The Ontario Business Corporations Act (OBCA) provides broad remedial options for directors, officers, shareholders, and other “complainants” to correct oppressive or prejudicial actions by or against a corporation. Most commonly, these take the form of either an oppression action or a derivative action. Oppression actions are where a complainant commences an action where that individuals interests have been oppressed or unfairly prejudiced. Derivative actions, on the other hand, are where a complainant starts litigation in the name of the corporation where the corporation has been wronged and the corporation (by its board of directors) chooses not to commence litigation itself. Because derivative actions bring the corporation into litigation without its consent, and often require the corporation to pay the legal costs of that action, leave of the court is required to commence a derivative action.
Tersigni v. Georgevitch
OBCA actions, and in particular oppression actions, can sometimes blur the legal distinction between a corporation and its shareholders, as often shareholders will sue in their own names for losses directly suffered by the corporation. In a recent appeal from the Small Claims Court, Justice Douglas confirmed in Tersigni v. Georgevitch that such claims are not mutually exclusive from one another, and just because a complainant could bring a derivative action does not prohibit them from proceeding by way of an oppression action.
The respondent to the appeal maintained that a shareholder could not sue in his personal capacity for diminution in share value as a result of losses the corporation suffered, and needed to sue as a derivative action and seek leave. The respondent relied on the traditional legal distinctions between a corporation and its shareholders, asserting that it was the corporation that had sustained losses, not the individual shareholder. In reversing the Small Claims Court’s decision, the court clarified that the purpose of these OBCA provisions is to provide a broad and inclusive set of remedies for complainants who have been unfairly prejudiced by the actions of the corporation or its directors. As a result, the traditional legal distinctions between corporations and their shareholders should not be relied upon to interfere with the availability of these oppression remedies.
Rea v. Wildeboer
By comparison, the Ontario Court of Appeal recently held in Rea v. Wildeboer confirmed that, though there is the availability of both oppression and derivative actions where the facts permit, there is still a distinction, and the court precluded the individual shareholder from suing in an oppression action over matters which should properly have been brought under a derivative action.
In both Rea and Tersigni, the conduct complained of related to the alleged misuse of corporate funds by directors of the company for their personal benefit, and the actions were commenced by aggrieved shareholders. The court in Rea noted that corporate losses are not shareholder losses, relying on the traditional legal distinction between the two, and further finding that a plaintiff in an oppression action must show some grounds as to why he or she was personally harmed by the defendants, and that a general harm suffered by all shareholders equally for a harm actually done to the corporation cannot ground an oppression action.
At first blush, these two decisions appear contradictory – both plaintiffs are in nearly identical situations and complained of very similar conduct by the directors of their respective corporations. Yet one was allowed to proceed as an individual oppression action and the other was not. However, there are small but key differences that help to explain this distinction.
First, the corporation in Tersigni was a small closely-held corporation, whereas the corporation in Rea was a large publically-traded corporation. The court in Rea noted that large publically traded corporations benefit more from requiring derivative actions to be granted with leave, since the body of potential claimants is significant and the corporation could be forced to fund potentially frivolous lawsuits if leave was not granted. Such a concern is reduced when the number of potential individuals involved is small. This was likely a factor in the Court of Appeal’s stricter scrutiny of the claims alleged.
Second, and more importantly, the plaintiffs in each action framed their harm in different ways. In Tersigni, the plaintiff sued over the loss of value in his shares as a result of the defendant’s actions. The court reasoned that a loss of share value is a personal harm against the shareholder, even if all shareholders would have suffered equally and resulted from harm that was principally against the corporation. Conversely, in Rea, the plaintiffs claimed that the defendants breached their fiduciary duties and sought the return of the misappropriated funds to the corporation. The court in Rea noted that the defendants’ fiduciary duties are to the corporation, not the individual shareholders, and the demand for the return of the corporation’s funds was also a proper claim for the corporation to make. The court held that none of the relief claimed related to any personal harm to the individual plaintiffs. The plaintiffs in Rea appear to have made no claims as to any diminution of share value resulting from the defendants’ actions which could potentially ground an oppression action.
As a result, though the courts may be flexible when claims made in the pleadings could be properly brought as either oppression or derivative actions, the courts still recognize the distinction between the two. As such, it is important for potential plaintiffs to properly determine whether the relief they are seeking is personal or derivative, and to frame their claims accordingly.
If you or your corporation have been unfairly prejudiced by the actions of others, or if you are a party in an oppression or derivative action, contact us for an initial consultation.