Refusing Membership

Amanda J. Stacey, Toronto

The recent decision of the Ontario Superior Court of Justice in Re London Humane Society serves as a useful reminder to charities, not-for-profits, and their directors about the rules and considerations applicable to a decision to change membership policies and to refuse membership to persons in such an organization.

In this decision, the London Humane Society (the “Society”) sought the direction of the court concerning the composition of its membership for the purposes of an upcoming special meeting of its members.  Over the course of a number of years, the Society had made numerous changes to its membership policies.  In 2003, the Society’s board of directors passed a resolution that granted automatic membership to any individual who donated $30 or more (which was the yearly membership fee).  At this time, the Society also began granting an automatic right of renewal to any individual who was an existing member and then made a donation in the following year of an amount equal to or greater than the yearly membership fee.  In 2007, the by-laws were amended to provide as follows:

The members of the Corporation shall be those persons who are approved by the Board of Directors and who pay to the Corporation the dues or fees determined by the Board of Directors.

The by-laws also provided that memberships expired on December 31^st of each year.

In late 2008, the board of directors passed a resolution to remove the automatic membership grant to donors.  In 2009, the board of directors resolved to require members to complete an application form for membership.  The Society’s membership was notified of this change in the Society’s Fall 2009 quarterly newsletter.  The notice itself was contained on the middle page of the newsletter, in a box roughly the size of a business card.  A second notification was given in early 2010 when tax receipts were mailed out to the Society’s 800 or so monthly donors.

By the time this second notice was mailed out, all of the Society’s memberships had expired.  The application form was not available to existing and new members until January 14, 2010.  Of the new applications received after January 14, 2010, eight were denied.  The board of directors did not give any reasons for declining these applications.

The Court addressed two main issues arising out of these facts:

(a) Whether sufficient notice of the new application form policy was provided to members; and

(b) Whether the decision to reject eight applications for membership was valid.

Was there sufficient notice of the policy change?

With respect to the first issue, the Court held that the board of directors gave sufficient notice of the new application form.  The Court held that this membership policy change was not a by-law change and that there were no statutory notification or confirmation requirements for such policy decisions.  As well, the Society’s by-law was silent on the issue of notification for policy changes.  The court also considered the directors’ common law duty of good faith, fiduciary duties, and the duty to avoid conflicts of interest.  The Court held that none of these duties had been breached by the directors in giving notice of the membership policy change in the manner that they did.  However, the Court did comment that the notice was not highly conspicuous and that the notice sent with the tax receipt was “underwhelming”.  The Court noted that the directors owe their duties to the corporation and not to the membership and that as such, despite its weaknesses, the notices were held to be sufficient.

Were the membership rejections proper?

The issue for the Court here was whether the Society’s board of directors acted in bad faith or contrary to the rules of natural justice in deciding to reject eight of the membership applications.  The Court noted that the Corporations Act (Ontario) permits the directors to pass bylaws related to the admission of members and that the by-laws were equally broad.  The Court also found that there was no evidence that the board had placed their personal interests above the interests of the corporation and as such had not breached their fiduciary duties to the corporation.

The Court held that the board’s decision to deny membership to the eight applicants was arbitrary.  While the court noted that arbitrariness is not itself part of the definition of bad faith, the arbitrary exercise of discretion has been associated with bad faith in a number of cases.  The Court found evidence that the decision to deny one of the applicants was founded in political or ideological divisions.  The Court held that it was improper for the board to reject an application for membership on this basis.  As such, it held that it appeared “likely” that the eight rejected applicants, if not rejected arbitrarily, were refused membership because of possible ideological differences.  The eight refused members were deemed to be members of the Society by the Court.

