implementation of a licencing arrangement to deal with intellectual property. Each of these components are discussed separately below.
(i) Association Agreement
An association agreement is often referred to as a "charter agreement", an "affiliation agreement", or a "membership agreement". The content of the agreement, not the terminology used to describe it is what is important. The association agreement sets out the contractual relationship between the governing association and its member organizations. Some of the more important considerations that should be included in an association agreement are the following:
· The preamble should state that the governing association and the member organization have similar charitable purposes, that they are recognized at law as being separate and distinct corporate entities with separate boards of directors, and that they are to remain independently responsible for the management and governance of their respective operations. This clear statement at the beginning of the agreement will help to offset any attempt to "pierce the corporate veil" between the two organizations as discussed later in this paper.
· There should be an indication that the contractual relationship contained in the agreement does not constitute either a partnership or a joint venture arrangement between the parties.
· The term of the agreement needs to be indicated. It is suggested that a period of five years is appropriate with an automatic renewal thereafter for an additional five year term, unless written notice is given by one party to the other.
· The basic requirements of the association relationship need to be articulated, which could include the following considerations:
the specific wording, or at least the general parameters for the charitable purposes of the member organization;
if the national association is a religious denomination, the agreement should require that the member organization include a denominational statement of faith in its letters patent;
the requirements to be included in the by-laws for the member organization concerning such matters as qualification requirements for members, which for a religious organization should include a requirement that the member adhere to a particular statement of faith;
the wording for the dissolution clause to be included in the letters patent for the member organization to ensure that the assets of the member organization on dissolution are transferred to another member organization;
a requirement that the national governing association be able to review and approve the general operating by-law for the member organization, as well as the right to approve other fundamental changes, such as application for supplementary letters patent, or adopting amendments to the general operating by-law of the member organization;
a requirement with respect to general liability insurance coverage and whether or not the national governing association is to be included as a co-insured under the insurance policy of the member organization; and
an explanation of the parameters under which the name and trade-marks of the national governing association can be utilized by the member organization, with particulars to be set out in a separate trade-mark licence agreement.
· The association agreement should also set out the rights that flow from the association relationship, such as the right of the member organization to use the names and trade-marks of the national governing association, as well as the right of the member organization to obtain resource materials, administrative services, as well as ongoing advice and counsel as necessary from time to time.
· The association agreement should clearly state what action by the member organization would terminate the association relationship, such as the loss of charitable status, a breach of a material term of the association agreement that is not remedied within a reasonable period of time, or a violation of the trade-mark provisions contained in the association agreement or in a related trade-mark licence agreement.
· The association agreement should then delineate the consequences that flow from the termination of the association agreement, such as termination of the right to use the trade-marks of the national association and a requirement that the member organization return all copyrighted materials back to the national association.
· Finally, the association agreement should set out a mechanism for conflict resolution by including a provision in the agreement requiring mandatory mediation and/or arbitration to avoid costly and divisive legal action.
(ii) Incorporating Documentation for Member Organizations
The incorporating documents for a member organization should be drafted or amended in accordance with the requirements set out in the association agreement. This could be done by having the member organization utilize standard incorporating precedent materials that are either attached to the association agreement as a schedule or are incorporated by reference into the association agreement.
The national governing association should be given an opportunity to review the final form of the application for letters patent and general operating by-law for the member organization before it is filed for incorporation. The same approval process would also apply in the event that a member organization applied for supplementary letters patent.
(iii) Trade-Mark Considerations
For many charities, its most important asset is the goodwill associated with its name as a trade-mark. The value of its name is reflected in its ability to attract donations through either inter-vivos or testamentary gifts. In the context of a national governing body, its name as a trade-mark and associated logo constitute the basis by which the public will identify the organization and the activities that it carries on. As such, the national governing association will need to be diligent in ensuring that the goodwill associated with its trade-marks is not compromised. For a more detailed discussion on trade-mark issues and how they affect charities, a summary is attached to this paper as Appendix "B".15
The trade-marks of the national governing association can include its corporate name and various operating names and logos. All of these should be protected by applying for trade-mark registration under the Trade-marks Act, R.S.C. 1985 c. T-13. In addition, depending upon whether the national association receives government funding, it may be possible to obtain the benefit of an Official Mark designation under Section 9 of the Trade-marks Act similar to what the Canadian Olympic Association has been able to obtained in the past for its Olympic symbols. The advantage of an Official Mark designation under Section 9 of the Trade-marks Act is that it prohibits anyone else from using the mark in question in any manner whatsoever, even if such usage is not associated with the wares and services with which the national association has used the mark.
The registered trade-marks and, if applicable, Official Marks, should be owned by the national governing association and then licensed to each member organization. The licensing of the trade-marks needs to be done pursuant to a separate trade-mark license agreement to ensure full compliance with the requirements for an effective trade-mark licence under the Trade-marks Act. Many national governing associations incorrectly assume that by giving their consent to a member organization to use the name of the charity, such consent constitutes an effective trade-mark licence arrangement. This assumption is incorrect, since a formal trade-mark licence agreement should be entered into to comply with the various licencing requirements of the Trade-Mark Act.
A trade-mark licence agreement would include, amongst other matters, the following:
· recognition of the ownership of the trade-marks by the governing association;
· an explanation of the manner in which the trade-marks can be used by a member organization and sufficient means by which the trade-mark owner can exercise active control over the use of the trade-marks;
· how the trade-marks are to be protected and enforced, together with a requirement by the member organization to advise the governing association of any infringement of the trade-marks;
· a description of what constitutes default under the trade-mark licence agreement and what are the consequences resulting from the termination of the trade-mark licence; and
· the inclusion of a provision dealing with conflict resolution through mandatory mediation and/or arbitration.
(iv) Copyright Considerations
Copyright issues can also be an important part of establishing control by a national association. However, copyright law is not often well understood and is frequently ignored all together in the context of documenting an effective national association relationship. A brief summary of copyright law in Canada, particularly as it effects charities is attached as Appendix "C" to this paper.
Once ownership of the copyrighted materials has been established, it may be prudent to register the copyright, particularly if the materials are going to appear in a public source, such as on an internet web page.
In relation to copyrighted materials belonging to the national governing association that are used by member organizations, such as resource materials, audiotapes, videotapes, training manuals, check lists, brochures, fundraising documentation, etc., it is important that the national governing association set out in a copyright licence agreement an acknowledgment of its ownership in the copyright material and the parameters under which the member organization can use those copyrighted materials. The licence agreement should also set out the basis by which the copyright licence will be terminated and the consequences of the termination of the licence by requiring the immediate return of all copies of the copyrighted materials.
(d) Decentralization Through Utilization of the National Association Model
(i) What is Meant by Decentralization
A national charitable organization that is currently structured as a single legal entity based on a National Chapter Model may at some point in the future decide to convert its operating structure to that of a National Association Model. When this occurs, the process of restructuring is referred to as decentralization because it involves a decentralization of a single national organization in favour of multiple separately incorporated members, such as local associations, churches16, or related church corporations including camps, schools or seminaries.
