Not‑for‑profits across the sector increasingly rely on financing their projects through community bonds. Community bonds are social finance tools like traditional bonds. Community bonds generally have a fixed interest rate and a fixed maturity date. They are typically issued by the not‑for‑profit itself and are available to all members as well as the community at large. In many cases, directors and officers of the issuing not‑for‑profit may wish to purchase community bonds. In this article, we explore how Ontario’s Not‑for‑Profit Corporations Act, 2010 (“ONCA”) applies to directors and officers purchasing community bonds, particularly how the conflict of interest rules apply.

Section 41 of ONCA applies to director and officer conflicts of interest. Section 41(1) says a conflict of interest arises when a director or officer is a party to a “material contract” with the organization. In this case, the bond note would constitute a “contract” with the organization, but what would amount to “material” is fact specific to be determined, if challenged, by a court. For example, a director who invests $10,000 in a $1,000,000 community bond raise would likely not be seen as entering into a “material contract”, but the same investment in a $100,000 community bond raise would likely amount to a material contract

Directors and officers who invest or are thinking of investing in community bonds have certain disclosure requirements pursuant to Section 41(2) and (3) and are prohibited from voting on matters related to the community bonds. The remaining non‑investing directors shall constitute a quorum (Section 41(6)). If all directors are conflicted out of voting on matters related to the community bonds, the membership shall decide on such matters (Section 41(7)).

Despite the rules in Section 41, a director or officer, acting honestly and in good faith, is not liable to the corporation or any members for any profit realized from the community bonds if the membership was notified about the nature and extent of a director or officer’s interest in the community bonds.

As a best practice, if directors and officers will be permitted to purchase community bonds, then such intention should be disclosed in the offering materials and explicitly to the membership. The membership should pass a special resolution allowing directors and officers to purchase community bonds.

It’s worth noting that Section 41 applies only to the material contract between a director or officer and an organization, being the bond note itself. ONCA does not prohibit directors and officers from voting on transactions and projects where the source of funding is the community bond.  So, if your organization raised funds through community bonds to create programming for youth, directors who hold bonds would not be prohibited from voting on matters related to the youth programs. However, as a best practice, we recommend open and full disclosure of any financial interest directors and officers may have in community bonds.

Our firm has helped many organizations structure raising funds through community bonds  to meet their objectives and comply with legislation. Our firm’s founder, Brian Iler, sits on the board of Tapestry Community Capital, an organization that has helped many not‑for‑profit organizations finance their projects through community bonds. Should you require assistance, get in touch and we would be happy to help.

Filed in: Environment, Firm News, Not for Profit Law

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