Derivative Actions in Ontario: Suing on Behalf of Your Corporation When Directors Won't

A director embezzles funds. A controlling shareholder steers a valuable contract to their own side company. The corporation is harmed — but the very people who caused the harm control the board and refuse to sue themselves. What can you do?

Ontario's derivative action lets a shareholder or director apply to court for permission to commence or defend a lawsuit on behalf of the corporation, stepping into the corporation's shoes when its own leadership won't act. This article explains how derivative actions work, when courts grant leave, and how to use the remedy effectively.

What Is a Derivative Action?

A derivative action is a claim brought by a shareholder (or director, officer, or other complainant) on behalf of the corporation when the corporation itself has a cause of action but its directors refuse — or are unable because of a conflict — to pursue it.

The claim "derives" from the corporation's injury. Any recovery goes to the corporation, not to the individual who brought the action. This distinguishes a derivative action from a personal claim or an oppression remedy, where the individual's own interests are at stake.

Why Would a Corporation Not Sue Its Own Wrongdoers?

In a closely held private company, the wrongdoer is often also a director or controlling shareholder — the very person who controls the board's decision to sue. A self-interested board will predictably vote to do nothing. The derivative action exists precisely to overcome this deadlock.

Who Can Bring a Derivative Action?

Under the Business Corporations Act (Ontario), a "complainant" can apply for leave to bring a derivative action. Complainants include:

• Current or former registered holders of shares of the corporation or a related body corporate
• Current or former officers or directors of the corporation
• Any other person the court deems proper

Getting Court Leave: The Requirements

A derivative action cannot simply be filed. The applicant must first obtain leave of the court. Courts evaluate whether:

1. The directors have been given reasonable notice of the complaint and have declined to act (or it would be futile to ask them);
2. The applicant is acting in good faith; and
3. It appears prima facie in the interests of the corporation to bring or defend the action.

Notice to the Corporation

Before applying, the complainant must give written notice to the directors of the corporation describing the intended action and asking the corporation to pursue it. If the directors investigate and bring the action themselves, the derivative claim becomes unnecessary. If they refuse, ignore the request, or have a conflict, the complainant can proceed to court.

Good Faith

Courts will not grant leave if the derivative action is really a personal vendetta dressed up as corporate interest. The test is whether a reasonable shareholder in the complainant's position would perceive a genuine benefit to the corporation.

Prima Facie in the Corporation's Interests

The claim must have reasonable merit — not a certainty of success, but a real, legitimate basis that would justify the corporation spending resources to pursue it.

The Action Itself

Once leave is granted, the action proceeds in the corporation's name. The complainant controls the litigation, but acts as a steward for the corporation. Courts can set conditions, and any settlement requires court approval to ensure the corporation's interests are protected — not simply the individual complainant's.

Derivative Action vs. Oppression Remedy: Key Differences

In practice, lawyers often plead both in the same proceeding, as the facts frequently support both theories.

Practical Scenarios

Director Self-Dealing

A director approves a contract between the corporation and their own side business, at inflated prices. The corporation is overcharged. A shareholder gives notice, the board refuses to sue, and the shareholder applies for leave to bring a derivative action claiming damages equal to the overcharge.

Misappropriation of Corporate Funds

An officer diverts cash from the corporate bank account. The remaining directors, who are family members, decline to act. A minority investor brings a derivative action to recover the stolen funds.

Usurping a Corporate Opportunity

A director learns of a business opportunity while working for the corporation and diverts it to a personal entity. The derivative claim asserts the corporation lost profits from the opportunity.

Costs and Indemnity

Courts have the power to order the corporation to pay the complainant's legal costs — and to indemnify the complainant against any costs ordered against them. This is an important protection: a shareholder who brings a legitimate derivative claim on behalf of a corporation shouldn't bear all the financial risk personally.

Frequently asked questions