Memo From JOHN R DUNN Barristers and Solicitors 469 Water St., Peterborough Undated 1 CORPORATIONS WITHOUT SHARE CAPITAL INTRODUCTION: When members of a group prefer incorporation as a means of creating an organisation more definite and permanent than a mere unincorporated association of individuals, they may obtain Letters Patent incorporating them as a corporation without share capital. Corporations without share capital are usually welfare organisations, churches, agricultural, cultural, scientific, patriotic, religious, professional and trade associations. In Ontario, corporations without share capital are incorporated under The Corporations Act. Generally speaking, non-share corporations are conducted without pecuniary gain to their members and it is so provided in their Letters Patent, the members do not receive dividends or other monetary gain. However, some non-share corporations are conducted for pecuniary gain to their members, for example, co- operative corporations which may be incorporated without share capital or with share capital. A co-operative corporation without share capital does exist for the pecuniary gain of its members either through the declaration of dividends or through a financial saving to the members. ADVANTAGES OF INCORPORATION: A corporation without share capital has certain advantages over an unincorporated organisation. Incorporation creates an organisation more definite and permanent than an unincorporated group of individuals. The individual members of the corporation and the Directors of the corporation are exempt from personal liability for the debts and obligations of the corporations. An unincorporated organisation is not recognised as having any legal existence apart from the members of which it is composed. It cannot enter into contracts or sue or be sued in its own name. An unincorporated organisation cannot hold real estate in its own name but only through trustees. The members of an unincorporated association may be liable for its debts and obligations. 2 FEDERAL OR PROVINCIAL INCORPORATION: The Federal parliament and the legislatures of all the provinces have enacted legislation on corporations without share capital. The Federal Act provides that non-share corporations may be incorporated under it if the objects of the corporation are those to which the legislative authority of the parliament of Canada extends. This limits the number of types of non-share corporations which can be incorporated federally. A provincially incorporated corporation without share capital can carry on its undertakings in other provinces, provided that it complies with the laws of the particular jurisdiction in which it carries on. If a non-share corporation wishes to open offices or maintain separate mailing addresses in other provinces then normally registration is required in each of those provinces. Such registration generally involves fees of $150.00 to $250.00 for each province as well as some considerable amount of legal work in order to prepare the documents necessary to comply with the requirements of each province. These requirements apply even if the corporation was incorporated federally rather than under the laws of Ontario. As a matter of economy it is least expensive to maintain a single national office in the Province of Onatio with a single mailing address. INCORPORATION IN ONTARIO: In Ontario non-share corporations are incorporated under Part III of The Corporations Act by Letters Patent. The issue of Letters Patent is within the discretion of the Lieutenant- Governor (the Government of Ontario) and is withheld when incorporation is considered not to be in the public interest. The application for incorporation must be by three or more persons of eighteen or more years of age. Only one executed copy of the application need be filed at an application fee of $100.00 payable to the Treasurer of Ontario. NAME: The name of a corporation without share capital cannot include the word "limited" but can end with the word "incorporated" or the abbreviation "inc.". A non-share corporation may not have the word "company" in its name. The membership of the corporation should be representative of the group indicated by the name. For example, the name "Hamilton Retail Tobacco Distributors Association" would not be granted if only 10% of the retail tobacco distributors in Hamilton are expected to become members. If the word "association" is to be used in the proposed corporate name so that it appears to indicate that the corporation will be a representative body for the named group, then the applicants must file with the application an affidavit indicating a substantial majority of the named group will be members of the corporation on incorporation. 