A shareholder addresses corporate colleagues during a meeting, symbolizing the right to pursue derivative actions for corporate misconduct.

Derivative Actions in Ontario and BC: How Shareholders Can Sue on Behalf of a Corporation

Date: June 11, 2026

When directors or officers of a corporation commit fraud, misappropriate assets, or breach their fiduciary duties, the corporation itself is the party that has suffered harm. Ordinarily, only the corporation can sue to recover that harm. The problem arises when the very people who control the corporation are the ones who caused the harm: they will not authorize the corporation to sue itself, which means the wrongdoing goes unaddressed and the corporation bears the loss.

A derivative action solves this problem. It allows a shareholder or other qualified complainant to obtain court permission to commence proceedings in the name of the corporation, stepping into the corporation's shoes to pursue a claim that the directors or officers have refused to bring. The remedy is available in both Ontario and BC, under equivalent statutory provisions, and is one of the most important tools in corporate litigation involving misconduct by those who control a closely held corporation. For an overview of the broader shareholder dispute framework, see our guide to shareholder disputes in Ontario and BC.

What is a derivative action?
A derivative action allows a shareholder or other complainant to bring proceedings in the name of the corporation, with court permission, where the corporation has suffered harm but its directors or officers have failed or refused to pursue the claim. Any recovery flows to the corporation, not to the individual who brought the action.

The action is derivative because the complainant's right to bring it derives from the corporation's right to bring it. The complainant acts on behalf of the corporation, not in their own right. This distinguishes a derivative action from the oppression remedy, which is brought by a stakeholder in their own right to address harm to their personal interests.

The governing statutory framework

Ontario and federal

  • Ontario corporations: Business Corporations Act, RSO 1990, c B.16 (OBCA), ss. 245 and 246
  • Federal corporations: Canada Business Corporations Act, RSC 1985, c C-44 (CBCA), s. 239
  • Leave required from the Ontario Superior Court of Justice before proceeding
  • Three-part test: notice, good faith, interests of the corporation
  • Recovery flows to the corporation
  • Court can make interim orders, including for legal costs to be paid by the corporation

British Columbia

  • BC corporations: Business Corporations Act, SBC 2002, c 57 (BCBCA), s. 232
  • Leave required from BC Supreme Court before proceeding
  • Same three-part test: notice, good faith, best interests of the company
  • Recovery flows to the corporation
  • Court can make orders for interim relief and legal costs
  • Substantially same framework as Ontario with different section numbers

Who can bring a derivative action

All three statutes define the category of person who can bring a derivative action broadly, using the term "complainant." The definitions are substantially similar across the OBCA, CBCA, and BCBCA.

In Ontario under section 245 of the OBCA, a complainant includes a current or former registered holder or beneficial owner of shares in the corporation or an affiliated corporation, a current or former director or officer of the corporation or an affiliated corporation, and any other person who in the discretion of the court is a proper person to make an application. The open-ended final category means that creditors, secured lenders, and other stakeholders may have standing in appropriate circumstances where the court considers it proper.

In BC under the BCBCA, the definition of complainant is equivalent. The same categories apply, and the court retains discretion to recognize other persons as proper complainants where justice requires it. The breadth of the definition reflects the legislature's intention that derivative actions be available wherever there is a genuine need to pursue claims on behalf of a corporation that those controlling it have refused to bring.

The three-part leave test

A derivative action cannot proceed without court leave. This gatekeeping requirement is a deliberate feature of the remedy: it prevents derivative actions from being used as a harassment or tactical tool in shareholder disputes and ensures that the action genuinely serves the corporation's interests before the litigation machinery is set in motion.

Under section 246 of the OBCA, section 239 of the CBCA, and section 232 of the BCBCA, the court must be satisfied of three things before granting leave.

1. Reasonable notice to the directors The complainant must have given reasonable notice to the directors of the corporation of their intention to bring the application. The purpose is to give the directors an opportunity to take appropriate action themselves before the court is asked to authorize a derivative proceeding. What constitutes reasonable notice depends on the circumstances: a formal written demand identifying the misconduct and the proposed claim will generally satisfy the requirement. Where the directors take appropriate action in response, the basis for the derivative action is removed.
2. Good faith The complainant must be acting in good faith. This requirement exists to prevent derivative actions from being used as a weapon in personal disputes between shareholders or as leverage in unrelated negotiations. A complainant who brings a derivative action primarily to benefit themselves rather than the corporation, or to harm a director against whom they have a personal grievance, is not acting in good faith. Courts assess good faith objectively based on the complainant's conduct and the substance of the proposed claim.
3. Interests of the corporation It must appear to be in the interests of the corporation that the action be brought, defended, or discontinued. This is assessed at the leave stage without a full hearing on the merits: the court asks whether the proposed claim has a reasonable prospect of success and whether bringing it serves the corporation's genuine interests. A derivative action brought to pursue a claim with minimal prospect of recovery, or where the cost of litigation would exceed any likely recovery, may not satisfy this requirement.
The leave requirement does not mean the complainant must prove the underlying misconduct at the application stage. Courts apply a lower threshold at the leave stage: there must be a reasonable basis to believe the corporation has a viable claim, not a conclusive showing that the claim will succeed. The full merits are determined at trial, not at the leave hearing.

