Written by David L. Sevalrud
Directors of not for profit or charitable organizations in Canada (collectively referred to in this article as “non-profit organizations” or “NFPs”) have a number of important roles, responsibilities and duties in the event of a proposed amalgamation, merger or consolidation (which will be referred to in this article as a proposed “combination”) of two or more NFPs.
These roles, responsibilities and duties can be understood by examining both the legal requirements imposed on the Board of Directors (the “Board”) in the event of a proposed combination, as well as from a governance best practices perspective.
Credibility is fundamental for any combination process between two or more NFPs. First, the Board must ensure that the proposed combination is in the best interests of the organization. Then the Board must obtain the approval of the organization members based on the Board’s recommendation. Individually, the directors will also want to ensure they have adequately discharged their duties in order to avoid personal liability.
A credible combination process will demonstrate that:
- the Board was diligent in its investigation of the material risks involved;
- experts were consulted where necessary, and their advice was provided to the Board;
- any conflicts of interest were considered and avoided;
- all reasonable options were considered and the related advantages and disadvantages identified and understood; and
- the impact on all material stakeholders was considered in arriving at the Board’s decision.
Who approves a combination of non-profit organizations?
The Board of a NFP is responsible for making the decision to recommend (or to not recommend) the combination as being in the best interests of the organization. This recommendation is made by the Board to the NFP members, who must approve the combination. Typically, approval is done by way of a special resolution of the NFP members.
Determining the best interests of a non-profit organization
In determining what is in the best interests of a NFP, the Board is responsible for informing itself of both the material risks as well as the material advantages of any combination. This process entails a balancing of the needs, wants and influences of an organization’s key stakeholders.
It is important to note that the best interests of an organization can change over time and can also change with differing circumstances. For example, the best interests of a financially challenged organization may be its survival, and a combination of some form may be the only way for such an organization to survive.
In some cases, the Board will have time to be thoughtful and thorough in balancing these considerations and making a decision regarding a proposed combination. Other times, Boards may need to act quickly to respond or react to circumstances or events that may occur in a shortened window of time.
Directors’ duties in a non-profit combination
Directors are responsible for managing the business and affairs of a NFP, and they owe both a fiduciary duty and a duty of care to the organization. These duties do not change based on circumstance and are not diminished, even in the face of the potential insolvency of a non-profit organization or a director’s conflicting self-interest.
Each individual director must understand the roles, duties and responsibilities of being a Board member, including the legal obligations imposed on the director by virtue of his or her position. If directors fail to carry out their duties responsibly, they may face potential personal liability.
The directors are required to manage the risks to their organization. In the context of a proposed combination, directors must understand the risks of the other organizations that are involved in the proposed combination and how those risks are being avoided, mitigated or managed. If a combination if completed, those risks may need to be assumed by the resulting organization.
In managing the risks involved in a combination, directors can utilize the information provided by the due diligence process, and can also rely on professional advisors to ensure that such due diligence is thorough and completed in a timely manner.
Directors also need to manage the risk of personal liability.
Best practices for record keeping in the event of a combination
The process followed by the directors in arriving at a decision regarding a proposed combination must be reflected on the record. The best record will usually be minutes of both the Board meetings and its Committee meetings.
Minutes should not simply be a transcript of a meeting, nor a record of only the decisions made in a meeting.
Rather, the minutes should demonstrate the process that the Board used in making its decisions. Each Board or Committee member should therefore keep notes on:
- the material issues discussed;
- the material questions asked;
- the advice of any experts received; and
- the different options the Board or Committee considered.
These notes will help ensure that official minutes of Board and Committee meetings are accurate and should then be destroyed when the official minutes are approved.
To the extent possible, minutes should avoid the inclusion of:
- The names of specific individuals (other than experts) who ask questions or make comments: questions or comments can be recorded in the minutes in a general way; and
- How directors voted individually: If a decision is passed, the decision of each individual director is irrelevant. The decision is then a decision of the collective Board and all Board members must support it, regardless of how each voted.
Furthermore, Board minutes are confidential and should not be made available to NFP members or others without good reason and full Board approval. However, in certain circumstances the Board may be required to disclose a summary description of the process used to arrive at their decision to the NFP members. Such disclosure may also be important where stakeholders, other than NFP members, are affected in a material way.
Carscallen LLP’s Charities and Not-For-Profit Organizations Expertise
Carscallen LLP’s team of experienced corporate and commercial lawyers have advised a range of NFPs with legal advice tailored to the field of charity and non-profit organizations. Our lawyers can assist with such issues as structuring, organization and governance of NFPs, as well as advising on regulations and compliance issues for NFPs.
Whatever the legal issue, Carscallen LLP’s Charities and Not-For-Profit Organizations team can help guide your organization through a complex legal landscape. If you have any questions about directors’ roles and duties in a NFP combination, or any other legal questions for our team, please contact us.
*This update is intended for general information only on the subject matter and is not to be taken as legal advice.