Superior Court of Justice – Ontario

COMMERCIAL LIST

RE: Ontario Korean Businessmen’s Association, Cheol Joong Kang, Yang-Pyung Kim and Hichul Ko, Applicants

AND:

Seung Jin Oh, Hyung Byung Kwon, Jong Hwa Lee, Yang Kon Kim, Gu Yeob Lee, Dong Hun Lee, Seung Yeol Baek, Sang Heum Yeon, Gun Sik Lee, Woo Sik Kim, Doo Seung Lee, Yong Sang Cho, Tae Kyu Choi, Moon Taek Lim and Bum Hee Choi, Respondents

BEFORE: D. M. Brown J.

COUNSEL: R. Macklin and N. Wilson, for the Applicants

M. Hassell, for the Respondents

C. Ho, for the Monitor, Morgan & Partners Inc.

T. Carter, court-appointed election Supervisor

HEARD: January 13, 2012; with subsequent Second Report of the Monitor dated January 23, 2012, and subsequent written submissions by the parties dated January 26 and 29, 2012.

REASONS FOR DECISION

I. Further directions for court-ordered elections of a not-for-profit corporation

A. Background

1In my Reasons dated January 15, 2012, I gave directions for providing the Court with additional information on Question No. 11 posed by the election Supervisors:

Question 11: Are those members who were terminated by the Association in December 2010/January 2011 entitled to vote at this special members’ meeting?

2One aspect of that Question was the “franchise issue” which I summarized as follows in my January Reasons:

59The respondents seek an order that 18 individuals whose memberships were suspended or terminated on December 30, 2010, or thereafter, be entitled to vote and run for office in the elections. The Association did not oppose such an order provided, and it was a big “provided”, that those individuals whose terminations or suspensions are set aside must otherwise qualify for membership as regular members. The Association submitted that some re-instated members might not so qualify because of the “franchise issue”, which I will discuss below.

65In order to be eligible to vote in or to run for office in the court-ordered election those individuals will have to meet the qualifications for “regular members” contained in Section 4(1) of the Articles. They must be current in their membership fees, and I order that they be allowed until February 15, 2012 to pay their current membership fees. So those individuals are aware that their suspensions or terminations have been set aside, I order the Monitor to mail to each of those 18 individuals a copy of these Reasons no later than January 20, 2012.

The “franchise issue”

66At the hearing counsel for the Association argued that some of those 18 individuals may no longer qualify for regular membership in the Association because they operate convenience stores as franchisees, and not as independent store owners. Counsel for the Association submitted that the Articles prohibit franchisee store operators from becoming regular members.

67Section 4(1) of the Articles defines the category of “regular member” as follows:

Regular members of the Association are those who are ethnic Koreans holding either Canadian citizenship or permanent resident status, and who have acquired a licence or registration to operate a business in Ontario. They shall pay membership fees in full set by the Association, contribute to the generation of profits for the Association, and participate in the operation of businesses. (However, the scope of the principal businesses shall be determined by the Board of Directors).

68Nothing on the face of Section 4(1) refers to franchisee store operators. Counsel for the Association submitted that the phrase, “contribute to the generation of profits for the Association”, when understood in the historical context of Association practices, requires members to be independent store owners.

69In his affidavit Mr. Choi pointed to a Board of Director’s November 20, 2006 “declaration” that owners of stores operated as franchises had no right to become regular members. He attached an extract from the November 29, 2006 Association Newsletter which contained a headline reading, “November 20 General Meeting…Member with Chain Convenience not accepted as a member, final decision” and a report of a plenary session of chapter (regional) presidents stating that members running businesses with other trade-name banners cannot be regular members. No formal resolution of the Board or members amending the Articles to exclude franchisee owners was filed by the Association.

70The respondents adduced evidence that last fall Mr. Kang sought to pass a by-law excluding franchisee owners from regular membership, but the proposed by-law amendment lost on a vote, with 435 members voting against, and only 203 in favour.

71Counsel for the Association argued that in light of the late delivery of that evidence, he had not been able to make inquiries about the accuracy of the respondents’ assertions. He submitted that a decision was required as to whether franchisee owners were eligible to join as regular members before the ordered election was held because a few of the individuals whose suspensions/terminations I have set aside may now operate as franchisee owners. The Association suggested that the Supervisors could consider this issue. Mr. Carter demurred. I agree. If this issue truly requires adjudication, I shall do it.

