The Ontario Business Corporations Act (OBCA) and The Canada Business Corporations Act (CBCA) are both remedial statutes. They serve to regulate corporate behaviour but also to remedy some restrictive common law rules that applied to corporations.
Two such remedies are the Oppression Remedy and, with leave of the court, The Derivative Action. To understand these remedies one must understand their provenance. Why were they necessary? What problem was being solved?
Common Law & Corporations
The two, well established, historical common law principles of concern are the “Doctrine of Corporate Personality (DCP)” and “The Indoor Management Rule (IMR)”.
Doctrine of Corporate Personality
The DCP holds that a corporation is a legal entity which means it has a legal personality which is separate and distinct from its owners, the shareholders. Therefore wrongs done to the corporation are remedied by its own legal actions and not by its shareholders. A shareholder does not therefore have a personal cause of action for a wrong done to the corporation they own. It is a correlate to the rule that a shareholder cannot be sued for the liabilities of the company so equally they cannot sue for harms suffered by the corporation.
The Indoor Management Rule
The IMR was a rule of deference by the law to the internal management of a company. If for example a wrong was committed it could be ratified by a majority of shareholders at one of their general meetings. If ratified neither the corporation nor any shareholder could sue in an attempt to redress the wrong.
Impact on the Minority Shareholder
These two rules effectively emasculated the rights and interests of any minority shareholders for wrongs done to them or their company. They stem from the English decision in Foss v. Harbottle decided in 1843. They remain the law in Canada which was confirmed recently by the Supreme Court of Canada in its Hercules Management decision in 1997 and the Ontario Court of Appeal in Meditrust Healthcare Inc. in 2002.
Legislation to the Rescue
The inequity to minority shareholders was addressed by statute both federally and provincially. Two remedies, or avenues of relief, which can potentially overlap, were the Oppression Remedy and The Derivative Action. The CBCA sections are s. 241 and s.239, and in the OBCA, s. 248 and 245, both respectively.
The statutes provided a personal remedy to a “complainant” which included a minority shareholder. The minority could bring an action personally against the corporation to recover for wrongs done to themselves by the company. Equally they could do so as a result of the affairs of the company being conducted in a way that was:
- Oppressive; or
- Unfairly prejudicial; or
- Unfairly disregarded the interests;
of the complainant.
The Derivative Action
The statutes also provide a remedy to a “complainant” which could include a minority shareholder, to apply to the court for leave to bring an action “in the name of or on behalf of the corporation….for the purposes of prosecuting, defending or discontinuing a proceeding on behalf of the company.”
Intersection of the Remedies
A wrongful act may be so to both the corporation and the personal interest of one of its shareholders. In that case both remedies would logically be available, the one as of right and the other with leave. Yet the distinction remains, and although at times confusing, the right remedy must be pursued. One cannot bring an Oppression Claim that is properly solely a Derivative Action and vice versa. However where the facts are such that both remedies are available, the courts have permitted both remedies to be dealt with solely through the Oppression Remedy.
This muddling of the remedies has been the source of much confusion and criticism. The answer may be that they involved closely held companies and, in the cases where an oppression claim has been permitted to proceed even though the wrongs asserted were wrongs to the corporation, those same wrongful acts have, for the most part, also directly affected the complainant in a manner that was different from the indirect effect of the conduct on similarly placed complainants.
At Milosevic & Associates, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes, to complex multi-party commercial claims. Over the years, our team of exceptional litigators has seen it all, and has successfully fought for our clients’ rights. Our impressive track record speaks for itself. Call us at 416-916-1387 or contact us online for a consultation.