Corporate Statutory Remedies: Derivative Actions and Oppression Remedies

• Author: Christopher C. Nicholls
• Pages: 387-435

387

CHAPTER THIRTEEN

Corporate Statutory Remedies:

Derivative Actions and

Oppression Remedies

INTRODUCTION

As we have seen in earlier chapters, when a corporation interacts with third parties—

entering into contractual relations, engaging in tortious conduct, and even, on occasion,

committing crimes—it is subject to traditional legal remedies and is entitled to many

traditional legal protections. These remedies and protections, must, of course, be tweaked

from time to time to ensure that they will apply appropriately to an artificial person rather

than to the sort of natural (that is, human) person for which they were originally developed.

But disputes often arise within the proverbial walls of the corporation itself: disputes,

not just between the corporation and arm’s-length third parties, but also, for example,

between the corporation and those who manage its business and affairs. Disputes may

even involve one or more of the corporation’s principal constituents. When conflicts of

this sort arise, a special set of rules and remedies is sometimes called for.

Intracorporate disputes between the corporation and its investors are especially fre-

quent. The term “investor” is sometimes used as a synonym for shareholder, but as we

saw in chapter 12, corporate investors may, broadly speaking, be divided into two

categories: creditors and shareholders.

Creditors of a corporation enjoy contractual rights. If their corporate debtors fail to make

a payment of interest or principal on time, or otherwise commit some act of default,

creditors may sue to enforce the terms of their loan agreement, debt security or instrument,

or trust indenture (subject to restrictions imposed by the indenture), as the case may be.

However, the relationship between shareholders and the corporation in which they

hold shares is not contractual in the conventional sense.1 As discussed in chapter 10,

corporate statutes accord shareholders various rights to exercise their “voice” in the

1This statement is subject to two qualifications. First, provincial corporate statutes in British Columbia and

Nova Scotia still adhere to the English memorandum/articles of association model of incorporation,

pursuant to which the memorandum and articles of association are, as a technical matter, said to constitute a

contract between the members. (See Companies Act (NS), s. 24 and Business Corporations Act (BC),

s. 19(3).) Second, as discussed at some length in chapter 4, many Canadian corporate statutes now provide

for creation, and recognition, of a unanimous shareholder agreement. (See, e.g., CBCA, s. 146.)

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.

388 Chapter 13 Statutory Remedies: Derivative Actions and Oppression Remedies

governance of the corporation on a regular (if not an ongoing) basis. These statutory

measures include voting, proxy, and shareholder proposal rules. Shareholders also have

the same rights as any other person dealing with a corporation to pursue personal actions

against the corporation when some wrong has been done to them personally.

But when shareholders have been subject to unfair actions taken by the corporation,

its directors, or its officers, they cannot turn to the enforcement of contractual covenants

for protection. When shareholders’ economic interests are placed in jeopardy by the very

managers they entrusted to safeguard them, they suddenly find themselves barred by the

gates of the fortress of separate legal entity that had originally been constructed for their

own protection.

In cases such as these, the corporate structure creates obstacles to justice. Accordingly,

a number of special avenues of redress have been developed and are, in Canada, typically

included within the corporate legislation. These protections are often referred to, collec-

tively, as “shareholder remedies.” However, this term has become a misnomer because,

although shareholders are still the primary beneficiaries of these measures, in many cases

aggrieved parties other than shareholders are also permitted to make use of them.

To be clear, the corporate remedies with which this chapter is concerned are civil

remedies. There are, of course, also a host of penalty provisions in Canadian corporate

statutes intended to ensure that corporate managers and others comply with the applicable

law.2 But the philosophy underlying most modern corporate law statutes is that they ought

to be, so far as possible, “self-enforcing”—relying mainly on the initiative of those who are

aggrieved to ensure that appropriate legal proceedings are undertaken, rather than depending

on a detailed regime of harsh penalty provisions. The Dickerson committee, for example,

explicitly advocated such an approach in its report that led to the enactment of the CBCA.3

AN OVERVIEW OF KEY CORPORATE CIVIL REMEDIES

Among the most important of the special corporate civil remedies found in the CBCA

and most other Canadian corporate statutes, are the following:

