DIVISIONAL COURT FILE NO.: 009/07

COURT FILE NO.: 06-CU-323276PD1

DATE: 2007/07/06

ONTARIO

SUPERIOR COURT OF JUSTICE

(DIVISIONAL COURT)

MATLOW¹, JENNINGS, LINHARES DE SOUSA, JJ.

B E T W E E N:

LAI CHU

Gordon Slemko, for the Respondent

Respondent

• and -

THE SCARBOROUGH HOSPITAL CORPORATION

James G.D. Douglas and Heather K. Pessione, for the Appellant

Appellant

HEARD: March 26, 2007

REASONS FOR JUDGMENT

Linhares de Sousa J.

Introduction

1The Appellant, The Scarborough Hospital Corporation (the Hospital) appeals the order of Brown J. dated December 28, 2006 ordering that the memberships of Ms. Lai Chu, the Respondent, and other members of the Hospital should run for a full 12 month period, until June 28, 2007 and ordering that the Hospital Board of Directors (the Board) call a general meeting of the Hospital members to be held on or before January 31, 2007. The Hospital asks that this order be set aside, submitting that Brown J. erred with respect to his application and interpretation of the relevant provisions of the Corporations Act, R.S.O. 1990, c. C.38 and the Hospital’s by-laws.

2The appeal comes before this Court pursuant to section 329 the Corporations Act, R.S.O. c. C.38 “an appeal lies to the Divisional Court from any order made by a court under this Act.”

3The Respondent contests the appeal. He takes the position that Brown J. did not err in finding that the Board had not acted fairly towards its Annual Members, including Ms. Chu and that the Board misconstrued its powers to appoint such members and to amend the Hospital by-laws. Ms. Chu requests an order dismissing the Hospital’s appeal with costs.

STANDARD OF REVIEW

4The parties agree on the standard of review to be applied to either errors of law or to errors of mixed fact and law. They differ, however, on the characterization of the alleged error made by Brown J. The Appellant submits that Brown J committed an error of law or an extricable error of mixed fact and law in interpreting the category of “Annual Membership” pursuant to the Corporations Act and the Hospital’s by-laws as requiring membership for at least 12 months. Consequently, the Order is reviewable on a standard of correctness. Alternatively, the Hospital respectfully submits that Brown J. committed a palpable and overriding error in his interpretation of the Corporations Act and the Hospital’s by-laws, and in his application of the facts to these legal tests.

5The Respondent argues that Brown J.’s decision involved questions of mixed fact and law because the questions of law considered by Justice Brown are not readily extricable from the questions of fact. Consequently, his decision should not be overturned unless he made a palpable and overriding error.

6This Court agrees with the Respondent. Justice Brown’s decision involved a legal interpretation of the Corporations Act as well as the Hospital’s By-Laws and the application of that interpretation to the very specific facts of this case. The questions of law are not readily extricable from the questions of fact and hence the standard of review should be that of palpable and overriding error.

FACTUAL BACKGROUND

7The parties agreed on the following facts:

(a) The Hospital was created on September 8, 1999, upon the amalgamation of the Scarborough General Hospital and the Scarborough Grace Hospital pursuant to the Corporations Act. The operation of the Hospital is governed, in part, by the provisions of the Public Hospitals Act, R.S.O. 1990, c. P.40, as amended, and the Hospital Management Regulation, R.R.O. 1990, Reg. 965, as amended, made pursuant to the Public Hospitals Act (the “Regulation”). The Regulation prescribes that the Hospital shall be governed and managed by its board of directors.

(b) The Hospital’s general administrative by-law is By-law No. 1 (“By-law 1”), which sets out the corporate governance structure of the Hospital. Among other things, By-law 1 sets out the composition, duties and responsibilities of the board. By-law 1 also governs membership in the Hospital.

(c) Pursuant to Part IV of By-law 1, the Hospital’s Board consists of nine ex officio directors and fourteen directors elected by the Hospital membership (collectively, the “Directors”). The duties and responsibilities of the Board are set out at section 4.2 of By-law 1, which states:

The Director[s] of the Corporation shall govern and manage the affairs of the Corporation in all things and make or cause to be made for the Corporation, in its name, any kind of contract which the Corporation may lawfully enter into and, except as hereinafter provided, generally, may exercise all such other powers and do all such other acts and things as the Corporation is, by its charter or otherwise, authorized to exercise and do.

