THE .

CANADIAN BA EVIEW

EVUE DU BA EAU
CANADIEN
VOL. LII MAY 1974 MAI NO. 2

THESHAREHOL ERS' DERIVATIVE ACTION

STANLEY M. BECK*
Toronto

Introduction

One of the major socio-legal problems of the twentieth century

has been how to call to account representative power. Traditional
political theory has relied on the ballot box. Holders of public
office, labour union leaders and corporate directors are all voted
into office and at regular intervals must submit themselves and
their records to an appropriate constituency for a further span
of official life. Through this periodic, democratic ritual our repre-
sentatives are held accountable and their power is said to be
legitimized . This theory of the ballot box may have worked well
enough in ruder times of smaller and simpler economic and social
units. But in a time when enormous size, baffling complexity and
byzantine sophistication characterize our political and economic
institutions, and the appropriate constituencies are themselves
uncertain, shifting and heterogeneous, the ballot box is no longer
seen as a sufficient guarantor of democratic control. New modal-
ities of accountability are being sought, new constituencies are
being identified, and power and the bureaucracies, both public
and private, through which it is exercised are being analyzed
afresh and redefined.
The large corporation, as the dominant economic institution
of our time, is particularly being redefined. No longer is it seen
as a private institution operating solely for profit on behalf of
and answerable only to its one true constituency, its shareholders.

* Stanley M. Beck, of Osgoode Hall Law School, York University,

Toronto. The author also serves as a member of the Ontario Securities
Commission . The views expressed are solely those of the author .
160 LA REVUE DU BARREAU CANADIEN [VOL . LII

It is realized that it is a public institution in the sense that its

major decisions have as significant an impact on the economy
as do those of government and that its constituency, like govern-
ment's, is the entire citizenry whether in the guise of shareholder,
worker, consumer, supplier, or simply user and enjoyer of clean
air and water. And so a debate has ensued, mainly since the publi-
cation of Berle and Means' seminal study in 1932,1 as to how
the large corporation should be governed and by whom, how it is
to be made answerable to broader public concerns while ensuring
a reasonable return to investors, and whether its shareholders
should be treated as owners or merely rentiers of capital.
While the debate over the public governance of the corpora-
tion has occupied the headlines it has not, until very recently,
occupied the law journals . Legal scholarship has been, and still
primarily is, concerned with the private governance of the corpora-
tion and with the relationship between the shareholders and
the legal managers-the directors, and between majority and
minority shareholders . That this is so is probably attributable to
the fact that lawyers, both practicing and academic, are more
proficient at and more comfortable with private ordering-with
the narrow and intricate planning and shaping of the internal
corporate structure than with the socio-economic problem of the
large corporation as a governmental institution . And it is also
attributable to the fact that the rights of the minority shareholder
are still far from adequate . It is a tribute to the adroitness, imagi-
nation and singlemindedness of the corporate managers and their
professional advisers, and to the overwhelming effect of economic
power on the legislative process, that the nominal owners, the
shareholders, are still, at this late date, engaged in an uphill legis-
lative and judicial battle to obtain full and truly informative
disclosure of corporate activities and their effects, and to protect
their investment from fraud, over-reaching and self-dealing by
their elected representatives and, on occasion, by their fellow
shareholders .
At the level of private governance of the corporation the
interests of the shareholder in the large, publicly-held corporation
and in the small, private corporation come closer together than
is often considered to be the case . The public shareholder is con-
sidered to be less the true capitalist-owner and more an investor
with little, if any, understanding of the workings of the particular
company. His vote is uninformed except as he is able to appreciate
complex proxy material, and is but one of many thousands. The
securities market provides him with a ready escape hatch should

' A. A. Berle, Jr., and Gardner C. Means, The Modern Corporation and
Private Property (1932) .
1974] The Shareholders' Derivative Action 16 1

he become disenchanted with his investment and that market

may well, for a time, protect him from the worst effects of fraud,
unfair dealing or mismanagement .
The shareholder in the private company is still likened to the
capitalist of old-a man who invests all, or a large portion of his
capital in the enterprise, is himself one of the managers and has
a day-to-day knowledge of the workings of the company and the
activities of management . In so far as there is fraud or over-reach-
ing by fellow directors or shareholders he is in a position to person-
ally blow the whistle and to seek a remedy. He does not, however,
have the securities market exit and if he cannot find redress in the
narrow and tortuous legal avenues open to him he may well fit
unhappily into the corporate jargon of being "locked in", "frozen
out", "squeezed" or simply oppressed!
Clearly, the shareholder in the private company needs adequate
remedies written into the companies Acts to protect him from
unfair dealing. But curiously enough it is the shareholder in the
large, publicly-held company who has been the recipient of most
legislative and judicial concern. This concern is most clearly
manifested in legislation regulating the securities markets which,
among other things, has greatly increased the personal rights of
the individual shareholder. This has been particularly true in the
United States where the judiciary has been quick to grant a civil
right of action for breaches of the securities Acts,' and is well on
the road to reading a very general standard of fair dealing into
the fraud provisions of rule lOb-5 of the Securities Exchange Act
of 1934' Apart from civil remedies, the securities Acts themselves
do much to protect the individual shareholder by regulating in-
sider-trading, proxy solicitation, takeover bids, accounting prac-
tices, and requiring a much higher standard of general corporate
and financial disclosure .
That these improvements have been made in the position of the
public stockholder is all to the good . The stock market can be a
very narrow and unsatisfactory outlet in many cases and, in any
event, a shareholder should not have to pay for unremedied
wrongdoing in a lower price for his shares . In short, the public
shareholder needs a particular kind of protection against fraud
and unfair dealing because he is not usually in a position to protect
himself. It is unlikely that the average shareholder would ever
become aware of corporate wrongdoing or be strong enough or
have the resources to take remedial action even if he did. Those
' For a classic example of an oppressed shareholder who sought but
did not receive aid from the courts see Greenhalgh v . Arderne Cinemas,
[19501 2 All E.R . 1120 (C .A .) .
'J . I. Case Co . v. Borak (1964), 377 U .S. 426.
'See generally, Bromberg, Securities Fraud-Rule lOb-5 (1968) .
162 THE CANADIAN BAR REVIEW [VOL . LII

who call the directors of public corporations to account are in-

creasingly other large financial aggregates who either have signi-
ficant holdings in the corporation or are contending with it in one
form or another, very large individual shareholders, or admin-
istrative agencies . The individual public shareholder can be in-
creasingly confident that other, more expert investors are listening,
watching and thinking about his investment.
The private minority shareholder is not in so secure a posi-
tion . In law and in practice he is treated as a rugged individualist.
There is no securities legislation with a host of proscriptions,
commands and remedies upon which he can rely and neither do
securities commissions, financial institutions, independent financial
analysts, and large, sophisticated investors maintain watch for
him and stand ready to help him. He must be his own watchdog
and seek his own remedies. And if a remedy is not available then
he should realize that "he is a minority shareholder and must
endure the unpleasantness incident to that situation" .' For this
reason much of the reform of the corporation Acts should be
directed toward giving adequate protection to the private share-
holder . It is not necessarily so directed, but that is often one of
its primary effects. That is, from a purely company law aspect
the rights and remedies that are written into the statutes are as
equally available to the public as to the private shareholder-the
public shareholder is as limited in the company law remedies he
can pursue as is the private shareholder. But for the reasons ad-
verted to above, it is to the private shareholder that adequate
avenues of redress are most crucial.
One obvious avenue of redress for all shareholders is suit to
compel the directors to live up to their fiduciary duties in con-
ducting the company's business . But shareholder litigation has,
through variations on the theme of the rule in Foss v. Harbottle,s
proved to be a narrow, hazardous and generally unsatisfactory
remedy. Moreover, attempts to encourage shareholder litigation
and clear the procedural thicket that all but blocks entrance to the
courts have not, until recently, received much support. Indeed,
shareholder litigation has drawn a curiously hostile reaction which
has been aptly noted by Eugene Rostow :'
-'Re Jury Gold Mine Development Co ., [1928] 4 D .L .R. 735, at p . 736,
per Middleton J .A . (Ont. C .A .) .
c (1843), 2 Hare, 67 E.R . 189 (hereinafter referred to as "the rule") .
See generally Beck, An Analysis of Foss v . Harbottle, in Ziegel, ed ., Studies
In Canadian Company Law, Vol . 1 (1967), p . 545 ; Wedderburn, Share-
holders' Rights and the Rule in Foss v . Harbottle, [1957] Cambr . L.J . 194,
[1958] Cambr . L .J . 93 .
' Rostow, To Whom and for What Ends Is Corporate Management
Responsible?, in Mason, ed ., The Corporation in Modern Society (1959),
p . 49 .
1974] The Shareholders' Derivative Action 16 3

[Olne would expect those concerned for the integrity and future of
private business institutions to applaud the intrepid souls who ferret out
corporate wrongdoing, and risk their own time and money against a
contingency of being rewarded if in the end sin is found to have flour-
ished. Not at all. Such men are not treated as honored members of the
system of private enterprise, but as its scavengers and pariahs . .
At least they are viewed as necessary evils, the Robin Hoods of the
business world, for whom a patronizing word may sometimes be said,
when they succeed in revealing some particularly horrendous act .
Part of the feeling against shareholder litigation, particularly in
the United States where Professor Igostow was writing, stems from
the notion of "strikes suits" supported by an avaricious segment of
the Bar. That there has been some abuse in the United States by
shareholders who launched or threatened suits primarily to gain
a quick settlement, aided by lawyers who gambled for large pay
days through the workings of the contingent fee system, there is
no doubt. Put there is equally no doubt that the shareholders'
derivative suit can be an important and effective agent in con-
trolling directorial conduct. Indeed, Professor Rostow has charac-
terized such shareholder actions as "the most important procedure
the law has yet developed to police the internal affairs of cor-
porations" .' And such abuse as the derivative suit does allow,
can and has been effectively cured by appropriate rules of pro-
cedure.
Although the contingent fee and the "strike suit" are virtually
unknown in Anglo-Canadian practice, there has been a similar
hostility to shareholder inspired litigation. Some of it stems from
an uninformed and exaggerated view of the American experience
and some from a muffled notion that those who commence such
suits are malcontents and troublemakers . But more importantly,
the judiciary itself has not been receptive to such actions and has
continued to apply the intricacies of the rule, derived as it is from
nineteenth century partnership principles and unrealistic notions
of an informed, independent body of shareholders, to effectively
sidetrack the derivative suit . And the underlying judicial philos-
ophy has continued to be that hardy perennial : "It is not the
business of the court to manage the affairs of the company. That
is for the shareholders and the directors."'
For these reasons an important part of the company law re-
form that has been under way in Canada since the new Business
Corporations Act" was introduced in Ontario in 1970 has been
to provide a procedure whereby the road to the courts would
be relatively sinooth and straight for genuinely aggrieved minor-
8 Op. cit., ibid., at p. 48 .
9 Shuttlewortli v . Cox Bros . & Co ., [19271 2 K.B . 9, per Scrutton L.f .,
at p . 23 .
io R.S .O ., 1970, c . 53 (hereinafter referred to as "The Ontario Act") .
164 LA REVUE DU BARREAU CANADIEN [VOL . LII

ity shareholders . It is the purpose of this article to examine and

compare the shareholders' derivative suit as provided by section
99 of the Ontario Act and section 229 of the draft federal Ace'
and to ask whether they provide an adequate procedure through
which minority shareholders can seek a remedy for wrongs done
to the corporation. As sections 99 and 229 are both modeled on
rule 23 .1 of the United States Federal Rules of Civil Procedure,"
and as there has been over thirty years experience with it and its
predecessor, rule 23(b), extensive reference will be made to the
shareholders' derivative suit in the United States .

I. A Recapitulation of Foss v. Harbottle.

In order to understand and evaluate the reform of the derivative
suit it is necessary to set out briefly the substantive and pro-
cedural problems spawned by the rule . The decision in Foss V .
Harbottle was premised on the separate legal personality of the
corporation and on majority rule in internal corporate affairs.
If the corporation is a legal person separate from its members, it
follows that for a wrong done to it the corporation itself is the
only proper plaintiff. The two shareholders who appeared as
plaintiffs in Foss v. Harbottle alleged, inter alia, a sale by the
directors of their own property at inflated values to the company.
The wrong alleged was thus a wrong to the company and the
Vice-Chancellor ruled that the plaintiffs had no standing to sue
on behalf of the corporation.
As to the transaction itself and bringing suit for damages for
the injury caused by it, those were both matters to be decided upon
by the company in general meeting. The purchase of their own
lands for the corporation by the directors was a transaction that
was voidable at the option of the corporation . The corporate
pleasure was to be determined by the shareholders in general
meeting and as the plaintiffs did not represent a majority, or allege
that the will of the majority had been determined, they had no
standing to sue in the name of the company. The court was not
going to be put in the position of ruling on a breach of trust that
the principal might elect to confirm. Moreover, the decision
whether or not to bring suit in the company name belongs at
u Bill C-213, Canada Business Corporations Act, 1st Session, 29th Parl-
iament, 21-22 Eliz . 11, 1973 (hereinafter referred to as "the federal Act") .
The federal Act was given first reading on July 18th, 1973 but did not pro-
ceed any further before the session ended. It is expected that the govern-
ment will re-introduce it in the session which commenced on February
24th, 1974 . Section 222 of the British Columbia Companies Act, S.B .C .,
1973, c. 18 is virtually identical to s. 229 of the federal Act and is. now in
force in that province.
" 28 U.S .C .A ., rule 23 .1 .
1974] The Shareholders' Derivative Action 16 5

common law to the general meeting where, once again, the majority
rules." In short, the will of the majority had not been ascertained
and the plaintiffs were non-suited . Thus in 1843, one year before
the first modern companies Act, the Court of Chancery applied
its rule of non-interference in the internal affairs of a partnership
to the incorporated company." Internal affairs were a matter
for the majority and the majority was thus firmly established in
a pivotal position and has remained there ever since. Two other
judicial extensions to the rule in Foss v. Harbottle soon increased
the power of the majority even more .
In Mozley v. Alston" two shareholders brought a personal
action for a declaration that the board of directors was holding
office illegally and in contravention of the terms of the company's
Act of incorporation. James L.J . was of the opinion that the rule
appliéd. An usurpation of the office of director was a wrong done
to the company and the company was the only proper complain-
ant. His Lordship did not consider the argument that the plaintiffs
were asserting a personal right to have the internal governmental
affairs of the company conducted in accordance with its terms of
incorporation and according to which terms they had subscribed
their capital.
This "irregularity" branch of the rule was further settled in
1875 in MacDonald v. Gardiner ." The articles provided for the
taking of a poll upon the demand of five members. When a poll
was demanded on a motion to adjourn, the chairman ruled there
could be no poll on that question. The Court of Appeal said that
the matter was an internal dispute and for the majority to decide-
the rule applied. The court did not advert to the section that has
been in the English Companies Act since 1856" which constitutes
the memorandum and articles a contract between the members
and the company and thus to the fact that the plaintiff could be
considered as suing to enforce his personal right to have his con-
tract enforced according to its terms. This irregularity branch of
the rule has been approved by the privy Council and applied in
many cases:"

"Isle of Wight Ry . Co . v. Tahourdin (1883), 25 Ch . D. 320.