•Derivative actions:Derivative actions are initiated by a complainant,4 as defined

by statute, when a wrong has allegedly been done to a corporation. At common law,

2See, e.g., CBCA, s. 251 (a general provision making it an offence to contravene the CBCA or the

regulations). In addition to this general provision, there are a host of more specific penalty provisions

including s. 20(6), s. 21(10), s. 22(3), s. 32(4), s. 85(6), s. 130(4), s. 149(3), s. 149(4), s. 150(3), s. 150(4),

s. 152(4), s. 153(8), s. 159(2), s. 160(3), s. 168(4), s. 171(9), s. 225(2), and s. 235(4).

3See Robert W.V. Dickerson et al., Proposals for a New Business Corporations Law for Canada, vol. I,

Commentary (Ottawa: Information Canada, 1971), at para. 476 (Dickerson committee): “we think that

the best means of enforcing a corporation law is to confer reasonable power upon the allegedly ag-

grieved party to initiate legal action to resolve his problem, making the Draft Act largely self-enforcing,

obviating the need for sweeping administrative discretion and harsh penal sanctions, and, at the same

time, forcing resolution of the issues before the courts, which have the procedures, the machinery and

the experience that enable them better than any other institution to deal with such problems.”

4The term “complainant” is used in most Canadian corporate statutes. It might be noted that under s. 232

of the Business Corporations Act (BC), a derivative action may be initiated by a “complainant,” a term

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.

Derivative Actions 389

such actions were circumscribed by the rule in Foss v. Harbottle.5 Canadian corpor-

ate statutes today now specifically prescribe the procedures and conditions to be

followed when commencing derivative actions.

•Oppression remedy:Oppression applications may be initiated by a complainant,6 as

defined by statute, in cases where, among other things, acts or omissions of a

corporation, or its affiliates, or the exercise of directors’ powers effect a result that is

“oppressive or unfairly prejudicial or that unfairly disregards the interests of any

securityholder, creditor, director, or officer.”

•Dissent and appraisal rights:Dissent and appraisal rights are available to dissent-

ing shareholders when certain specified fundamental changes have been undertaken

by the corporation; the appraisal remedy refers to a requirement that the corporation

purchase the dissenting shareholders’ shares for fair value.

•Compliance orders:Compliance orders are available to a complainant, as defined

by statute, or to a creditor, when certain fundamental corporate documents (for

example, articles, bylaws, or unanimous shareholder agreements) or the provisions

of the corporate statute itself are not being complied with by the corporation. The

remedy sought is an order to comply with the document or provision in question.

•Liquidation or dissolution (winding-up orders):Action can be taken by a share-

holder seeking dissolution of the corporation in cases where an “oppression” rem-

edy would be available, where a unanimous shareholder agreement permits the

shareholders to demand dissolution, or where it is otherwise “just and equitable” to

do so.

This chapter will discuss the first two of these remedies, the derivative action and the

oppression remedy. Chapter 14 will canvass the other statutory remedies. The availability

in certain circumstances of an investigation order will also be touched on briefly in

chapter 14. An investigation order is not, strictly speaking, a remedy, but it is another

statutorily prescribed arrow in the quiver of aggrieved corporate investors.

DERIVATIVE ACTIONS

Framing the Issue

From time to time the directors or officers of a corporation will be tempted to act in

selfish disregard of the corporate interests they were elected or appointed to protect. They

might, for example, wrongly seize for themselves a business or investment opportunity

that properly belongs to the corporation. “Corporate opportunity” cases of this sort were

defined to mean “a shareholder or director of the company.” However, the term “shareholder” is given an

extended definition for this purpose and includes not only a beneficial owner of the company’s shares,

but also any other “appropriate person” as determined by the court in its discretion (s. 232(1)).

5Foss v. Harbottle (1843), 2 Hare 461.

6Again, as in the case of the derivative action, the BC Business Corporations Act differs from most other

Canadian corporate statutes that provide an oppression remedy. Such an action can be initiated only by a

“shareholder”; but the term “shareholder” includes both a beneficial owner of shares and any other

“appropriate person” as determined by the court (Business Corporations Act (BC), s. 227(1)).

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.