In Binscarth Holdings LP v. Anthony, 2024 ONCA 522, the Ontario Court of Appeal confirmed that, in some circumstances, a limited partner may obtain leave to commence a common law derivative action in the name of a limited partnership.
Derivative actions are typically actions brought on behalf of a corporation for wrongs that are done to it. The action has common law origins and was created to counteract the rule in the seminal case of Foss v. Harbottle that, as a separate legal entity from its shareholders, only a corporation itself possesses a cause of action for wrongs done to it. The derivative action allows a person to bring an action in the name of a corporation against its management for harm they have caused to the company. In modern Canadian corporate law, the derivative action has been codified under Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16, and the Canada Business Corporations Act, R.S.C., 1985, c. C-44. To date, the Ontario legislature has not implemented a similar provision in the Limited Partnerships Act, R.S.O. 1990, c. L.16 (the “LPA”).
Notwithstanding this, the motion judge in Binscarth granted leave to a limited partner in a limited partnership to commence a common law derivative action in the partnership’s name against its general partner. The Ontario Court of Appeal was asked to consider whether it was permissible at common law for limited partners to bring a derivative action in the name of a limited partnership against its general partners.
The Court ultimately found a derivative action was not permitted against the general partner in this case, but that such an action does exist at common law for limited partners. The Court canvassed the leading authorities on this issue from the UK and Canada, and provided the following guiding principles:
- Limited partnerships are partnerships. Unlike corporations, they are “a collection of partners, rather than a distinct legal entity separate from the parties who are its members.”
- A limited partnership is permitted to behave like a corporation in some instances. One such instance is when the partnership is commencing or defending legal proceedings. In such a case, the general partner must act on the partnership’s behalf.
- Where a cause of action can be pursued by a limited partnership, but “the general partner chooses not to do so,” it may be appropriate for a limited partner to commence a derivative action in the name of a limited partnership. This is only available where “special circumstances” exist which justify such an action.
- “Special circumstances” are facts which “justify the bringing of the claim in the context of the alternative rights and remedies available.” Leave for a limited partner to commence a derivative action in the partnership’s name “need not be granted where other recourse exists.”
- before granting leave to pursue a derivative action on behalf of and in the name of a limited partnership, the court should also be satisfied that:
- the general partner has refused to pursue a claim against a third party;
- the limited partner is acting in good faith; and
- it appears to be in the best interests of the limited partnership that the action be brought.
- In considering these elements, a court must be sensitive to the context of a limited partnership, the management role of the general partner, the terms of any limited partnership agreement governing the partners, and the provisions of the LPA.
The lawyers at Gilbertson Davis LLP have experience in partnership disputes, business litigation and commercial litigation. Please contact us for an initial consultation.
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