(d) By-law 1 sets out two categories of membership in the Hospital at section 3.1: Honorary Members and Annual Members (collectively “Hospital Members”). Generally, pursuant to section 3.2 of By-law 1, Annual Members consist of the Directors of the Hospital, who remain Hospital Members as long as they remain Directors, and individuals who submit membership applications and membership fees as set by the Board and are admitted as Annual Members by resolution of the Board. Under section 3.6(d) of By-law 1 the latter remain Hospital Members until the 31^st day of July following their admission to membership. The By-law does not stipulate any time by which the Board is to admit Annual Members. The application under appeal concerns this latter category of Annual Members.

(e) Brown J. found at page 5 of his decision that “Although the Annual Members who were directors held their membership over the course of a year, the Board historically collected applications for membership and exercised its power to appoint Annual Members under section 3.2(b) in the spring of each year, with the result that the membership of these Annual Members would terminate on July 31^st following their admission to membership.”

(f) The procedure for amending a by-law of the Hospital is set out in Part XX of By-law 1, which complies with the requirements set out at section 129 of the Corporations Act. In general, pursuant to section 20.1, any by-law not embodied in the Hospital’s letters patent may be amended by further by-law enacted by a majority of the Directors and sanctioned by at least a majority of the Members.

(g) In the spring of 2006, the Board began considering amending By-law 1 to alter the governance structure of the Hospital to improve efficiency and to reflect a more balanced representation from the various constituencies served by the Hospital. However, the Hospital’s annual meeting had already been scheduled for June 29, 2006. The Board determined that this did not allow enough time to communicate the proposed by-law amendments to the Annual Members and have them vote thereon at the 2006 Annual Meeting. Therefore, the Board decided to call a special meeting of the Hospital for September 28, 2006 for the purpose of electing directors and approving the proposed by-law amendments.

(h) In order to give effect to its decision as described in paragraph (g) above, a majority of the Directors passed By-law No. 3 (“By-law 3”) on March 9, 2006. Among other things, By-law 3 provides for the postponement of consideration and approval of Annual Membership applications until after the 2006 Annual Meeting, scheduled for June 29, 2006, and for the extension of the term of Annual Memberships to the end of the Special Members’ Meeting, to be held on September 28, 2006. In particular, section 2.3 of By-law 3 provides that the memberships of 2006 Annual Members admitted by resolution of the Board after the 2006 Annual Meeting terminate at the end of the September 28, 2006 Special Members’ Meeting. In accordance with section 20.1 of By-law 1 and section 129 of the Corporations Act, By-law 3 was confirmed at the 2006 Annual Meeting by the Directors, who constituted a majority of the Hospital Members at that time. The reason for this was that otherwise such memberships would end on the 31^st day of July following their admissions to membership pursuant to s. 3.6(d) of By-law 1.

(i) On June 29, 2006, following the 2006 Annual Meeting, the Board passed a resolution admitting the 2006 Annual Members of the Hospital who had submitted applications and the requisite fee and who otherwise met the prescribed qualifications in By-law 1. The Applicant/Respondent was among the members admitted at that time.

(j) As the Special Members’ Meeting approached, it became apparent to the Board that the Hospital Members wanted more time to review and consider the proposed by-law amendments and to offer further input. Therefore, the Board decided not to bring forward the proposed by-law amendments for approval at the Special Members’ Meeting on September 28, 2006 and the item was removed from the meeting agenda. This decision was communicated to the Hospital Members by letter dated September 22, 2006, written by the then Chair of the Board.

(k) As a result of the Board’s decision as described in paragraph (i) above, the only matter on the agenda at the Special Members’ Meeting was the election of Directors. The meeting took place as scheduled on September 28, 2006. Directors of the Hospital were elected, and the meeting was then terminated by the Chair.

(l) On October 27, 2006, the Hospital received a purported requisition for Special Meeting (the “Purported Requisition”) pursuant to section 295 of the Corporations Act and section 11.3 of By-law 1 from counsel for the Respondent. Section 11.3 of By-law 1 provides that Hospital Members may request that the Board call a special meeting of the members if at least 10% of the current voting members submit a written requisition to that effect.

