In Alberta, a shareholder cannot sue on a corporation's behalf without first obtaining the court's permission. A derivative action is a claim brought in the name of a corporation, usually by a shareholder, to remedy a wrong done to the corporation itself, and section 240 of the Business Corporations Act, RSA 2000, c B-9 (the "BCA") makes leave of the court a precondition. The applicant must qualify as a complainant, must have given reasonable notice to the directors, must be acting in good faith, and must show that the proposed action appears to be in the best interests of the corporation. An application that fails any one of those requirements cannot succeed.
The Court of King's Bench of Alberta applied that test in Young v Scheuerman, 2026 ABKB 543 ("Young"), released July 29, 2026, denying two family members leave to bring a derivative action on behalf of a family holding company. The reasons work through each element of the test and explain why the application failed on good faith and on the best interests of the corporation. Roger Baker of Baker Law Firm acts for Reta Scheuerman and 1211943 Alberta Ltd., the successful respondents to the leave application.
A Derivative Action Belongs to the Corporation
A derivative action asserts the corporation's claim, not the shareholder's. The wrong at issue is a wrong done to the company, most often by its own directors or officers, and any recovery belongs to the company rather than to the person who brought the application. The shareholder is a stand-in, suing on behalf of an entity that will not sue for itself. As the Court put it in Young, "a derivative action is ostensibly brought for the benefit of the Corporation, not a particular complainant, notwithstanding there may be a personal benefit to them as well" (Young at para 25).
The leave requirement exists because a corporation is a separate legal person whose decision to sue ordinarily rests with its directors. Section 240(2)(a) reflects that order. Notice gives the directors the opportunity to bring, prosecute, defend, or discontinue the action themselves, and the screening that follows protects corporations from litigation brought to serve a shareholder's private interests, or from litigation that would cost the company more than it could recover. Both concerns decided Young.
The Four-Part Test for Leave Under Section 240
The Court identified four statutory tests that must all be met before leave is granted (Young at para 14, citing Black Fluid Inc v Opulence Clothing Inc). The applicant must qualify as a "complainant" under the BCA, adequate notice must have been given to the directors of the corporation, the applicant must be acting in good faith, and the court must be satisfied that the action would be in the best interests of the corporation (Young at para 14). The heart of the provision, section 240(2) of the BCA, as reproduced in Young at para 13, reads:
No permission may be granted under subsection (1) unless the Court is satisfied that
(a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant's intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action,
(b) the complainant is acting in good faith, and
(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.
Meeting all four requirements still does not compel the court to grant leave. Leave is an equitable remedy, and the court retains a residual right to refuse it even where the statutory criteria are satisfied (Young at para 40, citing Meyer v Altex Energy Ltd). In Young itself, two of the four requirements were never in play, since the Respondents conceded that proper notice had been given and did not dispute Norman Young's standing as a shareholder (Young at para 15). The contest was over Scott Young's status as a complainant, good faith, and the best interests of the corporation (Young at para 15).
How the Test Was Applied in Young v Scheuerman
The dispute was a family one. In 2005, Irene Armstrong incorporated 1211943 Alberta Ltd. as a holding company for tax planning purposes, farmland was transferred to it, and her four children, including Reta Scheuerman and Norman Young, received common shares (Young at para 3). Reta generally oversaw the company's management and bookkeeping, while Norman was not involved in its operation (Young at para 3). In 2016, Irene agreed that the corporation would sell a parcel of its farmland to Reta's son for $632,640 without obtaining an appraisal, and to complete the sale the corporation paid out a bank loan owed by a company belonging to Reta and her husband, forgiving a balance of $152,090.13 (Young at paras 5–6). The corporation also began operating a jewellery store in Brooks in 2019, which employed Reta and members of her family (Young at para 8).
Norman and his nephew Scott commenced an action in August 2021 and applied for leave to sue Reta on the corporation's behalf, alleging among other things that the farmland was transferred at less than fair market value, that corporate funds were used to pay obligations of the related company, and that corporate assets were used to subsidize the jewellery store (Young at paras 10–11). The application originally extended to Irene's estate. Irene died in 2024, and at the outset of the hearing the Applicants advised they were no longer pursuing the application against her estate (Young at para 1).
Standing and the "Proper Person" Discretion
The definition of "complainant" is not a closed list. Section 239(b) names registered and beneficial security holders, former holders, directors, officers, and certain creditors, and section 239(b)(iv) gives the court a residual discretion to include other persons, a discretion that has been applied broadly (Young at paras 13, 18). Scott claimed standing through the shares of his late father, and the Respondents answered that the true beneficial owner of those shares was the personal representative of the father's estate (Young at paras 16–17).
The Court found that Scott is not currently the beneficial owner of the shares, but held that his interest as his father's heir and potential eventual owner of them made him a "proper person" under the BCA (Young at para 19). Standing was the one contested element the Applicants cleared. It did not carry them far, because the Court went on to treat the good faith of the application as resting entirely on Norman, with whom Scott had aligned himself (Young at para 22).
Good Faith Requires Putting the Corporation First
An applicant must establish on a balance of probabilities that they are acting in good faith and that "the primary goal of the proposed litigation is to benefit the corporation" (Young at para 20). Good faith has a subjective component and an objective one. The applicant must subjectively believe the proposed action has merit, and the action must not objectively be frivolous and vexatious (Young at para 20).