3 HEAD OFFICE: The head office of the corporation must at all times be within Ontario. The place within Ontario where the head office is to be situated is set forth in the application for incorporation and transcribed into the Letters Patent. Such place is almost without exception an incorporated municipality. A corporation may by special resolution change the location of its head office to another place within Ontario. A special resolution passed by the Directors and confirmend with or without variation by at least two-thirds of the votes cast at a general meeting of the members duly called for that purpose, or in lieu of such confirmation, by consent in writing of all members entitled to vote at such meeting. OBJECTS: The term "objects" refers to the purposes, objects, or functions which the corporation is intended to fulfill. The objects of a non-share corporation to be conducted without pecuniary gain to its members should not be those ordinarily found in the Letters Patent or Articles of Incorporation of commercial companies. For example, the objects of a non-profit corporation could not begin with the clause "to carry on the business of printers". A non-profit corporations may wish, however, to carry on business incidental to its main objects. For example, an agricultural society may desire to conduct a printing and publishing business for the purposes of disseminating information to its members and to the public. In that case, the objects might read; a.) To promote interest in and the study of agriculture generally; and b.) for the object aforesaid, to carry on printing and publishing and to sell and distribute literature. SOCIAL OBJECTS: For non-share corporations with objects of a social nature and/or maintaining a clubhouse or similar premises, the applications are subject to an investigation by the local and provincial police authorities. Each applicant must provide detailed information about themselves, i.e. full name, present and previous addresses, age, weight, height, and any distinguishing marks, colour of eyes, etc. Each applicant is then individually screened by police authorities. The reason for this process is to deter any illegitimate operations such as gambling houses from receiving Letters Patent. 4 CAPITAL: A corporation without share capital cannot, of course, finance itself by the sale of shares. It may, however, raise capital by other means, notably by membership entrance fees, annual membership dues, donations, borrowing, or by the issue of bonds or debentures which may be secured by a mortgage upon the assets of the corporation. Often the by-laws provide that as a condition precedent to becoming a member a person shall subscribe for a bond or debenture of the corporation for a specified principal amount. DIRECTORS: The affairs of a non-share corporation are managed by a Board of Directors of not less than three people. The Board must be a fixed number. The Directors need not be designated as such but may be designated by some other term such as "governors" or "trustees" The persons named as the first Directors in the Letters Patent are the Directors of the corporation until replaced by the same number of others duly elected or appointed in their stead. The number of Directors may be increased or decreased by special resolution except in the case of a corporation operating hospital or a recognised stock exchange. No person can be a Director unless she is a member or unless she becomes a member within ten days after his election or appointment. Every Director must be eighteen or more more years of are. The Directors of a non-share corporation are not personally liable for its debts and obligations except for the wages of employess of the corporation. Directors are liable to clerks, labourers, servants and apprentices and other wage earners of the non-share corporation for all debts due while they are Directors for services performed for the company not exceeding six months. Each Director is liable for the full amount of such wages. Generally the Directors must be elected by the members. The Letters Patent, however, or Supplementary Letters Patent or by- laws may provide for persons becoming ex officio in lieu of election. The Directors cannot be designated, elected, or appointed by an outside body. The Directors must be elected by the members in a general meeting. The Directors are elected for a term of one year unless the Letters Patent or Supplementary Letters Patent provide otherwise. The term of office of Directors must be an integral number of years not exceeding five. It is possible to provide for the election and retirement of Directors in rotation. For example, a certain number of Directors may be elected for terms of one year, others for terms of two years, and still others for terms of three years. 5 So long as a quorum of Directors remain in office vacancies on the Board of Directors may be filled by the Directors from among the qualified members of the corporation by appointment and such Directors will hold office until the next annual meeting of the members. BY-LAWS: The by-laws contain the rules and regulations for the operation of the corporation. The Directors have the sole power to initiate by-laws. The function of the members is largely to confirm, reject, amend or otherwise deal with by-laws submitted to them by the Directors at the annual general meeting of the members. The Directors have the power to pass by-laws not contrary to the act or to the Letters Patent or Supplementary Letters Patent to regulate, a.) the admission of persons and unicorporated associations as members and as ex officio members and the qualification of and the conditions of membership; b.) the fees and dues of members; c.) the issue of membership cards and certificates; d.) the suspension and termination of memberships by the corporation and by the member; e.) the transfer of memberships; f.) the qualification of and the renumeration of Directors and the ex officio Directors, if any g.) the time for and the manner of election of Directors; h.) the appointment, renumeration, functions, duties and removal of agents, officers, and employees of the corporation and the security, if any, to be given by them to the corporation; i.) the time and place and the notice to be given for the holding of meetings of the members and of the Board of Directors, the quorum at meetings of members, the requirements as to proxies, and the procedure in all things at members' meetings and at meetings of the Board of Directors; j.) the conduct in all other particulars of the affairs of the corporation. 