Directors' Terms of Office: Creative Variations

Under the Canada Not-for-profit Corporations Act (the "CNCA"), the default rule is that each director is elected at an annual meeting to a one-year term expiring at the close of business of the ensuing annual meeting. If no annual meeting is held or no replacement directors are elected at the annual meeting, the incumbent directors remain in office. But corporations and their members have considerable flexibility to craft other arrangements.

1. Flexibility

(a) Term Duration

Within certain parameters, corporations and their members have great flexibility to craft the term of office of directors to better meet the needs of the corporation. First, the maximum term of a director is four years. Therefore, a term of one, two, three or four years for a director is available.

(b) Term Limits

The CNCA does not set out a maximum number of terms (or term limit). However, a corporation can validly set, as a qualification, that a director not serve more than, for example, two consecutive terms or, less commonly, two or more terms in the aggregate. Term limits can be used to ensure that the corporation has new blood on the board and that directors joining the board do not perceive their tenure as a lifetime commitment.

If a corporation adopts term limits, a further consideration is whether there are any exceptions, so that the term can be extended in extraordinary circumstances. For example, a director who is serving as chair or president may have an automatic extension of his final term limit so that he can complete his term as an officer or remain on the board for a year after his term as an officer ends (to provide continuity to his successors).

Another issue is the treatment of stub periods. For example, if a director initially joins the board to fill a vacancy, should that count as a first term in calculating his term limit. Usually, the by-laws provide that an election to office to fill a vacancy is disregarded in calculating the director's term limit.

(c) Staggered Terms

Also, a corporation can provide for a staggered (or scheduled) terms. With staggered terms, each director is elected to a multi-year term (at least two years but not more than four years). However, the terms of the directors end in different years so that, in effect, only part of the board need be elected each year. Suppose that a board consists of nine directors and that each director is elected to a three-year term. Ideally, the terms of the three directors elected in year one (Y1) expire in Y4, the terms of the three directors elected in Y2 expire in Y5 and the terms of the remaining three directors elected in Y3 expire in Y6, so that an equal number of directors is elected at each annual meeting and there is always continuity on the board.

One issue that arises is the mechanics of converting from, say, a system in which all directors are elected annually to a system of staggered terms of three years each. The best process is to have an election at the next ensuing annual meeting in which all directors are elected. In this example, three directors would be elected to a one-year term, three to a two-year term and the remaining three to a three-year term. Directors can either be elected to these initial terms as a slate or, if there is a contested election, the by-laws can provide that the directors receiving the most votes are slotted into the longest terms. Therefore, the three candidates who receive the highest number of votes would have three-year terms, the three candidates receiving the next highest number of votes would be assigned two-year terms and the remaining elected candidates would be assigned one-year terms. Thereafter, all directors would be elected to three-year terms (unless a director is being elected to complete the term of an director who, because of death, incapacity, resignation, removal or other reasons, has ceased to be a director).

If the total number of directors is a multiple of their elected terms of office (disregarding stub periods), then the same number of directors will ordinarily be elected at each annual meeting. In the example above, nine is a multiple of three, permitting three directors to be elected for three-year terms each year for three years. However, sometimes the total number of directors is not a multiple of the directors' term. In our example, a total of 10 directors would mean that four directors would have to be elected to a one-year, two-year or three-year term. Or if there are a total of eight directors, two directors would be elected to a one-year, two-year or three-year term. The solution is easy, however; the by-laws must be clear about matching directors to the required terms.

What happens when a director elected to a term ceases (for whatever reason) to be a director before her term expires? Under a staggered election system, the best option is for the remaining directors to appoint an individual to fill the vacancy for the unexpired term of his predecessor. The members would have the right, at any time (including at the next ensuing annual meeting), to remove the appointed director if they prefer someone else.

To assist in tracking the terms of each director, it is helpful to set out in the by-laws the rules on staggered terms and to assign all directors to terms designated by separate letters designating different term expirations. In our example, directors could be designated as A, B or C directors, with the by-laws setting out the years in which each term expires. The terms for A directors would expire in, say, 2021 and, if elected, each third anniversary thereafter. The term for B directors would expire in 2022 and, if elected, each third anniversary thereafter (with C directors in 2023).

2. Conclusion

Great care must be paid to setting out the rules coherently and completely should a corporation wish to depart from the default rules with respect to directors' terms. Otherwise, confusion results.