14 It has been noted that just at the time Foss v. Harbottle applied the

old partnership rule to the incorporated company, the Court of Chancery

was itself relaxing this rule to meet the problems raised by the unincorpor-
ated joint stock company which might have as many as 3,000 members
who at law were still treated as partners, e.g. Carlen v. Drury (1812), 1
V. Rc B. 154, 35 E.R. 61 . See generally, Wedderburn, op . cit., footnote 6,
pp . 196-197 and references noted there .
's (1847), 1 Ph . 790; 41 E.R . 833 .
is (1875), 1 Ch . D. 13 .
l' Now s. 20(1) of the Companies Act, 1948 .
"Burland v. Earle, [1902] A.C. 83 (P .C.) .
166 THE CANADIAN BAR REVIEW [VOL . LII

. . .no mere informality or irregularity which can be remedied by the

majority will entitle the minority to sue, if the act when done regularly
would be within the powers of the company and the intention of the
majority of shareholders is clear.
The second extension of the rule came with the decision of
the Privy Council in North-West Transportation Co . v . Beattyl9
in 1887 . What the Vice-Chancellor had said in Foss v. Harbottle
must be done, was done in the North-West case. The controlling
director who had purchased his own property for the company
submitted the contract to the general meeting for its approval.
Approval was given but only by reason of Mr. Beatty's votes
qua shareholder. The Supreme Court of Canada held that an
interested director could not use his shareholder's votes to con-
firm his own contract ." The Privy Council disagreed and ruled
that Mr. Beatty was entitled to vote to approve the transaction."
Moreover, as a general proposition, a shareholder was said to be
entitled to exercise his vote "from motives or promptings of what
he considers his own individual interest"."
Subsequent companies Acts amendments and corporate
draughtsmanship have added further complexity to the rule and
have changed majority control from what it was in 1843 . At com
mon law a director could not submit a contract in which he was
interested to the board for approval as he himself was disqualified
from voting and the company was entitled to have the disinterested
opinion of every director. Thus all such contracts had to go to
the general meeting. This inconvenience was soon remedied by
statutory amendment, now common to nearly all companies Acts,
whereby the board could approve such transactions if the inter-
ested director declared his interest and refrained from voting .
There was no longer any need to inform the shareholders of such
transactions, much less seek their approval.
The power of the directors (and thus of the majority share-
holders) was further increased by corporate draughtsmanship
which, through the articles of association, vested management in
the board of directors ." In the five Canadian letters patent juris-
dictions and in Ontario, where incorporation is now by articles of
is (1887), 12 App. Cas. 589 (P .C.) .
20
(1887), 12 S.C.R . 598.
z'Supra, footnote 19, at p. 594.
22
Pender v. Lushington (1877), 6 Ch . D. 70, at p. 76 (C.A.) . A share-
holder may not, however, exercise his votes to expropriate corporate prop-
erty to his own advantage (Cook v. Deeks, [1916] 1 A.C . 554), or to
oppress minority shareholders (Brown v. British Abrasive Wheel Co.,
[1919] 1 Ch . 290) . But see, Greenhalgh v. Arderne Cinemas, supra, foot-
note 2.
2 "Article 80 of Table A of the English Companies Act, 1948 is typical.
Table A of each of the five Canadian memorandum jurisdictions, (B .C .,
Alberta, Saskatchewan, Nova Scotia, Newfoundland) contains a similar
article .
1974] The Shareholders' Derivative Action 167

incorporation, management power is vested in the board by statute.

The power to manage includes the power, probably the exclusive
power," to use the corporate name in litigation. Thus the two
matters of majority control that were at the heart of the judgment
in Foss v. Harbottle, the possibility of shareholder approval of
the contract in which the directors were interested, and the decision
to sue in the corporate name, no longer belong to the majority
and reside, almost exclusively, in the board of directors .This has
not, however, prevented the directors themselves from resorting
to the shareholders for ratification of their actions as a sort of
safety-value protection, a manoeuvre which, as we shall see, has
introduced a new complication into an already complex area of
the law.
Taken in its purest form the rule, along with the additional
corporate facts noted above, would allow the directors-majority
shareholders to ride roughshod over the minority . Thus a number
of exceptions have been worked out in an attempt to give share-
holders who are aggrieved by an unremedied wrong to the com-
pany access to the courts to sue on behalf of the company . The
exceptions to the rule are those listed by Jenkins L.J. in Edwards
v. Halliwell ."
1. Ultra Vires Acts : . . . in cases where the act complained of is
wholly ultra vires the company or association the rule has no ap-
plication because there is no question of the transaction being con-
firmed by any majority."
2. Fraud on the Minority : . . where what has been done amounts
to what is generally called", in these cases a fraud on the minority
and the wrongdoers are themselves in control of the company, the
rule is relaxed in favour of the aggrieved minority who are allowed
to bring what is known as a minority shareholders action on behalf
of themselves and all others ."
3 . Special Majorities : "An individual member is not prevented from
suing if the matter is one which could be validly done or sanctioned
not by a simple majority of the members . . . but only by some
special majority ."
4. Personal Rights : Where "the personal and individual rights of
membership of [the plaintiff] have been invaded", the rule "has no
applicatibn at all".
The ultra vires and special majorities exceptions are straight-
forward and pose few problems . But in the areas of fraud on the
minority and personal rights the shareholder is up against the
procedural maze of the male. The line between personal and de-
rivative actions is neither clear nor settled and the shareholder
who begins his suit believing he has a personal right of action
"This point will be discussed more extensively, infra.
25
[1950) 2 All E.R. 1064 (C.A.) .
168 LA REVUE DU BARREAU CANADIEN [VOL . LII

may be met by a ruling that the wrong of which he complains

is not to him but to the company and he must comply with the
rule-which may well mean that his grievance will go unremedied .
The fraud on the minority exception is the one most often
invoked by the aggrieved minority shareholder. But although the
courts have used such broad language as "the court will prevent
the management of companies being so conducted as to produce
injustice or injury to any o£ the members"," and the court will
interfere if the conduct of the majority is "oppressive" or "harsh"
or, even more generally, if no adequate remedy remained except
that of a suit by individual corporators "the claims of justice would
be found superior to any difficulties arising out of technical rules
respecting the mode in which corporations are required to sue",?"
the path to an actual remedy has proved extremely narrow and
hazardous. Indeed it is difficult, if not impossible, despite the
generous sentiments of the judicial language, to find judicial in-
terference to halt conduct that falls short of an expropriation of
corporate assets ." The narrowness of the fraud exception is shown
by Pavlides v. Jensen," a case in which the directors were accused
of negligence for selling an asset for L182,000 which it was
alleged was worth £ 1,000,000. A personal action was not main-
tainable as no shareholders' individual right qua shareholder had
been interfered with. Fraud was not pleaded as the sale of assets
at an alleged E800,000 under-value was not a fraudulent expro-
priation of corporate assets, but was mere negligence. The rule
was therefore applied as the general meeting had power to ratify
the directors' acts, or to decide not to take action for negligence.
Even if fraud is involved the shareholder is always faced with the
uncertain procedural hurdles of determining who has control, who
are the wrongdoers, which corporate organ may take action in
the company name, upon whom the demand to sue must be made,
and whether or not the transaction is ratifiable.
It was to remedy these problems and to open the door to a
wider range of shareholders' derivative actions that section 99
was included in the Ontario Act and section 229 in the federal
Act. What follows will be an analysis of the shareholders' deriva-
tive suit in light of those sections. Some of the matters that have
been adverted to above will be analyzed in more detail as the
sections, particularly section 99, are procedural only and many
of the problems of Foss v. Harbottle still lurk in the background .
"'Re Langham Skating Rink Co. (1877), 5 Ch . D. 669, at p. 679
(C.A.) ; Heyting v. Dupont, [1964] 1 W.L.R . 843 (C .A .), at pp . 851, 854 .
a° Foss v. Harbottle, supra, footnote 6.
2e See generally
Beck, op. cit., footnote 6, pp . 556-560.
29
Pavlides v. Jensen, [1956] Ch . 565.
1974] The Shareholders' Derivative Action 16 9

11. The Personal Action and the

erivative Suit Distinguished.
Remedial legislation often has a perverse way of making the cure,
or at least part of it, se&m rather worse than the original problem.
And this, to some shareholders, may well be the case with parts
of sections 99 and 229 . Certainly the requirement that leave of
the court be obtained to commence the action" and approval be
obtained to settle or discontinue it" may be felt to have their draw-
backs. And this feature of judicial supervision may now be man-
datory if the statutory provisions are considered to be exhaustive
of the shareholders' right to bring a derivative action . This,
coupled with the fact that recovery in a derivative suit belongs, by
definition, exclusively, to the corporation", may cause an aggrieved
shareholder to search for an alternative remedy . The obvious
alternative is a personal action. Moreover, the vital question of
whether some directors' breaches of duty are ratifiable or not,
and thus of whether a cause of action remains, may well depend
on whether the aggrieved party is seen to be an individual share-
holder or the corporation. The critical threshhold question in
shareholder litigation, therefore, is whether the action is personal
or derivative. It was the answer to this question that tripped the
plaintiffs in Farnham v. Fingold," which was potentially the most
significant corporate action ever launched in Canada, and which
has bedevilled the course of action in Goldex Mines Ltd. v. Revill
et al." An analysis of the shareholders' derivative suit must there-
fore begin by attempting to clarify the distinction between it and
the personal action .
A. The Personal Action .
The ownership of stock in a corporation carries with it a num-
ber of personal rights . A partial list of the most common are the
right to receive timely" and informative' notice of company
a1S. 99(2) Ontario Act; s. 229(1) federal Act.
31S. 99(6) Ontario Act ; s . 232(2) federal Act .
"S. 230 (c) of the federal Act empowers the court to direct that any
amount payable by the defendant be paid directly to present or former
shareholders. This important provision was judicially created in Pearlman
v . Feldman (1955), 219 F. (2d) 173, and its significance will be discussed
in greater detail infra .
"This was the holding of the Ontario Court of Appeal in Farnham v.
Fingold, [19731 2 O .R . 132 (C.A .) .
"[1972] 3 O .R . 688 ; rev'd . [1973] 2 O .R. 132 (C .A.) .
" [1973] 1 O .R. 659 ; leave to appeal granted, [1973] 2 O.R . 389 ; rev'd.
[19731 3 O .R. 869 .
"Ashton v . Powers, [1921] 51 O .L .R . 309 (Ont. H .C.) ; Charter Oil Co.
Ltd . v. Beaumont (1967), 65 D .L.R . (2d) 112 (B .C .C :A .) .
"Kaye v. Croyden Tramways Co., [1898] 1 Ch. 358 (C.A .) ; Garvie v.
Axmith, [1962] O .R . 65 (Ont. H.C .) .
170 THE CANADIAN BAR REVIEW [VOL. LII

meetings, the right to vote" at such meetings, the right to have a

properly executed proxy accepted" and the right to inspect cer-
tain of the corporation's records.' Some of these rights arise out
of the companies Acts (the right to inspect books), some out of
the articles or by-laws (number of days before meeting by which
notice must be given) and some out of judicial legislation to
make the requirements of the statute or corporate contract mean-
ingful (truly informative notice) . As to a right that can be truly
classified as personal, the individual shareholder has standing to
bring a personal action to secure it. Other shareholders may have
had similar rights infringed and may join in the action for redress
in which case the action will be representative in form, but the
substance remains the assertion of a personal right by each share-
holder . The locus classicus is the judgment of Jessel M.R., in
Pender v. Lushington :'
This is an action by Mr . Pender for himself. He is a member of the
company, and whether he votes with the majority or the minority he is
entitled to have his vote recorded-an individual right in respect of
which he has a right to sue . That has nothing to do with the question
like that raised in Foss v. Harbottle and that line of cases.

It might be thought that the line between personal rights and

corporate rights would be well and clearly drawn. There is after
all not much confusion between being denied the right to vote
and a taking of property which depletes the corporate treasury.
Between those two poles, however, there is uncertain ground and
it is suggested that the personal rights category is in fact much
broader than has been thought to be the case .
The reason for the confusion and for limiting personal actions
stems from the idea that all wrongs committed by corporate di-
rectors and officers, and all duties owed by them, run exclusively
to the corporation. The fictional legal entity is viewed by the
courts as an unbreachable barrier behind which the directors are
safe from personal shareholder attack . Moreover, acts by the
directors which could readily be construed as their own personal
acts are invariably seen as corporate acts . All of which is a natural
result of the fact that a company acts only through its board of
directors and, occasionally, its shareholders . But a director acts
in a variety of capacities-as an agent of the company, as the
company itself, and as an appointed officer to carry out such
formal functions as running the proxy machinery and calling and
conducting meetings. If a functional analysis were given to the
directors' actions in each case it is suggested that it would lead
"Pender v . Lushington (1877), 6 Ch . D. 70 (C .A .) .
"Johnson v . Hall (1957), 10 D .L .R . (2d) 243 (B .C .S.C .) .
`° Cooper v . The Premier Trust, [19451 O .R . 35 (Ont. C .A.) .
"Supra, footnote 38, at pp . 80-81 .
1974] The Shareholders' Derivative Action 17 1

to a result that would accord more with reality while widening

the ambit of the shareholders' personal action . The matter was
well stated by Judge Fuld in Gordon v. Elliman.' At issue in the
Gordon case was the alleged failure of the corporation to pay
dividends in fraud of the minority shareholders in order to squeeze
them out." It was argued, successfully, that the action was deriva-
tive and that New York's security for expenses provision applied.
]Find J. dissented:'
The action, is, in short, brought against the corporation as a legal entity
and, if successful, will require the corporation to part with some of its
assets in favour of its stockholders. I am, therefore, unable to follow
the legal alchemy by which a breach of duty by the corporation-a
corporate wrong is transmuted into a corporate right .
The vice of the test [is the action one to compel the performance of
corporate acts which good faith requires the directors to take in order
to perform a duty which they owe to the corporation?] is that it pre-
supposes that every duty owed by corporate directors runs exclusively
to the corporation as such and never directly to the stockholders in their
personal and individual right. The law is otherwise.
. . . In a very real sense all suits against corporations-which must of
necessity act through directors and officers-involve the action of the
directors or of officers responsible to the directors. . . . In short, it
simply is not the law that an attack on directors' conduct is, ipso facto,
the assertion of a corporate right of action. The mere fact that the power
to declare dividends resides in the directors and that a suit to compel a
dividend payment challenges directors' action has no bearing on the
question of whose right is involved in such a suit . We must seek else-
where to ascertain the manner of the "right" that a court enforces
when it overrules the decision of corporate directors . . . .
The confusion in Anglo-Canadian company law over whether
a personal action is possible when the directors act for an im-
proper purpose, other than taking corporate property, would be
cleared up by the type of functional analysis that Judge Fuld
advocated. Directors' fiduciary duties are said to be "owed to the
company and to the company alone",' and "to redress a wrong
done to the company. . . . the action should prima facie be brought
by the company itself"." In issuing shares, for example, the di-
(1954), 119 N.E . 2d 331, (2d Cir.) .
43
Such an action would probably not be entertained by the Anglo-
Canadian courts-the matter would be treated as being exclusively within
the jurisdiction of the directors (if the shareholders, through the articles
or by-laws, are given a dividend declaring power-it is invariably limited
to an amount not exceeding that recommended by the directors) . This is
but one of many examples of the greater readiness of the American courts
to protect minority shareholders . Once a dividend has been lawfully de-
clared the amount due becomes a debt for which a shareholder may per-
sonally sue the company, Re Severn and Wye Rv ., [1896] 1 Ch. 559; Re
Sawtell, Ex . p. Bank of Montreal, [1933] O.R . 295.
"Supra, footnote 42, at pp . 340-341.
Gower, The Principles of Modern Company Law (3rd ed ., 1969),
p. 517.
48
Burland v. Earle, supra, footnote 18, at p. 93 .
1.72 LA REVUE DU BARREAU CANADIEN [VOL . LII

