- by Stacey Jessiman -
Part of my legal work for business and non-profit organizations involves helping them carry out a variety of changes -- from appointing or replacing directors and officers, to amending bylaws (or “articles of incorporation” of British Columbia corporations), to major restructurings. To do this work, I first need to establish who should be involved in approving those changes.
That requires reviewing an organization’s Records Book, including its bylaws/articles of incorporation where the rules regarding approving changes are set out, as well as the lists (“registers”) of directors and company shareholders (or society members) and evidence of their valid appointment or removal during a meeting or in written resolutions, so that I can determine who actually has the power to take the decision.
During that records review, I sometimes encounter errors -- like invalid director and officer appointments, failures to notify the provincial registry of director resignations, and failures to maintain an accurate list of shareholders/members – some of which can have serious implications for those people and the organization.
If that happens, I take the time to clearly explain to clients the specific rules in their bylaws/articles and applicable legislation that aren’t being followed, and why following them is important.
Here is why.
If a director has not been validly appointed, their decisions may not be considered valid or legally binding if challenged in the courts, and the organization may face expensive legal or regulatory consequences.
Also, Directors and Officers (D&O) Insurance policies typically provide coverage for directors and officers who are properly appointed in accordance with bylaws/articles and applicable legislation. If a director or officer was not properly appointed, their decisions may not be considered valid or legally binding, and they may not be covered by the insurance policy. Some D&O insurance policies provide coverage for “de facto” directors and officers who have been acting as if they were properly appointed or elected even though they were not. However, this will depend on the specific language of the policy and the relevant laws and regulations.
How is a director “validly” appointed? The BC Business Corporations Act, for example, requires that directors be elected/appointed in accordance with rules set out in a company's articles of incorporation and applicable provisions of that legislation. The BC Societies Act has similar provisions regarding appointing directors following the rules in a society’s bylaws. Other Canadian jurisdictions have similar legislative requirements. Typically, directors are appointed or elected by a majority of the voting shareholders/members who are present at a shareholder/member meeting, or in written resolutions signed by 2/3 of all voting shareholders/members. In limited situations, such as when there is a board “vacancy” (ie, less than the required minimum number of directors), directors themselves may be able to appoint a director to fill the vacancy. But generally, the power to appoint directors rests with shareholders/members.
Both the Business Corporations Act and Societies Act also require that directors consent in writing to being appointed, or attend the meeting at which they are appointed and do not refuse to act, in order for their appointment to be valid. That Consent to Act, or evidence of their consent at a meeting, must be placed in the Records Book, and their director appointment must be notified to the provincial registry.
Maintaining an accurate Records Book in physical or electronic format is crucial to avoiding legal and regulatory problems (see why here). Some organizations engage law firms as Records Offices to maintain their records and advise on how to carry out changes (for why this is a good idea, click here).
It’s also important to follow rules in legislation about the required minimum number of directors. For example, the Societies Act states that societies must have at least three directors (except member-funded societies, which may have just one). If the society does not have the minimum number required, it must appoint additional directors by holding a general meeting of the members, or by having remaining directors appoint new director(s) to fill any vacancies. This is important, because without that minimum number of directors, the Board cannot take decisions or pass resolutions, and it may not be able to continue to exist as a society.
Societies also must have a sufficient number of members. Under the BC Societies Act, for example, a society is required to have at least one member. The society’s bylaws may require a greater number of members. If a society does not have any members, because the members resigned, or their terms expired, the society can’t take decisions requiring members’ approval (such as altering the society’s bylaws and constitution), and may face legal or regulatory consequences including not being able to continue to exist. It must take steps to quickly address the situation, by recruiting members and properly considering and approving their membership applications, or by transferring its assets and winding up its affairs. In some cases, it may be possible for the society to merge with another organization or to dissolve and transfer its assets to another society or charitable organization.
If you need help analyzing the rules your organization must follow for your director and officer appointments to be valid, and for your current directors and shareholders/members to take major decisions, contact Stacey Jessiman at stacey@jessimanlaw.com. I offer tailored advice and guidance on corporate governance rules and best practices, including half or full-day workshops for directors and shareholders.