The July 20, 2016 decision of the Court of Queen’s Bench of Alberta (“Court”) in Colgan v Canada’s National Firearms Association is an interesting case illustrating how corporate disputes involving a corporation under the Canada Not-For-Profit Corporations Act (“CNCA”) were dealt with by the Court.
The dispute arose between two factions of the Club fighting for control of Canada’s National Firearms Association (“Club”) – the “Colgan Faction”, who are five first-time directors and the “Clare Bloc”, who are a group of re-elected long serving directors. The fight between the two factions included carrying on an “unsuccessful coup” to replace the president of the Club, revoking membership of directors of the Club, thereby removing them from their board seat, passing new by-laws prohibiting membership proxy voting and restricting membership to certain persons.
In reviewing whether the Court should intervene in the Club’s internal affairs, the Court stated that, “[c]ourts do not intervene in a club’s affairs unless the club is guilty of breaching its rules or the rules of natural justice, or if there is bad faith in decision-making.” Consistent with the case of Street v BC School Sports (2005 BCSC 958), the Court held that the “Courts have no interest in the day-to-day activities of voluntary associations” and “[t]hat certainly includes internal politics and inter-factional sniping.” However, the Court rejected the request of the Colgan Faction to direct the Club to comply with the laws of Canada and the Club’s own by-laws because the Club is already required to comply with them. As such, if the Club chooses not do so and the grievance meets the threshold for intervention, then the Court will intervene.
The Court held that three board seats were validly vacated when the board revoked the membership of three directors of the Colgan Faction, who were thereby disqualified to be directors because the bylaw states that a director resigns “if he or she ceases to be a member.” The Court was satisfied that subsections 130(1) and (3) and section 132 of the CNCA (which deal with removal of directors by membership vote) were not applicable in this situation. However, the Court held that the appointment of three replacement directors by the board at that same meeting was not valid because the by-laws of the Club required a by-election to be held to fill the vacancies.
The Court rejected the argument that the revocation of membership of the three directors were not valid because a proxy vote was counted, presumably at the board meeting. The Court held that subsection 126(3) of the CNCA (which provides that “No person shall act for an absent director at a meeting of directors”) is not “a ban on proxy votes.” It is not clear from the judgement whether a director voted by proxy at the board meeting, nor is the basis of the Court’s ruling, because it is settled law that voting by proxy is an improper delegation of a director’s powers and it is not possible for a director to discharge his/her fiduciary duties by appointing a proxyholder to vote in his/her stead.
Although a by-election was required to fill the vacancies on the board, the Court refused the request of the Colgan Faction to appoint an investigator. The Court held that in order to appoint an investigator under section 242 of the CNCA, there must be evidence of actions that are “oppressive or unfairly prejudicial to or that unfairly disregards the interests of a member or debt obligations holder.” The Court pointed to the decision of the Supreme Court of Canada in BCE Inc v 6796508 Canada Inc. (2008 SCC 69), which “interpreted the almost identical language in the Canada Business Corporation Act oppression provision, and set out a two-step test to determine if oppression is established: i. determine if the evidence supports the reasonable expectation asserted by the claimant; and ii. determine if the reasonable expectation was violated by conduct falling within the terms ‘oppression’, ‘unfair prejudice’ or ‘unfair disregard’ of a relevant interest?” As such, the Court refused to appoint an investigator because “suspicion and distrust, not evidence [drove] the contention that the Clare Bloc will stoop to using ‘dirty tricks’ to win the next election.”
Lastly, the Court held that two new bylaws that were passed after the Colgan Faction was purged require membership approval before the board can act upon them because subsection 197(1)(e) of the CNCA requires member approval of an amendment if it changes “a condition required for being a member.” These new bylaws removed membership proxy voting, restricted Club membership to only “moral” members, and restricted members to “natural persons” having “legal capacity” and thereby eliminated non-voting memberships that were previously available to corporations and minors.