When wronged, minority shareholders (and other appropriate stakeholders) can face an uphill battle when confronted by the dual shields of corporate personality and majority rule, both of which protect corporations and those with a majority, decision-making interest in them. Under both the Ontario Business Corporations Act and the federal Canada Business Corporations Act, however, two statutory remedies are available: the oppression remedy and the derivative action.
The oppression remedy provides a mechanism through which minority complainants may initiate an action in response to a corporate wrong done to them personally. A derivative action provides a mechanism for complainants to initiate an action in response to a wrong done to the corporate entity. The former remedy requires that the alleged harm be distinct from, and exceed the scope of, residual harm suffered merely as a result of a wrong to the corporate entity. Absent distinct, specific, individualized harm, the oppression remedy will not be appropriate because individuals do not have a personal cause of action for a wrong done to a corporation.
The drawback of a derivative action is the precondition that permission from the court (i.e. leave) be sought in advance of initiating a claim. Leave will only be granted if the court is satisfied that: (1) the directors of the corporation will not proceed with the action despite being on notice of the potential claim; (2) the action is in good faith; and (3) it is in the interest of the corporation to initiate the action.
This costly and time-consuming hurdle has resulted in claimants framing corporate harm as individualized harm in an attempt to avoid this precondition. Those efforts, combined with the courts’ historically inclusive approach to oppression remedy claims, have resulted in the line between the two remedies becoming, in the words of the Court of Appeal, “murky.” In its recent decision in Rea v Wildeboer, the Ontario Court of Appeal unanimously clarified the distinction between the remedies.
The issue before the Court was whether the claimant could seek an oppression remedy for the misappropriation of corporate funds. In deciding that the claimant was not entitled to an oppression remedy, the Court noted that when the claims advanced are common to every other shareholder, an oppression remedy is not warranted. The Court clarified that, to be classified as an individual claim, the alleged wrongful conduct must impact the personal interests of the complainant beyond the scope of his or her interests as a member of the collectivity of shareholders. The complainant must demonstrate that the alleged wrongful conduct has harmed his or her personal interests.
The Court acknowledged that where a wrongful act is harmful to both a corporation and the personal interests of a complainant, the two remedies are not mutually exclusive and an oppression remedy may be permitted, on the condition that the wrongful acts directly impacted the complainant in an individualized way.
The Court maintained, however, that the distinction between the two remedies remains important for, among other reasons, preventing meritless suits and avoiding a multiplicity of proceedings, both of which would lead to corporate defendants incurring significant, unwarranted legal costs.
Where a claimant seeks to recover solely for wrongs done to a corporation, where the thrust of relief is solely for the benefit of the corporation and where there is no allegation that the claimant’s individualized personal interests have been impacted by the wrongful conduct, an oppression remedy is not appropriate. Potential complainants should consider carefully whether an alleged wrong has actually impacted their interests personally, or whether the consequences are limited to those suffered by the corporation. Pursuing the wrong relief will result in even greater costs and time spent.