(ii) Considerations Involving Decentralization
The process of decentralization is complicated by numerous legal factors, most of which are beyond the scope of this paper to deal with. However, as an initial reference checklist, some of the key considerations which should be kept in mind in decentralizing a national charitable organization from a National Chapter Model into a National Association Model include the following:
· If the member organizations is to receive a transfer of assets from the national governing association, then those assets need to be set out in a bill of sale or other form of transfer agreement. A transfer to a member organization presupposes that the member organization is already registered as a charitable organization, either because it previously obtained charitable status as an "associate" of the parent charity, or has applied and received separate charitable status when the member organization initially become incorporated.
· In the event that the property being transferred consists of real property, which is often the case with religious denominations, then a search of title will need to be completed to determine if there are any restrictive charitable trusts attached to the deed for the property being purchased that needs to be complied with. Restrictions in this regard could include a requirement that the church property only be used in accordance with a particular statement of faith or religious practice. If there are restrictive charitable trusts, then the transferee organization, such as a local church, would need to agree in writing to comply with the terms of the restricted charitable trust set out in the title documentation for the property.17
· When donor restricted trust funds are being transferred, such as when an estate endowment fund states that is to be used for a particular local purpose, the investment powers that apply to those funds will need to be identified and complied with by the transferee member organization. In addition, the transfer of donor restricted charitable trust funds will generally require court authorization for a change of trustees in accordance with the consent order provisions of Bill 61 amending the Charities Accounting Act of Ontario.18
· In the event that the transfer of assets involves real property that may be subject to toxic contamination, as may occur from a leaking underground oil tank, the transfer of real property should not take place until an environmental audit has been conducted and the directors of the transferee member organization have acknowledged in writing that they understand their potential exposure to personal liability arising out of the transfer of the property in the event that the property is subsequently found to contain contaminated materials.
· In the event that the transfer of real property to a member organization is to be subject to a reversionary interest in favour of the national governing association, as what is often found in model trust deeds for religious denominations, such as the model trust deed contained in the incorporating statute for the United Church of Canada19, then the deed to the member organization would need to include an appropriate provision to establish a reversionary interest.
· In the event that there are liabilities that the transferee member organization is to assume as part payment for the assets being received, such as the assumption of an outstanding mortgage or unsecured debts, such as bonds or promissary notes, then there should be a clear description of what those liabilities are together with the consent of the creditors or secured party, if necessary.
(e) Piercing the Corporate Veil
Fundamental to establishing an effective National Association Model is the need to maintain the integrity of the limited liability characteristic of the various incorporated entities. While the concept of limited liability protection is still the general rule for corporate entities, whether the corporation is in the form of a share capital or a non-share capital corporation, there are a few instances where the governing body of a national association might be found to be liable for the actions of a member organization as a result of the equitable doctrine known as "piercing the corporate veil". In those few situations were the court will "pierce the corporate veil", the "piercing" seems to happen freakishly. "Like lightning, it is rare, severe, and unprincipled in its approach".20
Instances where the courts in the U.S. have been prepared to "pierce the corporate veil" have occurred where a subsidiary corporation has been found to be a mere instrument or alter-ego of the parent corporation where there has been significant elements of common identity established between the parent and the subsidiary corporation resulting in the court finding the following:
(i) that there has been total domination and control of the subsidiary corporation so that the corporation has no separate mind, will or existence of its own;
(ii) that the subsidiary has been used to commit a fraud or wrong to insulate the parent from responsibility; and
(iii) that injury has been caused to the plaintiff by the fraud or wrong.21
In Canada, the equitable doctrine of "piercing the corporate veil" has been rejected in a number of Ontario decisions, most recently Gregorio vs. Intrans-Corp.22, and Transamerica Life Insurance Company of Canada vs. Canada Life Assurance Company.23 In the Transamerica Life Insurance case, the court held that it is difficult to precisely define when the corporate veil can be lifted but that the lack of a precise test does not mean that a court is free to act as it pleases on some loosely defined "just and equitable" standard. The court went on to state in that case that the separate legal personality of a corporate entity will only be discarded when it is completely dominated and controlled and being used for fraudulent or improper conduct.24
The court also held that the first required element, that of "complete control", involves more than ownership. It must be shown that there is complete domination and that the subsidiary company does not in fact function independently. Not only did the court find in that case that there was no fraudulent or improper conduct, but there was insufficient evidence to conclude that the subsidiary was only a "puppet" of the parent corporation, notwithstanding the fact that all members of the board of directors of the subsidiary corporation were senior executives of the parent corporation. The decision of the court was primarily based on the fact that the subsidiary corporation had its own head office and branch offices distinct from that of the parent corporation and was managed and operated independently of the parent corporation.
Although the doctrine of "piercing the corporate veil" is not likely to cause a serious threat to the limited liability integrity of a national charitable organization structured on the National Association Model, it would still be prudent for the chief executive officer and board of directors of both the national governing association and the member organization to avoid circumstances that might lead to allegations of complete domination and control by the governing association over the operations of the member organization. Some of the factors suggesting "central control" that should be avoided where possible are outlined below as follows:25
(i) having common bank accounts or investments shared between the national governing association and the member organization;
(ii) making explicit or implicit representation that the national governing association is responsible for the operations of the member organization;
(iii) having both organizations occupy the same location for either operational or administrative activities;
(iv) using the same officers or employees unless there is documentary evidence establishing that one organization is invoicing the other organization for the services provided by the employees of the other organization;
(v) having either the national governing association or member organization use the land, buildings or property of the other organization;
(vi) having the chief executive officer of the member organization act on the direction and in the interest of the national governing association;
(vii) failing to observe the legal formal requirements of the member association in its operations and direction;
(vii) having the same individuals serving on the board of directors or key committees of both the national governing association and member organization, such as where there is a significant overlap in the membership of the finance committees of the two organizations;
(viii) directly or indirectly indicating on letterhead, signs, brochures, or other documentation that the member organization is an operating division of the national governing association;
(x) having the governing body pay the salary and other expenses or losses of the member organization;
(xi) having the national governing association and member organization use the same lawyers or accountants on a regular basis; and
(xii) failing to have loans from the national governing association to the member organization properly documented and formalized through proper corporate formalities and authorization by board resolutions.
The above list of factors is not intended to suggest that there cannot be some similarity in operations or some overlapping in control between a national governing association and a member organization. However, it is essential that the board members and key executive officers of both the national governing association and the member organizations understand that both organizations must operate as separate and distinct charitable corporations and as such must respect the autonomy and internal integrity of each organization.
