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Demand Futility in Derivative Action Cases

When seeking leave to commence a derivative action for and on behalf of a corporation, a core requirement1 is that the complainant demonstrate that (s)he has made demand upon the directors of the corporation to prosecute the claim.

At first blush, since the claim is, by its nature, one that belongs to the corporation, it would appear normal and sensible that the action be authorized and overseen by the board. In the normal course, the complainant should therefore attempt to persuade the directors, whom one would expect to make a decision based on the best interests of the corporation, to initiate proceedings.

In some circumstances, however, the requirement that the directors make the threshold determination may amount to the fox guarding the henhouse. In such situations, Canadian corporate law should be updated to that of contemporary business realities as has been done in some of the states in the U.S.

Whether, and in what circumstances, the complainant may avoid the notice requirement by pursuing other statutory or common law remedies such as an oppression or winding-up proceeding or an action founded upon misrepresentation, is beyond the scope of this article and will not be considered here. The availability of alternative remedies will be highly fact-driven.

To read the full article, click here.

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