On May 26, 2015, the Ontario Court of Appeal issued its decision in Rea et al v Wildeboer (“Wildeboer”). The decision clarifies the nature, purpose, and difference between two of the most widely-used shareholder remedies in Canadian corporate law: the oppression remedy and the derivative action.
Background and Facts
The oppression remedy and the derivative action are statutory remedies designed to provide minority shareholders (and other complainants) with protections against decisions taken by majority shareholders. However, they protect complainants in different ways. The derivative action allows a complainant to sue on behalf of the corporation for a wrong done to the corporation. Because it allows individual complainants to represent the corporation, and because any successful claim is binding on all shareholders, Canadian corporate statutes require a complainant to first obtain leave of the court before bringing a derivative action. The leave requirement ensures that not just anyone can bring a claim on behalf of the company, and that any such claim is brought in good faith. It thereby prevents both a multiplicity of proceedings as well as unmeritorious suits.
The oppression remedy, by contrast, allows a complainant to sue on behalf of him or herself for a wrong he or she suffers personally as a result of corporate conduct. Canadian corporate statutes do not require leave before seeking relief under the oppression remedy. Under the oppression remedy the complainant is not seeking to represent all shareholders, only him or herself, and any remedy granted by a court is not binding on all shareholders. There is also no concern about a multiplicity of proceedings. The absence of a leave requirement, and the broad, flexible nature of the oppression remedy make it in some respects more appealing to litigants seeking a remedy for alleged corporate malfeasance.
In Wildeboer, the appellant, Mr. Rea, was a former director and significant minority shareholder of Martinrea, a successful, widely-held public company. In 2012 he resigned as a director and sued a group directors and officers, claiming that they misappropriated $50 to $100 million of Martinrea’s corporate funds for their own personal benefit. Notably, Mr. Rea sought relief under the oppression remedy, even though he sought to recover funds for Martinrea which he alleges were improperly siphoned from the company. He did not claim to have suffered any personal loss distinct from the loss that was allegedly suffered by the company or its other shareholders, and did not seek recovery of any funds in his personal capacity.
Oppression Remedy or Derivative Action?
Two of the defendants brought a motion to strike the claim on the basis that it was in substance a derivative action masquerading as a claim of oppression. Mr. Rea, relying on a prior line of cases and legal commentary, argued that the two causes of action overlap: a harm done to the corporation will also involve harm done to the complainant, and therefore the claim could be brought either as a derivative action or a claim of oppression. According to Mr. Rea, as long as the complainant’s reasonable expectations have been violated in a manner that is oppressive or unfair (the test for oppression established by the Supreme Court of Canada in Re BCE Inc., 2008 SCC 69), then even if the remedy is sought on behalf of the corporation, the claim is properly one of oppression and no leave is required.
The motion judge disagreed with Mr. Rea and struck the claim. The Court of Appeal agreed with the motion judge. In doing so, the Court of Appeal elucidated the nature and purpose of each cause of action.
The Court agreed that while the two causes of action may overlap, they do not do so in every case, or even in most cases. A claim must be brought as a derivative action (with leave from the court) where it “seeks to recover solely for wrongs done to a public corporation, the thrust of the relief sought is for the benefit of that corporation, and there is no allegation that the complainant’s individualized personal interests have been affected by the wrongful conduct.” In a proper claim for oppression, by contrast, “the impugned conduct must harm the complainants personally, not just the body corporate,” and this harm must be distinct from the harm suffered by all shareholders generally. In these circumstances, no leave is required.
The Court held that the two causes of action only overlap where the wrongs asserted have harmed the corporation and also “directly affected the complainant in a manner that [is] different from the indirect effect of the conduct on similarly placed complainants.” This will typically be the case with small, closely-held corporations. In Malata Group (HK) Ltd. v. Jung, 2008 ONCA 111, for instance, the alleged misappropriation of corporate funds harmed not only the corporation, but also one of the three shareholders of the company, who as a creditor could not be re-paid as a result of the alleged misappropriation. In this circumstance, there is both a wrong done to the corporation and a separate and distinct wrong to the complainant.
By contrast, Martinrea is a widely-held, public corporation, and Mr. Rea did not allege that he suffered any harm distinct from that suffered from the other shareholders. Further, the remedy he sought was disgorgement of the allegedly ill-gotten gains back to Martinrea. No personal remedy was sought. As a consequence, the Court of Appeal held that this claim was in substance a derivative action – brought on behalf of the company in order to remedy a wrong to the company – and could not be framed as a claim for oppression. Leave was required.
The decision in Wildeboer provides clarity for shareholders considering a claim, as well as for directors, officers, and corporations seeking to defend themselves against allegations of corporate malfeasance. Specifically, it establishes the following points:
To claim oppression, a plaintiff must plead that they suffered personal harm distinct from that suffered by the corporation itself; By the same token, the focus of the oppression remedy is on the effects of the impugned conduct on the complainant, not on the corporation. If the relief sought is for the benefit of the corporation, then the action will most likely have to be brought as a derivative action, and leave will be required; The causes of action overlap where the corporation is small and closely-held, and where the impugned conduct directly affects the complainant in a way that differs from the effects on other shareholders. In such cases, a claim may be brought either as a derivative action or a claim for oppression.
In short, the Court of Appeal recognized that while the derivative action and the oppression remedy are not mutually exclusive, they are distinct, and shareholders considering bringing a claim must carefully consider which cause of action is appropriate in the circumstances.
Rea v Wildeboer, 2015 ONCA 373
Date of Decision: May 26, 2015