Court compels hospital to hold membership meeting

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Chu v. Scarborough Hospital Corp. (December 28, 2006), a dispute between The Scarborough Hospital and a group of its annual members, has generated a great deal of interest amongst hospitals across the province. It is also an interesting follow-up to my November 2006 column, in which I outlined the advantages of implementing a closed membership at hospitals.

Annual memberships under Scarborough Hospital by-lawsThe Scarborough Hospital’s by-laws contemplate various categories of annual members, including individuals who are admitted as annual members by the Board, as well as the directors of the corporation. According to the by-laws, annual individual memberships terminate automatically on July 31st of each year following the member’s admission to membership. In addition to the annual members, there were also a handful of honorary (voting) members under the by-laws.

Historically, the hospital’s board exercised its power to appoint annual members in the spring, and by virtue of the by-law, these memberships ended July 31st. Therefore, “annual” members were in fact members for only 4 or 5 months.

2006 AGMAt the 2006 Annual General Meeting (AGM), the board made two significant changes. First, it departed from its own past practice and did not appoint any annual members in the spring. Therefore, at the time of the June 29, 2006 AGM, no annual members existed, other than the directors of the corporation. The board admitted annual members only after this AGM adjourned.

Second, at the 2006 AGM, a new By-Law No. 3 was approved. Given that the board was in the midst of reconsidering its governance structure, this by-law postponed the election of directors until a special members’ meeting to be held in September. The by-law also contemplated that new annual members admitted after the 2006 AGM would have their memberships terminated after the September meeting. It was announced that new by-laws, with a new governance structure, would be put before the members for approval at that September special members’ meeting. Only the directors (in their capacity as annual members) and a handful of honorary members voted to approve By-Law No 3.

Lai Chu and 117 other individuals were admitted as annual members immediately after the 2006 AGM, with their memberships to terminate after the September special meeting.

September members’ meeting The special meeting was held in September, but the proposed by-law amendments were postponed, for further review, and elections were held under the unamended by-laws. The meeting ended, and the annual memberships were automatically terminated. As a result, Chu and the 117 other annual members were not permitted to vote on the by-law amendments changing the governance structure.

Complaint by Lai ChuLai Chu and others requisitioned a special meeting of the members in October 2006. Under the Corporations Act (Ontario), one-tenth of the members have the right to requisition a special meeting of the members,. for any matter within the members’ jurisdiction. The board refused to call the meeting, taking the position that the applicant Chu ceased to be an annual member in September 2006 and therefore had no right to request a meeting.

The Court’s decision does not specify what the purpose of the special meeting was intended to be, but it appears from later statements by the hospital that the members intended to exercise their rights under the Corporations Act and the by-laws to remove directors from office.

Court conclusionsMr. Justice David Brown, of the Ontario Superior Court, concluded that the hospital board had interpreted its by-laws in an unreasonable manner, by appointing annual members for only four to five month periods instead of for an annual (12-month) term. The board must apply its by-laws fairly, reasonably and in good faith. This was an unreasonable interpretation, because it radically limited the term of the annual members and reduced the board’s accountability to its annual members. The Court found that the board acted unfairly towards the annual members, thereby not allowing them meaningful input into the by-law amendments.

On December 28, 2006, the Court ordered that the applicant and the other 117 individuals, who were approved as annual members on June 29, 2006, remain annual members for one full year (i.e., until June 28, 2007) and ruled that a special meeting of members must be held by January 31, 2007. The Scarborough Hospital has announced that the hospital is appealing the court ruling.

ImplicationsThere are some statements in the Court’s decision that suggest that a board must be accountable not only to itself, but also to its members at large. The Court looks somewhat dubiously on the board members, with their membership hats on, approving By-Law No. 3, without also obtaining the approval of annual members who could “act as a check on the Board”. The Court states that the board placed complete control of governance matters in the hands of the directors.

Some hospitals have expressed concern that this decision requires hospitals to have a category of annual members in their by-laws and that it effectively prohibits closed memberships in public hospitals. That is not the case. These statements by the Court were made in the context of a public hospital that had chosen to maintain the category of annual members in its by-laws and that has historically admitted them. The lesson to take from this decision is that, if your hospital continues to have annual members in the by-laws and the practice has been to appoint such annual members, the hospital cannot arbitrarily change its practice. Also, the board must give annual members a meaningful role and appoint them for a full year’s term.

However, these statements are not applicable to any public hospital that has, using proper process, changed its by-laws to close its membership and remove annual members.