There were 17 Ontario cases on derivative actions in 2019. Possibly the most important is Drake v. Goodwin [2019] OJ No. 2543
Drake and Goodwin, longtime business partners ran their joint ventures out of the Drake Goodwin Corporation. Within the group of businesses under the Drake Goodwin umbrella (holding company), was a golf course named Redtail.
Throughout, Goodwin ran the day to day operations. All of the bookkeeping and management was run out of the Drake Goodwin corporation and managed by Goodwin, Drake being a silent partner.
They decided to wind up the Drake Goodwin corporation and so the Redtail golf court management was moved to another location owned by Goodwin.
Drake now wanted to review things because the usual sort of suspicious activity seemed to be taking place, namely, $69k in annual management fees, annual bonuses, etc. Goodwin said that these payments were unauthorized and not supported by documentation.
This case demonstrates a number of typical characteristics about these types of closely held shareholder disputes.
Drake initially started an oppression claim (s.248 of the Ontario Business Corporations Act) which was the correct step. He did not pursue it. Which was obviously damaging to his claim. He then started a derivative action on behalf of Redtail. Drake was a 42% holder of Redtail, 8% having been transferred to Goodwin for his ostensibly unpaid management services. So Drake was a typical minority shareholder who could not rely upon the corporation to protect itself.
The delay in carrying forward the oppression remedy assisted Goodwin in asserting limitation defences at the motion for leave. But the motion judge was not simply going to deny leave to bring a derivative action merely because of the possibility of a limitation defence.
This highlights the second characteristic of these types of cases: Just when did the victim know that there had likely been wrong conduct by the controlling shareholder?
In most of these cases there is a long chronology of suspicious activity (by the controlling shareholder) and some degree of acquiescence by the wronged party (the minority shareholder). So just when should the court start the limitations clock ticking?
The victim invariably says: I did not know the actual wrong conduct until very recently.
Ontario courts seldom dismiss these cases at the leave stage merely because a limitations argument might succeed. The divisional court on this leave motion agreed that the assessment of credibility (as to when the victim knew) is ordinarily a matter for trial.
takeaway #1: the division court endorsed the application of the derivative action test in Bellman v. Western Approaches Limited, [1981] 130 D.L.R. (3d) 193 at para. 19, a BC court of appeal decision. The main question is: is the action in the best interest of the corporation;
takeaway #2: the divisional court sensibly brought some Ontario law to the table endorsing a liberal approach to the derivative action:
[36] …”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.
