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Focus: Ruling offers guidance on oppression versus derivative actions

Focus
|Written By Julius Melnitzer

The Ontario Court of Appeal’s decision in Rea v. Wildeboer earlier this year suggests that counsel should think carefully about the nature of the claims they advance in corporate stakeholder litigation.

“What this case tells us is that it’s hard to do a wrong to a shareholder as shareholder,” says Monique Jilesen of Lenczner Slaght Royce Smith Griffin LLP in Toronto. “So unless complainants have been mistreated in a personal way in a way that impacts them differently from other shareholders, they should proceed by way of derivative action and not by way of an oppression remedy.”

The decision refocuses the distinction and, to some extent, restricts a series of rulings that suggested there was a significant overlap between oppression claims and derivative actions.

In Rea, the court, dealing with a case involving a public company, struck an oppression claim where the allegations of insider trading and self-dealing involved harm only to the corporation and not to the specific interests of an individual shareholder.

“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,” the court stated.

Rea arose when the plaintiffs brought an oppression claim under s. 248 of the Ontario Business Corporations Act against Martinrea International Inc., a widely held Canadian public company that manufactures auto parts. The claim alleged the defendants, including directors and an executive of Martinrea, breached their fiduciary duties to the corporation, resulting in the misappropriation of at least $50 million of its corporate funds for their own personal benefit.

The appellants argued the “somewhat murky” line between oppression remedies and derivative actions had all but disappeared and that in any event, the two causes of action could overlap and weren’t mutually exclusive.

The motions judge disagreed. He struck the claim, concluding that the plaintiffs should have sought leave of the court to institute a derivative action.

Counsel for the defendants, Don Jack of Aird & Berlis LLP in Toronto, submitted that any relaxation in the distinction had occurred, for the most part, in cases involving small, closely held corporations. He cited the necessity for leave in derivative actions in support of his argument that the distinction continued to exist, noting that the requirement serves to prevent meritless suits and helps avoid multiple proceedings.

Justice Robert Blair, who wrote the unanimous decision for the Court of Appeal, confirmed that the derivative action and the oppression remedy weren’t mutually exclusive. He did observe that the law was inconsistent regarding the proper procedure in the case of overlap but he noted that where courts had permitted an oppression claim to proceed even though the wrongs asserted were to the corporation, those same wrongful acts also directly affected the complainant in a manner that was different from the indirect effect of the conduct on similarly placed complainants.

In the instant case, however, the plaintiffs should have pursued their claims by way of a derivative action as they sought relief that was solely for the benefit of the corporation and hadn’t alleged any wrongful conduct had affected their personal interests as opposed to those of the corporation.

But the Court of Appeal offered little guidance for cases that did in fact give rise to a corporate claim and a personal oppression remedy, stating that “the question of whether an oppression remedy proceeding is available will have to be sorted out on a case by case basis.”

For his part, Jack believes leaving the overlap issue open was appropriate.

“The court did as good a job as it could do in straightening out the law bearing in mind that it did not want to restrict trial judges’ discretion going forward,” he says.   

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