rectors are exercising a fiduciary power which must be performed

bona fide for the géneral advantage of the company. If they use
the power to keep themselves in control, or to turn a minority
into a majority, or to defeat the wishes of the majority, or to
discriminate between groups of shareholders, they will have
breached their fiduciary duty and an action will lie." But an action
by whom? The answer to that question is best approached by
asking who, in reality, is the aggrieved party and not by the
mechanistic application of the formula that the director is an
agent, the company is the principal and therefore action for fraud,
negligence or irregularity lies only at the suit of the company.
Most cases of fraud will clearly involve a taking by the director
to the detriment of the company and the company is the only
proper complainant. But a variety of other cases in which the
directors act improperly involve not a breach of duty by the agent
but a causing of the company to perform a corporate act in an
improper or irregular manner to the direct detriment of the share-
holders and for which they ought personally to be able to sue .
No doubt a company may be said to have a vital interest in
having its affairs conducted in a proper manner and in accordance
with the law and its internal regulations. But how, to ask Judge
Fuld's question, is a wrongful issuance of shares by the company
truly turned into a wrong to the company for which only the
company may seek redress? Only in the most theoretical sense
may the company be said to have been injured by its directors'
misuse of the power granted to them . A more realistic analysis
is that by the misuse of their powers the directors have caused
the company to issue shares to the detriment of one group of
shareholders and to the advantage of another-including, most
likely, themselves . It should follow, therefore, that the shareholders
that have been injured have a personal right of action against the
company and the directors for a declaration that the issue and
allotment is void and for an injunction to restrain the voting of
such shares if they are about to be used at a general meeting.
This is the American position and it is suggested that it is in fact
what has occurred in similar cases in England and in Canada.
In Condec Corporation v. Lunkenheimer" the directors of
the defendant company caused it to enter into a merger agreement
with a third company that involved the issuance of a large block
of defendant's shares to the third company. The issue was large
enough to prevent the plaintiff from exerting the voting control
which it had just acquired through a cash tender offer. In declar-
ing the issue void, the Delaware court observed :"
47 Punt v. Symons, [19031 2 Ch . 506. See generally. Gower, op . cit.,
footnote 45, p. 524 et seq.
(1967), 230 A. 2d 769 (C . Ch. Del .) . 49 Ibid., at p. 777.
1974] The Shareholders' Derivative Action 17 3

Finally, we are not here concerned with the need of proving corporate
injury as has been held to be the case when a stockholder attacks deri-
vatively the spending of corporate funds for the purchase of his corpora-
tion's own stock . This rather is a case of a stockholder with a contractual
right being deprived of such control by what is virtually a corporaté
legerdemain.

There was no doubt in the Vice-Chancellor's mind that the di-

rectors had breached their fiduciary duty which they owed "to
the company and to the shareholders". But breach of fiduciary
duty did not necessarily mean that a corporate right was being
asserted . There is no need for the Anglo-Canadian courts to take
the step that the American courts have long since taken and hold
that the directors owe a fiduciary duty to the shareholders (and
the majority shareholders, on occasion, to the minority) to allow
a personal right of action in such cases. The reference above by
the Vice-Chancellor to the shareholder's "contractual right" is
presumably a reference to the right to vote that goes with each
share. A tainted allotment to shift control deprives the shareholder
of his votes which, in the aggregate, give him control. Seen in
this light, the reasoning is the same as in Pender v. Lushington-
the shareholder's personal rights have been interfered with .
The line of cases from Piercy v. Mills" and Punt v. Symons"
that deal with an invalid issuance of shares do not give any clear
guide as to whether they were considered to be personal or de
rivative actions. The form of the action was usually representative
(as it may be when personal rights are being asserted, and as it
must be in a derivative suit) and the company and the wrong-
doing directors were joined as defendants, so an argument for
either cause of action is plausible. With one exception, however,
there is no discussion in all these cases of the procedural necess-
ities of the derivative action, or indeed any mention of the deriva-
tive action as there invariably is in the true derivative suit . In fact,
Piercy v. Mills was an individual shareholder's action and it is
submitted that each of the other cases were also personal actions
brought in representative form . Moreover, analogous leading cases
in which the directors were alleged to have breached their fidu-
ciary duty by exercising their powers for an improper purpose
have also been personal actions . Smith v. Fawcett" was a personal
action by the executor of a deceased shareholder alleging that the
directors were exercising their unrestricted power to refuse trans-
fers in bad faith. As there was no showing of bad faith the action
failed, but there was no question of the standing of the individual
plaintiff to challenge the directors' action . Similarly in Galloway

$° [19201 1 Ch. 77 .
"Supra, footnote 47 .
ss [19421 Ch . 304 (C .A.) :
174 THE CANADIAN BAR REVIEW [VOL . LH

v. Halle Concerts Society," two individual shareholders success-

fully alleged that the directors had breached their fiduciary duty
in causing the company to levy calls on their shares to the exclu-
sion of the other shareholders .
What is occurring in these cases is an interference by the
company with the rights of certain of the shareholders and is the
same type of conduct that occurs in similar cases where the right
of a shareholder to take personal action is firmly established .
These cases" involve such matters as varying or abrogating class
rights," depriving a member of some right conferred upon him
by the articles or by-laws," altering the internal corporate structure
in a manner that amounts to a fraud on the minority," and de-
priving a member of his right to vote." A personal action may
be more readily granted in such cases because one group of share-
holders is more clearly seen to be taking action that deprives
another of their rights . But this is also the case where the directors,
while acting for a collateral purpose, cause the corporation to
act in a manner that deprives a group of shareholders of their
rights. In such cases as Piercy, Smith and Galloway, the judicial
reasoning, although it is not clearly expressed as such, is that in
causing the company to do certain acts which are primarily of an
internal nature and which primarily affect the shareholders (issue
shares, make calls, refuse transfers, solicit proxies) the directors
assume a fiduciary obligation toward the company as a whole,
that is to the shareholders as a general body," to act with an even
hand and in good faith. If they breach that duty the shareholders
may sue in their individual capacities for a declaration of their
rights or to restrain the company from acting. Some observations
of Russell L.J ., in Bamford v. Bamford" may seem to clash with
this argument . Bamford was, once again, an allotment of shares
to fend off a takeover bid. The articles of association of the Bam-
ca [19151 2 Ch. 233 .
s' The following list of examples is taken from Gower, op . cit., foot-
note 45, p. 593.
ss White v. Bristol Aeroplane Co., [19531 Ch. 65 (C.A .) ; Greenhalgh
v. Arderne Cinemas, supra, footnote 2; Re John Smith's Todcaster Brewery,
[19531 Ch. 308 (C .A .) .
se Edwards v. Halliwell, supra, footnote 25 ; Wood v. Odessa Waterworks
Co . (1889), 42 Ch. D. 636.
s°Brown v. British Abrasive Wheel Co ., [19191 1 Ch . 290. See other
cases listed in Gower, op . cit., footnote 45, p. 593, footnote 83 .
se gender v. Lushington, supra, footnote 38 .
51 1 am here giving "the company as a whole" the meaning which Ever-
shed M.R . gave it in Greenhalgh v. Arderne Cinemas, supra, footnote 2, to
mean "the corporaters as a general body". That case concerned discrimina-
tion between majority and minority shareholders, but the principle is the
same where the directors exercise their powers to cause the corporation to
discriminate between shareholders .
"Bamford v. Bamford, [19691 1 All E.R . 969 (C.A .) .
1974] The Shareholders' Derivative Action 175

ford Company vested the power to issue shares in the directors.

The question in the case was not whether the directors had exceed-
ed their powers, (it was assumed by plowman J. that they had),
but whether the shareholders might ratify svc''3 directorial excess
and thus validate the issue." That was the point of law set down
for argument, and on that basis plowman J. treated the action
as a personal one by the two individual plaintiffs to enforce the
contract in the articles between the members and the company
created by section 20(l) of the English Companies Act 1948 .' In
short, the plaintiffs argued that the terms of their contract re-
quired that only the directors could issue shares and to allow
the shareholders to ratify an unlawful issue would be, in effect,
to allow them a power of issuance.
In the Court of Appeal, in the course of discussing the ratifica-
tion point, Russell J.A. said :"
The point before us is not an objection to the proceedings on Foss v.
Harbottle grounds. But it seems to me to march in step with the prin-
ciples that underlie the rule in that case.
After thus implicitly recognizing that the action was personal.
and not derivative, but expressing the opinion that some of the
same principles applied, His Lordship then observed :
None of the factors that admit exceptions to that rule appear to exist
here . The harm done by the assumed improperly motivated allotment
is a harm done to the company, of which only the company can com-
plain . It would be for the company by ordinary resolution to decide
whether or not to proceed against the directors.
ussell L.J. then expressed the opinion, that the decision whether
or not to litigate was the equivalent of a decision on ratification.
It is suggested that the analogy, and that was clearly all that it
was, to Foss v. Harbottle for the purpose of deciding the ratifica-
tion point was unfortunate. There is little, if any precedent for his
Lordship's dictum that only the company can complain of an
improper allotment. For the reasons advanced above it is sug-
gested that an individual shareholder has standing to complain
of such an allotment, or of any other corporate act which the
directors cause the company to take for a collateral purpose.
The Australian courts have clearly treated an improper allot-
ment of shares as giving rise to a personal action, although the
reasoning in the leading cases is rather confused. In hlgurli v.
McCann" the High Court held that in failing to consider the
s' The ratification point will be considered infra.
"Bamford v. Bamford, (196812 All E.R. 655 .
ss Supra, footnote 60, at p. 976.
64
Ibid.
65
(1954), 90 C.L.I . 425.
176 LA REVUE DU BARREAU CANADIEN [VOL . LII

interests of the company as a whole in issuing new shares the

directors had breached their fiduciary duty and " . . . the plain-
tiffs have a clear right to sue in their own names to remedy the
breach of trust"." In so holding, the High Court relied on the
decisions of the Privy Council in Burland v. Earle" and Cook
v. Deeks" to the effect that where the acts complained of are of
a fraudulent character the minority can sue when the wrongdoers
are in control . The High Court then reasoned that the right to
issue new capital is an advantage which belongs to the company
and the appropriation of a corporate advantage for the benefit of
the majority to the exclusion of the minority is a fraudulent act.
The difficulty with applying this reasoning to Ngurli (apart from
the novel idea that the right to issue new shares is a corporate
asset) is that both Burland and Cook were shareholders' deri-
vative actions and what was clearly being referred to was the
right of the minority to personally bring suit on behalf of the
company when the wrongdoers are in control-the fraud exception
to Foss v. Harbottle .
In Provident International Corporation v. International Leas-
ing Corporation," Helsham J. relied on Ngurli and held that the
rule ". . . does not apply in the case of a fraud on the powers of
directors, at any rate where the abuse of power concerns a pur-
ported issue of shares, and I am of the opinion that this is so
where the fraud consists of no dishonesty but a mere attempt to
use the power for purposes other than that for which it is given" ."
But here again the non-applicability of the rule has reference to
the ability of the minority to sue in a derivative and not a personal
capacity . However, Helsham J . went on to use language that could
be taken to be a holding that the directors owe fiduciary duties
directly to the shareholders -"
The reason why the rule in Foss v. Harbottle does not apply in a case
of fraud on a power such as the present no doubt resides in the fiduciary
nature of the duty owed and the fact that it is owed to all the corpora-
tors of the company . A breach of duty owed to an individual share-
holder as one of the corporators could not be ratified by a majority of
shareholders ; any attempt by a majority to ratify a breach of fiduciary
duty by directors would be no less a fraud qua that shareholder than
was the case in the acts of the directors.
ss Ibid., at p. 447. The trial judge would have granted the plaintiffs
relief except that he considered the improper allotment a wrong done to
the company for which only it could complain. The Full Court of the
Supreme Court of South Australia reversed and set aside the allotment and
the High Court affirmed.
°'
°e Supra, footnote 18.
[19161 1 A.C. 554 .
s° (1969), 89 W.N. (Pt 1) (N.S.W.) 370 .
'° Ibid., at p. 375 .
'l Ibid., at p. 375 .
1974] The Shareholders' Derivative Action 177

It is certainly the accepted position in the United States that di-

rectors, and majority shareholders in certain cases, stand in a
direct fiduciary relationship to the shareholders ." But there is no
case in the Commonwealth that so holds and as much as such a
development is desirable and inevitable, it is not clear that that
is what Helsham J. meant. Provident International Corp . is simply
based on the proposition, elaborated above, that it is the share-
holders who are directly affected when an improper allotment of
shares is made and they therefore have a personal right to sue, have
the corporate act declared void and to have the share register recti-
fied . The directors who authorized the allotment may, but need not
be, joined as co-defendants with the company. Helsham J. also re-
lied on the more recent High Court judgment in Harlowe's Nomi-
nees Pty. Ltd. v. Woodside Oil Co ." which was a personal action to
set aside an improper allotment and for rectification of the share
register . There was no question either at trial or in the High
Court of the plaintiff's right to maintain a personal action .
It may be, as in threatened ultra vires or illegal acts, that
there is both a personal and corporate right of action. The share-
holder may properly sue to restrain the company, or the company
may proceed against the directors to restrain them from taking
the proposed action .' "But the fact that this second alternative
is a possible one is no reason for refusing to allow a member to
sue the company if he has an independent right to do so" ." So
too in collateral purpose cases ; the shareholders are the ones
most directly concerned, and injured, in such cases and the fact
that the corporation, in an indirect way, may also be injured by
the failure of the directors to stay within their powers should not
prevent the shareholders from asserting their personal rights .
Securities legislation provides the clearest example of both
personal and corporate rights of action arising from the same
wrongful act. Both the Ontario Securities Act and the Ontario
Business Corporations Act provide for individual and corporate
recovery when an insider trades in a company's securities with
knowledge of material, confidential information." Such a statutory
provision is necessary for a personal action because of the holding
72
Pepper v . Litton (1939), 308 U.S . 295 ; Jones v . H. F. Ahmanson
Co . (1969), 460 P. 2d 464.
73
(1968), 42 A.L .J .R. 123 ; Ampol Petroleum Ltd. v. R. W. Miller
(Holdings) Ltd., [19721 2 IW .S .W .L .R. 850, was also a personal action by a
majority shareholder to set aside an allotment that was designed to dilute
the majority position and aid another party in a takeover battle .
" Gower, op . cit., footnote 45, p. 592.
75 Ibid
.
71 The Business Corporations Act, R .S .O ., 1970, c. 53, s. 150; The
Securities Act, R.S .O ., 1970, c. 426, s. 113. The draft federal Act contains a
similar provision in s. 122 (2) .
178 THE CANADIAN BAR REVIEW [VOL . LII

in Percival v. Wright. 77 But even if the statute were silent as to a

corporate right of action it is suggested that one would exist, in
addition to the personal right, by extension of the principles in
Regal (Hastings) Ltd. V . Gulliver," particularly as recently elab-
orated by the Supreme Court of Canada in Canadian Aero Ser-
vices Ltd. v. Terra Surveys Ltd." This result was reached recently
in the United States where a common law derivative action was
allowed both in cases of insider trading by directors" and by
directors and "tippees".B .
The courts in the United States have recognized, particularly
in the context of securities legislation, that the same allegations
of fact can support both a derivative and personal action . The
leading case is J. I. Case Co . v. Borak" in which the Supreme
Court indicated that violation of the proxy solicitation require-
ments of the Securities Exchange Act of 1934 gave rise to a
private as well as a derivative action . In the Court of Appeals the
plaintiff had, inter alia, appealed from a trial holding that the
cause of action in the first count in the complaint, which related
to a denial of pre-emptive rights, was derivative and that Wis-
consin's security for expenses statute applied. In reversing, the
court held that the security for expenses statute was not applicable,
saying : 8.3
we think the trial court failed to recognize the principle that the same
. . .
allegations of fact might support either a derivative suit or an individual
cause of action by shareholders.

