Derivative Actions

Question 1

Who can sue?

Answer 1

If there’s a breach of FD, the corp need to sue its directors. Since it’s the board that would decide whether to sue, and that it’s unlikely for directors to sue themselves, derivative actions can be brought,

s102 - directors
s239 - SH, director, officer, people who were formerly in those position, govt administrator, and any other proper person, incl. creditors - derivative actions
- The claim is that of the corp.

Question 2

Primex Investments v. Northwest Sports Enterprises

Answer 2

Facts: G, who is the majority SH of NW, took business opportunity and engineered a CI transaction. The minority SH, PI, brought derivative action against corp.

Court:

1) Is PI acting in GF?
- Was p acting on a personal vendetta?
- Was p greenmailer?
- Was p acting only to maximize their own wealth rather than the best interest of the corp?
- Petitioner’s self interest in this litigation doesn’t imply bad faith as his interest coincide with that of NW. Anything that benefits a company will indirectly benefit its SHs by increase the share value and it is hard to imagine a situation where a SH will not have a self-interest in wanting the company to prosecute an action which is in its interests to prosecute.

2) Is it prima facie in the best interest of corp that the action be brought?
- How strong are the claims of violatin?
- What remedies are likely, do benefits outweigh cost of litigation?

Here court is deciding whether the proposed action has a reasonable chance of success or is bound to fail?

Business opportunity claim - respondend claim that NW has no resource for it and that SH of NW ratified the decision of bd

• No resource is not a defense for taking BO
• SH made decision w/o all material info - not a proper renounce of giving up the BO.

The takeover bid

• CI transaction - transfer of asset between corp and SH, with G on both sides.
• Majority of minority SH approval did not insulate the transaction from challenge - Court: we do not allow SH to decide what’s in the best interest of the corp - even if the decision is made by SH, if it’s not fair to the corp it can still be challenged in derivative action

Question 3

The US approach

Answer 3

1) Demand be brought to the board to consider the litigation
2) Corp appoint new directors and form special litigation committee [SLC]
3) SLC evaluates the issue and decides whether it is in the corp’s best interest to go forward with the suit
- In reality, SLC always dismiss the litigation: cost outweigh benefits
4) Court review SLC decision - two approaches
a) Auerbach v Bennett: court review procedure of SLC, assuming its members are disinterested and independent
b) Zapata v Maldonada: two-step process: first evaluate the indenpendence of the procedure, then use its own BJ to evaluate benefit v cost

Question 4

A different hurdle in Canada: the loser-pay rule

Answer 4

Loser-pay rule and legal fees are disincentive to bring suit

• Court has discretion to make interim orders for the corp to pay cost.
• s242(2)

Question 5

Conclusion

Answer 5

• Duty of loyalty issues (including taking business opportunities) are easier to litigation than duty of care.
• Both face procedural or pragmatic (cost) hurdles
• Again we are back to market and other mechanisms for providing accountability.