The business judgment rule and when courts will intervene

Courts in Ontario and BC are careful not to second-guess legitimate business decisions made by directors in good faith. The business judgment rule requires courts to defer to directors' decisions provided those decisions fall within a reasonable range of options given the information available at the time they were made. A decision that turns out to be wrong, unprofitable, or strategically questionable does not become grounds for a derivative action simply because shareholders disagree with the outcome.

The business judgment rule does not protect directors who act in bad faith, who have an undisclosed conflict of interest, who fail to inform themselves adequately before making a material decision, or who engage in fraud or misappropriation. Where the proposed derivative action targets this kind of conduct rather than a legitimate business decision gone wrong, the business judgment rule is not a shield and the leave requirements can be satisfied.

The practical distinction matters enormously: a derivative action framed as a challenge to a business decision the complainant simply disagrees with will fail at the leave stage. A derivative action targeting specific misconduct supported by evidence of fraud, misappropriation, or conflict of interest has a realistic prospect of obtaining leave.

Derivative action vs oppression remedy: choosing the right tool

Derivative actions and oppression remedies are the two primary litigation tools available to shareholders who believe they have been harmed by director or officer misconduct. They overlap in some circumstances but address different types of harm and have different procedural requirements. Understanding the distinction is essential to selecting the right remedy and avoiding the procedural complications that arise from using the wrong one.

Who the remedy protects

A derivative action protects the corporation. Any recovery flows to the corporation's treasury and benefits all shareholders proportionally. An oppression remedy protects the individual complainant's personal interests as a shareholder, creditor, or other stakeholder. Any award under the oppression remedy flows directly to the complainant rather than to the corporation. Where the misconduct has both harmed the corporation and directly damaged the complainant's personal interests, both remedies may be available simultaneously.

Leave requirement

Derivative actions require court leave before they can proceed. Oppression remedy applications do not require leave: they can be commenced directly in the Superior Court of Justice in Ontario or the BC Supreme Court. The leave requirement adds a step and some delay to derivative actions but also provides a degree of protection against frivolous use of the mechanism. An oppression applicant who does not need leave can move faster but must still demonstrate the substantive elements of oppression, unfair prejudice, or unfair disregard.

Common scenarios where both apply

In closely held corporations, the same misconduct by a director frequently harms both the corporation and minority shareholders directly. A director who misappropriates corporate funds reduces the corporation's assets (harm to the corporation) and simultaneously diminishes the value of all shares (harm to shareholders personally). In these situations, courts are often receptive to claims that pursue both the derivative action for recovery to the corporation and an oppression remedy for direct harm to the shareholders. The two claims are typically pursued in the same proceeding.

Practical guidance on which to use

Where the primary harm is to the corporation and the complainant's goal is to recover assets or damages for the corporation's benefit, a derivative action is the appropriate vehicle. Where the primary harm is to the complainant's personal interests as a shareholder, the oppression remedy is more direct. Where both are present, both should be pleaded. See our detailed guide to the oppression remedy in Ontario for the full framework on that side of the analysis.

Suspect directors or officers of your corporation have misappropriated assets or breached their duties in Ontario or BC?

The limitation period runs from discovery and the notice requirement means you need to act before the leave application is even filed. Get legal advice on whether a derivative action, an oppression remedy, or both fit your situation before the window narrows.

Call: 1-800-771-7882 Assess Your Options for Corporate Misconduct

Practical considerations for complainants and directors

Limitation periods apply

Derivative actions are subject to the general two-year limitation period in both Ontario and BC, running from the date the complainant discovered or ought to have discovered the misconduct. The notice requirement adds a preliminary step that takes time: it must be completed before the leave application is filed, which means the effective window for acting is shorter than the raw limitation period suggests. Complainants who delay in seeking legal advice may find the limitation period has run before the leave application can be brought.

Costs can be ordered against the corporation

Courts have power under the OBCA, CBCA, and BCBCA to order the corporation to pay the legal costs of the complainant bringing the derivative action, even before the merits are determined. This is a significant feature of the remedy: a minority shareholder who cannot afford to fund expensive litigation against the corporation's directors may be able to have the corporation itself fund the action against those directors. The court exercises discretion on costs based on the merits of the leave application and the conduct of the parties.

