Aug 2023 Charity & NFP Law Update
On June 19, 2023, the Supreme Court of Newfoundland and Labrador released its reasons for judgment in the case of Benoit v. Federation of Newfoundland Indians Inc.
The Federation of Newfoundland Indians Inc. (the “FNI”) was a non-profit corporation established to achieve status recognition for the Mi’kmaq of Newfoundland under the Indian Act. The FNI entered into a 2008 agreement with the Government of Canada (“Canada”) to establish the Qalipu Mi’kmaq First Nation Band (the “QMFNB”) as a non-reserve status band for the Mi’kmaq of Newfoundland (the “Settlement Agreement”).
In 2009, the FNI decided to restructure itself as a “skeletal” organization and to make changes to its membership. At its Annual General Assembly (“AGA”) of October 24, 2009, FNI’s voting members passed a special resolution (“Special Resolution”) to amend FNI’s corporate articles and to approve new by-laws (“New By-laws”) that terminated the membership of thousands of FNI members, including the plaintiffs. The FNI’s only remaining members were its band council (the “New Members”). However, the FNI had failed to circulate the Special Resolution to its members 21 days prior to the AGA, in contravention of its operating by-laws.
Due to an unexpectedly high number of applications for membership in the QMFNB, the FNI’s New Members approved a supplemental agreement (“Supplemental Agreement”) that, among other things, permitted reassessment of previously approved applications for membership in the QMFNB.
The plaintiffs had all been members of FNI and had been accepted as founding members of the QMFNB under the original Settlement Agreement. As a result of the reassessment under the Supplemental Agreement, the plaintiffs lost their status as members of QMFNB, as well as their section 6(1)(b) status under the Indian Act. They brought a claim against the defendants, asserting that the actions taken by the FNI and Canada constituted oppression under section 371 of the Corporations Act.
Oppression claims are assessed on a case-by-case basis using a two-pronged analysis; firstly, the “reasonable expectations” of the parties and secondly, if the breach of these expectations amounts to “oppression”, “unfair prejudice” or “unfair disregard”.
On the first prong of the test, the Court found that it was reasonable for the plaintiffs to expect the FNI to comply with its by-laws, including the notice requirements, to provide notice of termination of membership, to pass special resolutions in compliance with the by-laws and to adopt amendments to the by-laws in accordance with FNI’s by laws.
The Court held that, due to the failure to provide proper notice of the Special Resolution in accordance with FNI’s by-laws, the Special Resolution passed in 2009 was invalid and ultra vires and the New By-laws had not been adopted with proper corporate authority. By failing to provide notice of termination of membership, and by failing to permit discussion of the Special Resolution and the New By-laws by the membership, the FNI did not comply with its existing by-laws when amending them. As stated by the Court:
The Special Resolution (through the Replacement By-Laws), purported to effect a mass termination of the membership of the majority of the members of the FNI. It was a fundamental change to the membership of the FNI. Compliance with the by-law requirements respecting termination of membership was of the utmost importance. The FNI did not comply with its Original By-Laws respecting termination of membership. The FNI never provided notice of termination, or the opportunity for appeal. This, in itself, renders the Special Resolution ultra vires.
The Court also stated that it would be reasonable for the plaintiffs to expect that the FNI would conduct its affairs consistent with preserving their section 6(1)(b) status under the Indian Act and to expect that the FNI would protect their rights. The FNI had an obligation to ensure that any change to the Settlement Agreement would not be prejudicial to the interests of FNI members and yet it knowingly put the status of thousands of members at risk.
Therefore, on the first prong of the test for whether there has been oppression, the Court found that the Plaintiffs’ reasonable expectations had been violated by the FNI’s conduct.
On the second prong of the test, whether the FNI’s conduct was oppressive, unfairly prejudicial or whether FNI unfairly disregarded the plaintiffs’ interests, the Court confirmed that FNI’s conduct, as outlined above, was unfair, “burdensome, harsh and wrongful” and that the FNI knowingly risked the plaintiffs’ loss of their section 6(1)(b) status.
Ultimately, the FNI was found to have acted unfairly and to have caused prejudicial consequences to the plaintiffs. The plaintiffs were therefore entitled to a remedy in oppression against the FNI.
The Court reinstated the FNI’s original articles of continuance and original by-laws, ordered its corporate records to be rectified to show the plaintiffs as members and ordered the FNI to take all steps in its power to seek to obtain Canada’s consent to reconsider and reassess the plaintiffs’ eligibility, with a view to attaining reinstatement of the plaintiffs’ section 6(1)(b) status. The Court also indicated that an order for compensation of the plaintiffs may be assessed subsequently.
The Court rejected the plaintiffs’ claim against Canada.
This case demonstrates the need for charities and not-for- profits to scrupulously adhere to their corporate articles and by laws when making any changes to their governing documents, membership or corporate structure that could have prejudicial consequences to members. Failure to do so can lead to oppression claims being made against the charity or not for profit.