6 Every such by-law and every repeal, amendment, or revenactment thereof, unless in the meantime confirmed at a general meeting, has the effect only until the next annual meeting of the members and unless confirmed thereat, ceases to have effect. In that case no new by-law of the same or like substance has any effect until confirmed at a general meeting. The members may in a general meeting confirm, reject, amend or otherwise deal with any by-law submitted to them for confirmation. In the absence of any provision in the by-laws, the by-laws can be confirmed by a simple majority vote of the members present at the meeting. However, by-laws may be passed to regulate the procedure in all things at a members' meeting and accordingly, the by-laws could require confirmation by a greater majority vote. Any provision which may be made the subject of a by-law may be embodied in the Letters Patent. Although it is not usual, the applicants may desire to have special conditions relating, for example, to the qualification members or restrictions on the number of members, included in the Letters Patent rather than leave them to the by-laws. If the conditions are left to the by- laws, they may be readily changed by the by-laws; if embodied in the Letters Patent, they may be changed only by Supplementary Letters Patent. The Directors have powers to pass by-laws, to borrow money and to mortgage. The by-laws do not have to be approved by the Minister of Consumer and Commercial Relations and copies are not required to be filed with this ministry. The by-laws should ordinarily be numbered sequentially for ease of reference, e.g. "By-Law No 1". By-law No. 1 will ordinarily serve as the general procedural by-law of the corporation setting out all of the operating rules of the corporation. It will have to be several pages long and will probably be the only by-law which will run to a considerable length. MEMBERS: A corporation without share capital is composed of members rather than shareholders. The Act does not limit the number of members. The Letters Patent, Supplementary Letters Patent or byvlaws may limit the number of members but seldom do. The members may either be natural persons or corporations and also unincorporated associations. 7 The Directors may pass by-laws to regulate the conditions and qualifications for membership. Any provision that may be subject of a by-law may be embodied in the Letters Patent. If the applicants desire, the conditions and qualifications for the membership may be set forth in the Letters Patent. It may be provided that only persons residing in a particular area may become members. Such conditions and qualifications should be clear and easy to interpret. Each person who signs the application for incorporation automatically becomes a member upon incorporation. Subsequently, other members are admitted usually by a resolution passed by the Directors. The Letters Patent, Supplementary Letters Patent or by-laws may also provide for the admission of members ex officio. Under the Corporation's Act membership in the corporation may be transferable or not transferable. Unless the Letters Patent, or Supplementary Letters Patent otherwise provide, the interest of a member in the corporation is not transferable and lapses and ceases to exist upon his death or when she ceases to be a member by resignation or otherwise in accordance with the by-laws. It is very unusual for a membership in a non-share corporation to be made transferable. Non-share corporations which operate recreational clubs such as ski or golf clubs may, however, choose to provide for transferable memberships. Members may be divided into different classes if the Letters Patent, Supplementary Letters Patent or by-laws provide. For example, provision may be made for honourary members, life members, and ordinary members. Different voting rights may attach to different classes of membership. Each member of a class has one vote unless the Supplementary Letters Patent or by-laws provide that the members of a class have more than one vote each or no vote. A member may vote by proxy and the requirements as to proxies may be regulated by the by-laws. NON-PROFIT TO MEMBERS AND DIRECTORS: Corporations without share capital are not carried on for profit or gain to their members and this provision must be transcribed into the Letters Patent. Accordingly, a corporation may not pay dividends and no member or director can receive any profit or gain. Paid employees of a non-share corporation are, however, permitted to be members and Directors. They may receive reasonable renumeration and expenses for their services which they may provide in some capacity to the corporation. For instance a member or Director could receive a salary for services as secretary or superintendent or as a lawyer to the corporation. 