Court-Ordered Non-Compliance: How To Get Out Of A Corporate Bylaw Trap

• Published date: 21 September 2023
• Subject Matter: Corporate/Commercial Law, Compliance, Shareholders
• Law Firm: McLennan Ross LLP
• Author: Mr Jeremy Dixon and MaryAnne Loney

It is uncommon, but occasionally a corporation, society, or similar organization may find itself in a position where it is impossible or impractical for it to obey its own bylaws. Corporations and similar organizations can "live" a long time, far longer than the people that operate them. As a result, the bylaws these organizations use to govern themselves are often written to address different circumstances from a different era, including different enabling legislation. Changes to bylaws over years or decades and changes to the circumstances they operate in can result in unintended consequences.

Occasionally, these changes will result in a key bylaw rule becoming impossible to comply with. This can have significant consequences for an organization and its operation. For instance, a high quorum requirement for meetings of shareholders or members can go from a reasonable safeguard to an onerous mandate if the ownership or membership of an organization changes significantly. Rules written for an organization with small, closely related ownership or membership may require that all or most shareholders/members attend meetings. This can be a reasonable way of ensuring that all such people are substantially in agreement about how the organization should run to help ensure that its business runs smoothly, and disputes are avoided.

However, if the organization expands significantly as it develops, such a rule can suddenly become difficult or impossible to comply with. Mandating that all shareholders be present for a closely held corporation may be easy to obey, but such a mandate for a newly public corporation with hundreds of shareholders scattered across Canada may make such a rule effectively impossible to comply with. As a result, such an organization may in practice no longer be able to hold a validly constituted meeting of its shareholders or members, and so all decisions made at such meetings can be subject to question.

There is no easy fix in this situation because these meetings and shareholder/member votes at them are required to amend an organization's bylaws. Accordingly, the organization cannot simply make this change and then hold a meeting after.

The best way to avoid this is to ensure that an organization's bylaws are periodically reviewed to ensure that they are compatible with the organization's current status or with any proposed changes to the organization, like an expansion of its shareholders or membership.

However, in practice, this often is...