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Ontario shareholder remedies: Derivative and oppression actions

When corporate actions harm a shareholder, the legal question arises whether they should file a derivative action or an oppression remedy – the answer can be complicated.

Are you a corporate shareholder who suspects mismanagement of company assets or corporate failure to file a lawsuit against parties who have harmed the corporation? Do you believe that directors or officers are targeting you in a way that causes you financial harm? Is the corporation involved in a lawsuit that is bleeding corporate money in legal costs for questionable return?

What is the difference?

Two legal remedies for Ontario shareholders in these contexts – derivative actions and oppression remedies – are available under both federal law and Ontario statutes. The provisions of the federal and Ontario laws for these two actions are essentially the same and a complainant may file their application under either jurisdiction’s laws dependent on whether the corporation is federally or provincially incorporated.

Anatomy of a derivative action

Broadly, a derivative action allows the shareholder (or certain other parties) to act for the corporation or a subsidiary by suing on its behalf. In a derivative action, the shareholder stands in the shoes of the corporation, advocating for it in what they believe to be its best interests. The complainant may also apply to the court to intervene in another action in which the corporation is a party. The shareholder may prosecute, defend or end the lawsuit on behalf of the corporation.

A shareholder may apply to the court for leave (permission) to bring a derivative suit if the complainant first gives 14 days’ notice to the directors of this intention (unless all directors are defendants or notice would not be “expedient”). The court may allow the action if it finds the directors will not take the action proposed by the complainant, the complainant’s application is made in good faith and the relief is in the corporation’s interests.

The court has broad discretion to fashion the appropriate remedy, including any interim order for relief or other order at any time “as it thinks fit.” The complainant or another person may be authorized to “control the conduct of the action” or the court may direct the conduct. The court may order any money judgment for the corporation paid instead to current and former shareholders, and the court has discretion to order that the corporation pay the complainant’s legal fees and costs.

These orders are listed explicitly in the statute, but the court is not limited to them.

The nature of an oppression remedy

An oppression remedy is similar, but an oppression application asks for court relief for a shareholder (or other complainant) who is on the receiving end of harm unique to them and not necessarily faced by other shareholders.

If the court finds that a corporation or an affiliate (or the directors) have engaged or will engage in acts “oppressive or unfairly prejudicial to or that unfairly [disregard] the interests of any security holder, creditor, director or officer of the corporation,” it may order the matter rectified. As in a derivative action, the court has wide discretion to fashion interim or final orders it sees fit, including any in a long list of court actions in the statute such as to amend corporate documents, wind up the corporation, order a trial of any issue and other types of orders.

Takeaways

To summarize, a derivative action addresses the situation where because the corporation itself experiences harm, all shareholders will experience equivalent losses. In an oppression remedy, the complainant is facing unfair harm or loss in a distinct, individual manner. Under some circumstances, there may be overlap between the two kinds of action.

Parties have been known to try to use the oppression remedy even if the derivative action is more appropriate because the oppression remedy has no 14-day notice requirement or requirement that a complainant get leave of court first.

A party in a derivative action or oppression remedy may appeal any order.

In certain situations, there may be other legal remedies available to a shareholder. For example, they may be able to sue for breach of the shareholder agreement.