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What’s the Difference: The Oppression Remedy and Derivative Actions

What’s the Difference: The Oppression Remedy and Derivative Actions

April 15, 2022

By Brian Babcock

We have written several recent articles about oppression remedies – a tool created by the Ontario Business Corporations Act which allows stakeholders in a corporation to claim relief for misconduct by the directing minds of the corporation which unfairly disregards their reasonable expectations, causing them harm personally.

Oppression remedy actions are frequently confused with derivative actions, something we have yet to write about.

The difference may be important to you if you become involved in a private corporation dispute. Pursuing the wrong type of law suit might leave you out in the cold with no remedy, or even if you succeed, sorting out the confusion will increase costs and delay, often by tens of thousands of dollars. If you are a target of a lawsuit, recognizing whether it is correctly framed up front will save you time and money in your defence, and possibly stop the attack at an early stage.

A derivative action is a lawsuit that pursues a remedy on behalf of a corporation. Though this should be ultimately for the benefit of stakeholders, the claim is pursued in the name of the corporation, not by the stakeholders themselves. Any damages recovered are usually payable to the corporation, and only indirectly distributed to stakeholders, subject to a wide variety of possible exceptions. In some cases, the court orders money paid directly to claimants.

In an oppression remedy action, the claim involves wrongs done to a stakeholder, usually by the corporation or its controlling minds. In a derivative action, the claim is about a wrong done to the corporation. The defendants often include wrongdoing controlling minds, but also often reach to include outsiders involved in the wrongdoing.

To bring a derivative action, you need to obtain leave of the court by showing a judge that there is a claim worth pursuing that the corporation has refused to pursue, usually because the decision makers are the alleged wrongdoers. No leave is required to commence an oppression claim.

So, if you start your claim alleging oppression, but a court finds that the wrong was done to the corporation, not to you personally, you have wasted all that time, money and effort. It might also be too late to bring a derivative action, assuming you can get leave.

Although in some situations, there can be a mix of claims in one lawsuit, they are still different actions, and failure to get leave for a derivative claim because you confused it with oppression is still potentially fatal to your recovery.

Getting it right out of the gate is important.

You might think you can simply rely on your lawyer to sort this out. If that were true, we would not see repeated cases where the issues are confused, such as Di Silvestro v. Di Silvestro. This case is a classic example of a shareholder dispute within a family held corporation, made more complex by the fact that the control was notionally held by the elderly father. One of the adult children felt that her father was being manipulated by her siblings to her disadvantage, not sharing information, and diverting business opportunities to a separate corporation owned by one of the siblings.

You might have spotted that the diversion of corporate opportunities is usually a wrong done to the corporation, for which it, not the shareholder, must sue. Except in this case, it was not structured as a derivative action, and leave to sue on behalf of the corporation was not sought.

The defendants moved to strike the derivative claims, which were the bulk of the complaint.

Fortunately for the Plaintiff, the motions judge relied upon an earlier Court of Appeal decision that describes the distinction between the two forms of action as “murky”. In the court of appeal case, the Plaintiff’s claims were dismissed.

In Di Silvestri, the judge found that the closely held nature of the family business meant that the wrongs done to the corporation directly affected the Plaintiff personally, and allowed her action to proceed. This does not necessarily mean that she will succeed at trial, and it means that her action has been delayed and made more expensive. It does show that the issues are far from simple.

A somewhat similar result occurred in a 2021 Thunder Bay case referred to in Di Silvestri, so confusion also happens in the Northwest Region.

In every similar situation, there is a risk the court will strike the claim as happened in the Court of Appeal decision.

Sometimes confusion may be avoided by retaining lawyers experienced in and excited by complex cases. In other situations, the complexity of the facts makes it difficult to know how to plead the case immediately. In those situations, you need lawyers who combine those skills with the flexibility and creativity to shift course effectively. At Weilers LLP, our litigation team has these talents. We work closely with our experienced corporate lawyers to sort out the issues as early as possible, to save time and expense, and increase opportunities for recovery.  If you find yourself on either end of a corporate share dispute, we would be happy to discuss whether we are the right lawyers for you.