Derivative Action - M. Hamel-Smith & Co.
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Derivative Action

When can a derivative action be commenced?

Where the directors fail to have a company commence action in order to enforce its corporate rights as a result of a wrong done to the company, a complainant may seek leave of the Court either to bring an action in the name of the company or any of its subsidiaries or to intervene in an existing action to which the company or its subsidiaries are a party. Examples of the type of wrongs alleged to have been done to a company for which a derivative action has been considered appropriate include: an allegation by minority shareholders that the directors had sold company assets at a price far below their true value; and an allegation by minority shareholders that certain directors were in breach of their fiduciary duty to the company. The Court will grant leave to commence a derivative action if it is satisfied that:

  • The complainant has given reasonable notice to the directors of the intention to seek leave;
  • The complainant is acting in good faith; and
  • It appears to be in the interest of the company or its subsidiary that the action be brought, prosecuted, defended or discontinued.

Who can bring a derivative action?

The persons included in the category of complainants upon whom a right to commence a derivative action may be conferred include shareholders and creditors (past and present), directors and officers (past and present), the Registrar and any other person the Court considers to be proper.

What remedies may be granted?

The Court is given a broad discretion to make any order it thinks fit in a derivative action, including orders:

  • Authorizing the complainant to control the conduct of the action;
  • Giving directions for the conduct of the action;
  • Directing that any amount adjudged payable by a defendant be paid in whole or in part to former and present shareholders or debenture holders instead of the company; and
  • Requiring the company to pay reasonable legal fees incurred by the complainant.