It is fairly clear that breaches of the proxy solicitation legis-

lation in Canada give rise to a personal action ." The analogy is
to the notice cases in which it has consistently been held that every
shareholder is entitled to truly informative notice of matters pro-
posed for decision." Mandatory proxy solicitation and the infor-
"78 [190212 Ch . 421 .
[19421 1 All E .R. 378 . See also Gower, op . cit., footnote 45, p . 545 .
78
(1974), 40 D.L.R. (3d) 371 (S .C .C.) .
8 °Diamond v. Oreamuno (1969), 248 N.E . 2d 910 (N.Y.C .A.) .
"Schein v. Chasen (1973), 478 F . 2d 817 (2nd Cir .) .
82 (1964), 377 U.S. 426.
"Borak v . J. I . Case Co . (1963), 317 F. 2d 838 (7th Cir.), at p . 845 .
The most important aspect of the Borak decision was the holding that
violation of s. 14(a) of the Securities Exchange Act of 1934 gave rise to
a private right of actiori for damages notwithstanding that the Exchange
Act did not explicitly so provide but rather provided other remedies for
its breach .
84 Charlebois v. Bienvenu (1967), 64 D .L .R. (2d) 683 (Ont. H .C .) ;
Babic v. Milinkovic (1972), 22 D .L.R . (3d) 732 (B .C .S .C.) : Rudkin v.
British Columbia Automobile Association (1969), 70 W .W.R . 649 (B .C.
S .C.) . In Charlebois, Fraser J. was of the opinion that the case stated came
within the fraud exception to Foss v. Harbottle . It is suggested that Charle-
bois was in fact a personal, class action. This point will be discussed, infra,
footnote 129 .
11 Garvie v . Axmith, supra, footnote 37 and cases cited therein .
1974] The Shareholders' Derivative Action 179

matidn circular that must accompany it, is an attempt to provide

fuller corporate disclosure on a continuing, consistent basis-
it is simply notice in the modern form . If the statutory provisions
have not been complied with, or if the material is inadequate or
misleading, a shareholder has a personal right to sue for a declara-
tion that the meeting and all acts done at it are void ." It may also
be, as the United States Supreme Court thought in Borak," that
deceptive proxy solicitation also gives rise to a derivative action.
It tells nothing against the right to bring a personal action for a
declaration to agree with Justice Clark that :"
The injury which a stockholder suffers from a corporate action pur-
suant to a deceptive proxy solicitation ordinarily flows from the damage
done to the corporation, rather than from the damage inflicted directly
upon the stockholder. The damage suffered results not from the deceit
practiced on him alone but rather from the deceit practiced on the
stockholders as a group.
In Charlebois v. Bienvenu," eraser J. also seemed to be of the
opinion that the sending of a misleading proxy statement could
support a derivative suit but on somewhat different grounds than
those expressed in Borak : 1
The defendants were also in breach of duty owed to the company quite
apart from the requirements of the Corporations Act. The relationship
of directors to a company is fiduciary and to hold an annual meeting
and election of directors after sending out a misleading information
circular . . . would seem prima facie to be a breach of that duty.

Farnham v. Fingold and Goldex Mines v. IZevill.

The distinction between a personal and a derivative action
becomes more acute if leave of the court is required to commence
a derivative action . A personal action brought in representative
form cannot be turned into a derivative action merely by asking
that it be so treated if the plaintiff is faced with a motion for
dismissal on the basis that the cause of action belongs exclusively
to the company. Nor will the court grant a request by the plaintiff
on the hearing of such a motion that leave be granted nunc pro
tunc . Such motions to strike out pleadings and for dismissal arose
in the recent Ontario cases of Farnham v. Fingold" and Goldex
Mines v. Revill ." As these cases are the first to discuss the dis-
tinction between the personal and derivative action in light of the
requirements of section 99 of the Ontario Act, it is proposed to
examine them in some detail .
eo Charlebois v . Bienvenu, supra, footnote 84.
s° Supra, footnote 82 .
ss [bid., at p.
432.
ss Supra, footnote 84 .
so Ibid ., at p. 694.
s7
Supra, footnote 34 .
sz Supra,
footnote 35 .
180 LA REVUE DU BARREAU CANADIEN [VOL . LII

The essence of the claim in Farnham was that the premium

over market value that the controlling shareholders of Slater Steel
had received on the private sale of their shares should be shared
pro rata with the minority. The action was brought as a personal,
class action by the plaintiff suing on behalf of himself and all the
other shareholders of Slater Steel except the defendant majority
shareholders . As the action was personal the claim was necessarily
based on a fiduciary duty owed directly by the majority control-
ling shareholders to the minority . The defendants moved for dis-
missal and alternatively to strike out most of the statement of
claim on the grounds, inter alia, that the law does not recognize
such a fiduciary duty and that leave to commence the action had
not been obtained pursuant to the requirements of section 99 of the
Ontario Act. In short, the defendants contended that if any duty
was owed it was to the company and the action was therefore
derivative and within the requirements of section 99 .
Morand J. refused to decide the vital question of whether the
fiduciary duty alleged existed. Rather, he looked at the developing
law of fiduciary obligations both in the courts," in corporate
and securities legislation" and through decisions of securities com-
missions" and held that the matter was at least arguable and there-
fore should be left to the trial judge. If such a duty did exist then
the action was properly a personal one and was also proper as
a class action. For these reasons, Morand J. dismissed the motion .
The defendants then sought and obtained leave to appeal .
The Court of Appeal" recognized that the plaintiffs' claims
were novel in Canadian law and depended upon applying or ex-
tending the principles of Perlman v. Feldmann" and noted, with
approval, that the appellants were no longer contending that
such a difficult question of law should be decided in interlocutory
proceedings. However they were still claiming that certain para-
graphs of the statement of claim dealt with duties owed to and
damages suffered by Slater Steel. Such matters were properly the
subject of a derivative action and the requirements of section 99
were invoked. Jessup J.A. agreed and dismissed the action in so
far as it was derivative without prejudice to the plaintiffs' right
to apply under section 99. 89
"Morand J ., cited Perlman v. Fieldmann (1955), 219 F. 2d 173 (2nd
Cir .) and Brown v. Halbert (1969), 76 Cal . Rptr 781 .
94 Ontario Business Corporations Act, supra, footnote 10, s . 150 .
91 The Securities Act, R.S .O ., 1970, c . 426, s . 113 .

9° In the Matter of Consolidated Manitoba Mines Limited and Great

Basin Metal Mines Limited, O.S.C. Bulletin, Dec . 1966, p . 8 .
"Supra, footnote 34 .
se Supra, footnote 93 .
sa In so doing, Jessup J .A . also held that section 99 was exhaustive of a
shareholder's right to bring a derivative action. This important point will
be discussed more fully infra.
1974] The Shareholders' Derivative Action 151.

The difficulty with the judgment is that the offending para-

graphs in the statement of claim,"' particularly paragraphs 29
and 32, went to the heart of the plaintiffs' claim to share in the
control premium received by the majority shareholders . Paragraph
29 spoke of the defendants acting "in contravention of their fidu-
ciary duty to Slater Steel . . . and the general shareholders there-
of by entering into an agreement for the sale of shares of the
controlling shareholders . . . ". More particularly, sub-paragraph
29(F) spoke of "the sale of control . . . at a premium price with-
out regard to the general welfare of the shareholders of Slater
Steel . . . ". Paragraph 36 then makes it crystal clear that the
plaintiffs were suing derivatively"' and "in addition and/or in
the alternative", were claiming personally by reason of the fidu-
ciary duty owed directly to them ."' The decision, however, can-
not be read as deciding either that a cause of action exists when
the controlling shareholders sell their shares at a premiuml°3 or
that if it does it is derivative rather than personal . The only sub-
stantive holding was that section 99 was exhaustive of the share-
holders' right to bring a derivative action. As the action as pleaded
primarily raised a derivative claim the motion to dismiss was
granted.
It was clear in Farnham that the plaintiffs were not themselves
sure as to whether their claim was personal or derivative and they
tried to have it both ways ."' Prima facie, there is nothing wrong

goo
Statement of Claim, 7454/71, Registry, Supreme Court of Ontario .
101 Ibid ., para . 36 "The plaintiff states that this action is brought on
behalf of Slater Steel Industries Limited and all of its shareholders except
such shareholder- as are defendants . . ." .
., ". . . in addition and/or in the alternative the remedies sought
"'Ibid
by the plaintiff in this action are enforceable by him personally pursuant
to . fiduciary duties owed by the defendants to him personally" .
i63 There is no case that clearly holds that the majority are under obliga-
tion to share a control premium pro rata with all the shareholders . Such
a principle might, however, be taken out of the language and the holding
in Jones v. Ahmanson (1969), 460 P . 2d 464 . Perlman, supra, footnote
93, depended on the finding of an appropriation of a corporate advantage
for the exclusive benefit of the majority . In Ontario, the Select Committee
on Company Law of the Legislative Assembly has recently recommended,
in a 6-5 split opinion, that the controllers not be statutorily required to
share their premium; Report on Mergers, Amalgamations and Certain
Related Matters (Ontario, 1973), pp . 28-33 . For analyses of the problem
see Jennings, Trading in Corporate Control (1956), 44 Cal . L. Rev. 1 ;
Leech, Transactions in Corporate Control (1956), 104 U . Pa. L. Rev. 725 ;
Hill, The Sale of Controlling Shares (1957), 70 Harv . L. Rev. 986 ; And-
rews, Stockholders' Right to Equal Opportunity in the Sale of Shares
(1965), 78 Harv. L . Rev . 505 .
'"What was clear is that once one is in the thralls of section 99 the
approval of the court is necessary for settlement and if one can guess, that
is what the plaintiffs wished to avoid . Whether an action based on the
taking of a control premium should be brought as a personal or derivative
action depends on the theory that one adopts as to the duty of the control-
lers to share . Jennings, ibid., at p . 9, adopts Berle's asset theory which
182 THE CANADIAN BAR REVIEW [VOL . LII

with mixing a personal and a derivative claim in the same action .

The statement in Professor Wedderburn's classic article... on
Foss v. Harbottle to the effect that a shareholder cannot join a
personal claim in a derivative action is too broad. The case relied
on, Stround v. Lawson,' °° merely said that under the operative
mile of practice. the "plaintiff . . . cannot join the two causes of
action which he is putting forward in different capacities, unless
he can shew that they both arise out of the same transaction" .
The modern rules of practice with respect to joinder are to the
same effect ."' Parties may not join more than one cause of action
unless they can show they arose out of the same transaction or
series of transactions . This is simply a rule of practice to pre-
vent disparate causes being mixed in one trial-it has nothing
to do with substantive company law and a personal and a deriva-
tive action may well be joined, as in Farnham, if the claims arise
out of the same series of events ."'
It may be asked why, and in what situations, one would want
to join a personal and a derivative action? The personal action is
almost invariably for a declaration or injunction or both, but

would require a derivative action . Berle claimed that a premium is paid

for control because the purchaser is "buying power and not stock" . Thus,
"the power going with the `control' is an asset which belongs only to the
corporation, and . . . payment for that power, if it goes anywhere, must go
into the corporate treasury". Berle & Means, op . cit., footnote 1, p. 244.
The other theory is that in certain circumstances the majority share-
holders owe a fiduciary duty directly to the minority, Jones v. Ahmanson,
ibid . The taking of a control premium would be such a circumstance .
"Majority shareholders may not use their power to control corporate
activities to benefit themselves alone or in a manner detrimental to the
minority. Any use to which they put the corporation or their power to
control the corporation must benefit all shareholders proportionately . . .",
Jones v. Ahmanson, ibid ., at p. 470 and see particularly pp. 472-473. On
this view a minority shareholder would have a personal action . It is sub-
mitted that this is the preferable position as, in reality, it is the minority
shareholder who directly suffers loss or injury and it is to him that a pro
rata share of the premium should go . Perlman tried to have it both ways-
the suit was derivative but the court ordered the minority's share of the
premium to be held on trust for them . Surely a direct, personal action is
preferable and more realistic. In Farnham, supra, footnote 34, the Ontario
Court of Appeal was of the opinion that a class action would be appropriate
in such a case as the claim is not for individual damages but for a global
sum-the premium-and each member of the class, once it has been
properly defined, can simply claim his proportionate share of the fund.
'°' Wedderburn, op. cit., footnote 6, at p. 206.
'°° [18981 2 Q.B . 44 (C.A .) .
x°T
See e.g. rule 66, Ontario Rules of Practice.
1°s
Both the English and Canadian courts have allowed personal and
derivative claims to be joined and have dealt with the merits of each in
the same action . See e.g. Gray v. Yellowknife Gold Mines Ltd. (No. 1),
[19471 O.R. 928 (C .A .) ; Stone & Holt v. Margolian Ltd. (1957), 8 D.L .R.
(2d) 115 (N .S .S .C.) ; Foster v. Foster, [19161 1 Ch . 541 . The two most
important corporate jurisdictions in the United States, New York and
Delaware, both allow such joinder. See e.g. Benson v, Braun (1955), 145
N.Y .S. 2d 711; Bennett v. Brevil Petroleum Corp . (1953), 99 A. 2d 236.
1974] The Shareholders' Derivative Action 18 3

rarely for damages. The derivative action is most often for damages
although a claim for a declaration or injunction is quite possible.
Will not either the one or the other action give the plaintiff the
remedy that he seeks? The answer, it is suggested, is that it will.
ut not in all cases. A breach of duty owed to the company might
well involve, as part of a scheme, some variation of shareholders
rights which could be challenged by a personal action ."' Moreover,
securities law, both through legislation and judicial creativity, is
more often giving shareholders personal damage claims in situa-
tions where the corporation also has a cause of action. Insider
trading legislation in Ontario has been referred to as an example
of this."' Another example is the American cases where share-
holders have sold their shares (either in the same company or of
another company through a take-over) for less than their true
value or have purchased shares for more than they were worth
because of misconduct by management and the company has also
been injured by such misconduct."
The Goldexllz case involved a fight for control of a mining
company. The heart of the matter concerned the calling of the
annual meeting by the company, Probe Mines Ltd., and the send-
ing of allegedly misleading prosy solicitation -material in connec-
tion therewith. Goldex issued a writ (action one) on behalf of
itself and all other shareholders in Probe except the defendant
directors and joined Probe as a defendant. Thus the action could
have been either a personal, class action or a derivative action .
Leave pursuant to section 99 of the Ontario Act was not obtained .
The relief sought was an injunction against holding the meeting
and a declaration that the proxies solicited were null and void .
Probe was determined to proceed with an annual meeting and
called a second one at a later date pursuant to a fresh set of
directors' resolutions. Goldex again issued a writ (action two)
framed in the same manner, again asking an injunction and de-
claration. In action two, however, Goldex included in its writ
allegations of the purchase of properties for shares from parties
friendly to the defendant members of the Probe board and a
collateral agreement that placed the shares in escrow subject to
Probe retaining the voting rights . There were also allegations of
"'This was the case in Hogg v. Cramphorn, [19671 Ch . 254.
11°
Supra, footnotes 94 and 95 . The major example of this is the per-
sonal damages claims allowed in the United States through breaches of
rule 10b-5 of the Securities Exchange Act of 1934 since the decision of the
U.S . Supreme Court in J. d. Case v. Borak, supra, footnote 3 .
"'The more than twenty-five Georgia Pacific cases are the leading
examples of this situation. See Clare, The Derivative and Class Action-
AnotherPoint of View in The Law, Disclosure and the Securities Markets
Materials (1970), p. 93, at pp . 109-112.
us Supra, footnote 35 .
184 LA REVUE DU BARREAU CANADIEN [VOL . LII

