Transition Requires That You Dance the Two-Step

At the Sport Law & Strategy Group we have been working with almost 40 national level sport organizations on their transition from the Canada Corporations Act to the Canada Not-for-Profit Corporations Act. We are learning lots in the process but wanted, at this time, to share a critical but not well-understood aspect of the transition process - namely, that if your organization has a complicated membership structure and many non-voting members, then you need to proceed in two steps.

We have alluded to this before but will make it plain here in this post. A majority of NSOs have multiple classes of members including classes that have many individual members who do not have voting rights. These are typically in a category called  "Associates" which represents all the many individual coaches, athletes, officials, administrators and other volunteers who are non-voting members of the NSO by virtue of being registered members of a PTSO. The effect is that many NSOs have many thousands of individual, non-voting members. Some even have hundreds of thousands.

Here is where it gets complicated. Section 212 of the NFP Act requires that the documents necessary to make a transition from the Canada Corporations Act to the Canada Not-for-profit Corporations Act must be approved by two-thirds of the members entitled to vote. Section 197 and Section 199 of the Act speak to 'fundamental changes' and make it clear that those fundamental changes that involve changes to membership classes, rights or conditions must be approved by a two-thirds vote of each class of member (in what is called a 'separate class vote'), including those members who do not have voting rights in the organization's current bylaws.

The advice widely given to sport organizations is that to avoid future problems under the NFP Act, they should streamline their member classes and eliminate non-voting classes of members entirely. This is the course of action being pursued by most organizations who are preparing for transition to the NFP Act. It is a wise course for sure, and proactively addresses the risk that some fundamental change desired in the future (which we cannot anticipate in the present) might be obstructed because an organization was unable to get an affirmative two-thirds vote from all classes of members, including those that normally would not have the right to vote.

This is why your transition must be done in two steps. The first step is to streamline your member classes and eliminate the vast numbers of non-voting members, and to do so under the Canada Corporations Act. When that is done, the second step is to have your 'newly-defined' classes of members approve your Articles of Continuance and new Bylaws. Transition will then be complete.

What we have observed, however, is that some organizations are trying to combine the steps into a single vote to save time. In other words, they are asking voting members at an annual general meeting to approve Articles of Continuance and Bylaws that will radically alter membership classes and member rights within the organization, and cancel entire classes of non-voting membership, while disregarding the fact that to do so, they must ask ALL their members to vote. Failure to put the transition documents to a separate class vote of all members, voting and non-voting, will render the approval and your transition invalid.

It is also worth mentioning that in most cases, even if the organization wanted to put the vote to all non-voting members, it would be unable to do so because the organization lacks the means  to communicate directly with these individuals to give them notice and a means by which to vote. It would be a virtual impossibility for most NSOs.

This requirement to transition in two steps is well stated by Theresa Man, a lawyer with Carters (Canada's leading charity law firm) who is an expert on the NFP Act and has written extensively on it. In a presentation to the Ontario Bar Association in 2011, she wrote about changing the rights of membership classes, stating: "...if these changes are to be done by way of the new CNCA by-laws as part of the continuance process, the corporations will be required to hold a separate class vote (including non-member voting classes) under Section 212 of the CNCA in order to pass the articles and new by-laws, even if their current bylaws do not require separate class votes" (page 24). She goes on to suggest: "... corporations may want to start the by-law review process early, leaving enough time to amend their current CCA by-laws to implement these changes in order to avoid the need to hold a separate class vote, before preparing by-laws under the CNCA". (page 24). (Note that Ms. Man uses the term CNCA in her writings, and not the term NFP Act).

Ms. Man gives the same advice in another article written for Osgoode Hall Law School's Professional Development CLE program. She states: "If the corporation has more than one class of members,  subsection 212(4) of the CNCA provides that changes to the letters patent, supplementary letters patent or by-laws as part of the continuance process that affects the rights of a class or group of members in the nature referred to in subsection 199(1) of the CNCA must be approved by separate class vote of each class of members (regardless of whether they have the right to vote)" (page 60).

This same advice is given by the Canadian Olympic Committee in its guidance memo to National Sport Federations dated October 2, 2012 (see middle of page 6). We have given this same advice to organizations, and even Industry Canada's Transition Guide alludes to this at Step 4 in stating "Despite the voting rules in the existing by-laws, the NFP Act requires that the articles of continuance be approved by two-thirds of the votes cast by members of the corporation who are entitled to vote".

A two-step transition is not difficult. We urge sport organizations to make their desired membership changes under the Canada Corporations Act. This can be done at your regular annual general meeting. Thereafter, with member categories streamlined, it is a fairly simple task to call a special members meeting to approve the Articles of Continuance and Bylaws to continue under the NFP Act. And because you have streamlined your membership structure, this can likely be an easy-to-organize telephone meeting!

Please contact us if you require any further information.

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