By Joel Secter
Even the most seasoned volunteer directors are advised to familiarize themselves with the rules under the Canada Not-for-profit Corporations Act (CNCA). While this brief article only covers certain aspects of the law governing federal not-for-profits, it does highlight a few important aspects in the lifecycle of a board member.
ACT I – BECOMING A DIRECTOR
Qualifications of Directors
As a starting point, the CNCA establishes some basic qualifications for directors. Directors must be individuals and at least 18 years of age. In addition, a person is disqualified from being a director if they have the status of a bankrupt or if they have been declared incapable by a court. Corporations that are or plan on becoming registered charities must also consider that the Canada Revenue Agency (CRA) has the authority to refuse or revoke the registration of an organization when an “ineligible individual” is a board member.
According to the CRA’s policy for charities, an ineligible individual is someone who:
- has been convicted of a relevant criminal offence or a relevant offence;
- was connected to an organization that had its registered status revoked for a serious breach; or
- was a promoter of a tax shelter, and participating in that tax shelter caused the revocation of an organization’s registered status.
Finally, it may be helpful to know that it is permissible to establish additional qualifications for directors in the by-laws of the corporation.
Consent to Serve
Regardless whether they are elected or appointed, all directors must consent to be a director of the corporation. In the case of an individual who is present at the meeting when the election or appointment takes place, he or she is deemed to have consented to serve as a director, unless, of course, they refuse to be elected or appointed. In the case of an individual who is not present at the meeting, they must consent in writing before the actual election or appointment or within ten (10) days. Fortunately this requirement is met if the individual acts as a director after their election or appointment.
Many corporations require all directors to sign a written form affirming that they meet the qualifications of directors and consent to serve as a director. Such a form could also be used to obtain a director’s approval to participate in meetings of directors by electronic means among other things. As it happens, the default rule in the CNCA is that directors cannot participate in a meeting by means of a telephonic, electronic or other communication facility unless “all the directors of the corporation consent”.
ACT II – SERVING AS A DIRECTOR
Meetings of Directors
The default rules in the CNCA establish that a majority of the number of directors or minimum number of directors required by the articles constitutes a quorum at meetings of directors and that resolutions are passed by ordinary (more than 50% of the votes) or special (not less than 2/3 of the votes) resolution. However, the articles or by-laws can establish a different quorum for meetings of directors and require a greater number of votes to effect any action. In addition, it is important to note that absentee voting by directors (i.e. voting by proxy, mailed in ballot or other electronic facility) is not allowed; directors must participate in meetings, either in person or by telephonic, electronic or other communication facility, in order to vote.
Dissent
Some may be surprised to learn that a director who is present at a meeting of directors is deemed to have consented to any resolution passed or action taken at the meeting unless:
- the director requests a dissent to be entered in the minutes of the meeting;
- the director sends a written dissent to the secretary of the meeting before the meeting is adjourned; or
- the director sends a dissent by registered mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned.
A director who is not present at a meeting at which a resolution is passed or action taken is deemed to have consented to the resolution or action unless, within seven (7) days after becoming aware of the resolution or action, the director
- causes a dissent to be placed with the minutes of the meeting; or
- sends a dissent by registered mail or delivers it to the registered office of the corporation.
Furthermore, directors who vote for or consent to a resolution authorizing any payment or distribution, or any payment of an indemnity contrary to the CNCA, are liable to repay the corporation any money or property so paid or distributed. That being said, the CNCA does provide a due diligence defence for directors who have been diligent in their decision making.
Disclosure of Interest
It goes without saying that conflicts of interest arise from time to time. For this reason, the CNCA addresses the disclosure requirements for directors who have an interest in a transaction with the corporation. According to the CNCA, a director of a corporation must disclose to the corporation, in writing or by requesting to have it entered in the minutes of meetings of directors or of committees of directors, the nature and extent of any interest that the director has in a material contract or material transaction, whether made or proposed, with the corporation, if the director
- is a party to the contract or transaction;
- is a director or an officer, or an individual acting in a similar capacity, or a party to the contract or transaction; or
- has a material interest in a party to the contract or transaction.
A director required to make such a disclosure is forbidden from voting on a resolution to approve the contract of transaction unless the contract or transaction
- relates primarily to the director’s remuneration as a director, an officer, an employee, an agent or a mandatary of the corporation or an affiliate;
- is for indemnity or insurance; or
- is with an affiliate.
If a director fails to make such a disclosure, the corporation or a member may apply to a court to request the contract be set aside and the director repay any profits or gain realized on the contract.
ACT III – COMING TO AN END
Ceasing to hold office
A director not elected for an expressly stated term (of one, two, three or four years) ceases to hold office at the close of the first annual meeting of members following the director’s election. Otherwise, a director of a corporation ceases to hold office when the director dies, resigns, is removed by ordinary resolution of the members or becomes disqualified. Where a director resigns, the resignation becomes effective at the time the written resignation is sent to the corporation or at the time specified in the resignation, whichever is later.
Changes Regarding Directors
Under the CNCA, the corporation must file a change regarding directors referred to as a Form 4006 – Changes Regarding Directors, within fifteen (15) days of the change or, in the case of a change to a director’s registered address previously filed with Industry Canada, within fifteen (15) days of the corporation being notified of the change. It should go without saying that the number of directors must at all times be within the minimum/maximum number of directors set out in the articles of incorporation or continuance, as the case may be. If the number of directors is not within the minimum/maximum number, articles of amendment will have to be approved by the members and filed with Industry Canada.
Again, this article is not intended to cover the full range of duties and liabilities of directors under the CNCA. If you have specific questions about complying with CNCA or any other federal and provincial/territorial statutes, we advise that you consult a lawyer.