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Article

No Bright-Line Distinction between Derivative and Oppression Claims

Date

June 30, 2008

AUTHOR(s)

William J. Atkinson
Mendy M. Chernos
Michael Feder
Dana M. Peebles


In its decision in Malata Group (HK) Limited v. Jung, 2008 ONCA 111, the Court of Appeal for Ontario recently examined the relationship between a derivative action, which a shareholder may bring on behalf of a corporation, and the shareholder’s personal oppression action.

The decision arose from Henry Chi Hang Jung’s motion to dismiss portions of a lawsuit brought against him by Malata Group (HK) Limited (MHK). According to the statement of claim, MHK and Mr. Jung were two of three shareholders in Malata Canada Ltd. (Malata). Mr. Jung also served as a director and officer.

MHK claimed, among other things, that Mr. Jung had misappropriated funds of and otherwise breached his fiduciary duties to Malata. MHK sought a declaration in that regard and an order that Mr. Jung return more than $1.5 million to Malata’s bank accounts.

Mr. Jung moved to dismiss those aspects of MHK’s lawsuit. He argued that the claims in question related to wrongs done to Malata, and, as such, could be made only in the context of a derivative action brought on behalf of Malata with leave of the court.

The motion judge refused Mr. Jung’s motion, holding that MHK could advance its claims personally as part of an oppression action.

The Court of Appeal dismissed Mr. Jung’s appeal. Armstrong J.A., writing for the unanimous court, confirmed that there is not generally "a bright-line distinction" between the claims that may be made in a derivative action and those that may be made in an oppression action. He noted that the oppression section of the Ontario Business Corporations Act (much like other corporate statutes in Canada) "is drawn in broad language, both in terms of the harms it addresses and the non-exhaustive list of remedies it contemplates." He observed that derivative and oppression claims will often overlap "where directors in closely held corporations engage in self-dealing to the detriment of the corporation and other shareholders or creditors."

McCarthy Tétrault Notes:

The Court of Appeal’s decision correctly recognizes that misconduct by a director of a corporation, particularly a closely held one, can constitute a wrong to the corporation and to its shareholders at one and the same time. Provided that the director’s misconduct satisfies the statutory prerequisites for an oppression action, an affected shareholder should be able to sue in its personal capacity if it so desires.

The statutory prerequisites for an oppression action will often be difficult to satisfy, however. Most Canadian corporate statutes require an act that is either "oppressive" or "unfairly prejudicial" to a shareholder or that "unfairly disregards the interests of" a shareholder. Unless the corporation is closely held, such that a wrong to the corporation impacts its shareholders very directly, a shareholder who wishes to sue for this type of wrong will only be able to do so on behalf of the corporation itself, by way of a derivative action and with leave of the court.

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