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22 Nov

The ONCA at one month: the good, the bad, and the frequently misunderstood

Monday, November 22, 2021Clifford S. Goldfarb, James M. Parks, Heather Keachie, Christine JubianBusiness Law, Corporate Law, Non-Profit and CharitiesNot-for-profit Corporations Act (ONCA)

The Ontario Not-for-Profit Corporations Act, 2010 (the “ONCA”) came into effect as of October 19, 2021, and there are a number of misconceptions about its effect on existing corporations incorporated under the Ontario Corporations Act (the “OCA”). Some of these misconceptions result from incorrect summaries of the effect of the ONCA on OCA corporations, and some misconceptions result from confusion regarding the provisions of the ONCA. We thought it would be helpful to mention a few of these and to explain how we expect the ONCA to really work.

1.         Effect on OCA Corporations

Upon coming into force, the ONCA automatically applies to all non-share capital corporations incorporated under Part III of the OCA. Social Clubs with share capital remain under Part II of the OCA, and will have five years in which to transition out of the OCA, and into the ONCA or other applicable statutes, if desired. The ONCA also does not apply to mining or insurance companies incorporated under other Parts of the OCA.

2.         To Amend or Not to Amend? (That is the question)

When the ONCA came into effect, it started a three-year transition period which will end on October 19, 2024. During that period, provisions in a corporation’s articles (formerly called “letters patent” and “supplementary letters patent”) and its by-laws which do not comply with the ONCA, but complied with the OCA, will remain in effect as long as the corporation does not change them. At the end of the three-year period those provisions which do not comply with the ONCA will be deemed to be amended to comply with the ONCA.

There is no requirement for a corporation to actually make any changes to its articles or by-laws and it may continue to leave them in the exact same form in which they existed on October 19, 2021. However, in doing so there will inevitably be concerns that boards of directors, corporate executives and members will misunderstand relevant provisions of these documents and act in ways that are not in compliance with the ONCA. For this reason we are recommending that corporations review their articles and by-laws and take the necessary steps to update them to reflect the ONCA.

In addition, certain OCA compliant provisions which, if they are contained in a corporation’s by-laws or special resolutions, even if they are not compliant with the ONCA, will remain in effect indefinitely until a change is made by the corporation itself. These provisions that would remain in effect deal with:

  • the number of directors of the corporation;
  • two or more classes or groups of members;
  • voting rights of members;
  • a delegate voting structure pursuant to section 130 of the OCA; and
  • the distribution of the remaining property of a corporation that is not a public benefit corporation on winding up or dissolution.

3.         Contents of articles

Another misconception relates to the distribution of provisions between the articles or letters patent of the corporation and its by-laws. Under the OCA, membership provisions were generally to be found in the by-laws. If a corporation had more than one class of members, the provisions describing the classes of members would be in the by-laws and such provisions could be changed by an amendment to the by-laws.

That is not the case under the ONCA. A corporation’s articles must contain provisions setting out the different types or classes of membership that the corporation is authorized to issue and must indicate whether or not those classes have the right to vote at meetings of the corporation or by the other methods of voting permitted by the corporation’s by-laws. These changes will be among those deemed to be made at the end of the transition period.

In addition, if the articles contain a description of the different classes of membership and no statement about voting rights, each such class will be deemed to have voting rights. However, the actual terms and conditions which apply to those membership classes do not have to be set out in the articles (although they may). Those additional provisions are usually contained in the by-laws, where it will be easier to amend them as required.

Note, however, that the current forms for articles of incorporation and articles of amendment as released by the Ministry do not include specific boxes or sections for entering the classes of membership. Corporations wishing to file articles of incorporation or articles of amendment at this time should include membership class provisions in the box for special provisions.