(m) The Purported Requisition claimed to attach the signatures of more than 10% of the current voting membership of the Hospital including persons like the Respondent.

(n) The Hospital took the position that by operation of section 2.3 of By-law 3, the membership of the Respondent and all other members admitted following the 2006 Annual Meeting ended upon the termination of the Special Meeting held on September 28, 2006.

(o) On November 2, 2006, counsel for the Hospital informed counsel for the Respondent that the Purported Requisition did not meet the requirements of the Corporations Act as the only Annual Members of the Hospital as of the date thereof were its Directors, and as such, the Purported Requisition did not attach the signatures of more than 10% of the voting membership of the Hospital at that time.

(p) As a result of the Board’s position, Ms. Chu brought an application pursuant to s. 332 of the Corporations Act to compel the Board to recognize her membership in the Hospital and to hold a Special Meeting as requested in the requisitions dated October 27 and November 6, 2006. In his decision dated December 28, 2006, Justice Brown ordered that:

(i) Ms. Chu, and the other 117 individuals who were approved as Annual Members of the Hospital on June 29, 2006, remain Annual Members of the Hospital until at least June 28, 2007;

(ii) The Board call forthwith a general meeting of Members, to be held on or before January 31, 2007, for the transaction of the business stated in the requisitions of October 27 and November 6, 2006.

8It is agreed that the validity of the purported requisition for Special Meeting made on October 27, 2006 by the Respondent is dependent on whether the Respondent is ultimately found to be an approved Annual Member at the time at which it was made. If he erred in finding that the Respondent and the others in the same position as the Respondent were approved Annual Members after September 28, 2006, then he also erred in concluding that the purported requisition for Special Meeting was valid and in ordering the Hospital to hold the requisitioned meeting on or before January 31, 2007.

DECISION OF JUSTICE BROWN DATED DECEMBER 28, 2006

9The question before Brown J. was what interpretation should be put on Annual Membership. Should it be interpreted to require the terms of such membership to run a full year in the ordinary meaning of the word “annual” regardless of when the Board exercises its power to appoint such members. Or should it be interpreted to mean those members who are appointed by the Board in any given year with their membership to expire on the date stipulated in section 3.6(d), namely July 31^st following their admission to membership, regardless of the fact that when they are appointed by the Board they may indeed serve less than a year.

10Justice Brown found that the latter was in fact what was happening. For whatever reason the Board had traditionally exercised its power to appoint Annual Members under section 3.2(b) of By-Law 1 in March of each year, only 90 days before the Annual General Meeting which traditionally was held at the end of June of each year. This resulted, according to Brown J. in the appointment of members whose memberships ran for only 4 or 5 months, until they expired on July 31. By-Law No. 1 does not stipulate a date for the holding of the Board meeting which admits Approved Annual Members.

11In contrast to this the Directors certainly held their memberships for at least one year. Section 4.5 of By-Law No. 1 specifies a three-year term for elected directors. Effectively, then the situation which was being created by the Hospital’s practice and interpretation of the By-Law is that for over half of a year the Hospital would not have any Annual Members who could advise the Directors and most importantly act as a check on the Board by way of the rights accorded to Annual Members provided for in section 4.1 of By-Law No. 1 such as for example removing directors and filling vacancies amongst elected directors. Justice Brown found that this significantly reduced the corporate accountability of the Hospital’s Board.

12Justice Brown concluded with the following words at pages 9 and 10 of his decision:

[…] In my view the applicant remains an “Annual Member” of the Hospital at this point in time because the Board has failed to exercise its powers to appoint Approved Annual Members in a manner consistent with a reasonable interpretation of the Hospital’s by-laws.

To accede to the Board's interpretation of section 3.2(b) of By-law No. 1 as limiting the term of such memberships to a matter of only 4 or 5 months would result in a situation where for over half of a year the Hospital would not have any Annual Members who could act as a check on the Board through the mechanisms described in paragraph 8 above. For example, there would be long portions of a year during which no practical resort could be made to section 295 of the Corporations Act - requisitioning a special meeting. Although the seven or so Honorary Members could requisition a meeting, they would be outvoted by a majority of the Board. Without having Approved Annual Members for 7 or 8 months of the year, the corporate accountability of the Hospital's Board would be significantly reduced. This fact reinforces the unreasonableness of the Board's interpretation of the Hospital's by-laws.