(3) The Structure of the National Chapter Model
(a) The Internal Structure
(i) Preliminary Considerations
Many of the comments described above concerning the internal structure of the National Association Model have equal application to the structuring of an organization based upon the National Chapter Model. The basic structural difference between a National Association Model and a National Chapter Model is that with the Chapter Model, the national organization is not only the governing body for the charity but is also the only legal entity through which the organization carries on operations throughout Canada. The comments about international organizations that are specific to a national organization that is organized based upon the Chapter Model is set out later in this paper.
(ii) Federal vs. Provincial Incorporation
Since a national organization based upon the Chapter Model will need to operate as a single legal entity in more than one province, it would be prudent for a national organization to be incorporated federally under the Canada Corporations Act. Federal incorporation would permit the organization to operate in every province across Canada without having to obtain a separate NUANS corporate name search in each province, save and except Quebec, to comply with applicable extra provincial licence and/or provincial notice requirements.
For an existing national charity that operates as a Chapter Model but has been incorporated at the provincial as opposed to the federal level, there is often a feeling that the charity needs to reconstitute itself as a federal corporation to facilitate it carrying on operations across Canada. This design may result in the lawyer being initially asked to continue the provincial corporation as a federal corporation. However, it is not possible to continue a non-share capital provincial corporation as a non-share capital federal corporation. What can be done instead is to create a new federal corporation, have it obtain charitable status with Revenue Canada and then assign the operations of the provincial charity to the federal charity. This procedure, though, can lead to serious difficulties unless both the charity and the lawyer involved in the creation of the federal charity are careful to ensure that there is a proper transfer of all assets and liability between the two corporations and that there is a subsequent windup or dissolution of the provincial charity, which in itself can be an onerous process. An alternative to dissolving the provincial corporation is to maintain it as a registered charity but modify its objects into one of a "parallel foundation" to the federal corporation so that estate gifts that are set out in existing wills will vest in the named provincial charity and will then be able to be transferred to the new federal operating charity.
However, since there are numerous complexities and problems involved in converting a provincial charity into a federal charity, the lawyer should caution the charitable client not to proceed in doing so unless all of the risks have been identified and resulting consequences fully discussed. It is simpler and less costly for the provincial charity to continue to operate on a national basis notwithstanding the awkwardness this may involve compared to the complexities and confusion that can result in reconstituting a provincial charity into a federally incorporated charity.
(iii) Letter Patent Considerations
In addition to the considerations set out earlier in this paper in relation to letters patent for a governing association based on a National Association Model, the charitable objects contained in the letters patent or supplementary letters patent for a national organization based on a Chapter Model need to clearly identify that the work of the charity can be carried out through divisions, i.e., chapters or branches. In addition, it is essential that the lawyer for the charity ensure that the charitable objects of the national organization are broad enough to include not only the activities of the head office for the national charity but also the activities that are carried out at the chapter or branch level to avoid directors of the national organizations being exposed to personal liability for having authorized the corporation to carry on ultra vires activities at the chapter or branch level.
(iv) By-Law Considerations
The flexibility that is permitted in structuring by-laws for a federal non-share capital corporation under the Canada Corporations Act can be very helpful in establishing a chapter based national organization. The different organizational models for by-laws that are acceptable to Industry Canada are set out in an excerpt from the Federal Incorporation Kit from Revenue Canada that is attached to this paper as Appendix "A".
The Federal Information Kit from Industry Canada states that where a charity operates as a single entity and delegates certain powers to its chapters or branches, then the by-laws for the national organization must specify how the chapters or branches are to be accountable to the board of directors of the national organization. This could be accomplished by requiring the chapters or branches to submit key documentation, such as their financial statements, policy statements and budget, to the board of directors of the national organization for approval, as well as requiring that the organizing by-laws for each chapter or branch be approved at the national office. In this regard, the form of general operating by-law to be used at the chapter or branch level could be included as part of the general operating by-law for the national organization.
(b) Establishing the Structure of a National Chapter Model
(i) Utilizing a Chapter/Charter Agreement
When a chapter or branch is established, it operates as a division of the national organization instead of having created a new legal entity. However, often the members of the local chapter or branch do not understand that their establishment is simply an extension of the national organization and that the branch or chapter does not have a separate existence outside of the national organization.
To clarify the relationship and to provide certainty concerning the establishment, operations and expectations of a chapter or branch, it is important that the national organization ensure that an appropriate agreement, usually referred to as a chapter or charter agreement, is in place when the chapter or branch is established.
Some of the key considerations that should be part of a chapter/charter agreement would include the following:
· Recognition that the chapter or branch is an operating division of the national organization as opposed to being a separate legal entity on its own. As such, the continued existence of the chapter or branch will continue at the discretion of the board of the national organization in accordance with whether the branch or chapter complies with the terms of the chapter/charter agreement.
· Recognition that the organizational structure for the chapter or branch is to be reflected in the general operating by-law of the national organization.
· An explanation of the expectations of a branch or chapter similar to what is required of a member organization under a National Association Model.
· An explanation of the circumstances under which the corporate name, trade-marks and logos of the national organization can be utilized by the chapter or branch.
· A statement that all donations and income received by the chapter or branch is the property of the national organization and under its control and is therefore to be accounted for in the consolidated financial statements for the national organization. The required financial accountability will necessitate that regular reports by chapters or branches be given to the national organization, preferably on a monthly basis, or as frequently as is necessary in the circumstances.
· An explanation of the circumstances under which the grant of a charter will be terminated and the consequences that will flow from such termination. Some of those consequences would include the chapter or branch turning over all of its property to the national organization, ceasing to carry on operations and agreeing not to use the corporate name, logos and other trade-marks of the national organization. In addition, the chapter or branch would be required to return all donor lists and agree not to contact any donors in the future.
· In the event that a chapter or branch is of a size where it needs to obtain its own charitable registration number with Revenue Canada, it would be required to apply for "associate" status under Section 149.1 (7) of the Income Tax Act to allow for a transfer of funds between the chapter or branch and the national organization in excess of the normal 50% maximum of receipted donations for the previous year. The local chapter or branch should be required to submit its application for charitable status to the national organization for approval before it is filed with Revenue Canada.
· The agreement should also identify whether the chapter or the national office is to obtain general liability insurance for the operations of the chapter. Normally this should be done by the national office, since the national organization is the insured legal entity. It is important to ensure that the name of the national organization as well as all related chapters or branches are shown on the general liability insurance policy. Further, if directors and officers liability insurance is obtained, then the names of the members of the controlling board for each local chapter or branch should be shown on the policy in addition to the name of the directors of the national organization.
(ii) Licensing Considerations
As the National Chapter Model does not involve the use of multiple corporations, it is not necessary to require a trade-mark or copyright licence agreement between the national organization and a local chapter or branch.
