Update Regarding The Good Faith And Best Interests Requirements Of The Test For Leave To Commence Derivative Actions

• Published date: 28 January 2021
• Subject Matter: Corporate/Commercial Law, Directors and Officers, Contracts and Commercial Law
• Law Firm: Norton Rose Fulbright Canada LLP
• Author: Mr Steven Leitl, Aaron Stephenson and Preston Brasch

On December 2, 2020, we blogged about the release of a British Columbia Court of Appeal decision affirming a denial of leave for 2538520 Ontario Ltd. (253) to bring a derivative action on behalf of Eastern Platinum Limited (EPL) against various of EPL's directors and officers: 2538520 Ontario Ltd. v Eastern Platinum Limited, 2020 BCCA 313 (Eastern Platinum). That blog post is linked here.

Eastern Platinum is an important case because it clarifies that an application for leave to bring a derivative action may be denied if there is reason to believe the applicant is not acting in good faith because of ulterior or personal motives, even if the proposed derivative action is presumptively meritorious.

Eastern Platinum has quickly entrenched itself as a leading authority. In less than three months, it has already been affirmatively cited in three further leave cases:

• He v Zhong, 2020 BCSC 1867
• Empowered Startups Ltd. v Canadian Association of Business Incubation, 2020 BCSC 1904
• Hevey v Wonderland Commercial, et al., 2021 ONSC 540

In each of these new cases, leave to bring a derivative action was denied at least in part because an ulterior motive was identified that precluded the judge from finding that the applicant was acting in good faith and in furtherance of the corporation's interests. Like in Eastern Platinum, leave was denied in each case because there was reason to believe the applicant was motivated, not by a desire to advance the corporation's interests, but instead by the applicant's own interests.

Like Eastern Platinum itself, these three new cases reflect how the applicant's motivations are being pushed to the forefront of leave applications. A corporation that is faced with a leave application should carefully investigate the applicant's motives and adduce any evidence tending to prove a personal interest or ulterior motive on the part of the applicant that is not shared...