- The Case of the Missing Records - Part 3
- November 1, 2012 | Author: Hugh M. Kelly
- Law Firm: Miller Thomson LLP - Toronto Office
This is the third in a series of articles about how to deal with deficiencies in corporate records.
In Part 1, we discussed the importance of conducting thorough searches of available records and evidence of past corporate actions and decisions. In Part 2, we discussed the process by which gaps in the available records can be filled through the process of reconstruction, ratification and confirmation so as to produce records as reasonably accurate as possible in the circumstances.
In this Part, we will look at two specific deficiencies that often affect not-for-profit corporations:
what if the corporation has not maintained its membership list?
what if the directors have not been elected properly?
In a sense, these are specific examples of incomplete records, and many of the comments in Parts 1 and 2 of this series will apply. There are, however, specific best practices that should be followed in addressing these questions.
What if the corporation has not maintained its membership list?
Membership records are crucial to the life and existence of any corporation - the lifeblood so to speak - but it takes time and effort, and a lot of both, to collect, record and maintain constantly changing membership information.
It is much easier today with computer programs than in the “old days” of hand-written paper registers. But no experienced person will doubt that the collection, recording and maintaining of membership records still requires a live person to insert new data, amend existing data, and remove or archive obsolete data. These tasks, whether or not computerized, are drudgery without much appeal to most people. And so, inevitably, in some and perhaps many organizations, there is a constant struggle to ensure that the membership information retained by the organization mirrors the de facto picture.
So, what to do when the membership records are known to be deficient?
Conduct searches for available information
The nature of the searches will not differ much from what was suggested in Part 1. Once again, common sense should prevail, and the search process described in Part 1 applies equally to the search for membership information. Most organizations have membership lists routinely prepared for management and directors, often with a view to invoicing for membership fees or donation solicitation. This would be where the initial search would begin.
The next source of valid membership information may be in minutes of meetings, either of directors or of members. It is a common requirement that applications for membership must be approved by the directors, and for such corporations, a review of the minutes of meetings of directors may be the appropriate starting-point. Similarly, minutes of meetings of members are another potential source, since sometimes minutes include a list of those in attendance.
In the case of an organization that charges fees or dues, or an organization that provides services such as sport or exercise facilities, a bar or dining room, considerable member information may be contained in the records of such financial transactions. Employees managing such services can usually tell what persons are up-to-date on their annual fees and dues, and who is responsible for the charges for organization-provided services. These financial records could then form the basis of the reconstruction of membership lists.
Another possible source of membership information - albeit less reliable - can be the persons who are members and who can recall the names of, and maybe even the contact information for, other members for whom no formal records have been maintained. But as they say, "beggars can't be choosers" and less reliable information may be better than no information at all. Follow-up verification of what is obtained through such personal recollections may afford reasonable reliance upon lists generated in this way.
Reconstruction, ratification, confirmation
Once these sources have been mined and the collected information has been organized, the reconstruction, ratification, and confirmation process described in Part 2 might, with some variations, be applied.
The reconstruction resolution can only name the persons who have been identified in the searches, so the notice of the meeting seeking confirmation of the reconstruction resolution cannot be given to other persons who may actually be members. There does not seem to be any help for that. The directors could, and should, adopt a policy that if any other person comes forward subsequent to the notice of the meeting, such person would have the right to provide reasonably reliable evidence of membership and would be recorded as a member if that evidence satisfies the board of directors acting reasonably. Beyond that, the organization would need to rely upon their attempts in good faith to make the reconstruction as accurate as possible.
As soon as the reconstruction resolution has been approved, the membership particulars should be inserted in a formal register of members. And the organization should adopt a system of continuous updating of that register.
It should also be noted that if a person's name has been wrongly entered, retained, deleted or omitted from the records of a corporation, the person may apply for a court order to rectify the record.
What if the directors have not been elected properly?
Directors No Longer in Office
It will be a matter of judgment whether any current action is necessary where the possible improper election affects only directors who are no longer in office. If there is some concern about a potential challenge to the validity of corporate action taken while an improperly elected director participated, the cure is for the validly elected current directors to ratify and confirm, as a current act, the original imputed action(s) effective as of the date of the original action(s) taken. As in the case of reconstruction resolutions noted in Part 2, appropriate recitals explaining the background and reasons should be included.
Identity of Current Directors
Where the issue is the identity of the persons who have been elected as directors, the reconstruction, ratification and confirmation process described in Part 2 is suggested - including the search, the determination of who was elected and for what time period(s), the reconstruction resolution, and the meeting of members to confirm the reconstruction resolution.
Defects or Irregularities Respecting Current Directors
If the identity of the persons who have been elected as directors is not an issue, the problem may be an after-discovered defect or irregularity in the election, appointment or qualification of those persons. This is expressly resolved by the specific provisions contained in each of the Canada Not-for-Profit Corporations Act (s. 139), the Ontario Corporations Act (s. 292) and (when proclaimed) the Ontario Not-for-Profit Corporations Act (s. 37). These provisions provide that the acts of directors and officers are valid despite an irregularity in their election or appointment or a defect in their qualification.
There is no corresponding provision under the Canada Corporations Act where it is afterwards discovered that a director has not been properly elected. There are three possible solutions dependent upon the nature of the defect.
First, if the person remains in bankruptcy, then he/she is not capable of meeting the statutory requirement for acting as director; in this case, there is no "cure" for the defect, with the result that the director "slot" occupied by the person would be vacant.
Second, if the person does not meet a requirement set out in the by-laws (such as residency), then the directors could enact, and the members confirm, a by-law amendment altering the requirement, either for that specific person for her/his term of office, or more generally. Otherwise, a new election could be required.
Finally, if the required election process was not followed, the only practical solution would be to hold a new election using the proper procedures.