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Derivative Actions under the CNCA

The Canada Not-for-profit Corporations Act authorizes a complainant to apply to court for leave to:

● bring a derivative action on behalf of the corporation or any subsidiary (a derivative action); or

● intervene in an action in which the corporation or an affiliate is a party (an intervention in defence of the corporation).

Usually, the application is for leave to bring a derivative action. Interventions to defend a corporation against whom an action has been brought are rare.

The leave application enables the court to perform a gatekeeper role in screening out abusive strike suits. Likewise, the requirement for judicial approval of a settlement acts as a final control on abusive strike suits.

1. Conditions Precedent

There are four conditions precedent to a complainant's bringing a derivative action (or intervening to defend the corporation):

No faith-based defence: As discussed in more detail below, a court cannot grant leave where the adjudication involves a dispute over a board decision reasonably based on a tenet of faith held by members of the corporation.

Notice requirement: The complainant must give each of the directors of the corporation at least 14 days' prior notice of the complainant's intention to apply to court. If, however, all of the directors of the corporation are named as defendants, this prior notice requirement is unnecessary and need not be complied with.

Good faith requirement: The complainant must be acting in good faith. While the threshold to establish good faith is low, good faith is not presumed. The onus is on the complainant to present evidence to establish his or her good faith.

In the apparent interests of the corporation: This is a merit test - although again setting a low threshold. In most leave applications, the apparent interests of the corporation become pivotal, because they effectively subsume the good faith requirement. An action that does not appear to be in the interests of the corporation will also likely fail the good faith requirement. Likewise, an action not brought in good faith will also not be in the interests of the corporation. However, an action that meets the good faith threshold may still not appear to be in the interests of the corporation.

As stated above, a court cannot grant leave to bring a derivative action or intervene in a defence if the court is satisfied that:

● the corporation is a religious corporation;

● the impugned decision of the directors is based on a tenet of faith held by the members of the corporation; and

● it was reasonable to base the board's decision on this tenet of faith, having regard to the activities of the corporation.

Thus, a court is prevented from adjudicating on the merits of religious doctrines. But it would not be prevented from granting leave to bring a derivative action to recover church monies or other property wrongfully taken by those in control of the church.

2. Practical Application of Derivative Actions to Not-for-Profit Corporations

Derivative actions are warranted where those in control of the corporation will refuse to authorize the corporation to bring an action against themselves. In the context of a business corporation (especially a closed corporation with majority and minority shareholders), a derivative action can be a useful tool in the hands of the minority to bring an action against the wrongdoers in control of the corporation. Knowing that this remedy is available to the minority should also have a disciplining effect on the control group.

However, not-for-profit corporations do not usually have one controlling member, and no one individual generally controls the board. In most cases, boards are populated by several independent directors. If there is wrongdoing within a not-for-profit corporation, there is therefore no ownership barrier that prevents the majority of directors from authorizing an action by the corporation against the wrongdoers. If the majority of directors is unable or unwilling to authorize the action, a majority of the voting members can replace the board and the new board can authorize the action. If neither a majority of the directors nor a majority of the members are willing to take action, the court may well draw an inference that the dissenting applicant is acting against the will of the majority and that either the application is not brought in good faith or the proposed action does not appear to be in the interests of the corporation.

Accordingly there is, ordinarily, far less occasion to use a derivative action or intervention in the case of a not-for-profit board, as long as there is a sufficient degree of independence among the directors or the members of the corporation.

3. Salient Case Law

Indeed, as expected, in the case of not-for-profit corporations, there have been few attempts to seek leave to bring a derivative action to date, and no case in which leave has been granted.

In Thiessen v. Borden Hospital Foundation Inc., the Saskatchewan court declined leave for several reasons - one of which was that the board of the corporate foundation was found to have made a business decision to transfer funds to another non-profit organization to help fund the construction of a home care facility.

In the only other case, Gill v. Kalgidhar Darbar Sihib Society, the British Columbia court found that the applicant seeking leave to bring a derivative action was not acting in good faith in attempting to regain control of the society through litigation rather than through the society's electoral process. For this and other reasons, the court denied the applicant leave.

4. Conclusion

It will likely take unusual circumstances before a court grants leave to bring a derivative action where the majority of the disinterested directors and members are opposed to it.

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