What happens when a key asset of a target corporation is a cause of action? Can it be assigned to the purchaser in an asset purchase or to a “Newco” in a corporate restructuring?

It is a longstanding common law principle that a bare right of action in tort is not assignable. This is because it is considered to be tainted by “maintenance” or “champerty”. “Maintenance” occurs when a third party who does not otherwise have an interest in the litigation provides financial or other assistance to one of the parties to the litigation. “Champerty” involves a third party engaging in maintenance for a share in the proceeds of the litigation. Such “officious intermeddling”, “stirring up of strife” and “trafficking in litigation” is considered to be an abuse of the court’s process. Therefore, where a bare right of action has been assigned, a defendant can seek to have the claim struck as an abuse of process or may defend the claim on the basis that such an assignment is void.

However, as confirmed in two recent cases, there are exceptions to this general rule including: (a) where the assignee has a pre-existing property interest and the litigation is ancillary to that interest; and (b) where the assignee has a legitimate commercial interest in the litigation.

Both of these exceptions were considered and applied in Silverado Oilfield Ventures Ltd v Davidson. In that case, Silverado commenced an action against a former employee and her husband for defrauding the company of $1.5 million. Silverado went into receivership and its assets, including the action, were sold. The purchaser continued the action. The defendants applied for an order striking the claim as an abuse of process on the grounds that the assignment was champertous. The chambers judge granted the application and struck the claim.

The Alberta Court of Appeal set aside the order and reinstated the claim. The Court found that Silverado’s assets had been acquired for the purpose of carrying on its business. The cause of action was for the wrongful conversion of some of Silverado’s assets. The recovery of the wrongfully converted assets of the business was clearly ancillary to the business being acquired. This interest antedated the formal assignment: it was the purchaser’s offer to buy the business which gave rise to its interest in having the cause of action assigned and the purchase of the business conceptually preceded the assignment of the cause of action.

The legitimate commercial interest exception was also applied in Fission Uranium Corp v Dahrouge. The cause of action in that case was against a former President and COO for breach of fiduciary duty for usurping a corporate opportunity in relation to certain mineral claims. After it commenced the action, Fission was involved in a reverse takeover and a corporate restructuring. The cause of action was assigned and then assigned again in a series of spin-offs. Certain of Fission’s other mineral properties were transferred or sold to the spun-off company. The Court accepted that the assignments were related to a series of bona fide business arrangements. The Court concluded that the assignments were not void and refused to summarily dismiss the claim on that ground.

Thus, despite the rule against maintenance and champerty, a right of action may be assigned in a corporate transaction so long as it is tied to the purchase of related assets or is part of a larger bona fide business arrangement.

Stay informed on M&A developments and subscribe to our blog today.