What is a derivative action and when can a shareholder sue on behalf of a corporation in Ontario?
A derivative action lets a shareholder (or another eligible complainant) bring a lawsuit in the corporation's name to enforce a right or remedy that belongs to the corporation itself, typically where the people who would normally decide whether to sue - the board of directors - are unwilling or unable to do so, often because they're the very people who caused the harm. Common examples include a director who diverted corporate opportunities or breached a fiduciary duty, where the corporation has a claim against that director but the board won't authorize suing one of its own.
This is different from an oppression claim, which addresses harm to you personally as a shareholder; a derivative action addresses harm to the corporation, and any recovery generally goes to the corporation, not directly into your pocket, though it can indirectly restore the value of your shares. Because you're stepping into the corporation's shoes rather than asserting your own claim, Ontario law requires court permission before proceeding, which exists precisely to screen out claims that aren't genuinely in the corporation's interest before they go forward.
Key takeaways
- A derivative action lets a shareholder sue on the corporation's behalf to enforce a right that belongs to the corporation itself.
- It's typically used when the board won't pursue a claim, often because directors themselves are the wrongdoers.
- Recovery generally goes to the corporation, not directly to the shareholder who brought the claim.
- Court permission (leave) is required before a derivative action can proceed.