Can you remove a member from a NPC, and if so how?
It is generally not possible to remove a shareholder from a company (except in terms of an agreement), however does this restriction apply equally to a Non-Profit Company? The critical question is whether members of a Non-Profit Company (NPC) are analogous with shareholders of a for profit company, or can they be distinguished?
Non-Profit Companies vs. For-Profit Companies
The structure of a profit company necessitates shareholders, who have financial and voting interests. It is trite to say that shareholders are not bound by fiduciary duties (whether towards the company or fellow shareholders). The main instrument for regulating shareholder’s rights and responsibilities, as well as the procedure involved in having one removed, is a shareholder’s agreement between the parties thereto. This is subject to the exception in cases of oppression of minority shareholders, dealt with in section 163 of the Companies Act.
While the economic interests and control of the shareholders of a profit company is inherent, a NPC is not even required to have members. Accordingly, membership in a NPC is a voluntary, a choice by the founders. Where there are members of a NPC, they do not have the right to any financial benefit and their interests in the NPC are directly related to its public benefit objectives.
Since an NPC does not require members, it is important to consider why a NPC may have members and therefore what their roles and responsibilities may be. These must be carefully considered and incorporated in the memorandum of incorporation (MOI).
Role of members in an NPC
The following comprise the rationale for having members as a part of the governance structure of a NPC:
1. Governance and Decision-Making
As with profit companies, it is the Board of Directors of a NPC who are the “governing body” (per King IV and the Companies Act). As mentioned, many NPCs do not have members. However, it may be appropriate to have members who also have a role in decision-making, particularly in selecting the Board, approving major changes (like amendments to the entities MOI or Rules), or voting on critical matters. This creates an additional structure of governance that gives members a voice in how the NPC operates. An example, of where this would be useful would be a trade association, or advocacy group, established by and for a defined membership.
2. Accountability and Transparency
Having members can help hold the NPC accountable to the community or the interest groups that it serves, in other words “the public”. Members may be able to request information, attend meetings, and ensure the NPC adheres to its mission and maintains ethical standards.
3. Engagement and Support
Members can provide a source of community engagement for the NPC through contribution of time, money, expertise, or advocacy efforts.
4. Increased Legitimacy and Influence
This is especially important for non-profits engaged in advocacy or public policy work, as the number of members can demonstrate a broader base of public support for their issues, contributing to the credibility of the NPC.
5. Sustainability
Membership dues can be a reliable revenue stream, ensuring long-term sustainability for the NPC and its objectives.
There are instances where members are fundamental to the NPC, and its reason for being. A good example of this is a trade organisation, where the members pay fees and agree to subscribe to a Code of Conduct and Disciplinary Code. The concept of membership is therefore essential to such an NPC.
Provisions of the Companies Act
In South Africa, NPCs are specifically mentioned in section 8 and 10 of the Companies Act (71 of 2008), and generally governed by the provisions of the Companies Act (with some explicit exclusions). Furthermore, Schedule 1 to the Companies Act is entitled “Provisions concerning non-profit companies” and makes special provision for aspects of the operation of a NPC.
Where the MOI provides for members, Schedule 1 of the Companies Act specifies some key provisos, as set out in section 4 of the Schedule. Membership may not be determined on grounds amounting to discrimination in terms of section 9 of the Constitution. There may only be two types of members: voting and non-voting members. However, most importantly, the MOI must set out:
- the qualifications for membership;
- the application process for membership;
- any initial or periodic cost of membership;
- the rights and obligations, if any, of membership in any class; and
- the grounds upon which membership may be suspended or terminated.
Since NPC’s have very specific objectives, care must be taken to properly balance the interests and participation of the members. Many NPC MOIs do not pay sufficient attention to the terms related to these matters. In particular the qualifications for, and removal of, members in particular are often not properly set out. This can have severe and detrimental consequences for the good governance of the NPC, for example a member or members may try to “hijack” the NPC for purposes not consistent with the objectives thereof, or with a bias in favour of vested interests. Alternatively, errant members may bring the NPC and the other members into disrepute, and thereby disrupt the purpose of the NPC.
Since the only means by which to regulate membership of non-profit companies is through the MOI, this necessitates that the provisions that address membership must be sufficiently descriptive to deal with those members who fail to act in the best interests of the NPC, or in a manner consistent with the objectives and purpose of the NPC. The MOI must be explicit as to the procedure by which a member may be removed, and the process utilised to replace or add members.
Should the MOI fall short in this regard, the objectives of the NPC may be disregarded or even sabotaged by ill-intentioned members, and there will be no right of recourse by other members or the board. Since the NPC may have access to material resources or fulfil one or more significant public interest roles, proper governance is crucial.
Conclusion
Far from being a mere formality, the requirements in the MOI related to the membership of a NPC require careful thought and formulation. In addition, care should be taken to ensure that they are effective through a full range of membership scenarios. Since the board of directors of the NPC is the governing body (per King IV) and has fiduciary obligations, the role of the Board in determining membership qualification and disqualification should also be considered.
If you need to advice on how best to craft a NPC’s MOI with the provisions necessary to properly govern the members and their impact on the NPC, contact Kern, Armstrong and Associates.
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