Our incorporated charity and non-profit clients often wonder why they need members. Organizations with few governance participants, either because they are small or because they are controlled by a small group, sometimes wonder if they may operate with only a board. Our US clients looking to set up a Canadian affiliate or interact with existing Canadian charities are often accustomed to non-profit corporate statutes that allow a corporation to have only a self -perpetuating board without any members.
The short answer is that all Canadian non-profit corporate statutes of general application require members. Generally, in order to avoid having members, a non-profit in Canada needs to be incorporated by a special statute of the federal parliament or one of the provinces. This special act process is very slow, complex and expensive, although it does give flexibility in membership and in all other things.
Fundamentally, directors of a for-profit share capital corporation are fiduciaries who act on behalf of the corporation’s interests and its shareholders, with accountability to such shareholders. A non-profit corporation’s directors must act in the best interests of the corporation and its purposes, with the members being those who hold the directors accountable. Members (and shareholders) are generally not fiduciaries and can act to further interests other than those of the corporation.
While a US organization that establishes a Canadian affiliate and selects its initial board members may be dismayed to find that the Canadian board is obliged to think primarily of the interest of the new organization, the absence of a fiduciary duty for members can actually be very useful. For example, although a director cannot legally represent a constituency of the organization, a member (or member class) can do so. This means that if the US organization also holds a membership (including one with special voting rights), the US organization will be allowed to vote those membership rights in its own interests, rather than those of the Canadian organization. It is even possible to have the bylaws of an organization limit certain kinds of decisions to members, allowing an extra degree of member control without fiduciary duty where appropriate.
Where it is desired that there only be a board, it is usually possible for the board and members to be the same self-perpetuating group. When a non-profit is structured in this way, mission drift can be prevented. On the negative side, however, fresh ideas can also be prevented. In order to keep proper books and records, organizations with self-perpetuating boards need to be careful to ensure that directors’ decisions are made (and shown in corporate records to have been made) at directors’ meetings and that decisions made at members’ meetings are similarly reflected. This helps to ensure that at various times there is no question as to the correct fiduciary standard to be applied to individuals serving as both directors and members.
Canadian charitable and non-profit corporations need to have both directors and members, unless incorporated by special act. The fact that directors owe fiduciary duties not owed by members does not prevent directors and members from being the same people.
By Robert B. Hayhoe, Social Impact Group, Miller Thomson LLP
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