On November 21, 2016, the Ontario Superior Court of Justice (the “Court”) released its judgment in Polish Association of Toronto Limited v. The Polish Alliance of Canada (“2016 Case”). The parties to the 2016 Case had also been involved in previous litigation involving similar issues in The Polish Alliance of Canada v. Polish Association of Toronto Limited (2014 ONSC 3216) (the “2014 Case”) and on appeal (2016 ONCA 445) (the “2014 Appeal”). The Court in the 2016 Case applied the common law principle known as the “clubman’s veto” in an unusual corporate context. The clubman’s veto was explained by the Court as “a common law rule that provides that members of an unincorporated association must be unanimous to leave the association and to take the property of the association with them.”
The 2016 Case dealt with the issue of whether the members of Branch 1-7 (“Branch”) were entitled to leave The Polish Alliance of Canada (“National”), a not-for-profit corporation, and take with them the property used by the Branch. The Branch was an unincorporated branch of the National. The Branch’s property included a clubhouse on Lakeshore Blvd. in Toronto worth $50 million or more (the “Branch Property”), which was held in trust for the members of the Branch by a separate corporation, the Polish Association of Toronto Limited (“PATL”). Prior to its incorporation in 1973, the National had operated as an unincorporated association from the 1920s. However, it was the members of the Branch that raised money to purchase and maintain the Branch Property over the years and the PATL was incorporated in 1927 to hold property in trust for the benefit of the unincorporated Branch.
In the 2014 Case, the Branch’s efforts to leave the National based on the approvals obtained at a meeting attended by less than one third of the Branch members, with insufficient notice, was unsuccessful. However, the Court in the 2014 Case made determinations on several matters between and among the National, the members of the Branch and the PATL, which were upheld with some amendments in the 2014 Appeal. The Court in the 2014 Case held, among other matters, that the beneficial owners of the Branch Property are the members of the Branch, and that the Branch is an independent organization within the constitutional structure of the National. Regarding the nature of the Branch, the Court in the 2014 Case held that “While not a legal entity, as between the parties, [the Branch] is recognized as distinct, can lend and borrow, manage property interests delegated to it, and exercise the rights of a branch under the [National’s] constitution.”
After the 2014 Appeal affirming the decision in the 2014 Case was released, the Branch held a membership meeting at which the Branch members unanimously agreed to leave the National and take the Branch Property with them, giving rise to the 2016 Case. The National argued that the clubman’s veto did not apply to the National and its branches because the National was incorporated under the Corporations Act (Ontario) in 1973. The National also argued that there was no mechanism for the Branch to leave, since the National’s constitution was silent on the issue of how a branch could leave the National.
In finding against the National, the Court stated in the 2016 Case: “Given the unanimity of the branch members, the court is quite satisfied that they should be able to manage the legal title to their properties as well as the equitable title that they already own. […]At common law, the clubman’s veto allows a branch to disaffiliate and to take their property. […I]f the members are unanimous, then they can go and take their equity with them. Branch 1-7, as an identifiable, distinct, unincorporated entity within the [National] firmament, has duly engaged the clubman’s veto and obtained a unanimous vote with no vetoing vote cast.”
The Court also noted that the board of directors for the National had signed promissory notes documenting borrowing of money from the Branch, and the Branch had even sued the National on one such note. In commenting on the National’s incorporation in 1973, the Court noted that, “There was no indication that any individual member ever applied to join the corporation or knew that a change in corporate structure had occurred.”
Given the uniqueness of the background facts involved in the above decisions, it is unclear whether a court would apply the clubman’s veto in future cases involving a not-for-profit corporation where there are different facts involved. However, the decision in this case does raise the spectre that an internal division or branch of a corporation in an analogous fact situation might become so independent, distinct and separately identified that it might be entitled to leave the not-for-profit corporation and take its branch assets with them if the decision was approved unanimously by the branch members. As such, charitable and not-for-profit corporations with branches or divisions may want to take steps as necessary to ensure that the governing board of the corporation exercises a sufficient degree of control over its branches and divisions, both in practice and within the corporation’s governing documents.