However, the board of a local chapter or branch, as well as its executive staff, should be given parameters in which the local chapter will be permitted to use the name of the national organization and its operating names, logos and other trade-marks. For instance, the local chapter or branch should be instructed on the correct manner of identifying applicable trade-marks, i.e., by the utilization of Ô for an unregistered trade-mark or the ® for a registered trade-mark. Local chapters or branches should be advised about the steps that need to be taken to protect and enhance the value of trade-marks as well as the type of activities or usage of the trade-marks that could undermine the trade-marks and result in the loss of their distinctiveness. Some of these factors are described in more detail at Appendix "B" attached to this paper.26
To accomplish effective protection of applicable trade-marks, the description of the applicable trade-mark considerations should be as detailed and carefully drafted in the chapter/charter agreement as a trade-mark licence agreement that is utilized in an Association Model, save and except there is no need for an actual grant of a trade-mark licence, since the chapter or branch is not a separate legal entity.
Similarly, where copyrighted materials are used by a local chapter or branch, the chapter/charter agreement should emphasize the importance of the chapter or branch taking steps to protect the copyright materials belonging to the national organization. Those protective measures would extend to ensuring that any third parties that are authorized by a local chapter or branch to use copyrighted material should be required to recognize in writing that they are doing so as a sub-licensee of the branch or chapter on behalf of the national organization.
(c) Liability Considerations
Both the board and the executive staff of the local chapter or branch need to understand that whatever takes place at the local chapter or branch level will have a direct impact upon liability exposure of the national organization and all of its assets, including the assets of all chapters across Canada. As a result, it is important that each chapter or branch develop and implement effective due diligent legal risk management procedures as necessary.
In this regard, a national organization should ensure that effective risk management policies and procedures are in place at the chapter or branch level, such as a policy statement dealing with issues such as physical and sexual abuse of children and/or a policy statement concerning when volunteers can be involved in providing counseling services to the public, particularly with regard to religious organizations.
The national organization should also develop and implement policies requiring regular reports from local chapters about their operations and immediate notice of any actual or possible threats of legal action. This is necessary, since the national organization will normally be the insured under the general liability policy and will therefore have the responsibility of contacting the insurer in the event of an actual or threatened legal action.
(d) Utilization of a Parallel Foundation for the National Chapter Model
In recognition that all assets of a national charity are exposed to liability when organized on the National Chapter Model, consideration may need to be given to establishing and utilizing a parallel foundation.27
A parallel foundation could be used to shelter the assets of the national organization, such as long term endowment funds and monies received from special fundraising appeals, by means of a separate corporate charity that would be protected from future liability claims associated with the operations of the national organization at its various local chapters or branches. The same comments would have application to a national organization based on the Association Model, although the threat of liability exposure is less of a factor when a national charity operates utilizing multiple corporations using the Association Model.
4. International Charitable Structures
(1) The Lawyer’s Role in Advising on International Charitable Structures
One may ask how a lawyer acting for a charitable organization in Canada would become involved in giving advice on international charitable structures. There are, in fact, many situations, when a lawyer may and should become involved in advising on legal structures for charities in an international context. Some examples of situations where this may occur are as follows:
(a) where the lawyer is assisting a charity that is expanding internationally;
(b) when a domestic charity in Canada is being requested to sign documentation with a parent international charity;
(c) when a dispute erupts between a domestic charity in Canada and the international organization;
(d) when a domestic charity in Canada is wanting to obtain more input into the operations and/or control of an international charity; and
(e) when the lawyer is asked to review and/or advise on an existing international charitable structure.
Even if the lawyer is not specifically asked for advice on international legal issues, the lawyer may become aware of deficiencies in the international organizational structure in the course of providing legal assistance for a domestic charity in Canada, in which event the lawyer should advise the charitable client of the apparent deficiencies, as well as possible recommendations, if appropriate, concerning the remedial steps that could be taken to overcome the risks or problems that had been identified. Although the charitable client may not initially understand the importance of the recommendations being made, the comments from the lawyer may eventually "percolate" through the minds of executive staff and board members in Canada and possible at the international level as well to a point that changes in the organizational structure of the international charity may become a reality.
(2) The General Nature of an International Charitable Organization
(a) The Challenge of Operating in Multiple Jurisdictions
Unlike a national charity based on the Chapter Model where it is possible to have a single legal entity operating in various provincial jurisdictions, the sovereignty of each country makes it impossible to have one charity incorporated in one country act as a single international charity on a worldwide basis. To operate in Canada, for instance, Revenue Canada requires that a registered charity under the Income Tax Act must either be created or established in Canada.28
The ability of an international charity to operate and raise funds in various countries requires that its operations be carried out by independent charities separately incorporated in each country. Although this is not dissimilar to what share capital corporations are required to do on an international basis, the inability of a non-share capital corporation to be owned by the parent corporation through share ownership means that the establishment of an international charitable structure must be accomplished through a contractual arrangement and/or the terms of the internal organization of charitable corporation in each country.
(b) The Dichotomy Between National and International Operations
Often a charity that operates in more than one country will not have developed a clear organizational structure to carry on its operations. This normally results because the original charity in a country operates as both a domestic charity in that country as well as being responsible to oversee international operations. This dichotomy can result in confusion and dissatisfaction by member domestic charities due to the perception that the founding charity is acting as a type of benevolent dictator over international operations. This can result in resentment and stress throughout the whole international structure of a charity.
Confusion can also result when the organizational structure for the founding charity, which more often than not is located in the United States, Great Britain or Canada, is made the operative precedent that domestic charities in other countries are expected to use without adequate consideration being given to the statutory requirements of both corporate and tax law that applies in each country.
Another problem that often occurs with international charities is that the founding charity will continue to dominate international operations until some type of crisis develops between it and a domestic charity, normally arising out of a power struggle over money, that will finally require that the relationship be redefined.29 At that point, however, it is often too late to be able to do anything constructive about the tension that has developed. It is therefore prudent to clarify international structural relationships when both the international charity and the domestic charity are dealing with each other on a cordial basis.
(c) Funding Issues with Revenue Canada Involving the Transfer of Monies Outside of Canada
A fundamental prerequisite to any discussion about international charitable structures involves compliance with the administrative rules of Revenue Canada concerning when Canadian registered charities can transfer monies or assets outside of Canada to non Canadian charities. The paper in this binder by David Amy entitled "Canadian Charities Operating Outside of Canada" provides a full explanation and analysis of this issue. For ease of reference, a brief outline of some of the key factors are included in a summary entitled "Key Considerations for U.S. Charities Commencing Operations in Canada" attached as Appendix "D" to this paper.
The position of Revenue Canada concerning how Canadian registered charities can operate outside of Canada is now set out in a Draft Policy Statement issued in June of 1997.30 That Draft Policy Statement states that a registered charity can either carry on its own charitable activities or make gifts to "qualified donees".31 This would preclude a domestic charity in Canada as part of an international charitable structure from being able to "gift" monies or assets to a domestic charity in another country. However, Revenue Canada does permit a Canadian charity to work in conjunction with other organizations that are not "qualified donees" when the arrangement is such that Revenue Canada is satisfied that the Canadian charity has retained an appropriate level of direction and control over the expenditure of its funds and resources.
