The Ontario Court of Appeal (the “Court”) recently provided much needed guidance on the distinction between the oppression remedy and derivative actions. While both claims can be used to address corporate misconduct, there are important differences between the oppression remedy and derivative actions which should determine the choice of remedy in a particular set of circumstances.
The oppression remedy allows shareholders (and other appropriate persons) to apply to court if a company’s affairs have been conducted in a way that is oppressive or unfairly prejudicial to one or more shareholders. The oppression remedy is an equitable remedy which gives the court broad discretion to remedy the oppressive conduct. For example, the court can direct or prohibit any act, regulate the conduct of the company’s affairs and appoint or remove directors, among other remedies. In contrast, a derivative action is a procedural step necessary to bring a legal proceeding in the name of a company. Unlike the oppression remedy, a derivative action is designed to remedy harm that is done to the company. There are several procedural requirements that must be met in order to bring a derivative action, such as the complainant having made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding.
In Rea v. Wildeboer, the appellants asserted an oppression claim under the Ontario Business Corporations Act alleging misappropriation of funds from a TSX-listed company. The appellants were seeking to recover the funds on behalf of the company. The appellants argued that they were entitled to proceed under the oppression remedy because the distinction between the oppression remedy and derivative actions has been significantly weakened over time. However, the lower court disagreed and struck the claim. On appeal, the Court dismissed the appeal and clarified that the oppression remedy and the derivative action are two different remedies with separate rationales and statutory foundations. The oppression remedy is a personal remedy, whereas the derivative action is a corporate remedy.
Specifically, the Court accepted that the oppression remedy and the derivative action are not mutually exclusive where the factual circumstances give rise to both types of claims. In this case, however, the Court held that a claim must be brought by way of derivative action in the following circumstances:
- the claim only seeks to recover for wrongs done to a public company;
- the relief sought is only for the benefit of the company; and
- there is no allegation that the complainant’s personal interests have been impacted in a way that is different from other stakeholders’ interests.
The Court noted that in most cases where an oppression claim has been allowed to proceed for wrongs done to a company, the wrongful acts directly impacted the complainant in a way that was different from the indirect impact on other complainants. Further, most of these cases involved small closely‑held companies, rather than large public companies. Going forward, where the factual circumstances may give rise to both a personal claim (oppression remedy) and a corporate claim (derivative action), the question of whether the claimant is entitled to proceed under the oppression remedy will have to be determined on a case by case basis.
If you have any questions about the decision, please contact any member of Clark Wilson’s Corporate Finance & Securities Group.