Societies incorporated in British Columbia should take caution: since November 28, 2016, there has been a new and potentially powerful remedy that may be used in the context of British Columbian Societies.
This remedy, known as the derivative action, has long been a part of the for-profit sector. It is not until recently, however, that derivative actions began making their way into the non-profit realm. In 2009, the Canada Not-for-profit Corporations Act, S.C. 2009, c. 23 received royal assent. While its provisions did not come into force until 2011, this was the first law in Canada to specifically provide for derivative actions in the context of non-profit organizations. In 2010, Ontario followed suit with the Not-for-Profit Corporations Act, 2010, S.O. 2010, c. 15, although it has not been brought into force. While it took a few years, British Columbia’s new Societies Act, S.B.C. 2015, c. 18, has gotten onboard the trend.
What is a derivative action and what makes it special? Who can launch these actions? In what types of situations do derivative actions arise in the non-profit sector?
What is a derivative action and what makes them special?
Derivative actions essentially allow a “complainant” to “step into the shoes” of a society and either bring or defend an action on the society’s behalf. For example, a complainant could force a society to pursue a civil action against a 3rd party who had wronged the society. In contrast, a complainant could force a society to defend itself from an action launched against it.
A number of factors make derivative actions quite special. First, a complainant needs court approval to begin, whether it is beginning an action or defending an action. Second, a court can order that costs be reimbursed to the person controlling the proceeding on behalf of the complainant. Essentially, a court can order the society to reimburse the lawyer retained to defend or start the legal action. Lastly, once a derivative action has begun, further court approval is required to discontinue, settle, or dismiss the action.
Who can launch these actions?
So, who exactly are these “complainants?” Section 103 of the Societies Act allows for a “complainant” to commence a derivative action on behalf of a society. A complainant is defined as, in relation to the society, a member, director, or other person “whom the court considers to be an appropriate person” to begin the action.
It remains to be seen who is an “appropriate person” in the court’s eyes. No jurisprudence under the BC, Ontario, or Federal legislation has been tasked with exploring and defining who appropriate people are.
In what types of situations do derivative actions arise?
At the time of publication, only one (unsuccessful) derivative action has been launched in the Canadian non-profit context. Bhadra v. Chatterjee, 2016 ONSC 4845, was an attempt by one trustee to restrain the other trustees from calling a meeting to vote on proposed new bylaws.
In essence, the dispute arose out of a dispute between rival factions. The society in question was told that it had to transition itself out of the previous legislation (Canada Corporations Act) into the replacement act (Canada Not-for-profit Corporations Act). In order to transition, a constitutional amendment subcommittee was created for this purpose. The applicant (a member of the minority faction) was excluded from being membership on the subcommittee.
Ultimately, the derivative action was denied on a number of different procedural and substantive factors. It remains to be seen in what further contexts a derivative action may be launched in the non-profit sector.
If you have any questions about this article or require further assistance, please contact Karen Zimmer.