On September 12, 2017, the Ontario Superior Court of Justice released its decision in Ottawa Humane Society v. Ontario Society for the Prevention of Cruelty to Animals, concerning a governance dispute between the Ontario Society for the Prevention of Cruelty to Animals’ (“OSPCA”) and seven of its affiliated societies (the “Applicants”), separately incorporated and independent from the OSPCA. The dispute began when the OSPCA board voted to: i) “temporarily suspend” the affiliated societies, which were one of three classes of membership of the OSPCA; ii) revoke by-law 9, which provided those affiliated societies with sole voting rights at member’s meetings; iii) adopt a new by-law 10 that eliminated affiliated societies’ voting rights and replaced the three original membership classes with a new single voting class of membership composed solely of the OSPCA board of directors; and iv) subsequently reinstate the affiliated societies. After the Ottawa Humane Society (“OHS”) demanded these changes be undone, the OSPCA suspended the OHS and its agents and passed by-law 11 reinstating a separate class of membership for affiliate societies but retaining sole voting rights for the board.
The matter was brought before the court, which suspended the operation of by-laws 10 and 11. Subsequently, at the OSPCA’s 2016 annual general meeting, a new by-law 12 was passed by a majority of affiliate societies, changing the governance model from an open-membership to a closed-membership model with voting rights for the OSPCA’s board.
However, the Applicants continued to dispute the validity of by-law 12, arguing that the OSPCA’s incorporating legislation, the Ontario Society for the Prevention of Cruelty to Animals Act, provided an “accountability structure… [that] reflects a legislative choice from which neither the OSPCA board nor its members may derogate by passing by-laws contrary to the legislation.” The Applicants argued that by-law 12 contained a definition of “annual general meeting” limited to “Voting Members” and was, therefore, contrary to s. 293 of the OCA, which does not allow for the discrimination between classes of members in respect of the right to attend annual meetings.
The court held that by-law 12 was lawfully passed by voting members and that the OSPCA owed “no legislative or other accountability” to its affiliates. It further held that the board acted in the best interests of the OSPCA when putting in place a “best-practices” governance structure, and that it was “entitled to deference under the Business Judgment Rule.”
The Applicants also sought a declaration that a 2016 draft “non-suit clause” was illegal and void contrary to public policy. The draft non-suit clause prohibited affiliates from initiating legal action or claims against the OSPCA and other related parties, and was contained in the OSPCA’s Funding Agreement, which governs affiliates’ enforcement work as well as the funding relationship between affiliates and the OSPCA. Meanwhile, the OSPCA maintained that the Applicants were breaching the Funding Agreement with their application in court and did not provide them with any funding allocation. The court considered that the non-suit clause functioned as a release. It ultimately held that the non-suit clause was not unconscionable because the Applicants were “sophisticated parties in receipt of legal advice,” and no further overriding public policy existed to exclude the non-suit clause.
This case highlights the importance of well-drafted by-laws and of following corporate procedure, as well as the court’s reluctance to interfere in board decisions made in accordance with a charity’s internal documents. Although this case was in reference to a corporation created by special act, the court’s reliance on deference to the business judgment rule where boards seek to implement “best practices” to their governance in the best interests of the corporation is important at a time when many such corporations have or are implementing similar changes in their membership structure in anticipation of new federal or provincial not-for-profit legislation.