The Hospital argued that the Court should give considerable deference to the decision of the Board regarding memberships because such a decision fell within the scope of the Board's business judgment: Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, at para. 65; Maple Leaf Foods Inc. v. Schneider Corporation (1998), 1998 5121 (ON CA), 42 O.R. (3d) 177 (C.A.), at p. 192. I question whether a matter involving the interpretation of a corporation's by-law falls within those category of decisions typically subject to the business judgment rule. In any event, the Board's interpretation of the Hospital's by-law is unreasonable. In my view it is not within a range of reasonableness for this Board to time its resolutions approving new Annual Members under section 3.2(b) in such a way as to create a group of Annual Members whose term runs for only a matter of a few months. Annual members should be exactly that - members whose terms run for a year.

13Justice Brown saw the problem of the Hospital’s interpretation of the By-Law No. 1 expressly played out in the Board’s approval of By-Law No. 3 which was implemented to extend the Respondent’s membership from June 29, 2006 until September 28, 2006 with the specific purpose of allowing Annual Members to vote on two matters, namely, new directors and the proposed governance amendments to the Hospital’s by-laws. This did not happen and the Board simply approved its own action.

14Justice Brown states at page 10 of his decision:

[38] A similar criticism can be made of the Board's approval of By-law No. 3. The Hospital's position is that passage of By-law No. 3 resulted in the approval of a group of Annual Members whose term ran from June 29, 2006, until September 28, 2006, or three months. Again, it is not reasonable for the Board to interpret the Hospital's by-laws in such a way so as to radically limit the terms of `Annual Members'.

[39] Moreover, by passing By-law No. 3 and confirming it on June 29, 2006, at an AGM populated only by directors and a few Honorary Members, the Board adopted an unreasonable interpretation of section 20.1 of By-law No. 1 dealing with amendments to by-laws. Section 20.1 expressly contemplates the sanctioning of Board resolutions amending by-laws by a majority of members. The confirmation of By-law No. 3 on June 29 simply saw the directors, wearing their hats as individual members, confirming the resolution they passed earlier in March wearing their hats as directors. In no real sense can it be said that members of the Hospital sanctioned By-law No. 3 on June 29; the Board simply approved its own action.

[40] The express terms of the preamble to By-law No. 3 contemplated that those Approved Annual Members attending the September 28, 2006, Special Meeting would have the opportunity to vote on two matters: (i) new directors, and (ii) the proposed governance amendments to the Hospital's by-laws. The Board removed the latter item from the agenda by its letter of September 22, all the while purporting to do so because "the Board concluded that Members would like more time to review and consider the proposed By-Laws and to offer further input." By subsequently taking the position that, notwithstanding a material change to the special meeting's agenda, the memberships approved on June 29 lapsed on September 28, the Board ensured that quite the contrary result obtained. Now, according to the Board, the only members who can review and consider the proposed governance by-law and offer input are the directors themselves and a handful of Honorary Members.

[41] Further, By-law No. 3, by its terms, was to have been revoked no later than the September 28 special meeting. It was not, and the Hospital has offered no explanation why it was not. Had the revocation occurred, the limit on the terms of Approved Annual Members now relied on so heavily by the Hospital would have fallen away.

15Justice Brown made the order which he did because he did not find the Hospital’s interpretation of By-Law No. 1 to be reasonable. In addition, by interpreting the by-law in the way which it did to terminate the Annual Membership of the Respondent, the Board was acting in a way which was not fair to the Hospital’s Approved Annual Members. He concluded at paragraph 42 of his decision:

[42] The Board has not acted fairly towards the Hospital's Approved Annual Members. It has misconstrued its powers to appoint such members and to amend the Hospital's by-laws. In addition, the Board cannot on the one hand adopt a by-law amendment that by its very language created a reasonable expectation that Approved Annual Members would have meaningful input into the governance review process and resulting by-law amendments, and then dash those expectations by removing the item from the agenda and relying on a highly formalistic position that the memberships of Approved Annual Members had evaporated. The evidence paints the picture of a Board interpreting the Hospital's by-laws in an unreasonable way that places complete control of governance matters in the hands of directors and negates any meaningful role for Approved Annual Members.