Revenue Canada will generally find that the following arrangements will provided satisfactory evidence that the Canadian charity has retained adequate direction and control over its expenditure of monies and assets outside of Canada, provided that the arrangement is in writing and meets certain criteria that are set out in its Draft Policy Statement:
(a) an agency relationship whereby the Canadian charity appoints a foreign organization to act as its agent for a specific program or project;
(b) a joint venture arrangement whereby the Canadian charity enters into a joint venture agreement with a foreign charity to carry on a joint project or program, provided that the Canadian charity has proportional input into the control of the joint venture that is equal to its financial contribution; and
(c) a co-operative partnership whereby the Canadian charity enters into a partnership with a foreign charity to carry out a particular aspect of an international charitable program or project in accordance with the terms of a partnership agreement.
In establishing an international charitable structure, it is essential to ensure that the structure chosen facilitates instead of hinders the ability of the Canadian charity to transfer funds and/or assets outside of Canada and that such arrangement is done in accordance with the requirements of Revenue Canada. However, while compliance with Revenue Canada’s requirement is essential, it is also important to ensure that those requirements are not the only factors taken into consideration. The structure that is adopted should reflect the actual operations of the international charity as opposed to being artificially created for the sole purpose of meeting the requirements of Revenue Canada. There needs to be an appropriate balance between the functional operations of the international charity and the need to comply with the requirements of Revenue Canada.
(3) Options in Structuring an International Organization
Although the number of different structures utilized in international charitable operations makes it difficult to generalize, for the purpose of this paper, the options in structuring an international charity are categorized into three types, the Multiple Association Model, the Subsidiary Model, and the Separate International Organization Model, each of which is briefly described below:
(a) The Multiple Association Model
With the Multiple Association Model, each country in which the international charity operates establishes a separate domestic charitable corporation. The domestic charity is responsible for operating programs in its own country and generally has full control over the ownership of its corporate name and associated trade-marks in that country. The individual domestic charities work in conjunction with each other on a consensual basis in accordance with a loose international association, which is sometimes reduced to writing, but generally is not intended to be in a form of an enforceable contract.
In the event that the Canadian domestic charity needs to transfer monies outside of Canada, it would arrange to do so by entering into either an agency arrangement or a joint venture agreement, assuming that the specific requirements by Revenue Canada as set out in the Draft Policy Statement referred to above are complied with.
Many Canadian domestic charities currently participate in international charitable operations based on a Multiple Association Model and are very satisfied with the arrangement. However, if one of the domestic charities no longer complies with international standards, then there is generally little that the other domestic charities can do to stop the renegade domestic charity from deviating from the agreed upon international standards, other than to terminate any joint venture or agency relationship that may be in place. However, the renegade charity would still be able to use the name of the international charity in its own country, as well as being able to carry out charitable programs in that country in a manner that may otherwise be totally contrary to established international standards.
If the other charities involved in a Multiple Association Model decide to continue operations in that country by establishing a new and competing charity to that of the renegade domestic charity, they may find that the renegade charity may be able to successfully oppose the use of the charity’s name in that country. In such a situation, it may be difficult to argue that the renegade charity is infringing any trade-mark rights of the international charity, since there would be no other organization that could claim prior ownership of the trade-mark rights to the name of the charity in that country other than the domestic charity.
(b) Subsidiary Model
With the Subsidiary Model, one of the domestic charities, normally the original founding charity, functions not only as a domestic charity in its own country but also takes on the role of the international parent corporation in coordinating charitable activities amongst member domestic charities. In doing so, that charity often dominates, if not in law at least in practice, the operations of domestic charities in their own country. The control mechanisms utilized over member domestic charities normally requires the establishment of a contractual arrangement, such as an association or affiliation agreement. Such contractual arrangement would involve the founding charity, in its role as a parent corporation, permitting a domestic charity to use the name of the international charity in a country pursuant to a trade-mark license on the condition that the domestic charity complies with established international standards and otherwise cooperates with the international charitable activities of the parent organization. The requirements of Revenue Canada concerning the transfer of monies outside of Canada by registered charity would still need to be taken into consideration with this model when transferring monies to either the parent charity or to domestic charities in other countries.
The difficulty with the Subsidiary Model is that the parent charity is both a domestic charity within its own jurisdiction as well as the parent organization overseeing international operations. This normally results in inadequate input from member domestic charities into international operations, since input from other domestic charities onto the board of directors of the parent corporation is normally restricted to only nominal participation.
If there was to be proportionate international representation onto the board of directors of the parent organization, then the supporting donors in the country of the parent organization might become concerned about the potential loss of control over their own domestic charity to a board of directors controlled by residents from other countries. This concern is normally overcome by requiring that a majority of the board members of the parent corporation be residents of the country in which the parent corporation is located and then provide for proportionate input from member domestic charities into international operations by having those representatives participate as members of an international committee of the parent corporation. While this arrangement is often utilized, it does not deal with the main problem that domestic charities in member countries do not have direct input into the ultimate control over international operations of the parent organization.
(c) Separate International Organization Model
With the Separate International Organization Model, each country in which the international charity operates in has its own domestic charity. A separate charitable corporation is then established in one country and is designated as the international umbrella organization to establish, coordinate and enforce international standards and charitable programs. The separate international charity will normally own the trade-marks and copyrights of the charity internationally and will license the applicable trade-marks and copyrights to each domestic charity pursuant to a licence or other contractual terms.
This arrangement is similar to what has already been described with the International Subsidiary Model, save and except that the trade-marks and copyrights are owned by the international charity instead of being owned by one domestic charity in its role as the parent organization over international operations.
The separate international charity would be controlled by a board of directors elected on a proportionate basis from participating domestic charities. However, the international charity would not control the activities of a domestic charity in its own country, other than to ensure that the international standards that have been agreed upon by all domestic charities are adhered to. In the event that one of domestic charities significantly deviates from the established international standards, then the international charity would be able to require that the domestic charity relinquish its use of the applicable trade-marks and copyrights that had been licensed to it. This would not stop the domestic charity from being able to continue to operate as a charity or retain ownership of its assets in its own country. However, the loss of applicable trade-marks and copyrights by a domestic charity would be a very effective deterrent to a domestic charity departing form agreed upon international standards.
Another advantage of utilizing the Separate International Organizational Model is that each domestic corporation would be provided with proportionate input into the operations and control of the international charity instead of the international operations being under the control of one domestic charity. In addition, since an international charity would be structured as a separate legal entity, it would be possible for the trade-marks and copyrights on an international basis to be owned, registered and controlled through a single corporation that all domestic charities could have input into, instead of being owned by the founding charity under the International Subsidiary Model.
Where domestic charities need to coordinate funding for international projects or programs pursuant to either a joint venture agreement or a cooperative partnership, then the same individuals who are appointed by each domestic charity to be members of an international joint venture or partnership committee could also be members of the board of directors of the international charity. This would permit the same individuals in their capacity as members of the board of directors of the international charity to determine which domestic charities was to carry on a particular international project, with the same individuals then being able to coordinate and implement the funding of that project in their capacity as members of the international joint venture or cooperative partnership committee. By doing so, the board of the international charity would act in concert with the international joint venture or co-operative partnership committee to coordinate the disbursement of funds when an international project or program is being carried out by more than one domestic charity.
