New Corporations Act Creates Opportunities for NSOs

Published April 5, 2011

In this space we have written previously about the imminent Not-for-Profit Corporations Act (NPCA), due to take effect soon in Canada.

Back in 2009, our newsletter contained a footnote that the Act had received Royal Assent and was going to come into effect  ... sometime. In June 2010, we reported that the Act was on its way and we summarized many of its new requirements. Then, in December 2010 my colleague Steve Indig got to the point with a Newsletter piece warning our readers that they would soon have to re-incorporate! On February 23, 2011 we included the topic in our annual 12 Minute Sport Lawyer presentation, delivered as part of the Sport Knowledge Series in partnership with SIRC.

We hope this will be our last posting on the topic before the new law takes effect. Industry Canada has assured the public that the Act is coming soon - in the spring of 2011, regardless of the ongoing federal election. Regulations have been published in draft form and comments has been received and processed. Policies, templates, forms and brochures are in the works (we are told). So now it is just a waiting game.

Although we have covered this ground before, it is worth reminding everyone that:

• All federal corporations created under Part II of the Canada Corporations Act are affected. This is about 19,000 organizations in Canada ranging from charities to symphony orchestras to airport authorities to harbour commissions to advocacy organizations .... and this group includes sport organizations. But only national sport organizations - PSOs and TSOs need not concern themselves at this time.
• Once the Act takes effect, all organizations subject to the Act will have three years during which to comply with the new requirements of the Act. During this three year window, organizations may operate pursuant to their existing letters patent and bylaws, but at some point before the spring of 2014 they will have to create new articles of incorporation and new bylaws.
• Failure to come into compliance could result in the corporation being dissolved by Industry Canada. In reality that's not likely to happen, but even so we urge NSOs to pay attention now in order to prepare for a smooth transition to the new legal regime.

Our previous writings on this topic set out a number of ways that the new legislation is different and explained some of the rationale for creating this new law. In this post, we want to elaborate of the three areas that we think are the most important for NSOs to consider. We would also like to suggest that each of these three areas presents a real opportunity for each NSO to think carefully about "how they wish to be" in the second decade of the 21st century.

These are the three areas that we feel are particularly important for Canadian NSOs:

Every NSO will have to create new Articles of Incorporation

Under the new Act, there will no longer be "letters patent". Good thing too - most NSOs we are familiar with have letters patent or supplementary letters patent dating from prehistoric times and bearing little resemblance to the organization's current and present purpose. Similar to provincial statutes governing corporations and societies, articles of incorporation are a statement of an organization's core purpose and key objectives. This is an important document, a magna carta if you will, because it provides the structural foundation upon which all the other parts of the organization are built. Articles are a legal expression of your mission statement. Transition to the new Act will force NSOs to think about their mission, and this is a good thing. A lot has changed in the world of sport - as amply demonstrated in the document Environmental Scan 2010 prepared by the Department of Canadian Heritage. (Note: depending on the outcome of the federal election, there may also be some new requirements in this area for sport organizations having RCAAA charitable status).

'Ex-officio' directors will not be permitted under the new Act

There is a common misunderstanding about the meaning of the term 'ex-officio'. Most people equate it with the situation where the president of an organization also has a non-voting seat on every committee of the organization. In fact, ex-officio means "by virtue or because of an office" (Black's Law Dictionary, 2nd Pocket Edition, 2001) and describes the person who acquires a position with an organization by virtue of holding a different position within that organization or another organization. Ex-officio refers to more than just presidents sitting on committees. Many NSOs in Canada have a governance structure whereby getting elected president of the PSO means that one assumes a board position with the NSO. Similarly, some NSO boards have directors who serve as directors by virtue of their elected or appointed position with a different organization, such as a coaching organization or a partner organization. Under the new Act, such types of board structures will not be allowed. We suggest it is best to think now about how you would like your board to be structured in the future, rather than be forced to make unwanted changes at the last minute!

All members, even non-voting members, must be given the right to vote on fundamental changes to the corporation

This change is like a quiet monster lurking in the dark. NSOs are typically rewarded financially by having a large membership base. The more members you can count the larger your base grant from the government will be. So, an organization such as Softball Canada has six categories of members: PT Associations, Directors, Committee members, individuals who are registered with PT Associations, teams that are registered with PT Associations and host committees that organize Canadian championships. Of that list only PT Associations and Directors can vote - the remaining members do not have voting rights. However, Sections 197 through 199 of the NPCA stipulate that all members, with or without voting rights, must be given the opportunity to vote on 'fundamental changes' to the corporation, including any changes that affect the rights of a particular class or group of members. The result is that a NSO like Softball Canada could find itself needing to administer a voting process for tens of thousands of non-voting members including players, coaches, managers, umpires and teams all across the country. Imagine the logistical nightmare! Please note that we are not singling out Softball for scrutiny - it is just one example, as there are countless other NSOs that have similar membership arrangements.

So how can there be an opportunity in this disastrous scenario? We think it's this -  parallel to thinking about the board of directors you want for the future, your NSO can think about the ideal structure for its membership. There is no better time to press the pause button so that you can examine who your members are, and what you do for them. In 2008 we wrote an article about the  complexities and nuances of a sport organization's membership structure, highlighting some of the legal implications for conduct and discipline matters, as well as insurance. Clearly, this issue remains complex now that there are legislative implications. We feel that there is an opportunity here to consider who are your members, supporters, participants, customers and partners. What is your relationship with them, how do you serve them, how do they help you, and how do you work together towards a common purpose? It's a new decade in a new century, and these are rich discussions worth having.

Watch this space for breaking news about the Not-for-Profit Corporations Act and feel free to contact any of us at the Sport Law & Strategy Group if you have questions or would like a presentation, resources or some other help with your transition to the NPCA.