Animosity alone does not defeat good faith. Some self-interest is acceptable so long as it is consistent with the corporation's best interests, and hostility between litigating parties is common (Young at para 20). The Court did not find that the friction between Norman and Reta rose to the level of a vendetta, quoting counsel for Norman's observation in oral argument that "Lawsuits aren't usually brought between parties who are getting along" (Young at para 23).
The discontinuance against Irene's estate was a different matter. A derivative action is brought for the corporation's benefit, and the Court found it hard to see how abandoning the proposed claims against the estate, thereby limiting the scope of recovery for wrongs to the corporation, served the company's interest (Young at para 25). Norman had a personal stake in that choice. He is one of the residual beneficiaries of the estate, and any recovery against it would decrease the residue he stands to inherit (Young at para 26). The Court drew the inference that Norman was "putting his interests ahead of the Corporation's," which demonstrated, on balance, "a lack of good faith on his part" (Young at para 26).
The Applicants' own submissions reinforced the inference. They told the Court that the corporate financial records available to them were unclear or insufficient to articulate the full extent of their claim (Young at para 27). The Court reasoned that a shareholder who lacks that information cannot firmly conclude there is no action against the estate, leaving Norman's personal interest as the only explanation for the discontinuance (Young at para 27).
Litigation Must Serve the Corporation's Best Interests
Even if the application had been brought in good faith, the Court would still have found that the proposed action was not in the best interests of the corporation (Young at para 28). The best-interests assessment is not a trial on the merits, but the court must do more than "skim the surface" and must provide "some judicial scrutiny" of the relative merits of the parties' positions (Young at para 33). Three features of the proposed action failed that scrutiny.
The most serious hurdle was a limitation defence the Court described as clear (Young at para 29). The action was commenced in August 2021, and much of the conduct complained of occurred well before August 2019 (Young at para 29). The Applicants argued the limitation period did not begin until they discovered the conduct, but the Court noted that the farmland sale was clearly known to them and that they were aware, or should have been aware, of the jewellery store when it opened (Young at paras 30–31).
The economics of the litigation counted against leave as well. The corporation generates about $40,000 in revenues, the amount recoverable from the challenged dealings was unspecified, and any recovery might itself be taxable (Young at para 35). Using that income to fund the proposed claim was not in the company's interest because "the litigation may well be protracted and costly, diminishing the value and viability of the Corporation" (Young at para 35). The lawsuit had already forced the corporation to refinance a loan at a much higher interest rate than would otherwise have been available (Young at para 36).
Many of the impugned decisions also likely fell within the business judgment rule (Young at para 37). That rule accords deference to business decisions so long as they are within a range of reasonable alternatives (Young at para 37). As the Court explained, "the courts should not second-guess the business judgment of directors of corporations; rather, the court must decide whether the directors made decisions which were reasonable in the circumstances and not whether, with the benefit of hindsight, the directors made perfect decisions" (Young at para 37, citing Shefsky v California Gold Mining Inc). Opening a jewellery store when income from the land had been declining was likely a reasonable business decision, and there was no evidence before the Court that the store was not a viable enterprise (Young at para 38). The Court concluded:
"Pursuing a lawsuit at corporate expense to recover an unspecified loss to the company for which there are live limitations and business judgement rule defences is not in the best interests of the Corporation." (Young at para 39)
Leave was denied (Young at para 41). The ruling did not decide the truth of the allegations, since a leave application is not a trial on the merits (Young at para 33). Having found a lack of good faith and that the action was not in the corporation's best interests, the Court did not need to address the residual discretion (Young at para 40). If the parties cannot agree on costs, they may arrange a costs hearing within 30 days of the decision (Young at para 42).
What Does This Mean for Alberta Shareholders and Corporations?
For a shareholder considering a derivative action, the leave application is a genuine screen. An applicant must be able to explain how the proposed action serves the corporation rather than the applicant personally, and litigation choices that prefer a private interest over the corporation's potential recovery can defeat good faith (Young at paras 25–26). Delay carries risk too, since claims based on conduct the shareholder knew about, or was in a position to ask about, years earlier may face a limitation defence that undermines the case for leave (Young at paras 29–31).
A shareholder's own history with the company is part of the picture. Norman had never participated in the corporation's operation, had never sought financial information about it, and expressed concerns about its management only after an anticipated, though discretionary, dividend did not arrive (Young at para 34). The Court held that his assertion that he could not have known of the challenged transactions would have to be evaluated in light of that passivity (Young at para 34).
For corporations and directors responding to a leave application, the business judgment rule matters even at this early stage. The question is whether the directors made decisions that were reasonable in the circumstances, not whether hindsight could produce better ones (Young at para 37). The cost of the proposed litigation is also a legitimate consideration, particularly for a small company whose income could be consumed by protracted proceedings over an unspecified recovery (Young at paras 35, 39).
Baker Law Firm acts for the successful respondents in Young. Our commercial litigation practice regularly handles shareholder disputes and claims under the Business Corporations Act, including applications for leave to commence derivative actions and oppression remedy proceedings. We appear before both the Alberta Court of King's Bench and the Alberta Court of Appeal.
If you are dealing with a shareholder dispute or a claim under the Business Corporations Act, contact Baker Law Firm's commercial litigation group.
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