Directors facing a derivative action

A director who receives a notice of a proposed derivative action has an opportunity to address the misconduct alleged before the leave application is brought. Taking appropriate remedial action in response to the notice can remove the basis for the derivative action entirely. Where the alleged misconduct is denied, a director should obtain independent legal advice immediately: the corporation's lawyers act for the corporation, not for the individual director, and their interests may not be aligned once a derivative action is contemplated.

Closely held corporations

Derivative actions are most commonly brought in closely held corporations where the shareholders and directors overlap and where personal and business relationships are intertwined. Courts in both Ontario and BC apply the leave requirements with some sensitivity to the closely held context: they recognize that in a corporation with two or three shareholders who are also the directors, the distinction between harm to the corporation and harm to shareholders personally is often artificial. Where the misconduct has produced harm to both, courts are receptive to allowing both avenues of relief to be pursued simultaneously.

Dealing with a situation in Ontario or BC where directors or officers have harmed a corporation and will not authorize the corporation to pursue a claim?

A derivative action may be the right tool, but the leave requirements, the notice process, and the choice between derivative action and oppression remedy all require careful analysis. Get advice on the right approach for your specific facts.

Get Advice on Your Corporate Dispute Or call us: 1-800-771-7882

Practical takeaways

A derivative action allows a complainant to bring proceedings in the name of a corporation where the corporation has suffered harm but its directors or officers have refused to pursue the claim. Recovery flows to the corporation, not to the individual complainant.
Court leave is required before a derivative action can proceed. The three-part test requires reasonable notice to the directors, good faith by the complainant, and that it appears to be in the interests of the corporation that the action proceed.
The business judgment rule protects directors' legitimate business decisions from challenge through derivative actions. It does not protect fraud, misappropriation, undisclosed conflicts of interest, or decisions made in bad faith.
Derivative actions protect the corporation. Oppression remedies protect individual stakeholders. Where the same misconduct harms both, both remedies can be pursued in the same proceeding. The choice between them depends on where the primary harm lies and what relief is sought.
The limitation period in Ontario and BC is two years from discovery. The notice requirement means the effective window for acting is shorter than the raw limitation period suggests. Act promptly once misconduct is discovered.
Courts can order the corporation to pay the complainant's legal costs in derivative action proceedings, even at the leave stage. This can make the remedy accessible to minority shareholders who could not otherwise fund litigation against the corporation's directors.

Frequently asked questions

What is a derivative action in Ontario and BC?

A derivative action allows a shareholder or other complainant to bring proceedings in the name of a corporation, with court permission, where the corporation has suffered harm but its directors or officers have refused to pursue the claim. It is governed by section 246 of Ontario's Business Corporations Act, section 239 of the Canada Business Corporations Act, and section 232 of BC's Business Corporations Act. Any recovery flows to the corporation.

What are the requirements to obtain leave for a derivative action?

The applicant must satisfy the court of three things: the complainant gave reasonable notice to the directors and the directors have not taken appropriate action; the complainant is acting in good faith; and it appears to be in the interests of the corporation that the action proceed. These requirements apply under the OBCA, CBCA, and BCBCA with substantially the same content.

Who can bring a derivative action in Ontario?

Under section 245 of the Ontario Business Corporations Act, a complainant may be a current or former registered holder or beneficial owner of shares, a current or former director or officer, or any other person the court considers a proper person to make an application. This broad definition can include creditors and other stakeholders in appropriate circumstances.

What is the difference between a derivative action and an oppression remedy?

A derivative action protects the corporation from harm and any recovery flows to the corporation. An oppression remedy protects individual stakeholders from conduct that is oppressive, unfairly prejudicial, or unfairly disregards their interests, and any award flows to the complainant personally. Derivative actions require court leave. Oppression applications do not. Both can be pursued in the same proceeding where the same misconduct produces both corporate and personal harm.

Does a derivative action require court approval in BC?

Yes. Under section 232 of BC's Business Corporations Act, SBC 2002, c 57, a complainant must obtain leave of the BC Supreme Court before commencing a derivative action. The leave requirements are substantially the same as in Ontario: notice to directors, good faith, and the best interests of the company.

Dealing with corporate misconduct in Ontario or BC that the directors are refusing to address? Tell us what's happening.

Whether you are a shareholder considering a derivative action against directors who have harmed a corporation, a director who has received a notice of a proposed derivative action, or a corporation navigating a dispute that involves both corporate and personal claims, Achkar Law advises on shareholder disputes and corporate litigation across Ontario and British Columbia. We will assess the right remedy for your specific situation and advise on the most effective approach.

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