Membership futile

August 21, 2002 permalink

Following the adoption of the new bylaws by Dufferin CAS, Dufferin VOCA sought a legal opinion on the possibility of running candidates for director under the new rules. The legal opinion, which follows, is that there were some irregularities in the adoption of the bylaws, but under the new rules running true opposition candidates is impossible. Elections within CAS are now like those in the Soviet Union, where there was only one candidate on the ballot.

A consequence is that opposition to CAS can no longer be directed at the agency. The government of the Province of Ontario is the only possible source of relief from the abuses of Children's Aid.

This letter is on the letterhead of Minden Gross Grafstein and Greenstein, Barristers & Solicitors, Toronto Ontario:

Robert T McQuaid
RR #5
Orangeville, Ontario L9W 2Z2

Dear Mr McQuaid:

Re: The Children's Aid Society of the County of Dufferin ("CAS")

On July 15, 2002 you sent some material to me relating to the Revised By-Law No. 5 for the CAS. There are three issues to consider:

1. Whether it is possible for opposition candidates to run for the board of directors, given the provisions of Section 10.04. This Section provides basically that candidates running for the office of director "must be recommended by the Nominating Committee".

Is there some common law doctrine or court decision that allows people to nominate candidates from the floor notwithstanding the by-law or to force the Nominating Committee to nominate opposition candidates? There is nothing directly on point but there are some cases and some jurisprudence which I would like to bring to your attention regarding a possible challenge to the by-law.

There are two unreported cases both involving the Toronto Humane Society ("THS") and both in the Superior Court of Ontario. Enclosed pleased find copies of the following:

• Trow v Toronto Humane Society decided September 10, 2001
• Toronto Humane Society v Milne decided October 2, 2001

In both instances the issue related to the fact that the proposed by-law which reclassified THS members as either "active" or "sustaining" provided "only active members" would be entitled to vote at a meeting of members.

As you will see from the Trow decision (paragraph 3) this had the result of taking away the right to vote from more than 1,000 members and limiting the right to vote to 12 "active members".

What transpired in the case was that it was not clear to the members that they were being asked to approve a drastic change. As a result the Judge set aside the by-law because basically there was a failure to give sufficient information to permit the members to come to a reasoned decision as to whether or not to support the proposal to change the by-law (paragraph 15). What would have happened if the THS had made proper disclosure is a matter of speculation, but undoubtedly the members would not have approved it.

The second THS decision in paragraph 9 discusses the Trow case and again refers to the right to adequate notice of a meeting sufficient to permit someone to come to a reasoned decision.

What I question here related to the notices of the meeting called for the purpose of approving By-law 5 in the first instance (meeting of February 20, 2001) and any changes in it. Were they really adequate given the changes that were referred to in your March 8, 2001 letter to the Hon. John Baird, Minister of Community and Social Services, particularly with reference to the Nominating Committee and their nomination of the candidates for the board of directors and the fact that no member would be allowed to hold more than two proxies.

Regrettably the best that could be hoped for in these circumstances would be that the by-law would be struck down and then the proponents of the by-law would undoubtedly send out a new notice and bring specifically to the attention of the members the fact that these changes were proposed.

One could consider moving to strike down the by-law based on the THS cases but the results may ultimately be the same no matter what.

On the question of whether there is any common law right to strike down a by-law for any other reason there are certainly provisions in various textbooks which have been supported by cases that director must exercise powers for a proper purpose. For example, the power to enact a by-law must be exercised in good faith. So any by-law made in bad faith would be invalid. See McGuiness: The Law and Practice of Canadian Business Corporations

"3.33 As with every power to enact subordinate legislation, the power to enact by-laws must be exercised in good faith so that any by-law made in bad faith is invalid ...".

"Like all corporate powers, the power to enact by-laws must be exercised for its proper purpose, and therefore a hidden improper purpose affords a ground for attacking the validity of the by-law".

"By-laws may not be discriminatory".

See also Hogg v Cramphorn [1966] 3All ER 320

If what was done was for the purpose of maintaining the incumbents in office the by-law may very well do that by virtue of the Nominating Committee being composed of incumbent directors of the CAS. This, of course, would have to be "proved" in any court proceeding. The onus would be on you to show this.