The conclusion of the court in this case is somewhat surprising and leaves us with more questions than answers concerning how a court will interpret restrictions on the admittance of members to a corporation.  It is not clear whether the evidence before the court disclosed that the board applied set criteria for refusal or whether the decisions were in fact arbitrary.  In our experience, it is quite common for charities and not-for-profit organizations to restrict membership to individuals with beliefs and ideologies that align with the organization.  We would recommend that any such restrictions be clearly set out by the organization in its policies and its by-laws.  Any such restrictions should be consistent with the mission of the organization.  These policies and the by-laws should make clear that individuals can be refused membership without cause, in the discretion of the board, if this is desired.  It is unclear whether courts will accept such a policy, however, an organization that applies its policies in a consistent and fair manner will help to protect itself against court intervention.  Organizations should also keep in mind the protections afforded by human rights legislation and should ensure that its policies are not discriminatory.

Application of the new Not-for-profit Corporations Act (Ontario)

Organizations will want to look ahead to the new Ontario Act and how its provisions may apply to restrictions on membership.  Pursuant to section 49 of the new Ontario Act, the directors may issue memberships in accordance with the articles and any conditions set out in the by-laws.  As such, there is a broad power given to a corporation to set out the conditions for membership.

Section 51 of the new Ontario Act allows a corporation to set out, in its articles or by-laws, powers and procedures applicable to the termination or discipline of a member.  Subsection (2) of that section specifically requires that any disciplinary action or termination be done in good faith and in a fair and reasonable manner.  Subsection (3) of that section specifies when a procedure will be considered to be fair and reasonable.  Aggrieved members may apply to court under subsection (5).  Although this provision would not apply where a member is denied admission to the corporation, it is a good idea for corporations to familiarize themselves with these rules prior to the coming into force of the new Ontario Act.

Please note that the new Ontario Act is not yet in force and thus the provisions of the Corporations Act (Ontario) still apply.  It is anticipated that the new Ontario Act will come into force sometime in 2012.

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Do Employees Have Privacy Rights on Their Employers’ Computers?

André R. Nowakowski, Toronto

The recent Ontario Court of Appeal decision, R. v. Cole, addressed the issue of an employee’s expectation of privacy on an employer’s laptop computer.  At first glance, this decision appears to have far-reaching implications for an employer’s right to monitor and access workplace computers used by employees.  However, it is important to review closely the decision and consider how it could affect your workplace.

The case involved a school teacher who was charged with possession of child pornography and unauthorized use of a computer contrary to the Criminal Code.  A technician of the school board was performing routine diagnostics on the computer system and noticed irregularities in the teacher’s laptop.  The technician discovered that the teacher had accessed a student’s computer on the school server and downloaded nude pictures of another underage student on to his laptop.  The school board investigated further and discovered that the internet browsing history of the teacher on the laptop contained a large number of pornographic images.  The pictures of the student and the internet history were copied onto two separate discs and were provided to the police along with the laptop.  The police assumed that the computer was school property and did not obtain a warrant to view and search the discs and laptop.  Ultimately criminal charges were laid against the school teacher.

At issue in the case was whether the employee had a reasonable expectation of privacy with regard to the contents of the laptop computer and whether the individual’s rights under the Canadian Charter of Rights and Freedoms were breached by the search and seizure of certain contents in the laptop. 

The Court of Appeal found that the school teacher did have a reasonable expectation of privacy with regard to the contents of his laptop computer.  The following factors appeared to have been central to the Court of Appeal’s decision:

• The teachers were given possession of the laptops and explicit permission to use the laptops for personal use;
• The teachers had permission to take the computers home on evenings, weekends, and summer vacation;
• The teachers used their computers for personal use, stored personal information on the hard drives, and used passwords to exclude others from the laptops;
• “There was no clear and unambiguous policy to monitor, search or police the teachers’ use of their laptops.”

The school board did have a policy in place governing certain aspects relating to the use of workplace computers.  However, the policy did not address the monitoring, searching, and policing aspect that was focussed on by the Court of Appeal.  This deficiency, combined with the practice in place in terms of how teachers were permitted to use, and did use, the laptops, seems central to the Court of Appeal’s conclusion that there existed a reasonable expectation of privacy.

