Written by Jason W.J. Woycheshyn and Christopher S. McKenna
On May 26, 2015, the Court of Appeal for Ontario released its decision in Rea et al v Wildeboer, clarifying the distinct role of derivative actions under the Ontario Business Corporations Act. The role is so distinct that the Court upheld a decision to strike a statement of claim as being plain and obvious to fail because it was a derivative action dressed up as an oppression action.
For years, legal commentators and authorities have noted the seemingly murky line Ontario courts have held in allowing complainants to use the oppression remedy to pursue a derivative remedy under the OBCA. The 2008 decision of the Court of Appeal in Malata Group (HK) Ltd v Jung, only added to this murkiness when it held that there was a degree of overlap between derivative and oppression remedies, and that these OBCA remedies were not “mutually exclusive”.
Under the OBCA, derivative actions require, as a pre-condition of their use, that a complainant first seek leave from a court to institute an action on a corporation's behalf – and to remedy harm done to the company generally. The oppression remedy has no leave requirement. If would-be derivative actions are easily folded into claims for oppression, the potential existed for these types of claims to usurp the legislative framework of the derivative action, and effectively permit complainants to seek such relief without leave of the court. As the appellants in Rea argued on appeal, not only does that potential exist, but recent authorities support that it is happening, and that the distinction between these remedies has been blurred.
In Rea, the appellants sought to appeal the decision of a motions judge striking out their claim for oppression. The motions judge found that the appellants' claim, which asserted, among other things, oppression from the misappropriation of corporate funds, had failed to disclose a reasonable cause of action because the facts, as pleaded, did not support the claim.
The issue for the Court of Appeal was whether a complainant could assert through the oppression remedy a claim that, by its nature, is a derivative action for a wrong done to a corporation (and, in the process, circumvent the requirement to obtain leave from the court to commence such an action).
In their submissions, the appellants relied upon the murky applications between derivative and oppression remedies in cases since Malata and the seminal 2008 case of the Supreme Court of Canada in BCE, which focused the oppression remedy on the reasonable expectations of the harmed shareholder. In their view, a complainant is entitled to pursue a claim for oppression, even where the wrong is done to a corporation, provided that the complainant's reasonable expectations have been defeated by means of conduct caught by the terms “oppressive”, “unfairly prejudicial” or “unfairly disregards”. In this case, the pleadings disclosed such facts and therefore, a reasonable cause of action existed.
For their part, the respondents contended that the distinction between derivative and oppression remedies remains an important one, in part, because of the requirement that a complainant seek leave before a court can redress the wrongs done to a corporation. In their view, the requirement to obtain leave is necessary to protect corporations' interests against meritless and costly proceedings, particularly where those corporations are widely-held public companies.
The Court of Appeal examined the role and function of both the derivative and oppression remedies. The Court held that, at its core, the derivative action is a corporate claim because it is concerned with redressing wrongs done to the corporation. By contrast, the oppression remedy is a personal claim because it is concerned with redressing wrongs done to the individual complainant by the corporation, or as a result of the corporation being conducted in a manner that is oppressive, unfairly prejudicial to or that unfairly disregards the interests of the complainant. While there are instances in which these remedies will overlap, such as in closely-held family corporations, they are two distinct remedies and must be applied in such a manner. In the present case, the wrong at issue affected a widely-held public company, and the thrust of the relief sought was for the benefit of the corporation and not an individual complainant. The motions judge's decision to strike the oppression claim was therefore justified.
Examining Malata, and the cases that followed, the Court acknowledged that, while it was true that the jurisprudence was inconsistent about how to treat cases dealing with an overlap of derivative and oppression remedies, the cases relied on by the appellants did not support doing away with the distinction between them. In the Court's view, these authorities permitted complainants to proceed with the oppression remedy, even where the wrongs were asserted against the corporation, because the wrongs also affected the complainant in a way that was different from similarly situated complainants.
In the present case, as pled, the wrongs affecting the individual shareholders were not different from similarly situated shareholders; as shareholders of a widely-held public company, they were all affected similarly by the misappropriation of funds. Had the wrong also impacted the individual complainant's interest as a director, or creditor – as the cases relied on by the appellants had found – there would have been a basis to support a claim for oppression. However, there was no such claim here.
The decision in Rea provides us with the following lessons:
- The oppression remedy is one of the most flexible remedies in the common law world, but it has its limits. Derivative actions still have a role to play and judges will be tasked more frequently to weed out would-be derivative actions dressed up as oppression actions.
- In assessing whether a claim is properly the subject matter of a derivative or oppression action, consider: (1) whether the wrong complained of relates solely to a corporation; and (2) whether the thrust of the relief sought is solely for the benefit of that corporation. In such instances, a derivative action may be most appropriate.
- An action for oppression may be appropriate where the wrong complained of relates solely to a corporation. However, in such instances, that wrong must also affect the individual complainant in a manner that is different from similarly situated complainants. This is most easily achieved in closely-held corporations, with relatively few shareholders, or when the complainant's interests as a director or creditor of the corporation are also affected by the wrong. If the wrong complained of affects individual complainants similarly, the wrong must be redressed by the corporation and an oppression action will not be appropriate.
- Similarly situated complainants, such as shareholders in widely-held public companies, may not be as successful as compared to shareholders in closely-held companies in relying on a wrong done to a corporation as a basis for an oppression proceeding under the OBCA.
- The question of whether an oppression remedy is appropriate will be determined on a case-by-case basis.