Toronto Derivative Claims and Litigation Lawyers
Derivative Action by Corporation in Ontario

When a corporation is created the law recognizes that the corporation is a distinct legal entity with it’s own rights and responsibilities under the law. In reality a corporation is governed by a board of directors who make decisions on behalf of the corporation.

Derivative Claims

If a corporation has suffered from wrongdoing at the hands of any director for which a lawsuit needs to be commenced, a “complainant” defined under the Business Corporations Act, R.S.O. 1990, c. B. 16 (Ontario) (OBCA) as “a current or former shareholder, director or officer of a corporation, or any other person who, at the court’s discretion, is a proper person to bring an application” can seek leave from the court to commence a derivative proceeding on behalf of the corporation, where it is clear that the corporation is unable to do so through it’s own internal decision-making processes.

Derivative claims are distinct from oppression claims brought by shareholders, as an oppression claim is a personal claim brought by a shareholder to address wrongs done to the shareholder. By contrast a derivative claim seeks to address wrongs done to the corporation. Stakeholders may often be unclear about whether to pursue remedies through an oppression claim or a derivative proceeding as there can be considerable overlap between these types of claims.

Commencing Derivative Proceedings

The general assumption is that if a corporation has been wronged the directors and executives will take the necessary steps to pursue their legal remedies against the wrongdoer and as such the corporation would bring the claim itself. However, if those at the helm of the corporation are the wrongdoers it is unlikely that they will make a decision on behalf of the corporation to pursue their own wrongs. Derivative proceedings provide a remedy to interested stakeholders of the corporation to pursue wrongdoers in this situation on behalf of the corporation. However, since such stakeholders are not in control of the corporation, they must seek leave from the court to act on the corporation’s behalf in such circumstances.

Leave Requirement to Commence Derivative Proceedings

Sections 246 of the OBCA and 239 of the Canadian Business Corporations Act, RSC 1985, c C-44 (CBCA) each provide for remedies by way of derivative proceedings for Ontario and Canada registered corporations.

In order to seek leave to commence a derivative action, directors must be given fourteen days notice of the intention to bring the application. Further, an applicant seeking leave must satisfy the court that:

a) the directors of the corporation will not bring the action;
b) the complainant is acting in good faith; and
c) it appears to be in the best interest of the corporation that the action be brought.

Bringing a claim on behalf of a corporation often requires some consideration regarding the harms that have been done to the corporation; the legal remedies for those harms; and contemplation about how the action would logistically proceed if leave is granted. Although a claimant can make a request to the court to have the corporation pay the legal costs of the action, such requests are not always granted and the complainant may have to consider funding of the litigation, where costs would only be recovered if successful, on the conclusion of the action.

Whether you are a shareholder, director or stakeholder who believes that one or more of a corporation’s directors have committed wrongs against the corporation and would like to seek legal recourse, or you are a director who has been served with notice to seek leave from a stakeholder, the lawyers at Gilbertson Davis LLP have experience in representing parties to derivative proceedings.

If you have any issues or concerns regarding the conduct of an officer or director of a corporation, please contact Gilbertson Davis LLP for an initial consultation.