DISPOSITION

16This Court can find no palpable and overriding error in Justice Brown’s reasons or in the result of his decision. We agree with the Appellant’s submissions that the Corporations Act no where refers to a category of membership in corporations as “Annual Members”. Neither does that Act mandate a category of memberships in corporations which lasts for a year. Furthermore, the Corporations Act provides that the directors of a corporation may pass by-laws not contrary to the Act to regulate the admission of members and the suspension and termination of membership. It further provides that the memberships terminate in accordance with the by-laws of the corporation (see Corporations Act, R.S.O. 1990, c. C. 38, ss. 128(1), 129(1)).

17In accordance with those statutory provisions the Hospital’s by-laws, including By-Law No. 1 and By-Law No. 3 were put into force. The Hospital’s by-laws explicitly provided for the termination of Annual Memberships. That date was July 31, 2006. With the passing of By-Law No. 3 the Annual Membership of the Respondent was extended to the Special Members’ Meeting on September 28, 2006. However, nowhere in the by-laws does it stipulate by what date the Board is obligated to approve Annual Members. This, without a doubt, creates a situation in which the term of Annual Membership can be solely determined by the Board. This is in fact what had been happening. The extension of Annual Membership affected by By-Law No. 3 is an example of this.

18When one considers that the role and function of the Annual Members as stated under By-Law No. 1 is to act as a check and balance to the powers of the Board of Directors, it is not reasonable that Board of Directors should in its sole discretion be able to determine unilaterally the duration of such Memberships from year to year or from event to event. In light of this and in the face of the absence of a set time for the Board to approve applicants for the category of Annual Members under the by-laws, we find it reasonable to give Annual Membership an ordinary and plain language meaning, namely that such memberships would run for a full year.

19To do otherwise in the circumstances of this case would also be unfair to the Respondent and other Annual Members in her position. Such members were given to believe, upon their appointment, that they would be participating in the discussion concerning the Board’s proposed changes to By-Law No. 1 and to the Hospital’s governance renewal process. It was for this purpose that the term of Annual Membership was extended from July 3, 2006, until the Special Members’ Meeting on September 26, 2006. By relying on the interpretation put forward by the Board, these expectations were frustrated.

20We agree with the Appellants when they state in their Factum at paragraph 24 that the jurisprudence clearly establishes that the by-laws of non-share capital corporations incorporated pursuant to the Corporations Act, like the case at bar, constitute contractual obligations as between the members and the corporation (see Senez v. Montreal Real Estate Board, 1980 222 (SCC), [1980] 2 S.C.R. 555 (S.C.C.), QL p. 7 and Sahaydakivski v. YMCA, [2006] O. J. No 1368 (S.C.J.), paras. 28-30). Both the corporation and individuals who become members of the corporation undertake to comply with the constating documents and the by-laws, which are duly adopted by a majority of members entitled to vote , even if they disagree with those by-laws.

21On the facts of the case before us, there is no question that the by-laws, both By-Law No. 1 and By-Law No. 3 specifically provided for the termination date for the Annual Members, one of whom is the Respondent. However, without an indication in By-Law No. 1 of a designated date by which the Board must approve the appointment of Annual Members, a potentially unbalanced situation between the Board and the Approved Annual Members was created. In that case it is logical and reasonable that a common sense and plain language interpretation be given to the word “annual”, namely a full year of 12 months.

22We agree that the jurisprudence mentioned earlier also establishes that the Court will not intervene with determinations made by a non-share capital corporation in accordance with its by-laws provided the corporation does not demonstrate bad faith or act contrary to the rules of natural justice. The actions of the Board in this case, grounded on its interpretation of the word “annual”, in our view created a situation of unfairness. In view of that situation of unfairness to the Respondent created by the actions of the Board, we cannot find any palpable or overriding error in the decision of Brown J.

23The Appeal is therefore dismissed.

24If Counsel cannot otherwise agree on the question of costs, they shall have two weeks from the release of these reasons to serve and file with this Court their written submissions on costs.

Linhares de Sousa J.

I agree Jennings J.

Released: July 6, 2007

DIVISIONAL COURT FILE NO.: 009/07/06

Court File No.: 06-CU-323276PD1

ONTARIO

SUPERIOR COURT OF JUSTICE

(DIVISIONAL COURT)

Footnotes

1. 1Matlow J. took no part in this decision