Canada: Derivative Actions In Private Equity? Recent Caselaw From BC And Ontario
Capital Markets and Mergers & Acquisitions Bulletin

21 March 2023

by Grant E. McGlaughlin (Toronto), Caitlin Rose (Toronto), Rahat Godil (Toronto), Kaleigh Milinazzo (Toronto), Vincent Cérat Lagana (Toronto) and Paul Blyschak (Toronto)



In our previous bulletin, “Fiduciary Duties in Private Equity: What Sponsors and LPs Should Know” we explored the question of fiduciary duties owed in the private equity (PE) context, and specifically as between general partners (GPs) and limited partners (LPs) within a PE fund.

We now move to recent caselaw addressing a related question: when might LPs be able to bring a derivative action on behalf of the limited partnership against the corporate GP and/or the GP’s directors for a breach of fiduciary duty?

The Disputes

In Extreme Venture Partners Fund I LP v Varma, the subject of our previous bulletin, a derivative action was not necessary. The two directors who had breached their fiduciary duties to the limited partnership had left the GP and the GP was able to directly claim against them on its own behalf and on behalf of the limited partnership.

In both Asher Place LP and Binscarth LP, the situation was different, as the alleged wrongdoer remained with the GP (and the GP was unlikely to bring a claim on behalf of the limited partnership against itself). The issue before the courts was therefore whether the LPs could bring a derivative action against the GP and/or the GP’s directors on behalf of the limited partnership for breach of fiduciary duty owed to the partnership.

Asher Place LP, BCCA 2021

The British Columbia Court of Appeal (BCCA) held that, where a wrong is committed against a limited partnership, the claim lies with the limited partnership itself and not with the individual LPs, as they are “only incidentally or consequentially affected by the injury to the partnership…”1 Stated differently, the LPs themselves “do not have a personal right of action.”2

However, the BCCA also held that, “where the wrong is alleged to have been committed by the [GP],” the common law “may permit a [LP] to advance the claim against the [GP] in the name of and on behalf of the limited partnership.”3 Moreover, the BCCA elaborated that this “exception permits a minority party to bring a derivative action to redress a fraud, such as a breach of fiduciary obligation…”4 Finally, the BCCA indicated that the claim need not be limited to the GP and could also be against a third party that “knowingly participated” in such breach of fiduciary duty.5

Binscarth LP, ONSC 2022

Similar to Asher Place LP, the question before the Ontario Superior Court of Justice (ONSC) in Binscarth LP was whether certain LPs of the limited partnership could bring a breach of fiduciary duty claim against the GP and the GP’s sole director. The ONSC held that they could, and in doing so referred favourably to the BCCA’s decision in Asher Place LP.6

The ONSC explained that in “appropriate circumstances” LPs may “sue the [GP] on behalf of the limited partnership”, although the court also cautioned that “there are very limited circumstances where this is appropriate.”7 However, quoting Asher Place LP and citing the Ontario Court of Appearl (ONCA) in Varma, the ONSC held that a legitimate exception is “a derivative action to redress a fraud, such as a breach of fiduciary obligation…”8 That said, the ONSC also stressed that any such derivative action may only be against alleged wrongdoers who have “legal or de facto… control” over the limited partnership.9

Practical Takeaways

The key takeaway from the ONCA’s decision in Varma (discussed in our previous bulletin) was that both the corporate GP and the GP’s directors should be considered fiduciaries of the limited partnership, and that any third party knowingly assisting with a breach of such fiduciary duty may also be held liable.

The related takeaway from Asher Place LP and Binscarth LP is that, in the event of an alleged breach of such fiduciary duty owed to the limited partnership, the LPs may be able to bring a common law derivative action on behalf of the limited partnership against the corporate GP and/or GP directors, as well as any third party alleged to have knowingly assisted in the breach. Moreover, it appears that a single LP may be sufficient to bring such a derivative action, and that not all LPs need act collectively.10

These are fairly significant rulings. Perhaps most importantly for GPs and LPs, the result is that, in addition to any contractual claim available to the LPs under the applicable limited partnership agreement (LPA), the LPs may also enjoy a common law right of derivative action based on an alleged breach of fiduciary duty.

As for limited partnerships governed by Quebec law, despite the direct obligations owed by the GP to the LPs (see article 2238 of the Civil Code of Quebec), the distinct patrimony of limited partnerships may similarly render a form of derivative action necessary, depending on the nature of the claim and the terms of the LPA. Subject to the specific context, limited partners may then turn to the oblique action (1526 CCQ) or possibly to the general powers of the Superior Court over partnerships (art. 34 of the Code of civil procedure).

A critical question for GPs and LPs is therefore whether and to what extent the terms of the LPA can impact either (1) the right of the LPs to bring such a derivative action, or (2) the scope of the fiduciary duty owed by the GP to the limited partnership. We dive into the often nuanced answers given by Canadian courts in our third instalment, coming soon.


1. Asher Place Senior Residency Limited Partnership v. Balcom, 2021 BCCA 162 (CanLII) [Asher Place] at para. 32.

2. Asher Place at para. 32. See also para. 40.

3. Asher Place at para. 32. See also paras. 39, 41, 43 and 44.

4. Asher Place at para. 38.

5. Asher Place at para. 39.

6. Binscarth Holdings LP v. Grant Anthony, 2022 ONSC 3426 (CanLII) [Binscarth LP] at para. 45.

7. Binscarth LP at para. 46. See also para. 32.

8. Binscarth LP at para. 49 (emphasis in original), quoting Asher Place at para. 38. See also Binscarth LP at paras. 50- 52.

9. Binscarth LP at para. 51 (emphasis in original).

10. See Asher Place at paras. 32, 38, 41, 43 and 44.

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.

Source: Mondaq