An effective board of directors is key to the success of any charity or not-for-profit entity ("NFP"). A frequent concern is what to do about directors who, for whatever reason, are no longer appropriate for the organization. This article provides a summary of the key legal issues to consider for charities and NFPs incorporated under the Canada Not-for-Profit Corporations Act ("CNCA") or the Societies Act of British Columbia. Whether a director resigns, is removed, or comes to the end of his or her term limit, their departure must comply with the procedural requirements set out in the applicable legislation and the bylaws of the organization.
When does a director cease to hold office?
In general, a director ceases to hold office when they die, resign or are removed, when their term of office expires, or when they no longer meet the qualifications established by the organization's governing documents.
Regardless of why or how any individual ceases to be a director, in each case the organization should file the necessary notice of change promptly with the appropriate registries.
A director who wishes to leave a board often expresses that intention at a board meeting; thinking that this notification is sufficient. Legally, however, it is not enough.
Under both the Societies Act and the CNCA, an oral resignation is not sufficient, and a written resignation cannot be backdated. Under both Acts, a director's resignation becomes effective at the time a written resignation is sent to the corporation (CNCA) or received by the Society, or at a later time specified in the resignation. If a director leaves the board but does not provide a written resignation, it may be necessary to take steps to remove him or her formally. That process may delay the date upon which the individual legally stopped being a director.
If a director is also a member or an officer, consider whether they also need to resign in those capacities. The bylaws of an organization may require that certain officers also be directors and that they, therefore, cease to be officers when they leave the board; if not, the departing director should also indicate whether they are resigning as an officer.
A director who resigns from the board of a CNCA corporation has a right, unless the bylaws say otherwise, to submit a written statement giving reasons for his or her resignation. The corporation is required to give the members notice of the statement and send a copy to Corporations Canada.
Ceasing to be Qualified
Both the CNCA and the Societies Act set certain qualifications for directors. Under the CNCA, a director who becomes disqualified for reasons set out in the Act ceases to hold office automatically. The approach taken in the Societies Act is slightly different – a director who is no longer qualified is obliged to resign. Until a director resigns formally, he or she remains a director despite not being qualified.
Both Acts say that a director is not qualified if they are bankrupt or incapable of managing their affairs. The Societies Act also states that a director may be disqualified due to certain types of criminal convictions.
The bylaws can set additional qualifications. For example, the bylaws could provide that a director must be a member of the organization or hold membership in a professional body. A charity might state in its bylaws that a director cannot be an "ineligible individual" under the Income Tax Act, because having such a person on the board can imperil the status of the charity. A person who was connected to a charity that had its registration revoked for a serious breach of the Income Tax Act is an ineligible individual; so is a person who has been convicted of an offence which involves fraud or is relevant to the operations of the charity.
Expiry of Term
The bylaws should state the term for which directors are elected. Under the CNCA, director terms must be no longer than four years. At the end of their term they may be re-elected, if the bylaws permit. The Societies Act does not restrict director terms but it says that unless the bylaws provide otherwise, the term ends at the end of the next AGM after the director's election or appointment.
Many organizations set term limits in their bylaws to ensure sufficient and healthy board turnover. The bylaws should be reviewed well in advance of each annual general meeting to determine which directors are approaching the ends of their terms.
Occasionally, a director turns out to be a bad fit for the board. The usual first approach is to ask them to consider resigning, but they can be removed if they refuse to do so. The legislation and bylaws will govern the process.
Under s.130 of the CNCA, the members may remove any director or directors by ordinary resolution at a special meeting. A meeting must be held; directors cannot be removed by a written resolution. Only the members can remove directors; there is no provision in the CNCA for the board to remove a director. Furthermore, a director elected by a class or group of members that has an exclusive right to elect the director may only be removed by an ordinary resolution of those members. This protects the right of those members to have one or more directors of their choice on the board, even if that director does not have the support of the other member classes.
If a meeting is called to remove or replace a CNCA director, that director has the right to make a written statement opposing the removal or replacement. The corporation must send the statement to the members and to Corporations Canada.
The Societies Act offers more options for director removal. A director may be removed by a special resolution passed in writing or at a meeting. The bylaws may also permit additional methods of removal such as removal by the directors or by ordinary resolution of the members. The Act does not give the director in question any express right to make a statement, but a director is entitled to a copy of the register of members, with member contact information. That information can be used in an effort to influence the voting of members.
A vacancy created by the removal of a director of a CNCA corporation may be filled at the meeting of the members at which the director is removed or, if not so filled, may be filled by the remaining directors. Generally, a quorum of directors may fill a board vacancy, except where the vacancy results from an increase in the number of directors provided for in the articles or a failure to elect the number of directors provided for in the articles. Such vacancies must be filled by the members at a special meeting.
By-laws under the CNCA may provide that a board vacancy shall be filled only by a vote of the members, or by a vote of the members of any class or group with an exclusive right to elect one or more directors.
Under the Societies Act, if a director is removed by special resolution, the resulting vacancy can only be filled by the members unless the bylaws provide otherwise. Casual vacancies may be filled by the board.
Under the CNCA, a director appointed or elected to fill a vacancy holds office for the unexpired term of their predecessor. The Societies Act sets this as the default rule but permits the bylaws to vary it. For example, the bylaws could provide that a replacement director will only serve until the end of the next AGM if, for instance, they were appointed by the board rather than elected by the members.
Miller Thomson's Social Impact Group can advise charities and NFPs on all aspects of corporate governance, include director changes. We would be pleased to assist you with a review of your bylaws to ensure that your organization has the right provisions in place before any difficult situations arise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.