The governance of not-for-profit corporations in Ontario often involves a delicate balance between historical organizational structures and evolving operational needs. Changes to membership classes and voting rights can significantly impact control, decision-making, and stakeholder relationships. As a result, courts closely scrutinize such changes to ensure compliance with governing statutes and internal corporate rules.

In Islamic Food and Nutrition Council of Canada v. Islamic Food and Nutrition Council of America, the Ontario Court of Appeal addressed a dispute between two related not-for-profit corporations over membership structure and voting rights. The decision provides important guidance on the legal requirements for altering membership rights, the continued validity of bylaws, and the limits of corporate authority when transitioning to federal governance.

This case is particularly relevant for not-for-profit organizations undergoing structural changes, especially those transitioning under the Canada Not-for-profit Corporations Act (the “CNCA”). It highlights the risks of attempting to implement significant governance changes without proper member approval.

Dispute Between Two Halal Certification Organizations

The dispute arose between two organizations involved in Halal certification services: a Canadian not-for-profit corporation and a related U.S.-based entity. The core issue concerned who held voting control within the Canadian corporation.

The Canadian corporation was originally incorporated in 2007 under Ontario legislation. At that time, it had a single class of members, each of whom held voting rights. The founding members were individuals who also served as directors.

In 2015, a significant shift occurred. A bylaw was introduced that created two distinct classes of membership:

• Corporate Members, who held voting rights; and
• Director Members, who did not have voting rights but could attend meetings.

The effect of this bylaw was to concentrate voting power in a single corporate member—the U.S. organization—while removing voting rights from the individual members of the Canadian corporation.

Years later, in 2021, the Canadian corporation sought to reverse this structure. It continued federally under the CNCA and filed Articles of Continuance that purported to restore a single class of members, each with voting rights. This change would have fundamentally altered the organization’s control by eliminating the U.S. corporation’s exclusive voting rights.

Competing Applications Before the Court

The dispute ultimately led to competing court applications. The Canadian corporation sought declarations confirming that it had only one class of members, all members were entitled to vote, and its membership register should be corrected accordingly.

In contrast, the U.S. corporation argued that the 2015 bylaw remained valid, the two-class-structure continued to govern, and it remained the sole voting member. The U.S. corporation also requested additional relief to formally amend the corporation’s records to reflect this structure.

At first instance, the application judge largely sided with the U.S. corporation. The judge confirmed the validity of the 2015 bylaw and held that the 2021 attempt to change the membership structure was ineffective. However, the judge declined to grant certain additional corrective orders.

Both parties appealed.

Validity of the 2021 Governance Change

At the heart of the appeal was a fundamental question: could the Canadian corporation validly change its membership structure through its Articles of Continuance without obtaining approval from the existing voting member?

The Court of Appeal answered this question in the negative. Under the CNCA, corporations that continue federally may implement certain changes through their articles. However, where those changes affect membership rights, particularly voting rights, additional procedural safeguards apply.

Specifically, the court emphasized that changes to membership rights require a special resolution of the members, and that this requirement applies when rights are added, removed, or altered.

In this case, the 2021 Articles of Continuance attempted to convert non-voting members into voting members and reduce the sole voting member (the U.S. corporation) to one among several voting participants.

This constituted a fundamental alteration of membership rights. As such, a special resolution was required. However, no such resolution had been obtained.

The Concept of “Ultra Vires” in Corporate Law

Because the required approval was not obtained, the court held that the attempted amendment was ultra vires, meaning beyond the legal authority of the corporation.

This finding was critical. Even though the Articles of Continuance purported to establish a new governance structure, the court concluded that the changes had no legal effect. As a result:

• The 2015 bylaw remained operative;
• The two-class membership structure continued; and
• The U.S. corporation retained its status as the sole voting member.

This reinforces a key principle in corporate law: procedural compliance is not a formality. Where statutory requirements are not followed, even formally executed documents may be rendered ineffective.

Court’s Treatment of the 2015 Bylaw

The Canadian corporation also challenged the validity of the 2015 bylaw itself, arguing that it had been improperly adopted or that its signatories had been misled.

The Court of Appeal rejected these arguments. The court found that the individuals involved had received the proposed bylaw in advance, and had travelled to attend the meeting at which it was adopted. Further, they were legally obligated to review the documents before signing.

The court emphasized that the changes introduced by the bylaw were not hidden or obscure. Rather, they were clearly set out and readily understandable. As a result, the court upheld the validity of the bylaw and declined to interfere with the application judge’s factual findings.

Interpretation of Corporate Governance Principles

One of the Canadian corporation’s key arguments on appeal was that the application judge had violated a basic principle of corporate law: that a corporation’s articles take precedence over its bylaws.

While this principle is generally correct, the Court of Appeal clarified its application in this context. The court held that the principle did not assist the Canadian corporation because the amendments contained in the Articles of Continuance were invalid. As a result, there was no effective conflict between valid articles and the bylaw.

In other words, the hierarchy between articles and bylaws only applies where both are valid. Since the articles were ultra vires, the bylaw remained controlling.

Role of Evidence and Deference on Appeal

The Court of Appeal also addressed the standard of review applicable to the application judge’s findings. Key factual findings, such as the validity of the 2015 bylaw and the ambiguity of the meeting minutes, were treated as findings of fact or mixed fact and law. As such, they were entitled to deference and could only be overturned in cases of palpable and overriding error.

The appellate court found no such error.

This aspect of the decision underscores the importance of building a strong evidentiary record at first instance. Appeals are not opportunities to relitigate factual disputes but are instead focused on correcting legal errors.

Limitations Period and Declaratory Relief

An additional issue raised in the case was whether the U.S. corporation’s claim was barred by Ontario’s Limitations Act.

The Court of Appeal confirmed that no limitation period applied because the relief sought was purely declaratory in nature.

Cross-Appeal: Discretionary Relief Denied

The U.S. corporation cross-appealed, arguing that the application judge should have granted additional relief to formally amend the corporation’s records. The Court of Appeal dismissed the cross-appeal.

It held that:

• The relevant statutory provisions were discretionary; and
• The U.S. corporation could likely achieve the desired outcome through other means, given the declarations already granted.

This highlights that courts may decline to grant additional remedies where they are unnecessary or duplicative.

Key Takeaways for Not-for-Profit Organizations

This decision provides several important lessons for not-for-profit corporations in Ontario and across Canada.

1. Membership Rights Cannot Be Changed Informally

Altering voting rights or membership classes requires strict compliance with statutory requirements. Even well-intentioned changes may be invalid if proper procedures are not followed.

2. Special Resolutions Are Critical

Where changes affect the rights of members, a special resolution is typically required. Failure to obtain this approval can render the change void.

3. Articles of Continuance Are Not a Shortcut

Continuing under federal legislation does not provide a mechanism to bypass existing governance structures or member approval requirements.

4. Bylaws Remain Binding Unless Properly Amended

Validly enacted bylaws continue to govern unless they are properly repealed or amended in accordance with the law.

5. Directors Must Exercise Due Diligence

Individuals involved in corporate governance are expected to read and understand the documents they sign. Claims of misunderstanding or lack of awareness are unlikely to succeed.

Contact Milosevic & Associates for Modern Corporate Litigation Services in Toronto

Navigating the governance requirements of not-for-profit corporations can be complex, particularly when dealing with membership rights, voting structures, or transitions under federal legislation.

Milosevic & Associates advises not-for-profit organizations, directors, and stakeholders on all aspects of corporate governance disputes, including membership and voting rights issues. To discuss your organization’s needs with a knowledgeable business litigation lawyer, contact the firm online or call (416) 916-1387.