In its decision, the Court of Appeal assumed that the Charter applied to the school board in question.  Notwithstanding the lack of a clear and unambiguous policy on the monitoring and searching issue, the Court of Appeal ultimately held that the searches and seizure performed by the school board and technician did not violate the Charter rights of the school teacher.    However, the Court of Appeal found that the police breached the Charter when they viewed the disc with the internet browsing history and searched the laptop.  As a consequence, that evidence was excluded from the criminal trial.  The Court of Appeal ruled that the disc with the nude pictures of the underage student was admissible into evidence since the pictures were taken from the central school computer server and the teacher therefore had no reasonable expectation of privacy with regard to the pictures.

It is difficult to predict the impact of this decision on the rights of employers to monitor computer use by employees in the workplace and to ultimately impose discipline.  In some respects it is a very fact specific decision in a criminal context.  However, it seems clear that a well-crafted policy that is enforced consistently will go a long way in addressing the concerns of the Court of Appeal.  This is a good time for all employers to either review and update existing policies or to create and implement new policies regarding the use by employees of workplace computers.

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Facility Use Policies and Agreements for Religious Organizations and Other Charities

Sheldon L. Wood, Kitchener-Waterloo

Charities often receive requests from businesses, individuals and other charitable and non-profit organizations to use their facilities. Financially this makes sense, particularly if rental income can be generated from facilities that are underutilized by the charities themselves. In doing so, charities must ensure that they do not violate the rules in the Income Tax Act applicable to business activities by registered charities, which we have addressed in previous issues of this Newsletter. Charities must also be cognizant of the increased risk of liability arising from permitting third party use of their facilities, as well the potential for human rights claims should a charity inappropriately restrict users for reasons based on the charity’s particular religious beliefs.

Generally, when a religious organization allows rental of its facilities to outside user groups, the facility might then become seen as a “public use” facility that is open to any and all activities not barred by law, even if the activities are contrary to the sincerely held religious beliefs of the organization.  Should an attempt be made to restrict third party user groups due to values perceived as unacceptable, a religious organization must be careful to ensure it is not acting in a discriminatory manner contrary to applicable human rights legislation.

As a matter of due diligence in evaluating risk, all charities (whether or not religious) need Facility Use Policies and Facility Use Agreements that include prohibitions on activities that represent an unreasonable risk of harm.  Religious charities may also want to give consideration to setting limits against uses that are contrary to the religious beliefs of the organization through Facility Use Policies and Agreements that reflect the charitable purpose and religious beliefs of their particular religious organization. The charitable purpose is to be found in the governing documents. Facility Use Policy Statements reflecting this religious purpose can be of assistance in articulating religious beliefs, in order to lessen the chance that a religious charity might be compelled to allow a facility use that is disagreeable to the Members for religious reasons. A Facility Use Policy for these organizations may provide for limiting the use of facilities to programs and charitable purposes which are consistent with their own statement of faith and constitution, thereby strengthening the right to refuse a request for uses viewed as inconsistent with the organization’s religious beliefs.

Even with an appropriate Facility Use Policy, it may still be that a human rights complaint can be brought.  We therefore recommend that any religious charity seeking to deny rental access for religious reasons first get specific legal advice.

Miller Thomson lawyers can assist charities to develop appropriate Facility Use Policies to address these issues, and can advise on when it may be appropriate to restrict use in particular circumstances.

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When Do Naming Rights Constitute an Advantage?

Andrew Valentine, Toronto

Where a donor makes a significant gift to a charity, it is not uncommon for the donor to request, or the charity to offer, naming privileges in connection with the gift.  This often consists of naming a building, or portion of a building, after a donor whose donation financed its construction or who has provided significant support to the charity.  When issuing official donation receipts for donations for gifts in respect of which the donor will receive naming privileges, it is important to consider whether these naming privileges will constitute an advantage that must be subtracted from the fair market value of the gift to arrive at the eligible amount of the gift.