In the event that all domestic charities are participating in an ongoing charitable program, such as a child’s sponsorship program, then the international charity could undertake responsibility for that program itself and have the joint venture or agency agreement entered into between each domestic charity and the international charity. However, no matter what arrangement is put in place concerning international funding, the role of the international charity is primarily to establish and enforce international standards and to own and licence intellectual property for the benefit of all domestic charities. At no time should the international charity interfere directly into the internal operations of a domestic charity. To the extent that a domestic charity is required to comply with international standards established by the international charity, this arrangement would be accomplished by contractual arrangements as opposed to being able to interfere in the internal operations of a domestic charity as an independent charitable corporation.
Although an international charity could be established as a co-operative partnership, there are limitations in doing so. The first difficulty is that all individual domestic charities participating in a co-operative partnership could face joint and several liability in the event that the co-operative partnership was found liable for the actions of any of its domestic charities or international programs. In addition, the awkwardness of utilizing a co-operative partnership to own intellectual property may unnecessarily restrict the ability of the international charity to effectively own, licence and enforce its trade-marks and copyrights internationally.
By utilizing a corporation as the legal form for the international charity, it would facilitate the ownership and enforcement of intellectual property in one legal entity. In addition, domestic charities that become corporate members of an international charitable corporation could not be held liable for the action of the international charity or any of its member domestic charities.
(4) The Structure of a Separate International Corporation
Since the third model referred to above, the Separate International Organization Model, involves the creation of a separate legal entity, there are some legal considerations that should be taken into account in creating that corporate entity, particularly if it is incorporated in Canada. Some of the relevant considerations are set out below. However, the comments that follow concerning the creation of a separate international charitable corporation is not intended to suggest that it is either the only or necessarily the preferred international model to adopt. Instead, the following comments reflect the fact that there are unique factors involved in effectively establishing and operating an international charity through a separate corporation. The comments in this regard are set below:
(a) Where to Incorporate
Generally, the decision concerning which jurisdiction to incorporate the international charity in will be based upon a combination of the following factors:
(i) The jurisdiction would need to be in a stable country that had well developed charitable laws already in place. Normally, this generally restricts the choices to common law countries such as Canada, Great Britain, United States, Australia, or to civil law countries in Europe.
(ii) Since an international charity will likely need to obtain charitable status in its own jurisdiction for operational purposes or to receipt donations from donors in that country, the charitable purpose of the international charity to establish, co-ordinate and enforce international standards and to own and licence trade-marks and copyrights would need to be recognized in that country as a charitable purpose or law.
(iii) From a practical standpoint, where the original domestic charity is to continue having a significant role in overseeing international operations, it would make practical sense for the international charity to be established in the same jurisdiction as the founding domestic charity, although this is not a necessity.
(b) Letters Patent Considerations
No matter which jurisdiction is chosen to incorporate the international charity in, there are certain key considerations that should be kept in mind in drafting the application for letters patent. Those considerations are as follows:
(i) The name chosen should include the word "international" either as a prefix or as a suffix. Domestic charities should not include the word "international" as part of its corporate name or if it does, it should supplement the name with reference to the specific country in which it is operating, such as "ABC International (Canada)" to avoid confusion with the international charity.
(ii) The charitable objects should indicate that they are international in scope and are for the purpose of establishing, coordinating, and implementing standards and programs for member organizations on a worldwide basis. As part of the objects, the international charity would need to have authority to own and license intellectual property in the form of trade-marks and copyrights.
(iii) In the event that the international charity is also to implement international programs and activities, then the letters patent would need to include in its objects the ability to establish and operate international charitable programs in conjunction with member organizations.
(iv) For religious charities, the applicable statement of faith of the organization would need to be included in the letters patent as part of its charitable objects similar to what has already been suggested in establishing a national religious charitable organization.
(v) The dissolution clause in the letters patent should restrict the transfer of assets of the international charity to a charity in the same jurisdiction that had similar charitable objects to avoid a scenario where the board of directors of an international charity was able to circumvent the interests of domestic member charities by dissolving the international charity and transferring its assets, including international intellectual property, to a charity in the same jurisdiction that had significantly different charitable purposes. Although this is a remote possibility, it should be anticipated and addressed by including appropriate restricted wording for the dissolution clause at the time of incorporation of the international charity.
(c) By-Law Considerations
In drafting the by-laws of an international charity, it is essential to ensure that the by-laws address not only the corporate and charitable law requirements of the jurisdiction in which the charity is incorporated, but also creates an organizational structure that is able to function on an international basis. This requires that the by-laws be drafted to reflect the international character of the organization. Some of the key provisions that should be included in this regard are as follows:
(i) Membership in the international charity should be restricted to only qualified domestic charities from each country as opposed to allowing individuals to be members. Depending upon the formula that is adopted, each domestic member charity would be provided with a certain number of votes as a member, or alternatively would be entitled to send a specified number of voting delegates to membership meeting of the international charity.
(ii) The election of the board of directors of the international charity could either be done at the membership level of the international charity or delegated to member organizations themselves, which members would then be entitled to elect one or more directors to the board of the international charity in accordance with an agreed upon formula in the by-law.
(iii) If an international charity is primarily funded by one domestic charity or has recently been created at the initiation of a founding domestic charity, it may be necessary to provide a guaranteed number of seats on the board of directors to that domestic charity, or alternatively to provide the domestic charity with a right of veto over certain fundamental changes, such as a change in the letters patent, by-law structure, name, major programs, or the admission of new domestic charities as members of the international charity.
(iv) The procedure for amending the by-laws and/or letters patent of the international charity would need to be carefully structured so that a tyranny of the minority did not result by requiring too high a percentage vote. However, a percentage vote somewhat in excess of 50% would be necessary to ensure that the fundamental nature of the international charity could not be easily altered. Normally, between a two third percentage (66.3%) vote up to a seventy five percent (75%) vote is a realistic range to work within.
(5) Implementing Effective International Control Provisions
(a) The Importance of Developing International Control Provisions
No matter which model of international structure is adopted, it is essential that careful consideration be given to establishing and implementing effective control provisions by the international charity over domestic charities. Few charities that operate on an international basis adequately address this issue.
There is often a naive presumption that individuals working together on an international basis in various countries will avoid disagreement over operations or fights over ownership of charitable property, including the trade-marks of the international charity. The reality is that international disputes occur on a frequent basis and often become litigious because the architects of the international structure failed to address basic issues of who owns key assets, such as the names, trade-marks and copyrights of an international charity. The lines of demarcation in ownership are becoming more difficult to define, particularly with the advance of the internet and the ability of each domestic charity to establish a web page on a worldwide basis using the name of the charity.
