J. 2004 SKQB 498 Q.B.G. A.D. 2002 No. 1887 J.C.S. IN THE QUEEN’S BENCH JUDICIAL CENTRE OF SASKATOON BETWEEN: DALE HENRY, in the name and on behalf of 609897 SASKATCHEWAN LTD., and GREAT WESTERN BREWING COMPANY LIMITED, GWB HOLDINGS LTD., MAURICE DUVAL, RONALD WALDMAN and VAUGHN WYANT, DEFENDANTS Garth A. Brehon for the plaintiff Quentin D. Agnew for the Board of Directors of 609897 Saskatchewan Ltd. Michelle J. Ouellette for the defendants FIAT FOLEY J. December 8, 2004 [1] By fiat of December 5, 2002, Gerein C.J. authorized the initiation of derivative action by Dale Henry (Henry) on behalf of 609897 Saskatchewan Ltd. (609). By fiat of May 27, 2004, I ruled that the defendants in the action were entitled to examine a representative of 609 for discovery and that Henry was obliged to appoint counsel for 609 in the action. [2] In September 2004 clarification of my earlier fiat was requested and, with the consent of Mr. Brehon for the plaintiff, Ms. Ouellette for the defendants and Mr. Agnew for the board of directors of 609, the matter proceeded by conference call and written submissions. [3] The questions raised were: 1. Who is responsible for the cost of the counsel appointed by Mr. Henry 609 or Mr. Henry? 2. Is that counsel responsible in any way to Mr. Henry? 3. Can that counsel be member of the Rask Law Firm? 4. Does Mr. Henry’s counsel have any right to examine Mr. Kitz (assuming for purposes of this discussion that Mr. Kitz is the proper officer to be examined on behalf of 609)? 5. Does the right of counsel appointed to represent 609 to question Mr. Kitz at the end of examination by the Defendants mean simply the “normal right of re‑examination” on Examination for Discovery, or does it extend further? 6. Does the Defendants’ right to examine Mr. Kitz as representative of 609 include the right to request production of documents in the possession or control of 609 by way of undertakings at the Examination, and if so, who has the right to claim privilege on any such documents 609 through its appointed counsel or Mr. Henry through his counsel? 7. As corollary to the above question, whether there is any right of privilege as between 609 and Mr. Henry; if so, how is it claimed and are such documents privileged as between the Plaintiff and Defendants? Who is responsible for the cost of production of any such documents? [4] These questions, together with the disparate positions taken by the participants in their written submissions, demonstrate confusion and misunderstanding as to the nature of the action and consequently of a party’s rights and responsibilities within the action. [5] Some of the misunderstandings have their genesis in the pleadings which recite the plaintiff to be Henry, capacity which the defendants admit. As noted in my earlier fiat, the plaintiff is and was 609. Contrary to Mr. Brehon’s position the action remains derivative one in which the action by plaintiff 609 proceeds for the benefit of 609 against those it alleges to have caused it loss or damage. [6] In Phillips, Personal Remedies for Corporate Injuries (Toronto: Carswell, 1992), at page 402, the author states: If leave is granted, the applicant gains the right e.g. to “bring an action” on the company’s behalf. This is simply the right to instruct counsel in connection with such an action, it is not right to appear personally in court on behalf of the company in such an action. Note that the person instructing company’s counsel is exercising some of the authority that is normally possessed by the company’s directors. Just as that authority has caused the courts to view company’s directors as its fiduciaries, so it should cause the courts to view that person as one the company’s fiduciaries too. That is the American view, although there it is sometimes attributed to the apocryphal “fact” that the person in question represents the shareholders which flows from the incorrect view of derivative action as class action on behalf of the shareholders and not to the real fact that the person in question represents the company. [7] Phillips (supra) also observes that derivative action differs from normal corporate action on issues of privilege, cooperation, costs, settlement and personal awards. Explanations of the relationship between persons such as Henry, at whose behest derivative action is commenced, with the corporate plaintiff have been made by drawing analogies with other legal relationships such as those of litigation guardian/infant, trustee/beneficiary or agent/principal. [8] find it instructive in light of the above noted specific questions to compare this derivative action brought despite the objections to the action by 609’s board to that of subrogated action brought in the name of corporation by its insurer. The board of the insured does not control the subrogation action any more so than will the board of 609 in this case. The subrogating insurer usually sues in the name of its insured and appoints its own