Tuesday, May 26, 2015

Oppression Remedy and Derivative Actions

Rea v. Wildeboer, 2015 ONCA 373:

[26]   I accept that the derivative action and the oppression remedy are not mutually exclusive.  Cases like Malata and Jabalee make it clear that there are circumstances where the factual underpinning will give rise to both types of redress and in which a complainant will nonetheless be entitled to proceed by way of oppression remedy.  Other examples include: Ontario (Securities Commission) v. McLaughlin, [1987] O.J. No 1247 (H.C.J.); Deluce Holdings Inc. v. Air Canada (1992), 12 O.R. (3d) 131 (Gen. Div.); C.I. Covington Fund Inc. v. White, [2000] O.J. No. 4589 (S.C.), aff’d [2001] O.J. No. 3918 (Div. Ct.); Waxman v. Waxman, [2004] O.J. No. 1765 (C.A.), at para. 526, leave to appeal refused, [2004] S.C.C.A. No. 291.
[27]   However, I agree with the respondents that claims must be pursued by way of a derivative action after obtaining leave of the court where, as here, the claim asserted seeks to recover solely for wrongs done to a public corporation, the thrust of the relief sought is solely for the benefit of that corporation, and there is no allegation that the complainant’s individualized personal interests have been affected by the wrongful conduct. 
[28]   It is true that the jurisprudence is inconsistent about how to treat cases where there is an overlap and that there has been considerable discussion amongst legal commentators about this and whether the distinction should be maintained.  See, for example, the following texts and articles and the jurisprudence referred to therein: Koehnen, at pp. 440-448Jeffrey G. MacIntosh, “The Oppression Remedy: Personal or Derivative?” (1991) 70 Can. Bar. Rev. 29; Edward M. Iacobucci and Kevin E. Davis, “Reconciling Derivative Claims and the Oppression Remedy” (2000) 12 S.C.L.R. 87.
[29]   While this debate is interesting, it is not necessary to resolve it here.  On my reading of the authorities, in the cases where an oppression claim has been permitted to proceed even though the wrongs asserted were wrongs to the corporation, those same wrongful acts have, for the most part, also directly affected the complainant in a manner that was different from the indirect effect of the conduct on similarly placed complainants. And most, if not all, involve small closely-held corporations not public companies. 
[30]   Waxman is a good example. The company was a family scrap metal business.  Some of the acts complained of, including the wrongful distribution of bonuses, could have been the subject of a derivative action, but it was not disputed on appeal that the complainant “was personally aggrieved by the distribution” and that it “was done at the expense of his interest in the company”: para. 526.
[31]   Malata – a case involving another closely-held company – is also a good example.  The misappropriation of funds in that case affected not only the company (and therefore the indirect interests of all shareholders), but the direct interests of the minority shareholder as a creditor of the company.
[32]    Here, however, on the facts pleaded, there is no overlap between the derivative action and the oppression remedy (once one goes beyond the boiler plate repetition of the statutory language from the OBCA describing the oppression remedy).  The appellants are not asserting that their personal interests as shareholders have been adversely affected in any way other than the type of harm that has been suffered by all shareholders as a collectivity.  Mr. Rea – the only director plaintiff – does not plead that the Improper Transactions have impacted his interest qua director.
[33]   Since the creation of the oppression remedy, courts have taken a broad and flexible approach to its application, in keeping with the broad and flexible form of relief it is intended to provide.  However, the appellants’ open-ended approach to the oppression remedy in circumstances where the facts support a derivative action on behalf of the corporation misses a significant point: the impugned conduct must harm the complainant personally, not just the body corporate, i.e., the collectivity of shareholders as a whole. 
[34]   The oppression remedy is not available – as the appellants contend – simply because a complainant asserts a “reasonable expectation” (for example, that directors will conduct themselves with honesty and probity and in the best interests of the corporation) and the evidence supports that the reasonable expectation has been violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard”.  The impugned conduct must be “oppressive” of or “unfairly prejudicial” to, or “unfairly disregard” the interests of the complainant: OBCA, s. 248(2).  No such conduct is pled here. 
[35]   That the harm must impact the interests of the complainant personally – giving rise to a personal action – and not simply the complainant’s interests as a part of the collectivity of stakeholders as a whole - is consistent with the reforms put in place to attenuate the rigours of the rule in Foss v. Harbottle.  The legislative response was to create two remedies, with two different rationales and two separate statutory foundations, not just one: a corporate remedy, and a personal or individual remedy. 
[36]   The derivative action provides aggrieved minority stakeholders with the ability to pursue a cause of action on behalf of the corporation to redress wrongs done in respect of the corporation, provided leave is obtained from the court to do so.  As Professor MacIntosh has observed:
The corporation will be injured when all shareholders are affected equally, with none experiencing any special harm. By contrast, in a personal (or “direct”) action, the harm has a differential impact on shareholders, whether the difference arises amongst members of different classes of shareholders or as between members of a single class.  It has also been said that in a derivative action, the injury to shareholders is only indirect, that is, it arises only because the corporation is injured, and not otherwise. [See, for example, Farnham v. Fingold, [1973] 2 O.R. 132 (C.A.); Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.)].
[37]   The requirements for leave are straightforward and are set out in s. 246(2) of the OBCA: the directors must be given 15 days’ notice of the intention to bring the application, and the court must be satisfied: (i) that the directors will not pursue the claim; (ii) that the complainant is acting in good faith; and (iii) that it appears to be in the best interests of the corporation that the action be brought. In this way the legislative goals of avoiding strike suits, meritless actions and a multiplicity of proceedings against the corporation – and the potentially unwarranted costs that accompany them – are strengthened.  Although they have been the subject of some academic criticism,[3] these remain valid legislative objectives and concerns, in my view, particularly in the context of actions against publicly-traded corporations.  
[38]   Indeed, in para. 28 of their statement of claim the appellants themselves flagged Martinrea’s potential exposure “to legal proceedings by each person or company that acquired or disposed of shares of Martinrea during the period in which the Improper Transactions took place.”  A judgment in a derivative action, however, if proceeded with and ultimately successful, will be binding on all shareholders.
[39]   Much of the debate here focussed on Malata – this Court’s most recent consideration of the relationship between derivative actions and the oppression remedy.  Does it stand for the proposition, as the appellants assert, that oppression remedy claims and derivative action claims may be collapsed into an oppression remedy claim?  Or, as the respondents say, does it stand for the proposition that the remedies may not be conflated when it is a public corporation that is involved?  In my view, Malata stands for neither of these broad propositions and, in any event, is distinguishable from the present appeal.
[40]   Like this case, Malata involved the alleged misappropriation of funds from the corporation – there, by a director, officer and major shareholder. Unlike this case, however, Malata involved a small closely-held corporation.  The aggrieved minority shareholder was one of only three shareholders of the corporation and, significantly, was also a major creditor of the corporation.  On those facts, there was clearly an overlap and coexistence between the wrong caused by the alleged misappropriation to the corporate collectivity and the wrong caused by it to the minority shareholder in its capacity as creditor because the misappropriation threatened the corporation’s ability to pay its debt to the minority shareholder/creditor.  Martinrea, however, is a large, widely-held public corporation and no type of personal wrong is evident.

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