A fundamental principle in Canadian corporate law is that a corporation is a legal entity that is distinct and from its shareholders. The implication of this is that a shareholder cannot be sued for the liabilities of the corporation, and likewise, cannot sue for any losses suffered by the corporation or wrongs done to the corporation. A shareholder does, however, have some limited ways in which to sue for damages done directly to himself or herself, including a derivative action and an oppression remedy.
The Rule in Foss v. Harbottle: An Old Legal Principle That Still Stands
The notion that a corporation is a separate legal entity was laid out almost 160 years ago by a British court in Foss v. Harbottle.
Under the Rule in Foss v. Harbottle, a shareholder of a corporation (even a controlling shareholder or sole shareholder) does not have a personal cause of action for a wrong done to the corporation. The shareholder can make a claim for harm done directly to them, but in order to establish a personal claim, the shareholder must establish all components of the cause of action they allege (for example, proof of the damages they suffered).
The Rule was intended to avoid multiple lawsuits, since, without the rule, a shareholder would always be able to sue for harm done to the corporation since any harm done to the corporation would indirectly harm the shareholders.
The Indoor Management Rule
The rights of minority shareholders were even further limited by the so-called “indoor management rule” which states that if an allegedly wrongful act could be ratified by the majority at a general shareholder’s meeting, neither the corporation nor any individual shareholder could sue to correct the wrong.
The rationale behind the creation of this rule was that court were hesitant to interfere with the internal management of a corporation.
Statutory Relief for Shareholders
In the early 20th century, two statutory forms of relief intended to assist minority shareholders were introduced: the derivative action and the oppression remedy. These two forms of relief focus on providing a route for shareholders to assert their rights in two slightly different, though potentially overlapping, ways.
In Canada, derivative action relief is found in s. 239 of the Canada Business Corporation Act (CBCA), and in s. 245 of Ontario’s Business Corporations Act (OBCA) as well as other provincial business corporation statutes.
The derivative action was intended to provide a counterbalance to the Rule in Foss v. Harbottle by providing a “complainant” (including a current or former shareholder, a director or officer, or a former director of officer, among others) with the right to apply for leave of the court (i.e. permission of the court) to bring an action “in the name of or on behalf of a corporation…for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate”.
The derivative action is an action for “corporate” relief (i.e.: the goal is to recover damages for any wrongs done to the company itself).
The oppression remedy is provided for in s. 241 of the CBCA and s. 248 of the OBCA. It is designed to counterbalance the impact of the rule in Foss v. Harbottle by providing a complainant (which includes the same individuals contemplated in the derivative action) with the right to apply to the court without having to obtain leave, in order to recover for:
- wrongs done to the individual complainant by the company; OR
- wrongs stemming from the affairs of the company being conducted in a manner that is oppressive to, unfairly prejudicial to, or unfairly disregards the interests of the complainant.
Unlike the derivative action, the oppression remedy is a personal claim.
The Overlap Between Remedies
Unsurprisingly, these two legal remedies often overlap. In some cases, a wrongful act can be harmful and damaging to both the corporation and to the personal interests of a shareholder (or other complainant).
There has been frequent legal debate by the courts as to whether it makes sense to continue to have a distinction between these two available courses of action, but, to date, these distinctions remain.
As we explored in last week’s blog, decisions continue to explore the ramifications of both options.
If you are a shareholder and have questions about your rights, or have had an oppression claim or derivative remedy action filed against you, contact Eli Karp at Financial Litigation. Eli has many years of experience advising parties on both sides of the table and can skillfully represent you. Contact Eli online to schedule a consultation, or by calling him at 416-769-4107 x 1.