Introduction
In corporate law, accountability and integrity come first. Ontario’s legal framework offers stakeholders a remedy when corporations suffer at the hands of their own management; namely, derivative actions. This blog provides an overview of the depth and breadth of derivative actions in Ontario, and on their implications.
The Derivative Action Defined
A derivative action, at its core, is a legal procedure. It permits a member or shareholder of a corporation to stand in the corporation’s shoes, initiating litigation against those allegedly causing harm. This action is not for the individual’s direct benefit but seeks to redress wrongs done to the corporation itself. It is a protective shield, allowing stakeholders to take up the cause of the corporation when internal processes fall short.
The Historical Foundations
The foundations of derivative actions can be traced back to English common law. Initially, they served as specific redress mechanisms for certain grievances. Over time, as corporate structures grew in complexity and the need for broader accountability mechanisms became apparent, the scope of derivative actions expanded. Today, they are integral to Ontario’s corporate law, reflecting the province’s commitment to corporate accountability.
Who Holds the Right?
Ontario’s corporate legislation is exact in determining eligibility for initiating derivative actions, as follows.
- Shareholders: Both current and sometimes past shareholders can invoke this right. As a majority or minority stakeholder, their position doesn’t preclude them from initiating action. However, their shareholding percentage might influence their perspective and approach to the litigation.
- Directors and Officers: Interestingly, even those within the corporate structure, if they discern harm being done to the corporation, can initiate a derivative action. Their unique position, coupled with an intimate understanding of corporate workings, can be invaluable in these proceedings.
But eligibility has conditions. Beyond the basic criteria, the individual (the “complainant”) must demonstrate they’re acting in the best interests of the corporation. This requirement keeps the action rooted in concern for the corporation’s welfare rather than personal gain or vendettas.
The Procedural Labyrinth
Derivative actions, like all legal proceedings, are bound by a set of procedural norms:
- Seeking Permission: Before the court hears the case, the complainant must obtain permission. This leave from the court acts as a filter, so that only claims with a real basis proceed to litigation.
- Notifying the Directors: Before formal legal proceedings kick off, the corporation’s board of directors must be informed. This serves multiple purposes; it acts as an internal checkpoint, allowing the corporation a chance for internal resolution, and it also prevents the board from later claiming ignorance of the issues being raised.
Burden of Proof: A Weighty Responsibility
In derivative actions, evidence holds the keys to success, as follows.
- On the Initiator: The onus is squarely on the shoulders of the initiating party. They must furnish detailed evidence of the alleged wrongdoing, demonstrating its nature, extent, and its detrimental impact on the corporation.
- The Balance of Probabilities: This legal standard requires that the claims presented are more likely true than not. It keeps the court’s judgment rooted in a rigorous, yet fair, evaluation of the facts, maintaining the integrity of the legal process.
Potential Remedies: The Quest for Justice
When a derivative action concludes in favour of the initiating party, the court has a spectrum of remedies it can offer to redress the harm caused to the corporation:
- Monetary Compensation: Perhaps the simplest remedy, courts can mandate wrongdoers to pay a specific amount to the corporation. This seeks to rectify the harm caused in money, so that the corporation is compensated for losses incurred due to the wrongful actions of its directors or officers.
- Restitution: Beyond direct harm, wrongdoers might have benefited from their actions. Restitution seeks to reverse this unjust enrichment. By mandating the return of these benefits, courts see that wrongdoers don’t gain from their malfeasance.
- Injunctions: These are preventive measures. If the court determines that the wrongful actions might continue or recur, it can issue an injunction. This legal order will prevent the wrongdoers from continuing their detrimental conduct, safeguarding the corporation’s future interests.
- Mandated Changes: Sometimes, the issues run deeper than individual actions. The court might recognize systemic problems within the corporation that allowed the wrongdoing. In such cases, the court can order structural or policy changes. These reforms, while potentially challenging to implement, aim to rectify root causes and prevent future wrongdoings.
Weighing the Financial Implications
The financial aspect of derivative actions is multi-faceted:
- For Successful Claims: If the derivative action succeeds, it’s common for the court to order the corporation to cover the legal expenses of the initiating party. This recognizes the complainant’s role in seeking justice for the corporation and keeps them from being financially burdened for acting in the corporation’s best interest.
- On the Flip Side: Legal battles are risky, and failure can be expensive. If the action doesn’t succeed, the initiating party might bear the brunt of the costs. This potential financial liability is something complainants must consider before initiating a derivative action. The court might also scrutinize the action’s merit, and if found lacking or malicious, additional financial penalties might be imposed.
Beyond Derivative Actions: Other Avenues
While derivative actions are potent, they’re part of a broader body of law that offers multiple paths for redress, as follows.
- Oppression Remedy: Made for instances where corporate actions or policies are viewed as oppressive, prejudicial, or unfairly disregarding the interests of shareholders or stakeholders, the oppression remedy is a versatile one. It can address a wide range of grievances, from financial mismanagement to actions that dilute a shareholder’s stake. (For example, see our blog post on the oppression remedy.)
- Personal Actions: These are distinct from derivative actions. Here, complainants aren’t acting on behalf of the corporation but are seeking redress for personal grievances. Whether it’s related to dividend distributions, share allotments, or other personal rights, shareholders can approach the court directly for remedies.
Each of these avenues, while interconnected, offers its own remedies and is made for specific scenarios. Complainants must evaluate the nature of their grievance, the desired outcome, and choose the appropriate legal path.
Wrapping Up
Ontario’s derivative actions reflect the province’s commitment to corporate justice. They offer complainants a potent remedy, keeping corporations anchored to principles of integrity, transparency, and accountability. For stakeholders and shareholders, an understanding of derivative actions is needed. It equips them to take up the cause of justice, holding corporations and their management accountable for their actions.
For a derivative action of your own, the intake form is the way to reach the firm.
This article is part of the firm’s work in commercial litigation.