A recently-released technical interpretation offers some clarification of Canada Revenue Agency's position on when naming rights will constitute an advantage.  This document responded to an inquiry from a taxpayer as to whether an advantage would arise where a donor receives naming rights in gratitude for a gift, and in particular where the name to be displayed by the charity identifies a business of the donor – either one carried on as a sole proprietorship or by a partnership or corporation with which the donor does not deal at arm’s length.

CRA confirmed that the amount of advantage, if any, in respect of a gift, is the fair market value of any property, service, compensation or other benefits received (or expected to be received) in gratitude for the gift by the donor, or by a person or partnership that does not deal at arm’s length with the donor.  In the context of naming rights, CRA stated that the question is whether such rights will provide an economic benefit.  In the absence of such a benefit, the amount of the advantage is nil.  This would occur, for example, where the name recognition is provided to the donor and the donor’s name is not identified with the business or corporation.  CRA noted that the question of economic advantage is considered from the perspective of both the donor and all non-arm’s length persons or partnerships. 

CRA stated that where an economic benefit would be associated with the naming rights, then the fair market value of this benefit would reduce the eligible amount of the gift.  CRA also noted that to the extent that the transfer of property can reasonably be considered to have been made for business purposes – i.e., to produce income from business or property – rather than as a gift to charity, then such amount may be deductible in computing the income from the business or property.

Charities need to ensure that they consider the economic value of any naming rights provided to donors, particularly where the donor is a corporation or partnership, or where the naming right identifies a business with which the donor has a connection.  Where the naming rights have value, this value must be determined and subtracted from the value of the receipt.

Miller Thomson’s Charities and Not-for-profit lawyers can assist in determining the appropriate treatment of gifts for which naming rights are conferred.

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Do We Have to Put All That in the Minutes?

Hugh M. Kelly, Toronto

“Must the minutes include all motions, even the motions that are defeated?”

“Do we have to put in the minutes everything that everybody says? Or can we just summarize the various views?”

“Is it permissible for us to leave out the names of the movers and seconders of motions?”

“Our practice is to keep our minutes nice and slim, leaving out everything that we consider unnecessary, concentrating on just the action items. Are we at any risk in doing it this way?”

These are just some of the frequently asked questions put to us about the content of minutes of meetings of Boards of Directors, of Committees, and of Members.  In the January 2011 issue of this Newsletter, we offered some general comments on considerations that should be taken into account when preparing minutes of meetings.  This article offers greater detail on the content that is required to be included, and what is discretionary.

As will be well known, practices in the detail included in minutes vary widely, from the “bare bones” recitation, to a verbatim transcript of proceedings, with most falling somewhere in between these extremes. Subject to the absolute minimum noted in a moment, the choice of detail is in the discretion of the organization, having regard to what will be useful for the future operations of the organization and the future guidance of the Directors, and officers and staff (particularly the senior staff).

Generally speaking, statutes in Canada respecting corporations, business corporations and not-for-profit corporations alike, require that minutes of meetings of shareholders/members and of directors must be maintained, but do not prescribe the content of minutes (although British Columbia requires a list of every director present at a meeting if that information is not contained in the minutes).

The Canada Corporations Act provides, in part:

112. (1) Every [corporation] shall cause minutes of all proceedings at meetings of the [members] and of the directors and of any executive committee to be entered in books kept for that purpose.

(2) Any such minutes if purporting to be signed by the chairman of the meeting at which the proceedings were had, or by the chairman of the next succeeding meeting are evidence of the proceedings.

(3) Where minutes, in accordance with this section, have been made of the proceedings of any meeting of the [members] or of the directors or executive committee, then, until the contrary is proved, the meeting shall be deemed to have been duly called and held and all proceedings had thereat to have been duly had and all appointments of directors, managers or other officers shall be deemed to have been duly made.

There are parallel provisions in some but not all provinces.