If a disagreement developed between a domestic charity and an international charity, and if there was no clear documentation indicating that the trade-marks and copyrights in a particular country are owned by the international charity, then the domestic charity may very well be able to argue that it is the owner of the name and related trade-marks of the charity in that country. Although these issues could eventually be resolved through litigation, if necessary, the damage and legal costs to the international charity and to the domestic charity could be avoided if proper strategic planning is implemented, either when the international charity is created or through a reorganization of its structure. The lack of planning is often the most serious threat to the operation of an international charity. As such, it is a matter that should be brought to the attention of a charitable client, whether that charitable client is the international charity or a member domestic charity.
(b) Utilizing the Franchise Control Model
Just as the Franchise Control Model was recommended in relation to the operations of a national charitable organization, it also has application in an international context. Since international charitable organizations by necessity involve working through independent charitable corporations in each country, the implementation of control through contracts and licences as part of the Franchise Control Model is the only really effective way of establishing control over charitable organizations that are otherwise fully independent and autonomous in their own country.
When applied on an international basis, the Franchise Control Model would involve a single legal entity acting as the franchisor, with each domestic charity acting as a franchisee. The franchisor could be either a separately incorporated international charity or alternatively the founding domestic charity if the International Subsidiary Model is used.
Where the International Multiple Association Model is utilized, a franchise arrangement is seldom utilized because of the difficulties in establishing one domestic charity as the owner of the trade-mark and copyright on a world wide basis. However, it may be possible to have one domestic charity appointed as a trustee on behalf of all other domestic charities to hold title in trust to the intellectual property in question. Alternatively, if the domestic charity functions through a co-operative partnership, the co-operative partnership could own the applicable intellectual property and function as the international franchisor. However, the mechanics involved in effectively implementing a franchise model is most efficiently carried out by having the franchisor an incorporated entity, whether it be a separately incorporated international charity in accordance with that model or a domestic charity in the context of the International Subsidiary Model.
(c) The Specifics of the Franchise Control Model on an International Basis
The following is a brief discussion of the specific documentation that should be put in place to establish the franchise control model on an international basis.
(i) The International Association Agreement
An international association agreement, often referred to as a charter or affiliation agreement, is required to set out the basic contractual relationship between the international charity and each domestic charity in a similar manner to what is involved in a national charitable structure. Some of the key provisions that would need to be set out in such an agreement would include the following:
· The agreement would need to indicate that the two organizations share similar charitable purposes and agree to operate in an association to better accomplish the charitable purposes of both organizations.
· If the international charity involves a religious organization, then reference should be made to the statement of faith shared by both organizations, the adherence to which would be a fundamental pre-condition for the association relationship.
· A fixed term, normally five years, to be automatically renewed for additional five year terms unless either party provides notice in writing of its intent not to renew the agreement.
· A licence of the applicable trade-marks and copyrights to the domestic charity, either as part of the association agreement or by a separate licence agreement, depending upon the statutory requirements of each country.
· The requirements that the domestic charity would need to comply with to remain as a member of the international charity. These requirements would be similar to those referred to earlier in relation to an association agreement between a national governing association and a member organization. For instance, the association agreement would need to set out the requirements for the organizational structure of the domestic charity, the type of approved charitable programs that are to be carried out by the domestic charity, and the regular reporting requirements of the domestic charity to the international charity.
· The circumstances under which the association relationship could be terminated, as well as the consequences that would flow from such termination, such as the loss by the domestic charity of the right to use the trade-marks and copyrights of the international charity in that country.
· What governing law would apply would normally be determined by the jurisdiction in which the international charity was incorporated in.
· Given the difficulties and cost involved in pursuing litigation on an international basis, the association agreement should set out detailed terms for conflict resolution, including mandatory mediation and/or arbitration. The procedure in this regard would either need to be set out in the association agreement or incorporated by reference into the agreement by referring to an acceptable process of international dispute resolution in the jurisdiction of either the international charity or the domestic charity.
(ii) Incorporating Documents of the Domestic Charity
Part of the association agreement would include a description of the incorporating documents required for a domestic charity. While recognizing that each domestic charity is an autonomous legal entity, there is nothing to preclude the domestic charity from entering into a contractual arrangement whereby the domestic charity would agree that its incorporating document would need to reflect certain standard requirements, provided that those requirements were not contrary to the applicable corporate or tax law in the jurisdiction of the domestic charity.
Examples of the types of requirements involving the incorporating documents of a domestic charity that would not derogate from the autonomy of the domestic charity would include the following:
· the general terms of the charitable purposes for the domestic charity;
· the statement of faith, if applicable, required for a domestic charity to be part of an international religious charitable organization;
· the general terms of reference for the internal organizational structure of the domestic charity, such as the size of the board, officer positions, and membership requirements;
· the right of the international charity to review and approve fundamental changes in the domestic charity, such as a change of name, change of objects, or structural changes in its constating documents; and
· a requirement for participation by board members of the international charity on the board of the domestic charity, provided that such participation does not result in majority control either directly, by requiring more than 50% membership on the board, or indirectly by increasing the percentage vote required for board resolutions or quorum requirements for a board meeting above 50%.
(iii) Trade-Mark Licensing Considerations
It is beyond the scope of this paper to set out in any detail the complexities involved in protecting trade-marks on an international basis or in establishing enforceable international trade-mark agreements.32 However, some of the key considerations that an international charity should be aware of in protecting and licencing its trade-marks on an international basis include the following:
· The international charity should develop a strategic plan to identify the various names and logos of the charity that are recognizable trade-marks and then apply for trade-mark registration in each country that the international charity is either operating in or is anticipating operating in within the foreseeable future.
· The process should start with the international charity obtaining trade-mark registration in the jurisdiction that the charity was initially founded in.
· The applicant for trade-mark registration in each country should be the international charity whenever possible. When that cannot be done due to legal requirements in a particular country, then the domestic charity in that country should apply for trade-mark registration in accordance with a written acknowledgment that the domestic charity owns the trade-mark as agent for the international charity.
· The trade-mark license agreement between the international charity and the domestic charity should contain provisions similar to a trade-mark licence agreement involving a national charitable organization. The licence agreement should identify what the trade-marks are, who owns the trade-marks, the manner in which the trade-marks can be used, the terms of default by which the trade-mark license will be terminated and the consequences of termination, including the loss of the right to use the trade-marks in question in that particular country.
· The international charity should take steps to register internet domain names that include the name and trade-marks of the charity in conjunction with as many international domains as possible, i.e., www.abcfund.com, www.abcfund.org, www.abcfund.net, etc. Even if all of the internet domain names that are reserved are not activated by the international charity, by reserving domain names with as many domains as possible, the international charity will help to reduce the potential for confusion and possible trade-mark infringement by other organizations or even domain name "pirates" who could otherwise "cyber-squat" key domain names and attempt to hold the international charity for ransom before relinquishing the right to a potentially confusing domain name.
