Jan 19, 2012

In the decision of the Court of Appeal for Ontario in Malata Group (HK) Limited v. Jung, 2008 ONCA 111, the court therein addressed, in the words of Armstrong J.A., the following issue: “This appeal concerns the relationship between derivative actions and oppression complaints under the Business Corporations Act, R.S.O. 1990, c. B.16 (“the Act”), and the impact on that relationship of the rule in Foss v. Harbottle that a shareholder has no personal cause of action for harm done to the corporation.”


The defendant-appellant Mr. Jung was taking the position that the plaintiff-respondent Malata Group (HK) Limited (“Malata HK”), a shareholder of Malata Canada Ltd. (“Malata Canada”), was running afoul of the rule in Foss v. Harbottle by pursuing relief that was for the benefit of Malata Canada on account of harm allegedly done to that corporation. The defendant-appellant took the position that such relief could only be pursued derivatively, which required leave of the court to do so. The motions judge (Ground J.), in the motion below, took the position that the rule in Foss v. Harbottle had been “substantially diluted”.


The Court of Appeal, however, adopted a novel approach to this issue. Armstrong J.A., for the court, stated as follows:


38. It is important in my view that in this case, we have a closely held corporation. It seems to me that if the alleged oppressive conduct is made out when Malata HK is one of three shareholders and, more particularly, is a major creditor of Malata Canada , it is appropriate for Malata HK to seek a return of the monies to Malata Canada under s. 248 of the Act. Malata HK could have proceeded by way of a derivative action. However, given the overlap between ss. 246 and 248 of the Act and the particular circumstances of this case, I do not believe that it was required to do so.


39. In disputes involving closely held companies with relatively few shareholders, such as the case at bar and Covington, there is less reason to require the plaintiff to seek leave of the court. The small number of shareholders minimizes the risk of frivolous lawsuits against the corporation, thus weakening the main rationale for requiring a claim to proceed as a derivative action.



Accordingly, though the rule in Foss v. Harbottle can be said to have been “substantially diluted” in regards to “closely held corporations with relatively few shareholders”, it retains its vigor in regards to corporations with many shareholders. What constitutes a corporations with many shareholders is an issue, however, that needs to be decided on another day.


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