8 DISTRIBUTION OF ASSETS ON DISSOLUTION: In view of the non-gain clause in the Letters Patent, upon dissolution of a non-share capital corporation, after payments of debts and liabilities, the remaining property or part therof shall be distributed or disposed of to charitable organisations whose objects are beneficial to the community. BOOKS AND FINANCIAL STATEMENTS: Corporations without share capital are required to keep minutes of all proceedings at meetings of members and Directors. If your organisation has been carrying on as an unincorporated association for some time it will already have a book of minutes of meetings. Ordinarily it is wise for the incorporated association to start new minute books. The corporation is also required to keep a copy of the Letters Patent, Supplementary Letters Patent, all by-laws and special resolutions, a register of members and a register of Directors. The corporation must also keep proper books of account and accounting records. The foregoing books and documents must be kept, with one or two exceptions, at the head office. The members appoint an auditor at each general meeting. The Directors of a non-share corporation are required to lay before each annual meeting the financial statement and the report of the auditor must be read at this meeting. The financial statement must contain: a.) a statement of profit and loss for the fiscal period; b.) a statement of surplus for such period, and; c.) a balance sheet as at the end of such period. The financial statement does not have to include a comparative statement with the previous year or a statement of the source and application of funds or disclosure of sales and gross revenue. SUPPLEMENTARY LETTERS PATENT: A non-share corporation may apply to the Lieutenant-Governor (the Government of Ontario) for the issue of supplementary letters patent, a.) extending, limiting or otherwise varying its objects; b.) changing its name; c.) varying any provision in its Letters Patent or prior Supplementary Letters Patent; 9 d.) providing for any other matter or things in respect of which provision may be made in Letters Patent under the Corporations Act; e.) converting to a company. An application under clauses (a) to (d) is authorised by a special resolution. An application under clause (e) seeks to make a more drastic change in the status of the corporation and therefore must be authorised by a Directors resolution and confirmed (a) by 100% of the members; or (b) by 95% of the members, subject to certain conditions set out in Section 132 of the Corporations Act. BANKING: The corporation's bank will require the corporation to pass a borrowing by-law on the bank's form as well as a banking resolution on the bank's form. The bank may also require the corporation to enter into an "operation of account agreement" with the bank setting out terms and conditions upon which the bank agrees to keep an account for the corporation. Each of the chartered banks has its own prescribed forms for theses documents which may be obtained from the branch with which you are banking. The borrowing by-law authorises the corporation to borrow money and to give security upon the assets of the corporation for any loans. The borrowing by-law on the bank's form is passed by the Directors at a meeting and must be submitted to the annual or general meeting of the members for confirmation. This resolution on the bank's form is used to designate which officers are entitled to sign cheques and other banking documents. Usually it is best that the various banking documents be obtained from the bank and prepared by your lawyer for passage by the Directors. PROCEDURE FOR MEETINGS: It is usually customary for non-profit organisations to keep their own minutes up to date after the initial organisation of the corporation, mainly because because there are usually several meetings a year and it is usually a cost and time saving factor. However, certain procedures must be followed and we have tried to set these out below so that they are fairly straightforward and understandable. Meetings of the Board of Directors may be called by two different methods, which are as follows: 10 (a) Definite Time Set: At the original organisational minutes of the corporation, the Directors can establish that meetings be held at regular intervals e.g. the first Monday of each month. By using this method, there is no need to send out notices of each meeting, as each Director shall know when each monthly meeting shall be held. If this method is employed a Waiver of Notice would have to be completed and attached to each meeting, and signed by all the Directors. The signing of the minutes and the Waiver would usually be done at the next meeting, when the minutes from the previous meeting are read and approved. (b) Called by Notice: If the Corporation does not hold meetings at regular intervals, then, depending on what the by-laws of the corporation state, notice calling a meeting of the Directors must be either; (a) sent out by mail a certain number of days before the meeting or, (b) by telephoning all the Directors giving them notice of the meeting. The number of days required to give notices in writing or by telephone will usually be set out in the by-laws of the corporation. I hope that this memorandum is helpful in providing you with the general outline of the law affecting non-share capital corporations, as well as maintaining the corporation after it has been organised. DUNN & DUNN In this document unless the context otherwise requires, words importing the singular number of the masculine gender shall include the plural number of the feminine gender, as the case may be, and vice versa, and references to persons shall include firms and corporations. Transcribed by, JK Muir; December 22nd 1986