secret agreements for some of the shares so issued to come back

to certain members of the Probe board.
At the hearing of both actions, counsel for Probe argued that
they were not properly before the court as Goldex had not ob-
tained leave. Haines J., noted that the question of the exhaustive
ness of section 99 was then before the Court of Appeal in Farnham
and left the matter to be decided by the trial judge"' in the interests
of uniformity. The question of whether or not either or both
actions might have been personal was not considered . In any
event, the injunctions asked in both actions were granted . Probe
then sought leave to appeal .
On the application for leave to appeal,"' Galligan ruled that
as the application before Haines J. was for interim injunctive
relief it was incumbent upon the plaintiffs to establish a prima
facie case to the relief sought . Further, it was an essential part
of the proof of such case that the plaintiffs show they were en-
titled to bring the action . It was necessary, therefore, for the judge
on the application to "determine prima facie whether or not the
plaintiffs have status" .115 Counsel for Goldex then submitted that
both actions were personal and that leave was not therefore re-
quired . Galligan J. was thus faced with examining both actions to
decide if they were personal or derivative . As to action one, he
was of the opinion that it was solely an action for personal relief.
However, it related to a meeting that never took place so there
was no need to take any steps to enforce it. Action two caused
more difficulty as the endorsement on the writ ran to five pages
and mixed a number of different claims for relief. One part of
the claim, that directed to the proxy material and the holding of
the meeting was, as in action one, personal . But the part relating
to an alleged improper agreement with respect to purchase of
property and issuance of shares by the company in order that
the incumbent directors might keep themselves in office could
be construed as derivative and Galligan J. so held .. .' That being
the case, section 99 applied to that part o f the claim and leave
to appeal was granted.
On appeal, the Divisional Court held. . ' that the entire claim
in action two was derivative and, following Farnham, held that
leave had to be obtained ."' Before considering the merits of the
..' Ibid., at p . 680. Haines J . did express the view that section 99 was
not exhaustive . This point will be discussed infra.
..4 Goldex Mines Ltd . v. Revill et al., [197312 O .R . 389 (Ont. H.C.) .
. ..Ibid ., at p. 394.
. ..Ibid., at p. 395 .
117 [19731 3 O.R . 869 .
. .' Goldex has appealed the ruling of the Divisional Court but the
judgment of the Court of Appeal had not been handed down by the time
this article was submitted for publication .
1974] The Shareholders' Derivative Action 18 5

judgment of Hughes J., it is necessary to clear up a semantic dif-

ficulty that runs through all the judgments in Farnham and in
Goldex . Hughes J. referred to counsel's contention that the actions
"were class actions and not derivative actions . . . ". 119 It is clear
from the context that Hughes J. appreciated that the class action
he referred to was brought by the shareholders personally. Put
it leads to confusion to oppose the class action to the derivative
action . A derivative action must, at common law and by the re-
quirements of section 99 and section 229, be brought in repre-
sentative form so that all the shareholders will be bound by the
judgment and the company will not be harrased by a multiplicity
of actions . A personal action may (but need not) be brought in
representative (class) form if it is proper to do so."' If it is not
proper to do so, it proceeds as a personal, individual action rather
than a personal, class action. And a shareholder may well have
a personal claim against a company which would not be appro-
priately brought as a class action on behalf of his fellow share-
holders. The substantive distinction for company law purposes
is between the personal and the derivative action . It is respectfully
suggested that it can only lead to confusion to refer to the class
action in contrast to the derivative action which, while not in
substance a class action, is brought in respresentative form .
Hughes J. agreed with Galligan J. that the paragraph in the
endorsement on the writ in the second action which alleged a
sale of property for shares contrary to the best interests of Probe
stated a derivative cause of action. However, Hughes J. felt con-
strained to examine each of the fourteen paragraphs of the en-
dorsement' . . in light of the extensive relief granted by Haines J.
He noted that the first five paragraphs all related to acts of the
directors taken with respect to the calling of the annual meeting
and the solicitation and voting of proxies . He then noted that
each injunction asked for, including the injunction with respect
to the matters referred to in the first five paragraphs, was sought
on the grounds that "the Defendant Directors are in breach of
their fiduciary duty to Probe" .x22 His Lordship then concluded
that : ...
. . , all of the relief sought, and particularly that in respect of which
relief was granted, is necessarily derived from rights, duties and obliga-
tions owed to Probe and enforceable by Probe .

It followed that the claim in action one, to dispose of the appeal

119 Supra, footnote 117, at p . 874.

"'Rule 75, Ontario Rules of Practice .
121
Supra, footnote
122 Ibid., at p. 885 . 117, at pp . 880-884 .
las Ibid,
186 THE CANADIAN BAR REVIEW [VOL . LII

although there was no Us subsisting, was also found to be deriva-

tive.124
In coming to this conclusion, Hughes J. noted that it was not
claimed that the resolutions or proxies were ultra vires of Probe,
nor was breach of its by-laws claimed . The plaintiffs, therefore,
were relying "presumably [on] breach of statute".'xs In concluding
that all of the breaches alleged were based on duties owed to
Probe and enforceable by Probe, his Lordship is saying, in effect,
that all duties owed by the directors run exclusively to the com-
pany. What has been elaborated above with respect to the distinc-
tion between personal and derivative actions and the highly
theoretical analysis required to reach such a conclusion applies
to the judgment in Goldex. And, with respect, such a conclusion
is wrong in law . The Ontario courts have consistently held that
an individual shareholder has standing to seek a declaration or
injunction or both for inadequate or insufficient notice of a meet-
ing ."' If the by-law with respect to the number of days notice for
meeting is breached a shareholder has a personal right to have it
enforced.l 2° If the by-laws were silent as to the number of days
notice and the directors gave more than fifty days notice contrary
to section 106(2) of the Ontario Act can it be seriously contended
that only a derivative action will lie? Moreover, the mandatory
proxy solicitation and accompanying information circular now
required by the Ontario Act is, as has been submitted, simply an
extension and elaboration of the notice requirement . Indeed, the
information that the courts mandated must accompany a notice
of meeting is now required as part of the information circular :
the information circular is simply the legislative response to the
judicial requirement of fully informative notice ."' Can it then be
the case that non-compliance with the proxy requirements, or im-
proper solicitation, or an inadequate. or misleading information
circular can only be remedied by a derivative action where before
a personal action was possible? It is suggested that such a conclu-
sion is wrong in law and that a shareholder has a personal right
114 Ibid., at p. 887.
12s Ibid., at p. 885 .
116 Garvie v . Axmith, supra, footnote 37 and cases cited therein .
127 Ashton v . Powers (1921), 51 O.L.R. 309.
121 Regulation 25(1) of the Ontario Act requires that the information
circular "contain the information prescribed in Form 15". Item 10 of
Form 15 (Ont. Reg . 492/70, Form 15) requires "If action is to be taken
on any matter to be submitted to shareholders . . . such matter . . . should
be described . . . in sufficient detail to permit shareholders to form a
reasoned judgment concerning any such matter" . This is simply a codifica-
tion of the common law requirement with respect to informative notice
which could be enforced by a personal action, see e .g . Garvie v . Axinith,
supra, footnote 37.
1974] The Shareholders' Derivative Action 9.87

of action to enforce the proxy requirements... and other similar

requirements of the companies Acts that are directed at informing
and protecting him.

C. "Irregularity" And Majority Rule.

The analytical and functional distinction between the personal
and derivative suit that has been argued above applies equally to
the "irregularity" branch of the rule. . From a functional point of
view what occurs in the. irregularity cases is that the directors,
often in their capacity of corporate officers, so use the corporate
machinery in such matters as giving notice and calling and con-
ducting meetings that they commit a breach of the internal regula-
tions. Such a breach is in no sense an injury to the corporation
and the major premise of the rule has no application . But the
second premise of the rule, majority rule in the conduct of
the company's affairs, is said to apply . Thus the matter is not
one of the individual shareholder not having standing to sue be-
cause the wrong is not to him but to the corporation-it is to him
and he does have standing-but is one of the possibility of majority
approval of the breach . Through this side wind the shareholder is
effectively nonsuited.
The difficulty with this analysis is that the articles and by-laws
are in the nature of a contract between the members and the com-
pany . To allow a breach to be ratified is, in effect, to allow cor
porate business to be conducted as if the contract had been alter-
ed prior to the meeting when in fact it has not. Moreover, such a
contractual alteration in the case of articles of association requires
a special majority-a simple majority will not suffice. In the case
of by-laws such an alteration must first be passed by the directors
and then submitted to the shareholders for confirmation-the
shareholders have no originating power, or power of amendment,
apart from when a by-law is submitted to them for confirma-
.z . The judgment of Fraser J. in Charlebois v. Fienvenu, supra, footnote
84, may seem to contradict this statement. That case involved the sending
of a deliberately misleading information circular . The defendants argued
that the plaintiffs had no status to sue and invoked Foss v. Harbottle.
There had been no allegation of fraud and the doctrine of majority rule
was said to prevail . Fraser J. found that the facts alleged against the direc-
tors constituted constructive fraud and this was sufficient to give the plain-
tiffs standing. Fraser J. also relied strongly on the decision of the English
Court of Appeal in Faillie v. Oriental Telephone & Electric Co. Ltd.,
(19151 1 Ch . 503 (C.A .) and said that it was similar to the instant case.
It was indeed similar to Charlebois in that it involved inadequate and mis-
leading notice, but most importantly it was a personal, class action and the
Court of Appeal specifically held that Foss v. Harbottle did not apply.
Fraser J. did not consider whether or not the action in Charlebois might
be personal but it is respectfully suggested for the reasons advanced in the
text above, and following Faillie and similar cases, that it was a personal,
class action and that such an action is appropriate in similar proxy cases.
188 LA REVUE DU BARREAU CANADIEN [VOL . LII

tion ." A further complicating matter is that the courts are un-
certain as to which procedural matters are to be treated as ir-
regularities capable of the confirmation and which are to be
treated as matters of substance that must be adhered to."' This
unsatisfactory state of the law is pointed up by contrasting Pender
v. Lushington'3z with MacDougall v. Gat-diner."'
In Pender, Jessel M.R. ruled that a shareholder is entitled to
have his vote recorded and may sue to enforce that right . In Mac-
Dougall, a poll was demanded on a motion to adjourn. The chair
man ruled that there could be no poll on a question of adjourn-
ment. The Court of Appeal applied the second branch o£ the rule
to dismiss a shareholders' action . But the effect of the adjournment
was to postpone indefinitely a vote on important matters-a vote
the directors wanted to avoid and a vote the plaintiffs, by their
proxies, could control. Thus the procedural irregularity indirectly
deprived the plaintiffs of their vote, a thing the court in Pender
said could not be done . Other cases that might be contrasted with
equally unsatisfactory results are Cotter v. National Union of
."' with
Seamen" and Pelech v. Ukranian Mutual Benefit Assn
Garvie v. Axmith'38 and Re National Grocers Company ."'
In Cotter the English Court of Appeal refused to intervene
even though the irregularities were that improperly appointed
delegates were allowed to vote and no notice was given of a pro
posal to lend the union's funds to a political movement. In Pelech
the failure to give any notice of a proposed increase in dues be-
cause, as the court found as a matter of fact, the association's
officers expected opposition to develop, did not give rise to a
personal action ." In Gar-vie and in Re National Grocers,"' the
Ontario courts followed Kaye v. Croydon Tramways Co .'" and
held invalid resolutions passed by overwhelming majorities (nine-
13o
Business Corporations Act, 1970, S.O ., 1970, c. 28, s. 21(3) ; Kelly
v. Electrical Construction Company (1908), 16 O.L.R . 232.
"'The number of days notice that a shareholder must receive prior to
a general meeting is usually treated as a matter of substance which the
shareholder is entitled to insist upon . See Ashton v. Powers (1921), 51
O.L.R . 309.
I' Supra, footnote 38 .
133
[18751 1 Ch . D. 13 .
"' [1929] 2 Ch . 58 (C.A .) .
11
[1940] 4 D.L .R. 342 (Man. K.B .) .
138
Supra, footnote 37 .
11" [1938] O.R . 142 (Ont . C.A .) .
138 Neither Cotter nor Pelech are company cases-Cotter involved a

union and Pelech a society-but Foss v. Harbottle principles were spec~fical-

ly applied and the courts have extended the rule, through a majority
ratification justification, to any organization which can sue or be sued in
its own name . The leading modern analysis of the rule is contained in
another union case, Edwards v. Halliwell, supra, footnote 56 .
138 [19381 3 D.L .R. 106.
140 Supra, footnote 37 .
1974] The Shareholders' Derivative Action 18 9

ty-five per cent in Gar-vie) because the notice was not informative
enough to allow the shareholders to evaluate the proposed ar-
rangements .
The highwater mark of applying the irregularity branch of
the rule is the judgment of the Alberta Court of Appeal in Watt
v. Commonwealth Petroleum Ltd."' Proper notice was not given,
votes were improperly accepted, and an interested person acted
as a scrutineer . In dismissing a shareholder's personal action,
McGillivray J.A . observed that :`
The voting, the appointment of scrutineers and the recording of votes
are all matters which if done regularly could not be questioned as being
beyond the powers of the company. If done irregularly the wrong flow-
ing from the irregularity is a wrong to the company and not to the
plaintiff or other individual shareholders and so it is the company
which has the cause of action.
As is often the case, bad judgments can be particularly illuminat-
ing and so it is with Watt. The first branch of the rule-action
by the company alone for a wrong done to it, is tangled with the
second branch, majority rule in the governance of the corpora-
tion's internal affairs . Only on the most theoretical analysis, as has
been submitted above, can the wrongs in Watt be said to be
wrongs to the corporation. The matter is one between shareholders
with the directors acting as official functionaries . Surely it is the
shareholders, and only the shareholders, who are wronged when
there is improper notice, when votes are improperly accepted, or
when scrutineers are not impartial. Whether the majority should
be able to set right such wrongs is a wholly separate question . But
the answer to that vital question might be very different depending
upon whether one sees what is being approved as a wrong to the
corporation, or as a wrong to one group of shareholders being
approved by another, more numerous group.
Arrayed against the Watt decision, and those that agree with
it, are numerous cases that give the shareholder personally en-
forceable rights with regard to the calling and conduct of meetings :
the right to have properly executed proxies counted,' to have
votes recorded,' to be heard,' to have improper votes excluded,`
to move proper amendments,"' to have disinterested scruti-
neers,'" to have the chairman correctly determine the sense of
141
[1938] 4 D.L .R. 701 . For an equally harsh application of the ir-
regularity rule see Watson v. Barrett (1929), 41 B.C.R. 478.
11 Ibid ., at p. 707.
143
Johnson v. Hall (1957), 10 I .L.R . (2d) 243 (B .C .S.C .) .
144
Pender v . Lushington, supra, footnote 38 .
141
Wall v . London & Northern Assets Corp ., [1898] 2 Ch. 469 (C.A.) ;
Armstrong v . 1llcGibbon (1906), 15 Que. K.B . 345.
141
Shaw v. Tatti Concessions Ltd., [19131 1 Ch . 292.
147 Henderson v. Bank of Australasia (1890), 45 Ch. D. 330 (C.A .) .
14'Dickson v. McMurray (1881), 28 Gr. 533.
190 THE CANADIAN BAR REVIEW [VOL . LII

