Derivative Action: How a shareholder can sue when the corporation won't

The powerful but infrequently-used remedy known as the "derivative action” permits a shareholder or other complainant to advance an action on behalf of the corporation when the corporation refuses to bring the action itself.

Unlike oppression proceedings, a complainant brings a derivative action in the name of or on behalf of the company to enforce a right, duty or obligation enforceable by the company.

The derivative action is often used to enable a shareholder or other complainant to circumvent corporate management that will not take action to rectify a wrong where it may have been involved in or responsible for the wrong suffered by the corporation. However, the remedy is not limited to claims against other shareholders or management.

Standing to begin a derivative action is given to a "complainant", defined in the Ontario Business Corporations Act as a current or former shareholder, director or officer of a corporation, or any other person who, at the court's discretion, is a proper person to bring an application.

In order to bring a derivative action, the claimant must satisfy the court that the following four statutory pre-conditions are met:

1. The directors of the corporation will not bring, diligently prosecute or defend or discontinue the action.

2. The complainant has given reasonable notice to the directors of the corporation of his intention to seek leave to commence a derivative action.

3. The complainant is acting in good faith.

4. It appears to be in the interests of the corporation that the action be brought, prosecuted, defended or discontinued.

Where a complainant is successful in persuading the court that leave to commence a derivative action should be given, the court may make "any order it thinks fit," including, but not limited to an order directing the conduct of the action or authorizing the complainant or any other person to control the conduct of the action.