counsel for the action who then conducts the litigation without deferring to or necessarily adhering to the wishes of the insured’s board of directors. Such an insurer is entitled (albeit by terms of the insuring agreement) to the full cooperation of the board, its officers and corporation’s employees in furthering the subrogated action. [9] This particular analogy serves for the limited purpose of demonstrating that even though this action is brought in 609’s name and control of the action does not lie with 609’s board but rather is vested in Henry, issues of disclosure, privilege and reporting as raised by the above noted questions are capable of resolution utilizing analogous proceedings without doing violence to fundamental principles in the litigation process. [10] As a corporation may only litigate with legal representation, Henry is empowered and obliged to appoint counsel for 609. Whether that counsel is Mr. Brehon, another member of his firm or someone from outside that firm is entirely matter for Henry. Such counsel is entitled to access to the relevant documents, records and employees for the purposes of the action, including preparation of a statement as to documents and following the modified discovery process set out in my earlier fiat. [11] It follows that Henry and that counsel have professional and fiduciary obligations to 609. The nature of the action is such that Henry’s overall instructions to counsel should not be in conflict with the interests of 609 as Henry is obliged to advance the corporate interests in the derivative action. He was appointed for that purpose and is obliged to so instruct 609’s counsel. [12] Insofar as questions and raise the issue of costs in prosecuting the action Gerein C.J. in his fiat directed that “[t]he respondent corporation should not at this time be required to fund the action” [emphasis added] as, inter alia, no evidence of quantum of legal fees was provided and the merits of the action were difficult to assess at this early stage. These concerns still pertain and consequently, without prejudice to renewal of the application for cost reimbursement when the concerns expressed by the Chief Justice can be allayed, the costs in first instance remain with Henry. [13] Questions 4, and the first branch of fall to be resolved on the basis of the existing rules of court and the applicable jurisprudence, it not having been yet demonstrated that this aspect of the proceedings warrant modification of the rules. [14] The second branch of question and the first branch of question are self‑evident once one accepts the unity of interest between Henry and 609 which is necessarily reflected in the decision authorizing the derivative action. It follows that relevant documents will need to be disclosed and any issue of privilege related to those documents dealt with in accordance with accepted principles. The issue of cost of production of documents for the statement as to documents is presently to be resolved in the same manner as set out above dealing with costs generally. [15] As no formal motion was brought in this proceeding and the matter proceeded with all parties consenting, there shall be no order as to costs. I do wish to emphasize that, henceforth, it is the plaintiff and the defendants who have status in these proceedings and not Henry in his personal capacity nor the board of directors of 609.
FIAT: By fiat of December 5, 2002, Gerein C.J. authorized the initiation of a derivative action by Dale Henry (Henry) on behalf of 609897 Saskatchewan Ltd. (609). By fiat of May 27 2004, the Court ruled that the defendants in the action were entitled to examine for discovery a representative of 609 and that Henry was obliged to appoint counsel for 609 in the action. In September 2004, clarification of the May 27 2004 fiat was sought. HELD: The questions raised by the parties together with the disparate positions taken by the participants demonstrate the confusion as to the nature of the action and of a party's rights and responsibilities within the action. The action is a derivative one in which the action by plaintiff, 609, proceeds for the benefit of 609 against those it alleges to have caused it loss or damage. Henry is empowered and obliged to appoint counsel for 609. Such counsel is entitled to have access to the relevant documents, records and employees for the purposes of the action. It follows that Henry and that counsel have professional and fiduciary obligations to 609. Henry's overall instructions to counsel should not be in conflict with the interests of 609 as Henry is obliged to advance the corporate interests in the derivative action. As no formal motion was brought in this proceeding and the matter proceeded with all parties consenting, there shall be no order as to costs. Henceforth, it is the plaintiff and the defendants, who have status in these proceedings, and not Henry, in his personal capacity, or the board of directors of 609.