NFPCA – the new Not-for-Profit Corporations Act, 2010, (NFPCA), here, passed by the Ontario Government October 19, 2010, is the new framework for Ontario’s 46,000 not-for-profit corporations (NFP).
NFPs may also incorporate federally and therefore subject to the federal Not-for-profit Corporations Act.
The NFPCA will replace the Ontario Corporations Act for the legislation of NFPs (over a transition period of three years.)
Actions: As Directors and Officers of NFPs you will need to:
Amend letters patent, supplementary letter patent, by-laws, or special resolutions,
Confirm NFP “purposes” – now the NFP can conduct commercial activities so long as they advance the NFPs purposes, even if the transaction is contrary to the corporation’s articles or by-laws,
Understand the definitions of:
“public benefit corporations” – defined as (a) a charitable corporation (a corporation incorporated for relief of poverty, advancement of education, advancement of religion or other charitable purpose) or (b) a non-charitable corporation that receives more than $10,000 in a financial year, (i) in the form of donations or gifts from persons who are not members, directors, officers, or employees of the corporation, or (ii) in the form of grants or similar forms of financial assistance from the federal government or a provincial or municipal government or an agency of any such government.
“non-public benefit corporations” – a corporation that is not a public benefit corporation.
Understand the Audit Requirements for these different structures,
Know your Duties:
Duty of Care to, (i) act honestly and in good faith with a view to the best interests of the corporation; and (ii) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances
Duty to Comply with the Act and the regulations, and the corporation’s articles and by-laws, and not to contract out of statutory duty
Disclosure of any conflict of interest (par. 41 of the Act), even if the material contract or transaction or proposed material contract or transaction that, in the ordinary course of the corporation’s business, would not require approval by the directors or members.
The conflicted director or officer must also remove themselves from the meeting and not vote on any resolution unless for indemnity or insurance.
Continuing Disclosure of any interest in any person (other corporation or entity) involved in any contract or transaction with the entity
Understand your Liability:
Jointly and severally liable for money or property distributed or paid, (i) to a member, a director or an officer contrary to this Act, (ii) as an indemnity contrary to this Act.
Limitation of Liability: Any action commenced after two years form the date of the resolution authorizing the action complained of.
Jointly and severally liability to the employees of the corporation for all debts (wages, etc.) not exceeding, (i) six months’ wages… and (ii) 12 months’ vacation pay, payable or accrued while they are directors.
Limitation of Liability: Only liable if, (i) the corporation cannot satisfy the debt, or (ii) before or after the action is commenced, the corporation goes into liquidation, is ordered to be wound up or makes an authorized assignment under the Bankruptcy and Insolvency Act (Canada), or a receiving order under that Act is made against it, and, in any such case, the claim for the debt has been proved
Know your potential Defences:
Where the director or officer acted honestly and in good faith, and where the contract or transaction was reasonable and fair to the corporation at the time it was approved, and if the contract or transaction is confirmed or approved by special resolution at a meeting of the members duly called for that purpose; and the nature and extent of the director’s or officer’s interest in the contract or transaction are disclosed in reasonable detail in the notice calling the meeting.
Where the director exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances
Where the director relied in good faith on, (i) financial statements presented by an officer or auditor (note, see previous blog post, here, regarding the Hercules case, here, and auditors protection from director suits), (ii) report or advice of an officer or employee of the corporation, if it is reasonable in the circumstances to rely on the report or advice; or (iii) a report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by them.
Where the director recorded their dissent to a decision in the minutes of the meeting; however, a director who was not present at a meeting at which a resolution was passed or action taken is deemed to have consented to the resolution or action unless within seven days after becoming aware of the resolution, the director, (i) causes his or her dissent to be placed with the minutes of the meeting; or (ii) submits his or her dissent to the corporation.
Get comfortable with your Protection:
Indemnity agreements and indemnification from your corporation is a legitimate contract for the corporation, so long as it covers only directors and officers or former directors and officers of the corporation against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other action or proceeding in which the individual is involved because of that association with the corporation or other entity, but only when they acted at the corporations request. However, this indemnification is only allowed if the individual acted honestly and in good faith with a view to the best interests of the corporation or other entity, and, if the matter is a criminal or administrative proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that his or her conduct was lawful.
The concerns with this indemnity:
Financial impairment of the entity,
Granting indemnification is a very subjective test which will be based on the interests and attitudes of the remainder of the board of directors and/or members of the corporation at the time the costs need to be paid (which may be a completely different group from when the original transaction/decision occurred),
The indemnity provision is based on a “may indemnity” language, making that indemnification even more subjective,
The limitation of the indemnity is based on “shall not indemnify” language, suggesting the intent of the legislation was to make withholding indemnity easier than providing indemnity.
Directors have a responsibility to question management on all operations and risk of the business, including the current and proposed insurance coverage for General Liability and Property risk, as well as other operation-specific risk (Products Liability, Media Liability, Automobile, Environmental Impairment, Employee Benefits, Workers Compensation, Professional Liability, Crime, Employment Practices, Fiduciary Liability, Contracting, Construction, etc.) This is not the forum for full explanation of these insurance products, but appropriate risk management in these areas is a priority over Directors’ and Officers’ liability insurance, but, unfortunately, even extraordinary effort and due diligence in managing operational risk will not protect directors from 100% of their risk.
Directors’ and Officers’ liability insurance (D&O) has become critical for attracting and retaining a solid and experienced board of directors. However, most directors do not know how this insurance coverage actually works and many insurance buyers (not always a director) don’t know that there is no regulation of insurance policy contracts or premiums in Canada. Therefore, with dozens of insurance companies (and Managing General Agents, who are not insurance companies), hundreds of policy wordings, thousands of endorsements and even more insurance brokers, selection of your insurance broker is your most important decision.
Unless you have D&O insurance experience, are willing to read every line of every policy being presented, and able to research the quality of the insurer(s) backing your coverage, then you need to rely on your insurance broker (and you should only use one.) Therefore, it is appropriate to question potential brokerage service providers on their, 1) strategy and recommendations for coverage and placement, 2) insurance market reach (how many market they deal with on this coverage line and who those companies are), 3) experience with this coverage line, including types of related products and claims, 4) independence (of the brokerage and the proposed insurance markets, including ownership, debt and remuneration agreements), 5) possible conflicts of interest, and 6) their dedication to you as a client over many years
D&O coverage questioning should include, but not be limited to, the following issues, 1. Continuity of Coverage, 2. Sharing of Limits, 3. Limit Exhaustion, 4. Severability (parties and matters), 5. Exclusions and their Preamble, 6. Hidden Exclusions and where to find them, 7. Exposures, and 8. Limit Adequacy.
Finally, don’t let any broker approach any insurance market on your behalf until you have selected your brokerage service provider. Board members might think they are helping the process by calling their insurance friend to investigate D&O coverage. But some brokers will use that opportunity to approach many markets with little or no information in an attempt to “block markets” from the legitimate broker. Being approached by multiple brokers for the same risk will create concern for the individual insurance company underwriters and may limit negotiating ability, increase premium and/or reduce coverage.
If you would like help navigating the risk of being a director officer, or you would like more information on insurance and D&O claim examples, please don’t hesitate to contact me directly, Greg Shields, Partner, Mitchell Sandham Insurance Services, email@example.com, or at 416 862-5626.
CAUTION: This is not an exhaustive list of definitions, duties, liabilities, limitations, defences, or suggested actions. The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to firstname.lastname@example.org.