Court File and Parties

CITATION: Melnyk v. Acerus Pharmaceuticals Corporation, 2018 ONSC 1353

DIVISIONAL COURT FILE NO.: 185/17

DATE: 20180301

SUPERIOR COURT OF JUSTICE – ONTARIO

DIVISIONAL COURT

RE: eugene melnyk, Plaintiff/Appellant

AND

acerus pharmaceuticals corporation, tom rossi, ihor (aka ian) ihnatowycz and jOHN DOES 1-6, Defendants/Respondents

BEFORE: Swinton, Linhares de Sousa and Kurke JJ.

COUNSEL: Todd J. Burke and Sarah Willis, for the Plaintiff/Appellant

David R. Byers, Daniel S. Murdoch and Aaron L. Kreaden, for the Defendants/Respondents

HEARD at Toronto: February 26, 2018

ENDORSEMENT

[1] Eugene Melnyk (“the appellant”) appeals the order of Wilton-Siegel J. dated February 22, 2017 dismissing his motion seeking leave to bring a derivative action in the name of the respondent Acerus Pharmaceuticals Corporation pursuant to s. 246 of the Business Corporations Act, R.S.O. 1990, c. B.16. At the time of the motion, the appellant owned less than .015 per cent of the shares of this publicly traded corporation.

[2] Section 246 confers a discretion on a judge to grant leave to a party to bring a derivative action if the party is a complainant within the meaning of s. 245, the complainant is acting in good faith and “it appears to be in the interests of the corporation” that the proceeding be brought. Only the determination by the motion judge on this last criterion is in issue in this appeal.

[3] The appellant argues that the motion judge applied the wrong legal test in assessing whether pursuit of the proposed action “appears to be in the interests” of the corporation, and he erred in law by considering irrelevant factors in determining whether leave should be granted.

[4] With respect to the first issue, the appellant argues that the motion judge erred by relying exclusively on an inappropriate “share value maximization” approach to assessing the “interests” of the corporation – that is, whether the market value of the corporation would be more likely to increase if leave to proceed was granted or refused. The appellant argues that the proper legal test is set out in Richardson Greenshields of Canada Ltd. v. Kalmacoff (1995), 1995 1739 (ON CA), 22 O.R. (3d) 577 (C.A.). In the appellant’s submission, the focus should be on whether there is a legitimate or arguable case. If so, and the proceeding is brought in good faith, then leave should be granted.

[5] In our view, Richardson does not stand for the proposition put forth by the appellant. The Court of Appeal in that case considered whether there was an arguable case, but then went on to consider what it described as two conditions precedent: the good faith requirement and the requirement that the proceeding appears to be in the interests of the corporation.

[6] The motion judge correctly identified and applied the legal test for leave. To the benefit of the appellant, he focused only on “the interests of the corporation”. Thus, for the purposes of the motion, he assumed there was an arguable case without entering into any discussion of the merits, and he did not address good faith. However, he found that a derivative action did not appear to be in the interests of the corporation. In reaching his conclusion on this issue, he properly looked at the proposed claim in the context of the particular corporation and considered multiple factors. We see no error in his overall focus on the maximization of the value of the corporation.

[7] The appellant argues that the motion judge improperly focused on whether the proceeding appeared be in the “best interests” of the corporation rather than in the “interests” of the corporation, and thus he applied too stringent a test.

[8] We disagree. The motion judge used the language of s. 246, referring to the “interests of the corporation” in several places. He did express the opinion there was no significant difference in the language of s. 246 and the language of “best interests” in federal legislation (at para. 39), and we see no error in that statement. Nor do we find any error in his statement that the important question was whether the proceeding would maximize the value of the corporation, as opposed to the interests of any particular stakeholders.

[9] In our view, the motion judge appropriately stated the issue before him as a question in the following words (at para. 61):

… is the benefit of shareholder oversight, in circumstances in which allegations constituting no more than an arguable case are raised by a shareholder having no financial interest of any significance in the outcome of the action, sufficient to establish that it appears to be in the interests of the Corporation that the action proceed?

[10] In answering that question, the motion judge considered the benefit of shareholder oversight, but he also considered and weighed appropriate and relevant factors that include the following:

• The corporation is in a development stage with limited financial resources.
• The proposed litigation creates an overhang on the corporation’s share price.
• The appellant’s allegations are not supported by any specific documentary or factual evidence, and an investigation of his allegations would be time consuming and expensive for the corporation.
• The appellant’s negligible interest in the corporation means that he has no countervailing incentive to minimize litigation costs.
• The litigation would divert considerable time of management and considerable resources away from their appropriate focus.
• There was no indication of support from any other shareholders of this publicly traded corporation, a factor that the motion judge found to be highly significant.
• The appellant would be in a conflict of interest position if he had carriage of the derivative action because of the personal action he had commenced against the corporation and the two named defendants in the derivative action - in particular, because of the ready access he would have to privileged documents of the corporation in the derivative action.
• The appellant has an alternative remedy.

[11] We reject the submission of the appellant that the motion judge improperly considered the size of the appellant’s shareholdings, the absence of participation by other shareholders and the existence of the alternative personal action. These were all relevant factors to be considered in the particular circumstances of this case.

[12] The decision whether to grant leave to bring a derivative action is discretionary. As the appellant has not identified any error of law or principle, nor any palpable and overriding error of fact, deference is owed to the motion judge’s decision.

[13] Accordingly, the appeal is dismissed. Costs to the respondents are fixed at $65,000.00, all inclusive, an amount agreed upon by the parties.

Swinton J.

I agree _______________________________

Linhares de Sousa J.

I agree _______________________________

Kurke J.

Date: March 1, 2018