BC Court Of Appeal Clarifies The Good Faith And Best Interests Requirements Of The Test For Leave To Commence Derivative Actions

• Published date: 03 December 2020
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Norton Rose Fulbright Canada LLP
• Author: Mr Steven Leitl, Aaron Stephenson and Preston Brasch

In a recent split decision, a panel of the B.C. Court of Appeal (BCCA) considered the good faith and best interests requirements of the test for leave to commence a derivative action: 2538520 Ontario Ltd. v. Eastern Platinum Limited, 2020 BCCA 313.

A derivative action is a procedure pursuant to which a shareholder or other "complainant" may commence and control litigation in the name of a corporation that declined to commence its own litigation in respect of a wrong allegedly done to it. Derivative actions are most frequently brought by shareholders to redress alleged wrongs perpetrated by directors and officers against their own corporations, to the shareholders' indirect prejudice. Leave (i.e. the court's permission) is required to commence a derivative action.

While each provincial jurisdiction has its own legislation and body of jurisprudence, the test for leave to commence a derivative action is generally accepted as requiring the applicant to establish, at a minimum, good faith and that its proposed derivative action is in the corporation's best interests.

Background

The Applicant, 2538520 Ontario Limited (253), was a minority shareholder of Eastern Platinum Limited (EPL). 253 sought leave to commence a derivative action in the name of and on behalf of EPL against various past and present directors and officers of EPL, alleging breaches of fiduciary duty and negligence in authorizing EPL to enter a framework agreement and related transactions pertaining to the recovery and sale of chrome from tailings at a mine in South Africa.

The chambers judge dismissed 253's leave application.

The Applicant appealed to the BCCA. The majority (Griffin and Bennett JJA) affirmed the decision of the chambers judge. Goepel JA dissented.

Majority Decision

Good Faith Requirement

The majority explained that the onus to prove good faith in applying for leave to commence a derivative action is borne by the applicant. The respondent does not have to prove bad faith.

The majority agreed with the chambers judge, who described the burden of proving good faith as "substantial". An applicant must prove its good faith with evidence that goes beyond bald assertions.

Further, the majority held that the chambers judge reasonably concluded that 253 had ulterior motives for applying for leave. 253's ulterior motives were borne out by evidence of a past "proxy battle" pursuant to which 253 sought to gain control of EPL's board of directors, 253's own interest in purchasing chrome...