What is a derivative action and when can someone bring one against an Ontario corporation's directors?

A derivative action is a lawsuit brought by a shareholder or creditor on behalf of the corporation, not for their own personal benefit but to enforce a right belonging to the corporation itself. Under the Ontario Business Corporations Act, the court may allow a complainant — typically a shareholder — to bring such an action when the corporation itself will not pursue the claim, which often happens because the very directors whose conduct is in question control the board.

To obtain court approval to commence a derivative action, the applicant must generally show that they gave the directors reasonable notice and an opportunity to bring the action themselves, and that the directors failed or refused to do so. The court must also be satisfied that it is in the interests of the corporation for the action to proceed.

Derivative actions are commonly used to address director self-dealing, breach of fiduciary duty, or negligent management that harmed the corporation financially. Any recovery goes to the corporation, not the individual shareholder bringing the claim. This distinguishes a derivative action from an oppression remedy application, where a shareholder may recover personally. If you believe director misconduct has harmed the corporation and the board will not act, legal advice is essential before serving the required notice.