Confusion about by-laws, unanimous member agreements, and appointment of directors in Canadian not-for-profit organizations

Question

The starting point for my question is this by-law for a not-for-profit organization in Canada (the by-law is about the make-up of the board of directors):

"(b) A majority of the Directors must not be employed or directly related to organizations that meet both of the following criteria as determined in the discretion of the Board:

• (i) it is a university or college in Canada; and
• (ii) it has one or more researchers who has(have), during the eighteen (18) month period immediately prior to the election, utilized an advanced computing system through access provided by the Corporation as designated by the Board from time to time."

But 9 members of the board of directors satisfy those two criteria and only 3 do not, despite the above by-law saying that the majority must not.

When I brought up my concern about this to the President and CEO there was no response, and when I later brought it up to the chair of the board of directors his response by e-mail was:

"Please be advised that we are not in violation of section 504 of the CC By-Laws.

The recommended slate of Directors was unanimously approved by our institutional members at the annual general meeting in September."

But the by-laws don't say anything about "unanimous approval" and they clearly state that the majority have to be from outside the two given categories (I could show you the whole by-law PDF if anyone needs to be convinced, and the only reason I didn't do it was because it would give away which organization I'm talking about).

Earlier I asked here: What happens when a Canadian not-for-profit organization does not comply with its own by-laws?, and in the comments I was directed to Part 3 and Part 16 of the Canada Not-for-profit Corporations Act (S.C. 2009, c. 23).

Now I start to get so much more confused. Perhaps I was being directed to "Part 3" because of this clause:

"(2) A corporation shall not carry on any activities or exercise any power in a manner contrary to its articles.",

where "articles" means:

"articles means original or restated articles of incorporation or articles of amendment, amalgamation, continuance, reorganization, arrangement, dissolution or revival. (statuts)"

so doesn't explicitly include by-laws, but that part isn't as confusing as what's next:

"19 (1) No corporation, no guarantor of an obligation of a corporation and, in Quebec, no surety may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that

(a) the articles, the by-laws or any unanimous member agreement has not been complied with;".

Here's an attempt at making the above quote easier to read for my purposes:

"No corporation, n̶o̶ ̶g̶u̶a̶r̶a̶n̶t̶o̶r̶ ̶o̶f̶ ̶a̶n̶ ̶o̶b̶l̶i̶g̶a̶t̶i̶o̶n̶ ̶o̶f̶ ̶a̶ ̶c̶o̶r̶p̶o̶r̶a̶t̶i̶o̶n̶ ̶a̶n̶d̶,̶ ̶i̶n̶ ̶Q̶u̶e̶b̶e̶c̶,̶ ̶n̶o̶ ̶s̶u̶r̶e̶t̶y̶ may assert against a person dealing with the corporation o̶r̶ ̶a̶g̶a̶i̶n̶s̶t̶ ̶a̶ ̶p̶e̶r̶s̶o̶n̶ ̶w̶h̶o̶ ̶a̶c̶q̶u̶i̶r̶e̶d̶ ̶r̶i̶g̶h̶t̶s̶ ̶f̶r̶o̶m̶ ̶t̶h̶e̶ ̶c̶o̶r̶p̶o̶r̶a̶t̶i̶o̶n̶ that the articles, the by-laws or any unanimous member agreement has not been complied with".

• What's the point of having by-laws if "no person can assert that they haven't been complied with"?
• Why is it talking about people "dealing with the corporation" rather than just "the corporation itself"?
• What if the "by-laws" and "unanimous member agreement" are in contradiction with each other as is the case I described at the beginning?

Perhaps more reassuring is "Part 16" which says:

"259 On the application of a complainant or a creditor of a corporation, a court may make an order directing a corporation or any director, officer, employee, agent or mandatary, public accountant, trustee, receiver, receiver-manager, sequestrator or liquidator of a corporation to comply with this Act, the regulations or the articles, the by-laws or a unanimous member agreement of the corporation or restraining any such person from acting in breach of them and make any further order that it thinks fit."

But what happens when "by-laws" and "unanimous member agreement" contradict each other as this case does based on the by-law quoted at the top of this question, and the quote from the chair of the board?

Answer 1

What's the point of having by-laws if "no person can assert that they haven't been complied with"?

You are misquoting the excerpt. Both excerpts read "No corporation [or] guarantor of an obligation of a corporation" rather than "no person". The prohibition restrains the corporation and its guarantor, not the "person dealing with the corporation or [the] person who who acquired rights from the corporation".

Why is it talking about people "dealing with the corporation" rather than just "the corporation itself"?

The purpose of this question is unclear, but maybe the previous clarification renders this one moot.

What if the "by-laws" and "unanimous member agreement" are in contradiction with each other as is the case I described at the beginning?

It depends on how or why the discrepancy hinders or reasonably could hinder the complainant's capacity and/or his rights. That issue is unclear from your description.

If the departure from by-laws does not harm (or implies no potential harm to) the complainant, the departure is immaterial and as such it does not disrupt the legal obligations the non-profit organization has. Accordingly, it is unlikely that a court "thinks fit" to order compliance with an item that seems ritualistic at least in relation to that complaint.

It is noteworthy, though, that requirement (b)(ii) in and of itself is rather unclear. The terms "advanced computing system" and "from time to time" are particularly vague. That vagueness foreseeably complicates the [judicial] ascertainment of compliance.

Lastly, the fact that the term "by-laws" is not explicitly mentioned in the statutory definition of "articles" is irrelevant. By-laws are for purposes of reorganization, arrangement, etc. of a corporation, and hence they fit the meaning of "articles". A definition does not need to include an exhaustive list of terminology.

Answer 2

Partial answer

"19 (1) No corporation, no guarantor of an obligation of a corporation and, in Quebec, no surety may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that

(a) the articles, the by-laws or any unanimous member agreement has not been complied with;".

This means that a non-profit that is sued to enforce an obligation to a third party which was apparently entered into properly cannot use its own disregard of its corporate formalities as a defense in the lawsuit.

For example, the defendant non-profit, sued for failing to pay its cable bill, can't present the defense that the contract to purchase services from the cable company was approved only by a board of directors at a meeting where a quorum was not present.

It does not mean that "no person can assert that they haven't been complied with".

Somebody realistically does have standing to enforce the articles, bylaws and statutes pertaining to the non-profit corporation, in furtherance of an appropriate remedy (indeed probably many people do). And, the remedies could range from seeking to remove unqualified directors from the board, to dissolving the company for failing to follow its bylaws, to appointing a receiver to run the company, to overturning internal policies passed by an invalidly appointed board. As long as the rights of innocent third-parties aren't impaired, lots of remedies are possible.

But exactly who has standing depends to a great extent on the internal organization of the non-profit (something that isn't nearly as uniform as it is for for profit corporations), and upon the nature of the claim asserted. It isn't enough that somebody did something that violated the law. To have standing, you have to you that you had a legally protected interest in not having that particular law violated and that you were harmed by the violation of that law in some concrete manner.

Without more facts, it is not possible to know who can enforce the violation.

Also, it isn't implausible that a unanimous ratification of a slate of board members by everyone with voting rights (if that is indeed the structure of the non-profit), could be construed legally as a waiver of the bylaw or as a ratification of actions taken in violation of the bylaw, since a unanimous vote would be sufficient to amend the bylaws anyway.

Similarly, even if the board appointments are deemed technically improper, a court could easily determine that since the unanimous support was sufficient to amend the bylaw, even though that wasn't done, that the procedural misstep was harmless because the same outcome would have been reached if the proper process was followed.