Shareholder disputes: oppression v. derivative action

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Where shareholders raise complaints about the conduct of a company’s affairs, they typically face a choice of two remedies under corporate legislation: oppression proceedings or a derivative proceeding.

Similar but different

These two remedies are similar, but have separate and distinct purposes. Choosing the right course of action can determine the success or failure of the complaint.

The oppression remedy (eg. section 227 of the BC Business Corporations Act) concerns actions that are unfairly prejudicial to shareholders. The derivative action remedy (eg. section 232 of the BC Business Corporations Act) enables shareholders to seek redress for wrongs done to the company, typically by malfeasance of directors or officers. While there is overlap between the two, they are different remedies. Oppression addresses wrongs to the shareholders; derivative actions address wrongs to the company.

Leave of the court

There is another crucial distinction between the two alternatives. Derivative actions require leave of the court to proceed, adding an additional layer of cost, delay and uncertainty. No such leave is required before starting an oppression proceeding.

Oppression proceedings dismissed

The relative ease of starting the oppression remedy has led many shareholders to proceed down that avenue in cases that should properly have been made out as a derivative action. This can be fatal to the proceeding.

This was the result in Rea v. Wildeboer (2015), where the Ontario Court of Appeal considered oppression proceedings that, the company argued, should be pursued as a derivative action. The court acknowledged that there is some room for overlap between the two, such as when the majority shareholder of a closely-held company acts in a manner that harms both the company and the minority shareholders. But the court held that, in most cases, there is a clear distinction that must be made.

The court ruled that here the wrong complained of was to the company, not to any shareholder, and leave to start a derivative action should have been sought. The court struck out the shareholder’s oppression proceeding.

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