· International charities should also register domain names using the geographic domains for all countries in which the international charity is operating in, i.e., "abcfund.ca" for Canada and "abcfund.us" for the United States. The international charity should then include in the trade-mark licence agreement a grant of licence from the international charity to the domestic charity for the right to use a specific geographic domain name for that country. Termination of the trade-mark licence agreement would result in the loss by the domestic charity of the right to use the domain name in that country. This result would be consistent with the loss by the domestic charity of the right to use the trade-marks of the international charity in that country.
· In some countries, such as Canada and the United States, trade-mark applications can be filed based upon a proposed use or intent to use a trade-mark as opposed to actual usage. As a result, when trade-mark applications are being applied for in those countries, the description of wares and services should include a description of all services and wares that the charity in that country may be intending to expand into in the foreseeable future.
· When a domestic charity has already been operating in a particular country without a trade-mark licence being in effect, the domestic charity should be asked to acknowledged in the trade-mark license agreement that it has used the trade-marks in question as licensee of the international charity, thereby effectively relinquishing its ownership in the proprietary rights that it has in the said trade-marks. Before a domestic charity gives up its rights to the applicable trade-marks in its own country, it would need to be satisfied that it was being provided with effective input on a proportionate basis into the control and operation of the international charity. The restructuring of an international charity where an existing domestic charity is involved should result in a "win win" for both the domestic charity and the international charity by establishing a more effective and protective international charitable structure in which the domestic charity would have a more meaningful and proportionate input into international operations.
(iv) Copyright Considerations
The comments concerning copyright considerations referred to earlier in this paper in the context of a national charitable structure would also have application in an international context. However, copyright issues become complicated when applied internationally as a result of different copyright laws in each jurisdiction as well as the impact of the international copyright conventions.33
Two key factors that need to be considered in relation to copyright matters when applied in an international context are as follows:
· First, the international charity would need to determine whether or not copyright registration is required in each country that a member domestic charity operates in. If so, it would need to take the necessary steps to apply for copyright registration in the name of the international charity in that country.
· Second, the international charity would need to ensure that it had effectively licenced the copyrights in question to the domestic charity, either as part of an international association agreement or pursuant to a separate copyright licence agreement.
(v) Enforcing Control Provisions
Although it may be a statement of the obvious, there is no point in establishing a Franchise Control Model for international charitable operations unless the international charity is prepared to enforce the control provisions that have been established. Failure to take consistent action to enforce available control provisions could result in a domestic charity being able to argue that the international charity is estopped from being able to enforce "moth balled" control provisions that had been put on paper but had never been put into practice. This is particularly a concern in relation to intellectual property issues involving trade-marks and copyrights. The addage of "use it or loose it" would have apt application to the time sensitive nature of enforcement provisions involving intellectual property.
To assist the board of the international charity in understanding the importance of utilizing control provisions, it is advisable that the board members of the international charity be provided with a copy of the international association agreement as well as a reporting letter from its lawyer that would provide an executive summary of the association agreement as well as an explanation of the control provisions that have been established through the Franchise Control Model.
(6) Liability Issues in International Operations
(a) Exposure to Liability
A detailed description of exposure to liability that can arise from international operations is beyond the scope of this paper. However, a lawyer who is advising a charity carrying on international operations needs to be cognizant of how different organizational structures for international charities may result in different levels of exposure to legal liability.
For instance, if the operations of an international charity is carried out through a co-operative partnership, then the assets of each domestic charity may become exposed to joint and several liability for damages and/or injuries arising out of the actions or inactions of each partner in the partnership arrangement. Alternatively, if a domestic charity is involved in carrying on international operations through a designated agent pursuant to a written agency agreement, then the domestic charity in its role as a principal in a principal/agency relationship will generally be exposed to liability for injury or damages resulting from the act or omissions of its agent.
Even if international operations are co-ordinated through a separate international charitable corporation, liability issues could still arise as a result of attempts to "pierce the corporate veil" in situations where the domestic charity was perceived as being simply the agent for the international charity. This in turn could expose all of the assets of the international charity, including its trade-marks and copyright assets to claims as a result of the actions of only one domestic charity operating in one country.
(b) International Risk Management Considerations
As a result of the increasing exposure to liability that can result from operating a charity on an international basis, additional steps should be taken to reduce those risks as much as possible. Some suggestions in this regard, although obviously not exhaustive nor detailed, are as follows:
(i) The insurance policy of both the international charity and the domestic charity should be carefully reviewed to ensure that any geographic restrictions in the policies coordinate with the actual geographic parameters of operations for both the international charity and the domestic charity.
(ii) Where two or more charities are involved in international activities, whether through an agency relationship, joint venture agreement, co-operative partnership, or a separately incorporated international charity, there should be a written allocation of risk between the parties in conjunction with an appropriate release and indemnification agreement as necessary. These matters should be addressed in any documentation that is entered into between charities on an international basis after being carefully reviewed by the insurers of both organizations to ensure that coverage for the charities in question is not prejudiced because of the wording in the release and indemnification agreement.
(iii) Each charity should ensure that it has passed a by-law to indemnify its directors and officers and that its corporate objects are broad enough to include operations on an international basis.
(iv) The directors and officers insurance coverage for each charity should be reviewed to ensure that the involvement of the charity on an international basis does not result in denial of coverage under the applicable insurance policy, otherwise a special endorsement to the policy may be required, if available.
5. Conclusion
Although it has not been possible to deal with all of the various issues raised in this paper in detail, the paper has identified both the quantity and breadth of issues that should be addressed by lawyers who advise charities in relation to both their national and international structures and operations. Too frequently, charitable clients, as well as their lawyers, remain focused on the pressing and urgent issues of the moment without taking the time to look at broader issues that may very well be responsible for creating the current problem at hand.
The focus of this paper is to encourage lawyers to become pro-active in identifying and then articulating to charitable clients the advantages of developing a strategic legal risk management approach to avoid legal problems that may occur through a deficient national or international structure. Often, when a lawyer initially raises an issue in this regard, the response from the client may be to politely listen but discount the lawyer’s comments as being either irrelevant to current operational pressures or impractical over the long run.
However, where the lawyer has an opportunity to advise a charitable client on an ongoing basis, there will often be opportunities for the lawyer to point out problems that arise from a deficient organizational structure and the long term advantages of developing and implementing an effective national and international structure. In this way, over the course of time, the charitable client will be able to look at the issues in a broader context and will often implement some of the comments and recommendations that have been identified by their legal counsel. It is hoped that this paper will prove to be a helpful reference tool for lawyers who wish to initiate discussions with their charitable clients in an effort to effect improvement in the national and international structures of the client both now and in the future.
The author would like to thank the research assistance of Adam Parachin, a second year law student at Osgoode Hall Law School. The author would also like to thank Patricia Sproule Ward and Mervyn White for reviewing and commenting on this paper.
Endnotes
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