the meeting,''' to have the directors meet and consider the neces-
sity of a special general meeting before it is actually called,"' to
prevent the chairman from going behind the share register,"' and
to challenge the status of a director to hold office."'
Apart from the general nature of a shareholder's right to
challenge matters that affect him in his capacity as shareholder,"'
there is the fact that the articles and by-laws are in the nature of
a contract between the member and the company, and possibly
between the members inter se, which each member should have
standing to enforce. The provision that is now section 20(l) of
the English Companies Act 1948, has been in that Act since
1856 .' A similar provision appears in each of the memorandum
jurisdictions in Canada. The Ontario Act does not constitute the
by-laws as a contract but gives each shareholder the right to seek
a compliance order where the corporation or any director or of-
ficer acts in breach of them."' The draft federal Act contains a
similar provision."'
The contractual nature of the articles was first given effect to
in Wood v. Odessa Waterworks Company ."' The articles em-
powered the directors, with the sanction of the company, to de-
clare a dividend "to be paid" to the shareholders . Instead of pay-
ing a cash dividend, the shareholders resolved that interest-bearing
bonds, redeemable at par by an annual drawing, should be paid
out of the surplus account. The plaintiff brought a personal re-
presentative action on behalf of himself and all the other share-
holders who had voted against the proposal to restrain the com-
pany from acting on the resolution . Mr. Justice Sterling ruled that
14"
National Dwelling Society v. Sykes, [1894] 3 Ch. 159; Second Con-
solidated Trust Ltd. v. Ceylon Amalgamated Tea & Rubber Estates Ltd.,
[194312 All E.R. 567 (C.A .) . This list of examples is partially taken from
Chumir, Challenging Directors and the Rule in Foss v. Harbottle (1965-
66), 4 Alta L. Rev. 96, at p. 102.
150 Wood
v. Pan-American Investment Ltd. (1961), 28 D.L .R. (2d) 703
(B .C.S.S .) .
151
Tough Oakes Gold Mines Ltd. v. Foster (1917), 39 O.L .R. 144, 34
D.L.R. 748 (Ont . H.C.) .
'52 Theatre Amusements Co . v. Stone (1915), 50 S.C .R . 32 ; In re the

Bodega Ltd., [19041 1 Ch . 276; Channel Collieries Trust Ltd. v. Dover,

[19141 2 Ch. 506 (C.A .) ; Holmes v. Keyes, [19591 1 Ch. 199 (C .A.) .
153
Such a right is clearly recognized in American company law unbe-
devilled by questions of irregularity . See e.g . Campbell V. Loew's Incorpo-
rated (1957), 134 A. 2d 852 (C . Ch . Del.) .
151
11 and 12 Geo. 6, c. 38, s. 20(l) : Subject to the provisions of this
Act the memorandum and articles shall, when registered, bind the company
and the members thereof to the same extent as if they respectively had
been signed and sealed by each member, and contained covenants on the
part of each member to observe all the provisions of the memorandum
and the articles ."
"'The Ontario Act, s. 261 .
gas The federal Act, s. 237.
157
(1889), 42 Ch. D. 636.
1974] The Shareholders' Derivative Action 19 1

the article in question required a payment in cash or in specie

that was immediately convertible to cash. The majority could not
bind the minority to accept its plan as "the articles of associa-
tion constitute a contract not merely between the shareholders
and the company, but between each individual shareholder and
every other" .' . . If the majority wished to alter the articles, they
had to comply with the article that required a special resolution
for such alteration .
A more recent application of the same principle is the Austra-
lian case of Krause v. J. G. Lloyd Pty. Ltd."' The plaintiff, in a
personal action, sought a declaration that one of the directors
had not complied with the articles of association. There were
further allegations of lack of quorums at directors' meetings and
wrongful refusal to accept the nomination of the plaintiff as a
director of the company . The defendants relied on the rule and
Mozley v. Alston"° to argue that all of the acts complained of
were wrongs to the company of which only the company could
complain .
Mr. Justice Hudson held that the rights of the plaintiff that
were being infringed were "individual membership rights" ."' To
allow the majority to act as if the articles had been altered is to
deprive the minority shareholders of their right to have the com-
pany run according to the rules by which the company and each
of the members are contractually bound. .Moreover, even if Foss
v. Harbottle did apply, the special majority exception (alteration
of the articles required a two-thirds majority) would apply to
give the plaintiff standing. If it were otherwise : .. .
. a company which, by its directors, had broken its own regulations
by doing something without a special resolution which could only be
done validly by a special resolution, could assert that it alone was the
proper plaintiff in any consequent action, and the effect would be to
allow a company acting in breach of its articles to do de facto by
is . Ibid., at p. 642 . His Lordship relied on a similar ruling by the House
of Lords in Oakbank Oil Company v . Crum (1882), 8 App . Cas . 65, at p.
71 . Mr. Justice Sterling's further elaboration that the articles also consti-
tute a contract between the members inter se, was not, strictly speaking,
necessary for his decision. On this point see also Rayfield v . Hands, [1958]
2 W.L.R. 851 . On the same basis as noted in the Wood case, the cases of
Grant v . U . K. Switchback RRys. Co. (1888), 40 Ch. H. 135 and Irvine
v . The Union Bank of California (1877), 2 App. Cas . 366 ought finally
to be put to rest.
... [1965] V.R. 232 (S.C. Vict.).
...... Supra, footnote 15.
v . J. G . Lloyd Pty. Ltd., supra, footnote 159, at p. 235 .
"' Kraus
Ibid., at p. 236 quoting from Edwards v. Halliwell, supra, footnote
25, at p. 1067. See also Quin and Axtens, Ltd. v . Salmon, [1909] 1 Ch.
311 ; aff'd., [1909] A.C. 442. In the Court of Appeal, Farwell L.J . held that
the plaintiff had the right to prevent an attempt to "alter the terms of the
contract between the parties by a simple resolution instead of by a special
resolution", at p. 319 .
192 LA REVUE DU BARREAU CANADIEN [VOL . LII

ordinary resolution that which according to its own regulations could

only be done by special resolution .
It must be emphasized that Krause is not just an example of the
special majority exception to the rule, but is, in the first instance
a holding that a breach of the articles of association gives a share-
holder a personal right to maintain an action for compliance.
It is instructive to compare Krause with Mozley v. Alston" 3
which, along with Foss v. Harbottle, is taken to be the leading
case that established the rule. A provision of the special Act which
incorporated the company in Mozley required that one-third of
the directors should retire each year . Two shareholders, in a
personal action, alleged that this had not been done and that the
entire board was therefore acting illegally . Lord Chancellor
Cottenham ruled that an usurpation of the office of director wa§
an injury to the corporation of which it alone could complain.
There are two objections to this holding . The first is that it is
carrying theory to an absurd point to hold that when directors
unlawfully remain in office it is the corporation that is primarily
injured. This point has been elaborated above and it is enough to
point out that it is the shareholders who elect the directors-in-
deed it is probably their most important and meaningful act as
shareholders, and if this right is interfered with it is they who
are primarily injured and who should have standing to complain.
Second, apart from any question of formal contract, a shareholder
subscribes for shares on the basis that on matters relating to his
rights as shareholder the terms of the company's governing docu-
ments will indeed govern unless and until they are properly
changed. If they are improperly departed from, an individual
shareholder should be able to sue to protect his rights . The de-
cision in Krause is more in accord with the reality of the modern
corporation and the relationship between the shareholders and
the directors than that in Mozley which was decided some nine
years before the first modern Companies Act of 1856 and which
should no longer be followed."'
In Canada there is a strong dictum by Duff J. in the Supreme
183
Supra, footnote 15.
184 See footnote 152, supra, and cases cited there for instances of a per-
sonal action by a shareholder to insist upon the disqualification of a dir-
ector for breach of the articles. Holmes v. Keyes, supra, footnote 77, in-
volved breach of a statutory provision, but it should make no difference
in principle whether the breach is of the statute or of the articles, e.g .
Kaye v. Croydon Tramways Ltd., supra, footnote 37 (notice requirement
in statute) ; Baillie v. Oriental Telephones Co ., [19151 1 Ch. 503 (C.A.),
(notice requirement in articles) . An interesting expansion of a share-
holder's personal rights was suggested by Street C.J. in Ampol Petroleum,
supra, footnote 73, who said that "Persons buying shares in listed com-
panies are entitled to expect directors faithfully to abide by Stock Exchange
rules", at p. 882 .
1974] The Shareholders' Derivative Action 19 3

Court confirming the contractual effect of the articles and the

personal right of a shareholder to insist upon their observance :'s5
The articles of association are binding upon the company, the directors
and the shareholders, until changed, in accordance with the law. So
long as they remain in force, any shareholder is entitled, unless he is
estopped from taking that position by some conduct of his own, to in-
sist upon the articles being observed by the company, and the directors
of that company. This right he cannot be deprived of by the action of
any majority . In truth, the articles of association constitute a contract
between the company and the shareholders which every shareholder is
entitled to insist upon being carried out.
The position in the letters patent jurisdictions is less clear.
There is no provision in these jurisdictions that constitute the
letters patent and by-laws a contract between the members and
the company . This flows from the fact that the foundation of a
letters patent company is not a contract between the corporators
but the grant of a charter from the Crown in accordance with a
statute. Both Wegenast. s. and Fraser and Steward s' state, however,
that a shareholder has a right to insist that the company be gov-
erned according to the by-laws . The Ontario cases ... have treated
the by-laws as binding on the company and the members and
have allowed personal actions to enforce them. The position in
Ontario is changed by the new Act .
Incorporation in Ontario is no longer by a grant of letters
patent from the Crown, but is by the signing and filing of articles
of incorporation."' If the articles conform to law, a certificate of
incorporation must issue."' Thus, in effect, incorporation is by
registration as it is in the memorandum jurisdictions. To con-
form to those jurisdictions, and to secure the shareholders' rights,
the Lawrence Report recommended that "the Ontario Act should
specifically provide that individual shareholders may sue for the
enforcement of individual rights including compliance with the
provisions of the company's charter and by-laws" ."' Section 261
1ss The Theatre Amusement Co. v. Stone (1915), 50 S .iffk'32, at pp.
36-37.
1ss Wegenast Canadian Companies (1931), p. 325, n. 22.
167
Fraser and Stewart, Company Law of Canada (5th ed., 1962), p.
678 . Both Wegenast and Fraser and Stewart cite, however, cases concern-
ing the enforcement of the articles, restraining an ultra vires act, and a right
derived from the statute, to support their propositions.
118
Rands v. Hiram Walker, Gooderham and Worts Ltd., [19361 O.R.
488 ; Ashton v. Powers (1921), 51 O.L.R. 309. There is a dictum to the
contrary in In re Good and Jacob Shantz & Co . (1910), 21 O.L.R. 153, at
p. 158 . The dictum is obiter as the court found the by-law to be void.
1s'
The Ontario Act, s. 4.
1's Ibid ., s. 5. This same procedure for incorporation is contained in
the 171
draft federal Act.
Interim Report of The Select Committee on Company Law, 5th
Session, 27th Legislature, Ontario, 1967, 15 & 16 Flit. II, at p. 70,
194 THE CANADIAN BAR REVIEW [VOL . LII

of the Act does not constitute the articles of incorporation and

by-laws a contract between the members and the company but
provides that where a corporation or a director, officer or em-
ployee does not comply with any provision of the Act, the articles
or the by-laws, a shareholder or creditor may apply to the court
for an order directing compliance . This provision is fundamentally
a sound one and provides broader rights than those that flow
from the usual contractual provision . There are two points, how-
ever, that must be considered.
The first is that the shareholder himself should have been
included in those who must comply with the corporation's govern-
ing documents so that one shareholder should be able to compel
compliance by another ."' The second point is that it is still pos-
sible for a judge to destroy the intent of section 261 by continuing
to apply the irregularity branch of the rule. That is, a judge may
say that the by-laws are a matter for the majority and there is
no point in making an order for compliance until the will of the
majority is determined (or saying, in effect, that the will of the
majority has been determined by the action they have taken) .
There are two reasons for hoping that section 261 will not be
destroyed by this side wind. The first is the plain intent of the
section itself. It was included as a result of the recommendation
of the Lawrence Report to protect the shareholders' personal
rights to have the corporation run according to its constating
documents. The intent of section 261 is that any shareholder
may seek the aid of the court in seeing that it is so run unless
and until a lawful change has been made. This last point raises
the second reason for objecting to the application of the irregu-
larity branch of the rule. It is that changes in the by-laws, although
they may be passed by a simple majority, are not in the control
of the shareholders . That is the by-laws, or any change in them,
can only be initiated by the directors who then must submit them
to the shareholders for approval ."' The only power of amendment
the shareholders have is when a by-law is submitted to them for
confirmation." To allow the majority to regularize a departure
from the by-laws would be to give the general meeting a power
it does not possess . If the power to initiate by-laws is vested by
statute in the directors, then that power resides exclusively in the
"If the by-laws provided for pre-emptive rights, for instance, a share-
holder should be able to enforce his rights against a shareholder who does
not comply.
1" The Ontario Act, s. 21 . S. 101 does give the shareholders the right
to initiate by-laws, but that section is not relevant in the context of the
point being discussed .
"'Ibid ., s. 21(3) .
1974) The Shareholders' Derivative Action 19 5

directors."' The argument made here is similar to the special ma-

jority point raised in Edwards v. Halliwell"s and applied to a pur-
ported alteration of the articles in Krause v. .P . G. Lloyd Pty.
Ltd.,` and the result should be the same-the matter is beyond
the competence of the majority .
Given the application of the contract and special majorities
principles in memorandum jurisdictions, and of the exclusive
power of the directors to initiate by-laws in letters patent juris-
dictions, and of the application of section 261 in Ontario and of
section 237 of the draft federal Act, is the irregularity branch of
the rule completely ousted? As to any procedural requirement
contained in the relevant companies Acts and in any of the govern-
ing corporate documents, it is suggested that it is . This branch
of the rule ought now to be considered inconsistent with the
modern legal position, insensitive to the realities of the governance
of the corporation, and an unjustified interference with the rights
of individual shareholders .
Apart from procedural requirements that arise out of the Act
or the company's regulations, there are a number of requirements
that are judge-made . Such requirements, which have already been
noted," include the right to be heard, the right to move
amendments, the right to have the chairman take the correct sense
of the meeting and the right to have impartial scrutineers . As a
personal action has been allowed in each of these cases, it can
be said that these judicial requirements are also beyond the power
of the majority to interfere with . This may still leave some pro-
cedural trifles that ought not to form the basis of a shareholder's
personal action. As Mellish L.J . observed in MacDougall "they
are not all lawyers who attend these meetings and nothing can
be more likely than that there should be something more or less
irregular done at them". ... But these "more or less" irregular
matters ought truly to be trifles... that in no way intrude upon a
shareholder's personal rights .
1n summary it may be said that there is a wide category of
shareholders' personal actions that are not affected by the rule
and thus are not within the ambit of the legislative provisions
that reform the rule . And for reasons of procedural simplicity
and remedial advantage, a shareholder should always consider
whether he might have a personal action before embarking on a
derivative suit.
175
Kelly v. Electrical Construction Company (1900, 16 O.L.R. 232,
at p. 238-239.
176
Supra, footnote 25 .
Supra, footnote 169 .
l'8
See footnotes 153 to 162, supra, for a list of the authorities.
179
MacDougall v. Gardiner, supra, footnote 143, at p. 25 .
"° Hayes v. Miron, [19571 Que. Q .B . 538, at p. 554.
196 LA REVUE DU BARREAU CANADIEN [VOL . LII

III . Foss v. Harbottle Reformed.

