There are two legal recourses under the Canada Business Corporations Act ("CBSA") to palliate unlawful or abusive conduct of those who control a corporation: a derivative action (ss. 239-240) and a claim for relief, commonly called an oppression remedy (s. 241).
Some authors have described the distinction between these two recourses as murky, while others question its utility. Be that as it may, this distinction, no matter how fine for some, exists in the CBCA and two recent decisions in Ontario and Quebecillustrate just how risky it would be for a complainant to disregard this distinction when triggering hostilities.
Let's first review the nature of the distinction.
In a derivative action, a complainant can institute proceedings in the name of the company to enforce the corporation's rights. In this case, the complainant acts on behalf of the company and, indirectly, for all its shareholders. As noted by Professor MacIntosh and cited by the Court of Appeal of Ontario in Rea:
"The corporation will be injured when all shareholders are affected equally, with none experiencing any special harm. ...It has also been said that in a derivative action, the injury to shareholders is only indirect, that is, it arises only because the corporation is injured, and not otherwise…."
The complainant must first obtain leave from the court to sue in the name of the company, which leave will be granted where the complainant can prove it is acting in good faith and if it appears to be in the corporation's interest to do so. The legislator provided this leave mechanism to prevent corporations, in particular public corporations, from being uselessly exposed to a multiplicity of proceedings or frivolous and abusive opportunistic actions ("strike suits").
An oppression remedy is fundamentally different from a derivative action. It is an equitable remedy the cornerstone of which is the reasonable and legitimate expectations of a shareholder or any other interested party of the corporation. It enables the complainant to obtain various provisional or final orders to uphold its reasonable expectations and halt the prejudice it is unfairly suffering. It applies in situations where the complainant is directly affected by the harmful abuse or injustice and not, as observed by Professor MacIntosh in the above excerpt, in situations where the complainant suffers indirectly as a shareholder or other interested party of the corporation as a result of prejudice caused to the company. Finally, the complainant need not obtain leave from the court before instituting such an action.
The courts have recognized that the two actions are not mutually exclusive and that they may overlap. Therefore, a complainant may, with regard to the same facts, seek both redress for the company and orders to rectify an unfair or abusive situation caused by that same company that results in personal injury to the complainant.
These two actions are often, intentionally or not, lumped together in the same proceeding, an oppression remedy, with the conclusions overlapping to the point of confusion and without the complainant seeking leave from the court.
In Rea, the Ontario Court of Appeal reaffirmed the distinction between the two types of action. It added that in cases where the complainant might with impunity also jump on board an oppression remedy, flexible by its very nature, to seek conclusions which should instead be sought by the company itself, without obtaining leave, will depend on the circumstances of the case. It noted however, that a review of the jurisprudence reveals that the combination of these two actions appears to be more easily tolerated by the courts when it involves a private company with a limited number of shareholders who are, more often than not, directly affected by the company's actions and omissions, as opposed to a public company with many shareholders and interested parties.
Thus, in Rea it confirmed the decision of the Superior Court of Ontario to dismiss an oppression remedy against "a large widely-held public corporation" because all the conclusions sought by the complainant were intended to enforce the company's rights and not to correct an oppressive situation in its regard.
The decision of the Superior Court of Québec in Cabanes also illustrates the need to clearly distinguish between these two actions, this time before submitting a motion for leave to institute a derivative action. To obtain leave under the CBCA, the complainant must demonstrate that it is acting in good faith and that a derivative action appears to be in the interests of the corporation. The Superior Court of Québec dismissed the motion on the grounds that the complainant failed to discharge its burden in that the conclusions sought were no different from the conclusions sought in its previously instituted oppression remedy:
"The defendants referred to Luft v. Ball and argued that even though the oppression remedy and the derivative action may coexist, the similarity between the conclusions sought in these two actions attests to the bad faith of the complainant. The Court shares this view. The applicants seek the same conclusions in their oppression remedy as in their derivative action and want to be the only ones authorized to provide Wajam's lawyers with the mandate and instructions in this matter. It is obvious that they will raise the same arguments and adopt the same position as that raised in the oppression remedy, with Wajam bearing the cost. In the Court's opinion, the applicants have failed to establish that with this derivative action they intend to act in the sole interest of Wajam."
These two decisions confirm that the nature of the conclusions sought by the complainant must be scrutinized before proceedings are instituted against a public corporation, by considering the fundamental difference between a derivative action and an oppression remedy.