BC Case Highlights Perils of Corporate Inflexibility

In Vancouver Opera Foundation, Re (released March 2015), a registered charity incorporated under the Society Act (British Columbia) tried to obtain a court order overriding certain provisions of its constitution that were declared to be unalterable. While it failed to obtain the court order it sought, the court suggested some viable work-around solutions.

1. Facts

The Vancouver Opera Foundation (VOF) was incorporated in 1987. Its purposes were to advance the performance of opera and to hold endowments to fund and support the activities of the Vancouver Opera Association (VOA).

Under the Society Act, the constitution of a society could have provisions that declared to be alterable or unalterable. If a provision of the constitution was stated to be alterable, it could be altered by special resolution (requiring the approval of a super-majority of the votes cast). If a provision of the constitution was stated to be unalterable, then, as its name would suggest, there was no provision or mechanism in the Act to amend it. If the provision was silent as to whether it was alterable or unalterable, the default rule was that it was alterable.

VOF's constitution established three funds, the terms of each of which were stated to be unalterable: the VOA Real Property Fund; the VOA Endowment Fund; and the VOA Capital Fund. The board also had the discretion under the constitution to create other funds.

However, the VOF determined that it wanted to find a way to change these unalterable provisions of its constitution. The reasons for seeking the change included:

• the incompatibility of having unalterable funds with current standards in not-for-profit governance;
• the desire to encroach on capital to meet potential (not immediate) income tax obligations;
• to increase its flexibility on the use of grants and donations; and
• low interest rates (under 1% per annum); and
• the desire to pledge the funds as security for VOF's guarantee of a bank line of credit.

With no specific amendment mechanism in the Society Act to resort to, the VOF prayed the assistance of the court.

2. Ruling

However, the court found essentially that an unalterable constitution provision means what it says. There is no legislative gap. The provision, however undesirable, cannot be changed without a statutory amendment. The court was powerless to alter it including under doctrines such as court's inherent cy-pres jurisdiction. Cy-pres jurisdiction allows the court to vary the express terms of a charitable trust to ensure that it is not defeated or frustrated by identifiable impossibility or impracticality. However, the cy-pres doctrine must be applied as narrowly as possible so that the settlor's intentions are carried out as nearly as possible to the original intention. But the court found that this was not a case where it could exercise its cy-pres jurisdiction because there was insufficient evidence to suggest that the changes sought to the constitution were a better way to carry out the intentions of the founders of VOF.

However, the court also pointed out that there was nothing preventing the VOF from authorizing a new general fund to receive funds for a variety of purposes, including to pledge funds as collateral.

Justice Griffin concluded by suggesting that the VOF's members seek to convince their legislative representatives to amend the Act to enable the VOF to respond to the times.

3. Key Observations

Technically, there is no provision for unalterable articles of incorporation (or continuance) under the Canada Not-for-profit Corporations Act (CNCA), articles being the federal equivalent to a constitution under the Society Act.

However, there are at least three possible ways to achieve the functional equivalent of an unalterable provision under the CNCA. These are:

• increase the super-majority required to amend the articles or the specific provision of the articles that is to be functionally unalterable. The usual rule to amend a provision of the article is at least two-thirds of the votes cast by voting members. But this threshold may be increased to a greater number of votes. Therefore, the provision could be made unalterable without unanimous member approval. However, this is not the same as having an unalterable provision because the provision can still be amended if all members approve;
• make the donors contributing to the unalterable fund a separate class of members entitled to a separate class vote on any proposal to amend the provisions of the fund and require that this class approve the change by unanimous vote. This as close to functional unalterability as the CNCA allows in the case of soliciting corporations such as the VOF would be (if it were incorporated under the CNCA); and
• in the case of a non-soliciting corporation, put in place a unanimous member agreement (UMA) and make the provision of the articles unalterable without the consent of all members or another person who is party to the UMA. While this would work for a non-soliciting corporation, it would not work for a soliciting corporation (as the VOF would be if it were under the CNCA) because a soliciting corporation cannot have a valid UMA.

That there has not been much call for unalterable provisions of the articles under the CNCA suggests that the VOF was correct in pointing out that unalterable provisions are no longer compatible with current non-for-profit governance norms. Modern not-for-profit corporations need flexibility to respond to evolving needs that may not be foreseen at the time that the corporation was formed and should not, therefore, be hard-wired into its constating documents.