When potential litigation arises in the form of a derivative action or oppression remedy under the Canada Not-for-profit Corporations Act, an association should determine whether the allegations are sufficiently serious to warrant internal review. If a director is named as a defendant, it is prudent to review at the outset how much the association may be obliged to indemnify the director and whether such costs are covered by the association's director and officer liability insurance.
An association may wish to appoint a person to conduct an internal review. It may be preferable to have counsel perform such a review so that results are protected by solicitor-client privilege in the event of litigation.
An association may also wish to form a litigation committee, which preferably would not include any directors named in the proposed action, to decide issues related to the potential litigation. Following such review, an association should determine whether it wishes to bring its own action against the alleged wrongdoer.
Associations have fourteen days to respond to a notice given by a complainant in a derivative action, after which the complainant may apply for leave to commence the action. An association may engage external counsel to oppose the leave application. If leave is not granted, the complainant will not be able to pursue the derivative action further.
Since no leave is required to bring an oppression claim, defendant associations may wish to engage litigation counsel and strike a review committee immediately.
Of course, there are things that can be done before claims are made. For example, it is important to ensure that directors and officers meet their fiduciary duties. From the association's perspective, that could involve implementing appropriate policies, procedures, training and review processes. If there is a concern about a breach of duty, such as a breach of confidentiality, misappropriation of corporate opportunity or the like, the association should deal with the situation as quickly as possible in accordance with the relevant law and the association's own processes.
It is important to consider how you will respond if any unhappy members decide to exercise their new and enhanced rights. While it is not yet clear how a court will interpret these rights, it is best to be prepared and in the know if and when these member claims arise. This includes putting proper policies, processes and procedures in place to minimize the risk of these claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
