The requirement to obtain leave before commencing a derivative action under the Ontario Business Corporations Act (“OBCA”) is often viewed as an unwelcome layer of time, complexity, and risk. Ten years after the Ontario Court of Appeal signaled an end to repackaging derivative claims as oppression claims to circumvent leave in Rea v. Wildeboer,[1] complainants still frequently opt for an oppression claim even within the acknowledged overlap between the two remedies. Recent cases provided an opportunity to reflect on how courts are currently approaching the leave test and whether historical apprehension remains warranted. Three lessons emerge.
First, the cause of action pleaded does much of the heavy lifting for both the good faith and corporate interest requirements. Second, the level of scrutiny effectively screens abusive claims without posing an insurmountable hurdle in the right case. Third, procedural orders can address minor concerns without barring meritorious actions.
Properly employed, the derivative action remains a powerful remedy to hold directors to account. While there may be other factors that drive the choice between pursuing an oppression claim, a derivative action, or both, fear of the leave requirement need not be one of them.
Test for Leave
The test for a derivative action under s. 246(2) of the OBCA requires that the Court be satisfied that the directors of the corporation will not bring or diligently prosecute the case, the complainant is acting in good faith, and it appears to be in the interests of the company that the action be brought.[2] Most of the analysis centers on the “good faith” and “interests of the corporation” branches. Good faith turns on whether the primary purpose of the litigation is corporate benefit.[3] The Courts will consider evidence of ulterior motives, including existing disputes between the parties.[4]
For corporate interest, the applicant need only show that the action “appears” to be in the best interest of the corporation, in the sense that there is an arguable case. This is neither a ‘rubber stamp’ nor a deep dive into the merits.[5] The Court must also consider whether the potential benefits to the corporation outweigh the financial and operational burdens of litigation.[6]
Because the derivative action is remedial, the test is given a flexible and liberal interpretation in favour of the complainant.[7] Cases that are not frivolous and vexatious and are in the company’s interest should proceed.[8]
Liberal Approach in Practice
The Ontario Superior Court of Justice’s recent decision in Clark v. Cen-Ta Real Estate Ltd. et al[9] shows this liberal approach in practice. In Clark, one of three shareholders sought leave to commence a derivative action against the directors of two related companies, alleging breach of fiduciary duty and the duty of care by awarding themselves unreasonable salaries and fees over a decade of declining profits.[10] The respondents opposed leave, arguing both a lack of good faith and that the action was not in the interest of the company.[11]
Notably, the Court accepted many of their concerns and still ultimately granted leave. On both good faith and corporate interest, much turned on the fact that the applicant had pleaded the right type of case – a cause of action belonging to the corporation – and sought relief for the company’s benefit.
Despite indicia often used to infer a lack of good faith (e.g. a pre-existing dispute,[12] delay in seeking leave,[13] the fact that the applicant himself had continued to take a salary from the struggling companies long after he ceased providing services[14]) the Court could conclude that the case would only benefit the complainant.[15] Any damages would flow to the companies (and their potential creditors), potentially conferring no personal benefit on the applicant.[16] The same is true of most proper derivative actions, where any damages awarded would be payable to the company.
On the corporate interest requirement, the Court similarly dismissed arguments that the existing oppression claim provided adequate redress because the breach of fiduciary duty claim properly belonged to the corporation.[17] The Court found that lingering concerns about duplicative proceedings and the cost litigation could be addressed through procedural orders, including consolidation and a cost-sharing order.[18]
The Court did not set a high bar for showing that the benefits outweighed the costs. For example, although the Court found that the amount of compensation to be clawed back from the directors was “speculative” in the absence of an expert report,[19] and questioned the Court’s ability to grant the requested order capping salaries going forward,[20] the evidence of falling revenues was sufficient for the Court to find an arguable case that remuneration had not been adjusted sufficiently.[21]
Where Leave is Denied
Contrasting Clark with cases denying leave underscores both the centrality of the pleaded cause of action and that leave remains an effective screen when necessary.
