Published September 20, 2013
I have been deeply immersed in the Canada Not-for Profit Corporations Act for over two years now, and so have many of Canada's national sport organizations. I am indebted to those sport leaders who have engaged with me in lively discussions about the general policy goals of the Act, whether it is good or bad for sport, are the various 'workarounds' moral or ethical (even if they are legal), what is really truly the best size for an elected board, and how much should we tell the members in the bylaws....
What is really interesting about this new law is that it is, as yet, untested. There is no 'go to' source to figure out just what a certain ambiguous subparagraph means. And a call to Corporations Canada isn't going to help either. The more we have worked with the Act and its Regulations over the last months and years, the more curious some things become. In this blog, I want to highlight two such areas: nominations for election, and proxy voting. Sounds boring but these are highly important to your governance!
Nominations for election
Readers will know that a main feature of the new Act is that directors must be elected by members. Complying with this will require many organizations to make some fairly big changes. A board that would otherwise compose itself somewhat automatically by virtue of 'ex-officio' directors appearing like magic from the ranks of provincial and territorial bodies, now has to be cobbled together with some careful planning. Candidates have to be sought out, recruited and nominated. The natural result of this phenomenon is that most organizations are thinking about succession and putting in place rigourous nominating systems, which is a very good thing.
[the following text was updated in September 2016 to reflect new interpretations]
However, the Act contains some curious features at Section 163 that have the potential to interfere with succession planning. Section 163(1) says that a member is entitled to "submit to the corporation notice of any matter that the member proposes to raise at the meeting (a 'proposal')" and to "discuss at a meeting any matter with respect to which the member would have been entitled to submit a proposal". Section 163(2) says that the "corporation shall include the proposal in the notice of meeting". Our interpretation of this is that:
Section 163(5) continues: "a proposal may include nominations for the election of directors if the proposal is signed by not less than the prescribed percentage of the members of a class or group of members of the corporation entitled to vote at the meeting at which the proposal is to be presented...". Our interpretation of this is that members may nominate candidates for election (outside any approved nomination process) provided that 5 percent of the members support the nomination (5 percent being the 'prescribed percentage' in the Regulation).
Section 163(5) continues "...but this subsection does not preclude nominations made at a meeting of members". This section suggests that members can nominate people from the floor of a meeting. Most governance experts would tell you that this is a very bad idea. Certainly it flies in the face of efforts of non-profit organizations to seek out skilled and qualified leaders and to work towards a planned succession of leaders.
We believe that the right of members to nominate from the floor of a meeting is slightly constrained in that it would still require support of 5 percent of the members entitled to vote. This is not a high percentage but it would be calculated on the basis of all members, not just the members present at the meeting. Ambiguity in these sections can be resolved be referring to the main purposes or principles of the statute, and in this case it is one of promoting the rights of members to be informed so that they may vote accordingly. Last minute nominations of candidates for election does not afford the members this right, and we think it is contrary to the 'spirit' of the Act.
Our advice is to prescribe a nomination system in your bylaws but to acknowledge that candidates may also be nominated outside of this system. The ballots could then indicate with an asterisk those candidates supported by the Nominating Committee, and those candidates who came forward outside the official process.
[the preceding text was updated in September 2016 to reflect new interpretations]
The default rule under the Act is that there is no proxy voting. However, the bylaws can allow proxy voting. Section 171(1) of the Act, titled 'absentee voting', says " The bylaws of a corporation may provide for any prescribed method of voting by members not in attendance at a meeting of members. If the bylaws so provide, they shall set out procedures for collecting, counting and reporting the results of the vote". The Regulation (at Section 74) then goes on at length about how proxy voting is to be done. It even goes so far as to say what should be on the written proxy form and what should be in bold type.
Of particular interest is Section 74(2) which states: "Members not in attendance at a meeting of members may vote by appointing in writing a proxyholder, and one or more alternate proxyholders, who are not required to be members, to attend and act at the meeting....". The key part of this is the statement that proxyholders are not required to be members, therefore a member may choose to give his proxy to anyone. What flows naturally from this is that a corporation cannot limit the number of proxies a person may carry, if every member has the right to give the proxy to a person of their choosing.
Almost all sport organizations that allow proxy voting in their current bylaws tend to also impose limits, most typically that the proxyholder must also be a member, and that any one proxyholder may not carry more than a prescribed number of proxies (often one). In our view, these restrictions are not in compliance with Section 74(2) of the Regulation. In fact, this is not surprising given that the overall principle of the new legislation is to empower members and there is no better way to do that then to given them the ability to become "activist shareholders" - one does that by collecting proxies and giving them to an articulate and persuasive advocate.
Our recommendation is that if your bylaws are going to allow proxy voting, then they should state the bare minimum - something along the lines of : "Members may vote by proxy if the proxy is in writing, it is received by the Corporation prior to the meeting, it clearly states the date of the meeting for which it is intended, it clearly states to whom the proxy is given, and it otherwise complies with the requirements of the Act". It is important to recognize that proxies cannot be tightly controlled as they could under the former legislation. So, think carefully whether proxies fit into your governance model. An alternative to proxies is absentee voting using various internet methods, which allows everyone to have a voice regardless of the location of the meeting. We wrote about that earlier this month.