At an absolute “bare bones” minimum, minutes of Directors, Committees and Members should include the following components (as applicable):

1. the identity of the organization (and Committee, as applicable);
2. the place and date of meeting, and whether morning, afternoon or evening (or time of day);
3. the names of those present, identifying separately:
   (a) those who are Directors (or Committee members, or Members, as the case requires), and guests invited to be present, and
   (b) those who are present in person, and those present electronically;
4. the identity of the person chairing the meeting and preferably the secretary;
5. the text of any motions that are corporate actions taken which may have policy or financial implications;
6. the name of each person declaring a conflict of interest, the identification of the specific matter on which the declaration was made, and the general nature of the interest as actually declared;
7. where a matter must be carried by more than a simple majority, the number of votes for and against, and the declaration of the chair as to whether the motion was passed by the requisite majority;
8. where a vote is taken by ballot, the number of ballots in favour, the number against, and the number of ballots spoiled, along with the declaration of the chair as to whether the motion was passed by the requisite majority;
9. whenever requested by any Director at a meeting:
   (a) the identity of such Director,
   (b) the way in which he/she cast his/her vote, and
   (c) a brief statement of his/her objection to the matter or to considering the matter;
10. the signatures of chair and secretary of the meeting.

Note, as to (c) above, that certain due diligence defences require a Director to record his or her objection. As a result, there is an obligation upon the organization to accede to a request (which itself is reasonable) that such a statement be recorded in the minutes.

There is no requirement that the minutes include:

(a) everything that every person says, nor even a summary of the arguments for and against the substance of any motion;

(b) the identity of the mover and seconder of motions; inclusion or exclusion of such names is purely a matter of policy, and exclusion is as appropriate as inclusion;

(c) defeated motions, although, there can be merit in having such details in the minutes for purposes of keeping an historical record of what the organization has considered and rejected;

(d) the identification of items that have been included in the agenda for information only; nor is it necessary or appropriate to include or attach copies of such information items. Where, however, it is considered that such material forms a necessary background to the related item upon which action was taken, at least some reference may be appropriate.

Of course, the By-laws of the organization could contain provisions prescribing the content of minutes in as much or as little detail as may be considered necessary or desirable for that organization. In determining what By-law provisions should be adopted, perhaps the question that should be asked is:

Would greater details, beyond the “bare bones” minimum, show justification for the decisions made, or be useful guidance for the organization or its Board of Directors, Committees, Chief Executive Officer and/or his/her staff in making appropriate decisions in the future?

In the absence of a By-law provision prescribing the content of the minutes, the chair and secretary should ask themselves that same question with respect to the content of the minutes of any particular meeting.

As with many matters that must be determined, a common sense consideration of this question will generally offer prudent guidance as to the particular content of any specific minutes.

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What's Happening at Miller Thomson

Hugh Kelly made four presentations in April 2011 to groups of soon-to-retire school principals, vice-principals and teachers on “Powers of Attorney and Wills”.

Robert Hayhoe presented on May 4, 2011 at Macquarie Private Wealth on “Legal Update: Endowments, Foundations and Charities”.

Susan Manwaring presented on May 6, 2011 at the Canadian Bar Association 2011 Charity Law Symposium on the topic “NPO Status and Strategies in Response”.

Arthur Drache delivered a paper on “Revisiting Trusts as an Organizational Alternative” at the CBA Charity Law Symposium in Toronto on May 6, 2011.

Sheldon Wood spoke on May 12, 2011 on the topic "Human Rights Law and the Impact on Faith-based Organizations", followed by a panel discussion on issues of "Freedom of Conscience and Religion" at the CFL's 2011 Christian Legal Institute at the Ivey Spencer Leadership Centre in London Ontario.

Brenda Taylor is attending the “Annual Conference of the Institute of Law Clerks” in Ottawa on the new Federal Act on May 13, 2011.

Kate Lazier spoke at the Law Society of Upper Canada's Business Law Summit, in Toronto, on the topic of "Statutory Reforms Affecting Not-for-Profit Clients" on May 17, 2011.

 Robert Hayhoe and Gail Black presented on "2011 Charities and Not-for-Profit Update" for the Prairie Provinces Tax Conference in Edmonton on May 30, 2011.

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