In Eastern Platinum, the British Columbia Court of Appeal reaffirmed the importance of pleading a proper corporate claim.[22] However, not all corporate claims are equal. Allegations of director dishonesty or self-dealing, including misappropriation, are more likely to succeed.[23] By contrast, negligence-only derivative actions are “exceptionally rare” given the business judgment rule.[24] In Eastern Platinum, the Court found there were simply too many gaps in the evidence to determine whether the negligence claim justified its costs.[25]
Even proper corporate claims for director misconduct can fail where abuse is evidence. Hevey v. Wonderland Commercial Centre Inc.[26] involved alleged misappropriation of funds by the directors of a company, a claim which the Court acknowledged was “obviously” in the best interests of the corporation to pursue.[27] Unlike Clark, however, there was evidence that the applicant knew of and may have participated in the alleged misappropriation, leading the Court to find that the allegation had no merit.[28]
As in Clark, the parties in Hevey were already involved in other litigation. However, unlike in Clark, there was evidence in Hevey that the true purpose of the derivative action was to oust a director for tactical reasons.[29] This mirrors a similar finding in Eastern Platinum that the proposed action was retributive and an attempt to continue an unsuccessful takeover bid by other means.[30]
Conclusion
The test for leave to commence a derivative action is being applied with the liberal and flexible approach intended. A properly pleaded claim that belongs to the corporation and seeks a remedy that will benefit the body corporate is a significant factor and may overcome minor concerns. The arguable case requirement is not onerous, particularly for claims of director misconduct or self-interest. Negligence claims are the notable exception, where Courts apply more robust scrutiny and require stronger evidence to surmount the business judgment rule. The gatekeeping function is not illusory: courts effectively police claims with clear ulterior purposes, such as attempts to effect a change in corporate governance or control for personal gain.
Clark also illustrates that claimants need not elect between oppression and derivative relief. Derivative actions can proceed in parallel with oppression claims for shareholder-specific damages, with cost and duplication issues managed procedurally. This approach broadens suite of available remedies and reduces the risk that misconduct escapes redress where individualized shareholder harm cannot be shown apart from harm to the corporation.
Taken together, recent jurisprudence reaffirms that the leave requirement should be viewed as a gateway, not a roadblock, and should not deter genuine corporate claims.
[1] 2015 ONCA 373.
[2] Business Corporations Act, R.S.O. 1990, c B.16, s. 246(2). The statute also requires that the applicant be a “complainant” within the broad meaning of the OBCA, and that the directors of the company (if they are not proposed defendants) be provided with notice.
[3] 2538520 Ontario Ltd. v. Easter Platinum Limited, 2020 BCCA 313 (“Eastern Platinum”), at para. 29.
[4] Ibid., at para. 31.
[5] Hevey v. Wonderland Commercial, et al., 2021 ONSC 540 (“Hevey”), at para. 59. See also Eastern Platinum, supra note 3 at para. 37.
[6] Clark v. Cen-Ta Real Estate Ltd. et al, 2025 ONSC 5759 (“Clark”), at para. 105; Eastern Platinum, at para. 111
[7] Clark, at para. 60.
[8] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para. 43.
[9] 2025 ONSC 5759.
[10] Ibid., at paras. 1, 33-34.
[11] Ibid., at para. 2.
[12] Ibid., at para. 32.
[13] Ibid., at paras. 50, 89.
[14] Ibid., at para. 90.
[15] Ibid., at para. 91
[16] Ibid., at para. 81.
[17] Ibid., at paras. 127-128.
[18] Ibid., at paras. 95-97, 130, 142.
[19] Ibid., at para. 113.
[20] Ibid., at para. 99.
[21] Ibid., at para. 75.
[22] Eastern Platinum, supra note 3 at paras. 30, 111.
[23] Ibid., at para. 128.
[24] Ibid., at paras. 130-131.
[25] Ibid., at para. 124.
[26] 2021 ONSC 540.
[27] Ibid., at para. 69.
[28] Ibid., at paras. 55, 70, 74.
[29] Ibid., at paras. 51, 58.
[30] Eastern Platinum, supra note 3 at para. 82.
