“At common law, minority shareholders in corporations had very little protection in the face of conduct by the majority (or by directors controlled by the majority) that negatively affected either the corporation itself or their interests as minority shareholders. This handicap was due to two well-entrenched common law principles of corporate law: the notion of a “corporate personality” and the “indoor management rule”. Both of these principles can be traced back to a decision of now almost mythical stature – that of Vice-Chancellor Wigram in Foss v. Harbottle (1843), 67 E.R.189, 2 Hare 461 (Eng. V.C.).
In law, a corporation is a legal entity distinct from its shareholders. It followed from this that shareholders were precluded from bringing their own action in respect of a wrong done to the corporation. Except as modified by the derivative action, the oppression remedy, and winding-up proceedings, this remains a governing principle in Canadian corporate law: see Hercules Management Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165, at para. 59; Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 CanLII 41710 (ON CA), 61 O.R. (3d) 786 (C.A.). As Laskin J.A. put it, in Meditrust, at paras. 12-14:
The rule in Foss v. Harbottle provides simply that a shareholder of a corporation — even a controlling shareholder or the sole shareholder — does not have a personal cause of action for a wrong done to the corporation. The rule respects a basic principle of corporate law: a corporation has a legal existence separate from that of its shareholders. See Salomon v. Salomon & Co. (1896), [1897] A.C. 22, 66 L.J. Ch. 35 (U.K. H.L.) A shareholder cannot be sued for the liabilities of the corporation and, equally, a shareholder cannot sue for the losses suffered by the corporation.
The rule in Foss v. Harbottle also avoids multiple lawsuits. Indeed, without the rule, a shareholder would always be able to sue for harm to the corporation because any harm to the corporation indirectly harms the shareholders.
Foss v. Harbottle was decided nearly 160 years ago but its continuing validity in Canada has recently been affirmed by the Supreme Court of Canada in Hercules Management Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165 (S.C.C.) and by this court in Martin v. Goldfarb (1998), 1998 CanLII 4150 (ON CA), 163 D.L.R. (4th) 639 (Ont. C.A.).
The companion indoor management rule has also played a significant role in restricting minority shareholders’ rights to redress. At common law, if an act that was claimed to be wrongful could be ratified by the majority at a general meeting of shareholders, neither the corporation nor an individual shareholder could sue to redress the wrong. The rationale for this was that courts were reluctant to interfere in the internal management affairs of the corporation.
It took over a century for legislative reforms to be put in place to temper the restrictive effect of these principles on minority shareholder rights. In the latter part of the 20th century, however, the two statutory forms of relief that are at the heart of this appeal – the derivative action and the oppression remedy – were created for this purpose. It is noteworthy that they approached the problem in two different, although potentially overlapping, ways.
The derivative action was designed to counteract the impact of Foss v. Harbottle by providing a “complainant” – broadly defined to include more than minority shareholders – with the right to apply to the court for leave to bring an action “in the name of or on behalf of a corporation … for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate”: Business Corporations Act, R.S.O. 1990, c. B.16, s. 246 (“OBCA”). It is an action for “corporate” relief, in the sense that the goal is to recover for wrongs done to the company itself. As Professor Welling has colourfully put it in his text, Corporate Law in Canada: The Governing Principles, 3rd ed. (Mudgeeraba: Scribblers Publishing, 2006), at p. 509, “[a] statutory representative action is the minority shareholder’s sword to the majority’s twin shields of corporate personality and majority rule.”
The oppression remedy, on the other hand, is designed to counteract the impact of Foss v. Harbottle by providing a “complainant” – the same definition – with the right to apply to the court, without obtaining leave, in order to recover for wrongs done to the individual complainant by the company or as a result of the affairs of the company being conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the complainant. The oppression remedy is a personal claim: Ford Motor Co. of Canada v. Ontario (Municipal Employees Retirement Board) (2006), 2006 CanLII 15 (ON CA), 79 O.R. (3d) 81 (C.A.), at para. 112, leave to appeal refused, [2006] S.C.C.A. No. 77; Hoet v. Vogel, [1995] B.C.J. No. 621 (S.C.), at paras. 18-19.
These two forms of redress frequently intersect, as might be expected. A wrongful act may be harmful to both the corporation and the personal interests of a complainant and, as a result, there has been considerable debate in the authorities and amongst legal commentators about the nature and utility of the distinction between the two. In the words of one commentator, “the distinction between derivative actions and oppression remedy claims remains murky”: Markus Koehnen, Oppression and Related Remedies (Toronto: Thomson Canada Limited, 2004), at p. 443.
Yet the statutory distinctions remain in effect.”