The problem we have here is that even if there was bad faith in the enactment of these provisions to the by-law, they appear to have been confirmed by the members and that of itself may mean that no-one can challenge the by-law even if it was passed by the directors in bad faith.

There is case law to the effect that the shareholders of a business corporation may "sanctify" an excess use of power by the directors. It is always open for the directors who are in breach of duty to cast their votes as members in favour of the "forgiveness of the breaches of duty committed by them as directors". Although the courts have placed some limits on the power of the shareholders (members) to ratify breaches of fiduciary duty it is not an easy task to set aside a decision of the members (Gower: Company Law at p. 646).

To mount a campaign against the by-law to strike it down for failing to give sufficient notice might be successful but ultimately if it were once again proposed to the members with adequate disclosure and confirmed by the members it would be difficult in our view to set the by-law aside absolutely as being discriminatory or for any other reason.

I enclose an extract from Renton: Guide for Meetings and Organizations an Australian text which refers to the role of the Nominating Committee. (See 11.14). The writer seems to infer there is nothing improper about restricting candidates for the board to those who are nominated by the Nominating Committee.

I reviewed a number of US texts on corporate procedure to see if there is any jurisprudence whereby this restriction or qualification of a director could be considered improper. The following extract is from Fletcher: Cyclopaedia of Corporations, Volume 2:

"S.297 - Qualifications and Eligibility of Directors

Any person may be elected or appointed as a director ... of a corporation, unless there is some special provision on the subject in the charter or by-laws of the corporation or in a general law ...

Section 298 - Power to make by-laws as to eligibility

It is undoubtedly within the power of a corporation to make by-laws prescribing the qualification of its directors ...

Other texts do not deal directly with the issue of whether other persons other than those nominated by the Nominating Committee can stand for election.

A final point on this issue is the fact the By-law was approved by the Ministry of Community and Social Services. This fact would make it even more difficult to set it aside.

2. Whether Section 12.09 "Voting by Proxy" provides that "No Member may hold more than two proxies at any time".
Is there an argument that this is invalid.?

Our view is that this is not invalid. You and your wife would not be able to hold more than 2 proxies which along with your own vote gives you 3 votes each or a total of 6. In basic terms instead of seeking proxies you would have to get members out to vote at a members' meeting to support a position you might take.

Another issue here is whether you could be nominated from the floor at an annual meeting. You referred me in your letter to Sturgis: The Standard Code of Parliamentary Procedure. By-law No 5 in Section 23.01 provides that "Sturgis: Rules of Parliamentary Procedures" shall apply at all meetings of the members, the Board, the Executive Committee and any other committees established by the Board".

You also provided me with an extract from Sturgis at p 150 which states:

"Unless the bylaws provide otherwise, nominations from the floor are always permitted even if the initial nominations are made by a nominating committee. To open the nominations, the presiding officer may say: "Are there nominations [or further nominations] for the office of president?" Any member may then rise and say, for example, "I nominate Mary Smith". (my emphasis)

If it comes down to a matter of interpreting which prevails, the foregoing quote seems determinative. To take it one step further by way of confirmation one of the leading Canadian text books on non-share capital corporations namely Burke-Robertson and Drache: Non-Share Capital Corporations provides as follows:

"when an organization has adopted rules of order as its authority, the rules are binding upon it in all cases provided they do not conflict with the organization's charter or by-laws." (my emphasis)

Accordingly, to rely on Sturgis is authority for your ability to be nominated from the floor at an annual meeting will not prevail.

Unfortunately there appears to be little you can do to correct the present situation. In coming to this conclusion I also reviewed the provisions of the Child and Family Services Act which created the CAS and it is very narrow in scope. Even if the CAS were governed by the Corporations Act which regulates non-share capital corporations incorporated under that Act, by-laws or amendments still need to be approved by directors in the first instance and then by the members.

Please let me know if I can clarify any matter for you.

Yours truly,

MINDEN GROSS GRAFSTEIN & GREENSTEIN LLP
Per

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Hartley R Nathan
HRN/lc
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