Drake v. Goodwin 2019 ONSC 2865 is the latest derivative action case in Ontario. The details are explained elsewhere.
Suffice it to say, the Divisional Court was considering well-established legal rules rather than far-flung ‘policy’ when it relied upon the following Court of Appeal statement:
[36] Third, in this case, a significant consideration is the existence of the oppression action. The Court of Appeal has recognized that there may be a degree of overlap between claims in a derivative action and in an oppression action, particularly “where directors in closely held corporations engage in self-dealing to the detriment of the corporation and other shareholders or creditors”: see Malata Group (HK) Limited v. Jung, 2008 ONCA 111, 89 O.R. (3d) 36, at para. 31. Accordingly, each situation must be analysed in terms of the particular circumstances.
Efficiency?
Having now applauded the Ontario courts for staying away from explicit attempts at ‘efficiency’, it’s still interesting to think about whether there are in fact any ‘efficiency’ aspects to ‘opening the floodgates’ to derivative actions. It is easy to suspect closely held corporations and self-dealing. It is almost an axiom of economic theory that directors, though they are bound to maximize shareholder value, in fact maximize director self-interest (which is seldom the same thing). (Houston p. 687)
Ontario thus having this excellently-low bar to getting derivative action, is there any ‘efficiency’ aspect to a liberal interpretation of derivative action?
Houston J., Lin C., Xie. W., Shareholder Protection and the Cost of Capital, Journal of Law and Economics, 61: (November 2018) 677-710 says yes.
In the 1985-2013 period, 23 US states significantly restricted derivative action. Houston (et.al.) look at the cost-of-capital-differential experienced by corporations in the 23 target states. Unsurprisingly, corporations in the restricted states experience a 26 basis point increase in the cost of capital. (Houston p.682).
Reverse causality (Grander causality) was controlled for. In other words, the fact of increased cost of capital did not cause the increased legislative derivative action restriction. (Houston (p. 682). The increased cost of capital unambiguously followed the legislative changes.
No single empirical report creates an economic axiom (i.e. that demand curves are downward sloping), any more than the fact that no single decision make a rule in Ontario law. Rather Houston (et.al.) is emblematic of the hostility that economists hold toward the agency problem in shareholder-director relations.
