Katherine Carre and Victoria Prince
Borden Ladner Gervais LLP
If your association has ever encountered an unhappy member or member group, you may want to consider the new and enhanced member rights under the new Canada Not-for-profit Corporations Act (the “CNCA”). Unhappy association members now have some new tools at their disposal. In many ways, they now have rights similar to those of shareholders of for-profit corporations. (Many of these rights are also present in the Ontario Not-for-Profit Corporations Act, 2010 which is not yet in force.)
Discussed below are some of the mechanisms by which members can now apply to a court to resolve their woes and what you can do to respond and manage these member claims when they arise. A later article will address member rights around proposals for meetings and related items.
Members can now bring claims, called derivative actions, on behalf of the association, if they feel that the association has not responded to certain matters appropriately.
The CNCA allows “complainants” to apply to a court for leave to bring an action in the name of and on behalf of the association. This means that someone other than the association itself could bring an action on behalf of the association. Note that derivative actions are meant to deal with harm done to the association, not to the complainant.
For example, a claim that directors have breached their fiduciary duties to the association might be a basis for a derivative action because fiduciary duties are owed to the association and not to the complainant. This could mean that a member who feels that the association wasn’t taking appropriate action around an alleged breach of fiduciary duty could apply to a court to allow the member to bring an action against that director.
The term “complainants” is defined broadly and includes former or present members, debt obligation holders, directors, officers or any person who, in the discretion of the court, is a “proper person” to make an application.
Note that the court will not grant leave to commence a derivative action unless it is satisfied that (1) the complainant has given sufficient notice, (2) the complainant is acting in good faith and (3) the action appears to be in the interests of the association, not simply the complainant as an individual. As noted above, a derivative action can only be brought by a complainant to enforce the rights of the association when the association is itself unwilling to act. The prejudice must be suffered by the association directly; the complainant cannot use a derivative action to enforce their own personal rights. In other words, there are a lot of things a complainant would need to establish before the court will grant leave.
In connection with a derivative action brought by a member, a court has broad discretion and may issue any order that it thinks fit.
Of course, there is law around the use of derivative actions in the for-profit context and it will be interesting to see how a court will react to requests made by complainants in the not-for-profit context.
Members can also bring claims against the association if they feel like their rights are being oppressed by the association.
The oppression remedy is an equitable remedy under the CNCA that also gives a court broad powers to intervene in the internal affairs of an association. Whereas a derivative action addresses harm done to an association, an oppression remedy is meant to address harm done to the complainant by an association.
Upon application by a “complainant,” which has the same definition as in the context of derivative actions discussed above, a court may make an order if it is satisfied that (1) any act or omission, (2) the conduct of the activities or affairs, or (3) the exercise of the powers of the directors or officers of the association is oppressive or unfairly prejudicial to or unfairly disregards the interests of any shareholder, creditor, director, officer or member.
Whether association conduct will attract the oppression remedy depends on the specific surrounding facts. Circumstances that may attract the oppression remedy include: mismanagement; self-dealing and self-interested transactions; appropriation of corporate opportunities; changes to membership structure; violation of procedural rules and laws; discrimination between members of the same class; or breach of the articles or by-laws of the association. In other words, there are a large number of association actions that could attract review!
The CNCA sets out the oppression remedies that a court may order, which include: requiring the amendment of the articles or by-laws or the creation or amendment of a unanimous member agreement; appointing additional or replacement directors; directing an association to pay a member all or part of the amount that the member paid for their membership; varying, setting aside or annulling a transaction or contract to which an association is a party and compensating the association or any other party to the transaction or contract; or liquidating and dissolving an association.
Note that in assessing an oppression remedy claim, a court will apply the “business judgment rule.” Courts recognize that it is impossible satisfy all stakeholders, and therefore will defer to the responsible business decisions of directors, without deeper analysis.
How can you respond to member claims?
When potential litigation arises in the form of a derivative action or the oppression remedy, an association should determine whether the allegations are sufficiently serious to warrant internal review. If a director is named as a defendant, it is prudent to review at the outset how much the association may be obliged to indemnify the director and whether such costs are covered by the association’s director and officer liability insurance.
An association may wish to appoint a person to conduct an internal review. It may be preferable to have counsel perform such a review so that results are protected by solicitor-client privilege in the event of litigation.
An association may also wish to form a litigation committee, which preferably would not include any directors named in the proposed action, to decide issues related to the potential litigation. Following such review, an association should determine whether it wishes to bring its own action against the alleged wrongdoer.
Associations have fourteen days to respond to notice given by a complainant in a derivative action, after which the complainant may apply for leave to commence the action. An association may engage external counsel to oppose the leave application. If leave is not granted, the complainant will not be able to pursue the derivative action further.
Since no leave is required to bring an oppression claim, defendant associations may wish to engage litigation counsel and strike a review committee immediately.
How can you avoid member claims?
Of course, there are things that can be done before claims are made. For example, it is important to ensure that directors and officers meet their fiduciary duties. From the association’s perspective, that could involve implementing appropriate policies, procedures, training and review processes. If there is a concern about a breach of duty, such as a breach of confidentiality, misappropriation of corporate opportunity or the like, the association should deal with the situation as quickly as possible in accordance with the relevant law and the association’s own processes.
It is important to consider how you will respond if any unhappy members decide to exercise their new and enhanced rights. While it is not yet clear how a court will interpret these rights, it is best to be prepared and in the know if and when these member claims arise. It also is important to put proper policies, processes and procedures in place to minimize the risk of these claims.
Victoria Prince is a Partner and Katherine Carre is an Associate in Borden Ladner Gervais LLP’s Corporate Commercial Law Group, specializing in Not-for-Profit law.