The following provisions must be contained in the articles:

  • name of corporation
  • contact information, including official email address for the corporation
  • North American Industry Classification System (NAICS) (This is new for Ontario not-for-profit corporations, and may elicit some confusion as corporations consider what industry they are operating in.)
  • registered office address
  • number of directors (or range), and their names and addresses
  • purposes of the corporation

In addition, the articles may contain:

  • any special provisions, including classes of members and voting rights that attach to each class
  • any provisions permitted by the ONCA or other law to be set out in the by-laws of the corporation

Some flexibility remains in terms of the provisions that can be included in the articles. Corporations should bear in mind, however, that amending Articles is more difficult than amending by-laws, and should include in the articles only those provisions they do not contemplate amending in future.

4.         Membership voting rights

When the ONCA was originally passed in 2010 it closely followed the provisions of the new  Canada Not-for-profit Corporations Act (the “CNCA”), which gave unprecedented voting rights to different membership classes. The CNCA applies to all corporations under the former Canada Corporations Act that chose to continue under it, and to any new corporations established under it. These voting provisions were considered to be controversial and unwelcome by most of the non-profit sector in Canada and considerable advocacy has gone into asking Corporations Canada to change them.

Under the CNCA, non-voting members have the right to vote as a separate class on certain corporate matters considered to be fundamental changes, such as changes to the articles and by-laws in instances described in subsection 199(1) of the CNCA (for example, cancellation of a membership class or changes to membership conditions) and other fundamental changes such as amalgamation or of the corporation to another jurisdiction, and sale or lease of substantially all of a corporation’s assets. In addition, members of different classes have the right to vote separately as a class on those fundamental changes, giving each class, including non-voting members, the ability to veto the change. Many CNCA corporations immediately eliminated multiple membership classes and, in many cases, reduced their memberships considerably, turning former members into “friends”, “associates”, “supporters” or other similar categories.

In the meantime, through legislative changes to the ONCA in 2017, 2020, and 2021, the more unpopular aspects of these voting rights have been removed. In particular, members of a non-voting class will not have the right to vote on any matter affecting the corporation and members of different voting classes will vote together and not have the right to veto any type of fundamental corporate change. In certain situations, however, a corporation may wish to provide in its articles or by-laws for separate class voting rights, which is permitted by the ONCA.

5.         Delegate voting

Many corporations in Ontario have a voting structure in which members of local branches or chapters elect delegates to attend at an annual meeting and vote to elect directors and approve other matters that are to be voted on at the meeting. A delegated voting structure requires more than one class of members. Under the CNCA, delegate voting is virtually impossible to achieve, and caused significant problems for existing corporations that continued under it. However the ONCA specifically allows for a delegated voting structure, and existing OCA corporations with such a structure will be able to continue it. It is also possible to create a delegate voting structure in the by-laws of new OBCA corporations.

CNCA corporations that want to implement a delegate voting structure may consider continuing under ONCA for this purpose.

6.         Board of directors

Under the OCA the number of directors was fixed. Initially the number was set out in the letters patent, but it was possible to change that number by passing a special resolution (a resolution passed by the board and confirmed by a 2/3 majority of the members). Under the ONCA, the number of directors of an OCA corporation will now be fixed at the last number set out in the letters patent or the most recent special resolution. It will no longer be possible for a corporation to pass a resolution to change the number of directors from the fixed number.

This will be a problem for those corporations that vary the size of their board over time to suit their needs, and they will have to file articles of amendment, which can provide for a minimum of three directors and a maximum large enough to accommodate future changes in the size of the board. This will allow the members to change the size of the board annually by simple resolution, or to authorize the board to make this change.

If it is necessary to file articles of amendment to set a range of the number of directors, a corporation would be well advised to make all the other changes necessary to conform its articles and the by-laws with the ONCA.

At Gardiner Roberts, we have developed new ONCA-compliant documents, including special provisions to be incorporated into articles of incorporation and articles of amendment, a new standard by-law, and other documents that will replace the current forms used under the OCA.

A PDF version is available to download here.

We will be pleased to review your existing corporate governance documents and assist you in bringing your corporation up-to-date. Please feel free to get in touch with the lawyer that you deal with at Gardiner Roberts to initiate this process, or contact one of our non-profit and charity law specialists.

 

 

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