72I say “if” because in the event inquiries establish that this past fall Mr. Kang, purporting to act as President, formally put to a ballot a resolution seeking to exclude franchisee owners from regular membership and the members defeated that resolution, then I see no reason for any further adjudication of the issue. Confirmation that such an event occurred would indicate that the President considered the current Articles did not contain such an exclusion, he tried to inject such an exclusion into the Articles, and the members rejected his proposal. That would strongly indicate that the Articles, as presently drafted, do not exclude franchisee owners from regular membership.

73I am increasingly concerned about the amount of legal fees this dispute is generating. I am not prepared to direct a trial of an issue where no need exists. Accordingly, I direct the Monitor to make appropriate inquiries and to report back to me, in writing, no later than Monday, January 23, 2012, whether, in fact, this past fall the Association’s members voted down a proposal to amend the Articles to exclude franchisee owners from regular membership. If the Monitor confirms that such a vote occurred, then I see no need to pursue this issue – the Articles, as drafted, would contain no restriction on franchisee owners joining as regular members. Of course, I would encourage the parties to talk sooner, rather than later, on this point so that the Monitor need not expend time and energy inquiring into an event which may not be in dispute.

B. Monitor’s Second Report

3The Monitor reported on information it had obtained from the Association’s General Manager, Mr. Eric Choi, based on his review of available documentation and records. The Monitor reported that:

(i) The “franchise” issue appeared to originate in a 2006 By-Law, or Articles, amendment which required a regular member to “contribute to the generation of profits for the Association”;

(ii) An English translation was filed of minutes of a Directors’ meeting held November 20, 2006;

(iii) As a result of that meeting a decision was made to terminate 85 members who were franchise store owners and those terminations were made in 2007;

(iv) The Association’s November 29, 2006 newsletter appeared to confirm the Board’s decision to expel members with franchise affiliations: see paragraph 69 of my January Reasons;

(v) On September 30 and October 1, 2011 a vote was held on an “omnibus bill” for the approval of amendments to the Articles;

(vi) The “omnibus bill” proposed numerous changes to the Articles;

(vii) One proposed change was to the definition of the “regular member” class of membership to read, in part, as follows:

A regular member shall be a business operator who has paid the membership fee set by the Association, and provides Association with an income through participating in the Association’s group purchasing items…

(viii) Of the 1,348 members eligible to vote on the “omnibus bill” amendments to the Articles, 641 cast ballots, of which 3 were spoiled, with the remaining ballots tabulated as 203 in favour of the proposed amendments and 435 against. The results of the ballot vote were reported in the Association’s October 12, 2011 newsletter.

C. Evidence and submissions on behalf of the OKBA

4In his evidence Mr. Choi, the Association’s general manager, described a supplier rebate program the Association administers for the benefit of its members. He stated that the intent of the program is to have members forward to the Association all supplier rebates they generate, and “any convenience store owner that does not fully participate in this mandatory program is not supposed to be a member of the OKBA”.

5Mr. Choi deposed that to his knowledge no member of the Association is a franchisee, but he then went on to qualify that statement as follows:

To the extent there are any franchisees that are members of the OKBA (not known to me), it would be in circumstances where the franchisee was within a smaller franchise and was complying with the mandatory program…”

6In written submissions the Association’s counsel stated that in 2006 the organization made a “policy decision…to exclude franchisees from its membership. Such decisions can be made at the board of directors level…”

D. Evidence and submissions on behalf of the respondents

7The respondent, Mr. Oh, deposed that at the present time he does not operate a franchise store and that his convenience store contributes to the rebates received by the Association: “I fully participate in the Association rebate program with all participating members.” Mr. Oh contended that the store operated by the applicant, Mr. Kang, does not participate fully in the Association rebate program with all participating suppliers. He also disputed that participation in the program was mandatory, as asserted by Mr. Choi.

II. Analysis and conclusion

8Let me start by recalling that the “franchise issue” arose in the context of my order setting aside the suspensions or terminations of 18 members of the Association. Counsel for the OKBA argued that some of those 18 members might not qualify as “regular members” because they operated franchise, not independent, convenience stores.