A. The Scope of Majority Rule.
There have as yet been no reported cases brought under
section 99 of the Ontario Act and as the federal Act did not pro-
ceed past first reading in the last session of Parliament,"' it is not
possible to discuss sections 99 and 229 in the context of specific
facts . But as both sections purport to resolve many of the diffi-
culties spawned by the rule, and as both are modeled to some
extent on rule 23 .1 of the American Federal Rules of Civil Pro-
cedure,"' it is possible to discuss them on the basis of the problems
thought to be remedied and the issues likely to be raised .
On a plain reading, sections 99(l) ... and 229(l)"' appear to
give a shareholder the right to bring an action, in representative
form, on behalf of the company in any case in which the company
could sue . And this seems to have been the intent, following rule
23 .1, which speaks compendiously of ". . . an action . . . to
enforce a right of a corporation". Is it the case then that the four
exceptions to the rule, ultra vires, special majority, personal rights
and fraud on the minority"' have been swept away in favour of a
general right to sue on behalf of the corporation? To be specific,
would the complaining minority in Pavlides v. Jensen"e now be
given their day in court? The answer to both questions is : not
necessarily. For while both sections open the derivative suit to
all corporate rights of action, nothing in either section gives guid-
ance as to the circumstances under which such a suit may be
maintained. Both sections require a demand upon the company
to itself bring suit"' but both are silent as to when the company,
'al Supra, footnote 11 .
Fez Supra, footnote 12 (hereinafter referred to as rule 23 .1) . Rule 23 .1,
which came into force in 1966, was formerly rule 23(b) which had been
in the rules for some thirty years.
lea S. 99 (1) : "Subject to subsection (2), a shareholder of a corporation
may maintain an action in a representative capacity for himself and all
other shareholders of the corporation suing for and on behalf of the cor-
poration to enforce any right, duty or obligation owed to the corporation
under this Act or under any other statute or rule of law or equity that
could be enforced by the corporation itself, or to obtain damages for any
breach of any such right, duty or obligation ."
"''S. 229(1) : "Subject to subsection (2), a complainant may apply to
a court for leave to bring an action in the name and on behalf of a cor-
poration or any of its subsidiaries, or intervene in an action to which any
such body corporate is a party for the purpose of prosecuting,-defending
or discontinuing the action on behalf of the body corporate."
"s Edwards v . Halliwell, supra, footnote 25, at p. 1067 ; Gower, op . cit.,
footnote 45, pp . 584-585.
ise Supra, footnote 29 .
""S. 99(3)(b) : "the shareholder has made reasonable efforts to cause
the corporation to commence or prosecute diligently the action on its own
behalf;"
s. 229(2) (a) : "the complainant has given reasonable notice to the directors
1974] The Shareholders' Derivative Action 197

through the directors, may justifiably respond that the matter is

one that is capable of ratification by the shareholders and their
opinion must be sought. Neither section, in terms, changes the
case law on ratification, or on the ability of the directors to vote
qua shareholders in their own best interests, and if the position
still is that the minority may only bring a derivative suit when
the majority may not ratify then the exceptions to Foss v. Har-
bottle continue to govern. For the line upon which minority
shareholder action has always been said to run is the line between
those acts which the majority may ratify and those which it may
not."' Thus the substantive question in shareholders' derivative
suits may be the same in the context of sections 99 and 229 as it
was prior to the reform-what are the limits of the power of the
majority?
Reliance is placed almost exclusively on the court in both
sections to expand the scope of the minority shareholders' suit.
Section 99 is silent as to the possibility of ratification by the
majority. The drafters of the federal Act clearly considered the
problem for section 232'8' directs that an application for leave
is not to be dismissed by reason only that alleged breach may be
or has been approved by the shareholders, but the court may take
such facts into consideration in dealing with the case on its merits .
Both sections thus leave the expansion of the minority's rights
in the hands of the court. For both require that leave of the court
is required to commence a derivative action and both require,
inter alia, that the court be satisfied that the shareholder is acting
in good faith and that it is in the interests of the corporation that
the action be brought ."' Thus under section 99 a court may well
of the corporation or its subsidiary of his intention to apply to the court
under subsection (1) if the directors of the corporation or its subsidiary
do not bring, diligently prosecute or defend or discontinue the action ;"
The requirement of demand is an important one and it will be discussed
more's8 extensively infra.
See Gower, op. cit., footnote 45, pp. 581-595 . See generally Beck, op.
cit., footnote 6, and Wedderburn, op. cit., footnote 6. Hogg v. Cramphorn,
[1967] Ch. 254 has been said to be a rare exception to this-and the situa-
tion would be the same in any case in which ratification of directors' acts
for a collateral purpose is allowed . See Wedderburn, Note (1967), 30 Mod.
L. Rev. 77.
'es S. 232(2) : "An application made or an action brought or intervened
in under this Part shall not be stayed, discontinued, settled or dismissed for
want of prosecution without the approval of the court given upon such
terms as the court thinks fit and, if the court determines that the interests
of any complainant may be substantially affected by such stay, discon-
tinuance, settlement or dismissal, the court may order any party to the
application or action to give notice to the complainant ."
?9o S. 99(3 ) (c) : "the shareholder is acting in good faith and it is prima
facie. in the interests of the corporation or its shareholders that the action
be commenced ."
S. 229(2) (b) : "the complainant is acting in good faith; and
198 THE CANADIAN BAR REVIEW [VOL . LII

use the accepted categories of ratification to deny leave on the

basis that the matter is one that has traditionally been within the
control of the majority and, absent unusual circumstances, it is
not in the best interests of the company to bring suit when the
majority have waived the alleged breach or may possibly do so.
There is nothing in section 99, or anywhere else in the Ontario
Act, that ousts the basic premise of majority rule . And notwith-
standing the direction given in section 232, a court faced with
an application under the federal Act could possibly take the same
approach . It would not, it is suggested, necessarily be dismissing
an application by reason only of ratification or its possibility to
say that on the facts as pleaded, it is not in the best interests of
the company to bring the action where there has been, or may
be ratification .
It can only be hoped that the courts will use the statutory
scheme in an enlightened manner to free the minority from the
tangles of the rule and not consider themselves constrained by
the traditional exceptions. This was clearly the intent of the com-
pany law reform committees that recommended statutory solution
to the Foss v. Harbottle problem. In recommending a rule 23 .1
solution the Lawrence Report said that:'..
The remedy is one which can and should be adapted to Ontario law and
practice to serve as an effective procedure whereby corporate wrongs
can be put right.
In commenting on the proposed section 229, the federal reform
group sounded a note of fervent optimism : . ..
At one stroke this provision circumvents most of the procedural barriers
that surround the present right to bring a derivative action . . . [wle
have relegated the rule to legal limbo without compunction, convinced
that the alternative system recommended is preferable to the uncertainties
-and obvious injustices-engendered by that infamous doctrine .
And most importantly, the federal Act clearly directs the court
to look to the merits of each case regardless of the fact or pos-
sibility of ratification ."' This is probably the only viable solution
to the problem. It would be unwarranted to have a rule that, in
effect, would prevent the majority from forgiving any breaches
of duty . But it is equally unwarranted to have the minority cut
off from court consideration of its grievance by such forgiveness,
particularly when it may have been secured by the directors
(c) it appears to be in the interests of the corporation or its
subsidiary that the action be brought, prosecuted, defended or discontinued."
... Interim Report of The Select Committee on Company Law (Ont .,
1967), p. 63 .
...1 Proposals for a New Business Corporations Law for Canada
(Canada, 1971), p. 161.
... S. 232, supra, footnote 189.
19741 The Shareholders' Derivative Action 19 9

voting qua shareholders . Thus ratification should be treated as

a cogent piece of evidence but as no more. This is the sense of
section 232 of the federal Act and while the Ontario Act is silent
on the point it is hoped that ratification will be treated in the
same manner in order that section 99 may be made to play the
role that was intended for it in corporate regulation.
The necessity of only treating ratification or its possibility as
a piece of evidence is pointed up by the uncertain boundaries of
majority rule. It is accepted doctrine that the majority may not
"appropriate to themselves money, .property or advantages which
belong to the company or in which the other shareholders are
entitled to participate" ." This is the fraud on the minority excep-
tion to the rule'.. and appears to state a clear rule that would
coyer the ground from truly fraudulent takings to uncertain cases
of corporate opportunity . But the rule is far from clear and dicta
in such cases as Regal (Hastings) Ltd. v. Gulliver... and Zwicker
v. Stanbury"' suggest that the directors in those cases could have
protected themselves from subsequent attack if they had secured
prior approval from the shareholders for their actions . Yet both
cases involved a taking of corporate property and they are dif-
ficult to reconcile with the general principle."' 1t has been sug-
gested . .. that the dividing line between a Regal type situation and
that in a case like Cook v. Deeks" is the bona fides of the direc-
tors . The critical question under section 99 and 229 is : who is to
be the judge of bona fides?
The courts have steadfastly refused to pass on the merits of
a breach of fiduciary duty on the grounds that they cannot ad-
equately investigate the matter and arrive at the truth."' But
sections 99 and 229 now appear to force the courts into such a
consideration. For in a Regal type situation there are three alter-
natives. The first is to say, consistent with the principle enunciated
in Burland v. Earle, 2"2 that any taking of corporate property is
1 .4
Burland v. Earle, supra, footnote 18, per Lord Davey, at p . 93, see
also Menier v. Hooper's Telegraph Works (1874), L .R. 9 Ch. App . 350 ;
Cook v . Deeks, [19161 1 A .C. 554 (P.C .) ; Parke v. Daily News, [19621
Ch . 927 ; Zwicker v. Stanbury, [19531 2 S.C .R. 438, [19541 1 D .L.R. 257 .
ise As to the uncertain scope of majority rule see the discussion in
Gower, op. cit ., footnote 45, pp . 564-580 .
la [19421 1 All E.R . 378, per Lord Russell, at p . 389 .
197 Supra, footnote 195, per Kellock J., at p . 269 (D .L.R.) .
yea For a discussion of this difficult point see Beck, The Saga of Peso
Silver Mines : Corporate Opportunity Reconsidered (1971), 49 Can. Bar
Rev . 80, at pp . 114-119 . Gower, op . cit., footnote 45, pp . 564-566 .
i .s Beck, op. cit., ibid., at p. 117 .
2010
Supra, footnote 195 .
za Regal (Hastings) Ltd . v . Gulliver, supra, footnote 196, per Lord
Wright, at p . 392 .
202 Supra, footnote 194 .
200 LA REVUE DU BARREAU CANADIEN [VOL . LII

npt ratifiable and the court will require an accounting in all such
cases."' The second is to allow ratification in cases not involving
mala fides. The third is for the courts to decide the matter on the
basis of bona fides whether or not there has been ratification.
Each alternative involves the court. In the first the court will
simply set aside the particular transaction or require an accounting
regardless of ratification and regardless of bona fides or do both .
In the second, the court will have to make the determination of
bona fides. Ratification, if it has been obtained, will simply be
a piece of evidence. In the third, the court is in the same position
of judging bona fides as in the second alternative, except that
there has been no ratification . The one alternative that is not
open, it is submitted, is for the court to treat ratification as being
determinative of the matter, for that would be contrary to the
spirit and intent of the new legislation. The only way the courts
could avoid adjudication in such cases is for them to sweep
aside the dicta in Regal and Zwicker and treat all breaches of
fiduciary duty that involve the taking of corporate property, in-
cluding the taking up of corporate opportunities, as non-ratifiable .
All breaches of fiduciary duty do not, of course, involve the
taking of property that belongs, in law or equity, to the corpora-
tion . Nor, indeed, is the ambit of sections 99 and 229 defined by
the scope of fiduciary duty. Both encompass the enforcement of
any right belonging to the corporation. Thus the question of rati-
fication is bound to arise in a number of different situations .
The two most obvious are acts by the directors for a collateral
purpose and breach of the directors' duty of care . It is submitted
that in the collateral purpose cases the possible approaches are
the same as those outlined above in the corporate property cases.
That is the courts may decide that an issue of shares by the di-
rectors for an improper purpose is not ratifiable and will be
automatically set aside. This was considered to be the position"
until the decision in Hogg v. Cramphorn 2 °5 which said that such
a breach of duty could be waived by the shareholders . Thus a
court considering the matter in the context of either section 99
or 229 could decide either to follow the old law and automatically
a°s This is the position that has been argued for in the corporate op-
portunity cases. See Beck, op. cit., footnote 208, at pp . 100-119. The con-
trary position has also been strongly argued ; see Jones, Unjust Enrichment
and the Fiduciary's Duty of Loyalty (1968), 84 L.Q . Rev. 472.
zoo Punt v. Symons & Co ., [19031 2 Ch. 506; Piercy v. Mills, [19201 1
Ch. 77 ; Bonisteel v. Collis Leather Co . Ltd. (1919), 45 O.L.R . 195; Legion
Oils v. Barron (1956), 2 D.L.R . (2d) 505; Ngurli Ltd. v. McCann, supra,
footnote 65 .
205 Supra, footnote 109. This decision was assumed to have been correct

by the Court of Appeal in Bamford v. Bamford, supra, footnote 60, al-

though the point was not directly in issue,
19741 The Shareholders' Derivative Action 2®1

strike down such an issue21s or to allow ratification . But if ratifica-

tion is allowed it should not be taken to be determinative of the
matter . The court must consider the question of bona fides and
decide the issue on its merits . Such improper issues as took place
in Punt v. Symons,"' or Piercy v. Mills," or Legion Oils V .
Parson" should not be capable of shareholder approval. The
facts of cases such as Hogg v. Cramphorn present a more dif-
ficult issue for decision but ratification, once again, should be
treated only as a cogent piece of evidence. It is appreciated that
Canadian courts may also follow the lead of the British Columbia
Supreme Court in Teck Corporation Limited v. Millar et al."'
and decide that an issue of shares that has, as one of its effects,
the favouring of one party in a control fight is not ipso facto
improper ."' Of course, such a decision also involves a judicial
determination of the merits of the case and the directors' bona
fides.
With respect to a breach of the directors' duty of care, it is
surely clear that sections 99 and 229 were meant to give a com-
plaining shareholder in a case like Pavlides v. Jensen"2 his day
in court. The possibility, ' or the fact, of ratification ought no
longer to be a bar to such a hearing. Again, ratification should
only be treated as evidence of the shareholders' views in the con-
text of a judicial determination on the merits .
The weight to be given to ratification, and indeed the entire
question of the rationale of judicial review of shareholders'
decisions, raises the question of the principle of North-West
Transportation v. Beatty ."' It will be recalled that it was the
decision of the Privy Council in that case that a director may use
his votes qua shareholder, which he is entitled to cast in his own
best interests, to waive his own breach of fiduciary duty. There
is nothing in either the Ontario Act or the federal Act that changes
that principle. Two points about the North-West case, however,
should be recalled and emphasized. The first is that the Privy
Council considered the bona fides of the transaction in sanction-
ing Mr. Beatty's conduct. Sir Richard Baggallay emphasized
206 It seems
fairly clear that the Australian courts will continue to take
this position unless the High Court reverses itself; see Algurli v. McCann,
.supra, footnote 65 .
207
Supra, footnote 204 .
203
Ibid.
209
Ibid.
M (1973), 33 D .L.R . (3d) 288, [19731 2 W.W.R . 385.
sn On the facts of Teck it was not necessary for Berger J . to decide
not to follow Hogg v . Cramphorn, supra, footnote 109, and everything his
Lordship said about the collateral purpose doctrine may be taken as dicta
For a discussion of Teck see Iacobucci, The Exercise of Directors' Power :
The Battle of Afton Mines (1973), 11 Osgoode Hall L.J. 353 .
212
Supra, footnote 29 . 213 Supra, footnote 19 .
202 THE CANADIAN BAR REVIEW [VOL. LII

that the uncontradicted evidence"' at trial was that the purchase

of the boat was essential to the company's business ; that the boat
in question was suitable for the business ; that no similar boat that
was equally well suited was available ; and that the price was
neither excessive nor unreasonable . In short, the director may vote
as shareholder but the court will give careful scrutiny to the
merits of the transaction-and this is the same stance that it is
submitted that courts should take in section 99 and 229 cases if
the North-West principle is to remain intact .
The second point with respct to North-West is that the Privy
Council overruled the Supreme Court of Canada. In the Supreme
Court, Ritchie C.J. had held that :215
. fair play and common sense alike dictate that if the transaction
and act of the director are to be confirmed it should be by the im-
partial, independent, and intelligent judgment of the disinterested share-
holders, and not by the interested director himself who should never
have departed from his duty .

