A derivative action may be necessary if a company suffers loss or damage at the hands of its own directors and officers. Cleary, if the wrongdoers control the company, they will not bring an action against themselves. This is exactly the situation contemplated by s. 232 of the Business Corporations Act, SBC 2002, c.57 (the “Act”). Under that section, certain people, such as a shareholder, can apply to the Court to bring an action in the name of the company. The derivative action is a remedy for a wrong committed to the company itself, as opposed to the oppression remedy which relates to a wrong to the individual shareholders in their capacity as shareholders. For information about the oppression remedy see the Oppression Remedies section in this website. There is an overlap. In some circumstances, the conduct of the company’s directors may justify both an oppression claim as well as a derivative action.
Under s. 323 of the Act, a shareholder (which includes beneficial shareholders), a director, or any other person whom the court considers appropriate, may bring an application to the Court to allow that person to bring a lawsuit in the name of and on behalf of a company known as a “derivative action”. An application can also be brought for the same individuals to defend a legal proceeding brought against the company, although this situation does not arise as often.
Before bringing the application, the complainant needs to make reasonable efforts to cause the directors to either bring or defend the lawsuit. Further, notice of the application must be given to the company, the complainant must be acting in good faith and it must appear to the Court that it is in the best interest of the company to either bring or defend the legal proceeding. The right to bring a derivative action in the name of the company does not necessarily mean the company will have to pay the legal expenses related to the action, as that is left to the discretion of the Court and will depend on the circumstances.
A cost benefit analysis ought to be done before launching the court application for the right to bring a derivative action. The complainant has to be serious in bringing the application as he or she may be required to give security for costs, or be ordered to indemnify the company or its directors and officers for expenses, including legal costs, that are incurred as a result of the legal proceeding. Further, the legal proceeding cannot be settled without court approval, so the complainant must be prepared to go back to court once the matter is resolved.
Ironically, many lawsuits brought by shareholders are struck on the grounds that their claim is derivative to the company. In other words, the wrong was really done to the company and not the shareholder as an individual. In these circumstances, the shareholders’ only recourse is to bring a derivative action. Of course, it is best to see a legal advisor to get it right in the first place and bring a derivative action, oppression claim or both, depending on the circumstances.
If you have questions or require legal counsel, the Business Disputes Team at Alexander Holburn would be happy to help you.
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