9The Association, or more specifically its general manager, contended that the exclusion of franchise store owners from regular membership resulted from a decision made by the Board of Directors on November 20, 2006. I have carefully reviewed the English translation of the Minutes of that meeting. I can see no reference to a resolution of the Board amending the Articles to re-define the category of “regular member” to exclude from eligibility a person who operated a franchise convenience store.

10Section 120 of the Corporations Act provides that the letters patent or a by-law may set forth the designation of classes of membership and the terms and conditions attaching to each class. The Association’s letters patent contain no such designation. Section 129(1)(a) of the Act authorizes directors to pass by-laws, or amendments to by-laws, regulating the admission of persons as members of the corporation. Such amendments to by-laws are only effective until the next annual meeting of the members. If the members do not confirm the by-law amendment, the amendment ceases to have any effect. The copies of the Articles filed by both parties indicate that no by-law amendment was approved at a 2007 annual general meeting. After November, 2006 the next Article amendment was approved at a special general meeting on October 14, 2008. The text of the approved amendment was not put before me.

11In light of that evidence, or lack thereof, I conclude that no amendment was made to the Articles at the November 20, 2006 meeting of the Board of Directors prohibiting owners of franchise stores from eligibility as regular members of the Association.

12As part of the package of by-law amendments voted on in late September and early October, 2011, it was proposed to amend a significant part of the language describing eligibility for regular membership, including removing the phrase “contribute to the generation of profits for the Association” and replacing it with “provides Association with an income through participating in the Association’s group purchasing items”. That package of by-law amendments was defeated, so the language “contribute to the generation of profits for the Association” remains in place.

13Having reviewed the Second Report of the Receiver, and the evidence and submissions filed by the parties, I remain of the view, as expressed in paragraph 68 of my January Reasons, that on its face Section 4(1) of the Articles does not refer to franchisee store operators. As I interpret the definition of “regular member” in the Articles, it does not bar a person who owns a franchise store from eligibility as a regular member for that reason alone.

14However, Section 4(1) clearly requires, as a condition of regular membership, that a person will “contribute to the generation of profits for the Association”. In order to ensure that the 18 persons whose suspensions or terminations I have set aside meet that term and condition of membership, I vary paragraph 106(iv) of my January Reasons to read as follows:

106 I set aside and declare null and void the suspension or terminations of the 18 members who are named in Exhibit 16 to the January 3, 2011 affidavit of Mr. Oh and I allow those individuals until February 15, 2012 to pay their current membership fees. In order for any of those individuals to vote in the elections directed by this Court, they must deliver to the Supervisors, no later than February 15, 2012, an affidavit stating their full name, the name and address of their store and which includes, as well, the following statement:

As at November 15, 2011, and from November 15, 2011 to the present, I and the convenience store which I operate have contributed to, and continue to contribute to, the generation of profits for the Association.

If a person swears or affirms such an affidavit and delivers it to the Supervisors by February 15, 2012, then that person is eligible to vote in the elections. If a person is unable to swear or affirm such an affidavit, or fails to deliver such an affidavit to the Supervisors by February 15, 2012, then that person is not eligible to vote in the elections. In consultation with the Supervisors the Association shall post on its website the name of any person who has delivered such an affidavit to the Supervisors.

15It is a very serious matter for a person to swear or affirm a statement in an affidavit. If a person swears or affirms a statement knowing it to be false, serious legal consequences can result. I am satisfied that those potential legal consequences will dissuade any of the 18 members whose suspensions and terminations I have set aside from submitting an affidavit which is not accurate. In addition, by requiring the Association to post on its website the names of persons who have delivered such affidavits, other members of the Association will learn of the matter, and the prospect of such public disclosure also should dissuade anyone from delivering an inaccurate affidavit. I expect those safeguards should work to ensure an accurate identification of eligible voters.

16The Monitor shall mail to each of the 18 affected individuals a copy of these Reasons no later than February 3, 2012, and the Association, in consultation with the Supervisors, shall post a copy of these Reasons on its website no later than Tuesday, February 7, 2012.

(original signed by)__

D. M. Brown J.