Thus it may well be that in the context of the realities of the

governance of the modern corporation that the Canadian courts,
and particularly the Supreme Court, should revert to the rule they
first announced in 1887 and require a director to refrain from
voting as shareholder in a matter in which he is interested . At
the least, any matter which has been approved by the shareholders
with the aid of the directors' votes should be subject to careful
scrutiny by the court.

B. Demand.
Both sections 99 218 and 22921' follow the common law2" in
requiring that a shareholder first attempt to have the company
commence the action itself. This seems a reasonable requirement
as the company should be given the opportunity of vindicating
its own rights . And the directors, faced with an application to the
court and possible trial, may well decide that corporate action is
the responsible course . Moreover, such a request might result in
214 Ibid.,
at p . 594.
215
(1887), 12 S .C.R . 598, at p. 604 .
99(3)(b) : "the shareholder has made reasonable efforts to cause
216S.

the corporation to commence or prosecute diligently the action on its own

behalf."
219
S. 229 (2) (a) : "the complainant has given reasonable notice to the
directors of the corporation or its subsidiary of his intention to apply to
the court under subsection (1) if the directors of the corporation or its
subsidiary do not bring, diligently prosecute or defend or discontinue the
action ."
218
Ferguson v . Wallbridge, [1935] 3 D .L .R. 66 (P .C.), at p . 83 . Demand
was not required at common law on a showing that the alleged wrongdoers
were in control. Sections 99 and 229 are silent on this point but it is sub-
mitted that the rule should be the same as at common law .
1.974] The Shareholders' Derivative Action 203

an amicable resolution of the dispute. Explanation may satisfy the

shareholder that suit should not be brought or the directors may
decide to revoke or restructure the matter that gave rise to the
complaint. It must be emphasized that a refusal by the company
to itself bring suit will not automatically allow the shareholder
to proceed with a derivative action. He still must seek leave from
the court and the directors may show that it is not in the company's
best interests in the particular case to seek redress. The share-
holder has the burden of establishing that it is, prima facie, in the
best interests of the company that suit be brought and the court,
once again, is made the arbiter.
There is, however, one aspect to the demand requirement,
particularly in section 99, that may be troublesome. Section
99(3) (b) speaks of ". . . reasonable efforts to cause the cor
poration to commence . . . the action". Section 229 (2) (a)
refers to ". . . notice to the directors. . .". Does the "corporation"
in section 99(3) (b) possibly mean that the decision of the share-
holders must be sought? And might the directors be entitled to
take such a position under section 229(2) (a)? There are two
reasons, one legal and one practical, for suggesting that recourse
to the shareholders is not required . Both the Ontario Act and
the federal Act require that the company shall be managed by the
directors."' The decision to sue or refrain from suing is clearly
an essential management function. And it is equally clear that
where the statute vests a particular power in one part of the cor-
poration no residual power resides in the body at large."' Thus
the shareholders have no power to decide whether or not to sue
and there should be no requirement that their opinion be sought
either under the Ontario or the federal Act.
The practical objection to such a requirement, at least in the
public company, is that to impose it would be to take away the
remedy . The calling of a meeting of shareholders under either
the federal Act or the Ontario Act involves the mandatory solicita-
tion of proxies and the sending of an information circular ."' If
the complaining shareholder is opposed by management, which
would probably be the case if it has demanded that a general
meeting be called, he may feel that it is necessary to solicit proxies
himself to put his case adequately before his fellow shareholders .
ut unlike management, the individual does not have access to
the corporate treasury to pay the price of solicitation or, possibly,
of a protracted proxy fight. And such cost could well act as an
219S . 132, Ontario Act; s. 96(1), federal Act.
22° Kelly v. Electrical Construction Co ., supra, footnote 130. The same
rule hôlds where the articles vest management power in the directors in a
memorandum company . See Gower, op. cit., footnote 45, pp . 130-133.
221 S s 117, 118, Ontario Act; ss 140, 141, federal Act.
204 LA REVUE DU BARREAU CANADIEN [VOL . LII

effective bar to the use of the statutory remedy. Moreover, whether

or not the shareholder solicits proxies, it is notorious that it is
extremely difficult to explain complex matters through an infor-
mation circular and that there is an overwhelming tendency on
the part of shareholders to support management . The case against
requiring demand on the shareholders was cogently noted by the
United States Court of Appeals in Levitt V. Johnson."' The com-
pany in Levitt had over 48,000 shareholders (not a large number
in a public company) scattered over the United States. The trial
court dismissed the claim because of the plaintiff's failure to
allege a prior demand on the other shareholders . After noting that
the purposes of such a demand are for the shareholders to decide
either to take over the action themselves or to take no action,
Judge Aldrich said : ..'
Neither of these purposes could be accomplished in any real sense un-
less the demand evoked a full and fair consideration of the issues, in
depth, by the other stockholders . . . . here not only would the burden
be enormous, but no disclosure that the plaintiff could be expected to
make would be likely to persuade a majority to take over the action, or,
conversely, permit an informed decision by the majority that the action
be not instituted .
Judge Aldrich did not completely rule out the possibility of re-
quiring a demand on shareholders (as he could not in the context
of rule 23 .1) but he said that it should be confined to those cases
in which it "evoked a full and fair consideration of the issues, in
depth, by the other stockholders". This might be possible in the
small, private company but in such a case the majority, through
the board, have already decided not to sue. If they vote as share-
holders not to sue, the minority should have the right to have the
court hear the prima facie case on the application for leave. If
the majority refrain from voting, the minority will have its way.
In either case, demand on the shareholders seems pointless. In
summary, there are cogent legal and practical reasons why the
courts should not read a requirement of prior demand on the
shareholders into either section 99 or 229.
The practical objection to demand on shareholders applies
also to a request by the directors that the shareholders' opinion
on ratification be sought. If on the application for leave, manage
ment requests that the matter be adjourned to seek the opinion of
the general meeting such a request should be denied . What has
been said above with respect to the cost of a proxy battle, the
difficulty of truly informing the shareholders, and the natural
tendency to go along with management applies equally here .
222 (1964), 334 F. 2d 815, sert . den. 379 U.S. 61 .
221 Ibid., at p. 818.
1974] The Shareholders' Derivative Action 20 5

Moreover, if ratification, as has been submitted, is just a piece of

cogent evidence to be taken into consideration in deciding the
case on its merits, then the hearing on the merits should not be
delayed while that piece of evidence is gathered . There may or
may not have been ratification, but if there is a proper case for
leave the action should proceed .

Contemporaneous Ownership.
Section 99 (3) (a) of the Ontario Act requires that the apply-
ing shareholder have been a shareholder at the time the wrong
complained of occurred."' This is the American rule of contem
poraneous ownership and illustrates the dangers of blindly fol-
lowing American legislative remedies without inquiring as to their
rationale. The reason for the rule in the United States was to stop
the collusive practice of the resident of one state transferring his
shares to the resident of another to manufacture federal diversity
jurisdiction in order that the matter be litigated in a federal
court."' Another reason is said to be to prevent "strike suits"
and more particularly, purchased litigation.
The first reason clearly has no application to Canada. And
the second reason has very little, if any, application given the
absence of the contingent fee and the enormous potential cost
liability that a litigant faces in Canada in contrast to his counter-
part in the United States. Any small fear of "strike suits" is amply
taken care of by the requirement of obtaining leave and the neces-
sity of showing good faith and in the best interests of the cor-
poration. The common law does not require contemporaneous
ownership... and there is simply no reason for it in the Canadian
context. The inconsistencies created by the rule are pointed up
by examining some contrasting situations . The fact that all or a
majority of the shareholders of a company have changed does
not deny the company the right to sue for a breach of duty that
took place before such change. Indeed, that was exactly the situa-
tion in Regal and in Peso Silver Mines v. Cropper."' The point
simply is that a company is a continuing entity in which a chang-
ing group of shareholders hold various interests and its right to
seek redress for an injury to it is in no way affected by the com-
224 S. 99(3)(a) : "the shareholder was a shareholder of the corporation

at the time of the transaction or other event giving rise to the cause of
action ."
225
Wright & Miller, Federal Practice and Procedure (1972), Vol. 7A,
pp . 341-342.
226
Seaton v. Grant, [1867] 2 Ch . Ap . 459; Bloxam v. Metro lay., [1868]
3 Ch. App. 337.
227
(1966), 58 .R
.L (2d) 1 (S.C .C.), affing (1966), 56 D.L.R . (2d)
D
.
117 (B .C.C .A .) .
206 THE CANADIAN BAR REVIEW [VOL . LII

position of that group. As the derivative action is for and on be-

half of the corporation the same principle should apply.
The federal Act has no similar rule of contemporaneous
ownership. Indeed, the federal Act goes quite far in the other
direction and also gives standing to complain to former share
holders, to directors and officers, and to former directors and
officers."' The inclusion of directors and officers who may not
be shareholders seems a sound expansion of the list of potential
complainants for they may be in the best position to know of
conduct that has injured the corporation. As the action is for the
company's benefit there is every good reason why they should
initiate it in appropriate circumstances. The same considerations
apply to former shareholders and directors, although there is the
additional consideration here that under the federal Act the
court may order the award to be paid to present or former share-
holders."'

D. Shareholder Recovery.
The federal Act, in section 230(c), gives the court the power
to order that the award be paid to present or former shareholders .
Such a distribution of a corporate recovery has been ordered in
cases in the United States when the corporation was in liquidation
or when the corporate assets had been sold ."' Providing that the
rights of creditors are protected, such an order does no violence
to corporate theory as it merely facilitates distribution . A more
serious problem arises in the Perlman v. Feldmann"' situation
where such an order is made to prevent those who have partici-
pated or acquiesced in the wrong from sharing, indirectly as
shareholders, in the recovery . "The courts . . . are forced to
choose between competing equities : either certain shareholders
will receive an unjustified benefit, or the defendants will be able
to retain a portion of funds not rightfully theirs .""' Of course,
corporate recovery in Perlman would have meant that the pur-
chasers would have indirectly recovered part of their purchase
price. And in fact this is exactly what occurred in Regal when
the action was brought by the corporation itself . On balance, such
a power in the court seems justified but should be used sparingly
keeping in mind that the funds are coming, in effect, out of the
corporate treasury.
"s S.228, federal Act .
"9 S. 230(c), ibid.
230 May
v. Midwest Refining Co . (1941), 121 F. 2d 431 ; Sale v. Ambler
(1939), 6 A. 2d 519.
211
Supra, footnote 93. See generally, Multiparty Litigation in the
Federal Courts (1958), 71 Harv. L. Rev. 874, at pp. 946-950.
232 Ibid., at p. 946.
1974] The Shareholders' Derivative Action 20 7

E. Survival of Common Law Rights.

In the Ontario Court of Appeal in Farnham,"' Jessup J.A .
held that section 99 had abrogated the common law right to bring
a derivative action and that leave of the court was therefore
necessary in all such cases."'
. . . the very broad language of s. 99(l) embraces all causes of action
under any statute or in law or in equity, that a shareholder may sue for
on behalf of a corporation . All forms of derivative actions . . . come
within it, and therefore s-s. (2) applies to all such actions.
In Goldex,"5 Haines J., while the decision in Farnham was re-
served in the Court of Appeal, expressed the opinion that section
99 ought not to be treated as exhaustive and that:...
. . . it would seem more appropriate to apply the rule of statutory
construction that common law rights are not held to have been taken
away or affected by a statute unless it is so expressed in clear language
or must follow by necessary implication.
At first blush there is a good deal to be said for the position
taken by Haines J. Section 99 was intended to widen the ambit
of the shareholders' remedies and as there is nothing in express
terms in section 99 that requires it, there is no reason why the
common law remedy should be deemed to have been abrogated.
Indeed, it may be argued that notwithstanding the wider ambit
of section 99, the common law allowed a derivative action t® be
launched more quickly and less expensively."'
On balance, however, it is suggested that the opinion of Jessup
J.A . as to the exhaustiveness of section 99 is preferable. It seems
clear that the section was intended to be a code for the expansion
and control of the derivative suit. Thus the judicial controls re-
ferred to above in the context of unfettered access to the courts .
It would only lead to confusion to allow. both common law and
statutory actions . A more orderly development of the law would
result from the one point of access to a derivative action and
would allow for a body of experience and precedent to be built
up to guide shareholders .

Conclusion
The one thing above all else that is clear about sections 99 and
229 is that they have moved the courts into the centre of the
... Supra, footnote 34.
Ibid., at p. 135.
as.
Supra, footnote 35 .
Ibid., at p. 680.
zas

""See Zacks, Note, (1973), 8 U. .C.IL. Rev. 191.

208 LA REVUE DU BARREAU CANADIEN [VOL . LII

corporate arena. Whether the courts can be expected to shift

suddenly into an active role in corporate regulation after decades
of standing passively behind the formula that: "It is not the busi-
ness of the court to manage the affairs of the company. That is
for the shareholders and the directors ",233 is the vital question that
only experience will answer . For if the courts are not willing to
make the shift and play their essential role, statutory reform will
turn out to be an illusory gain . The role that the judiciary must
play was aptly put by Mr. Justice Black in the Supreme Court of
United States in commenting on rule 23 .1 : 239
The basic purpose of the Federal Rule is to administer justice through
fair trials, not through summary dismissals as necessary as they may
be on occasion. These rules were designed in large part to get away from
some of the old procedural booby traps which common-law pleaders
could set to prevent unsophisticated litigants from ever having their day
in court. If the rules of procedure work as they should in an honest and
fair judicial system, they not only permit, but should as nearly as pos-
sible guarantee that bona fide complaints be carried to an adjudication
on the merits . Rule 23(b), like other civil rules, was written to further,
not defeat the ends of justice.

239 Shuttleworth v.
Cox, supra, footnote 9.
239 Surowitz v. Hilton Hotels Corp . (1966), 383 U.S. 363, at p. 373.