Membership is About Control
By Joel Secter
Though we advise charities and non-profits at all stages in their evolution, we typically get involved in the start-up phase. At the start up phase we often recommend incorporation, most notably because of the limited liability protection it provides. Our discussions with clients invariably lead to the roles of directors and the rights of members. While establishing a governance model may be straightforward at the outset, even a simple structure can get complicated down the road. Considering that members control the corporation, we are generally of the opinion that it is important to carefully consider the kinds of members that the organization is authorized to have.
Especially now that members can initiate court action in the name of the corporation (i.e. the derivative action) we advise all our readers to pay close attention to the conditions of membership in their articles and by-laws. If, for example, membership in the corporation is automatic (i.e. by virtue of meeting a condition or simply paying a fee), and there is no mechanism to terminate a member, membership rolls may swell to be unmanageable. It is important to remember that the action of admitting and terminating members must be carried out in good faith, without conflict of interest and with a view to the purpose of the corporation. While restricting membership in the corporation may seem undemocratic, our experience has been that not all supporters of an organization want to participate in running it. Besides, for many corporations, having a large membership makes conducting members meetings impractical and costly.
Where membership is automatic, it is easy for the board of directors to lose control. By way of example, the members of a corporation whose purpose it is to operate a religious school may be comprised of the parents of students enrolled at the school. If a dispute were to arise over changes to the curriculum, the parents as members could do an end run around the board by exercising their right to requisition a meeting. At the meeting, they could remove the directors and replace them with other board members that share their views. There is also the possibility that a group of rogue members could undertake activities that jeopardize the reputation of the school and expose the directors to liability.
This begs the question whether membership should be open to a large number of people or restricted to a small group? Recognizing that a corporation can establish any number of conditions and classes for membership permissible under the governing statute, below are examples that reflect the range of options:
At one end of the spectrum is restricting membership to a small group of people, such as the directors. This can be achieved by making membership in the corporation conditional upon being elected or appointed to the board.
Another option is to provide for more than one class of members, whereby one class is voting (and controlling) and the other is not. Conceivably, even non-voting members could have rights (especially in certain circumstances), such as the right to attend meetings, to obtain information and to elect or appoint a representative to the board.
Yet a third option is to remain open to a mass membership while ensuring that all members are admitted by resolution of the board pursuant to stringent membership conditions.
While having a tightly held membership (i.e. the founders or directors) allows those individuals to control the corporation, it can be difficult for organizations that already have large memberships to downsize them. Modifying the rights of existing members may have the unintended consequence of alienating those members from the organization. Furthermore, such a move could give rise to an action in court. Finally, depending on the legislation, there are instances where even non-voting members get to vote separately as a class, effectively giving those members a veto over changes that would affect them.
What this boils to is that care should be taken in deciding who may, or may not, be a member and which class of members should control the corporation. While an open membership may seem like the most obvious way to expand, this structure can become unwieldy over time. For this reason, we recommend to founders of charities and non-profits that they begin with the end in mind and carefully consider who it is that they want determining the character of the organization in the future.