Closely held companies often depend on relationships of significant trust. The same individuals may be shareholders, directors, officers, family members, business partners, and employees. Unlike a widely held public corporation, ownership and day-to-day management may be concentrated among only a few people.
When those relationships deteriorate, disputes can extend beyond disagreements about business strategy. Allegations may arise that someone entrusted with corporate authority used that position for personal gain, diverted opportunities, concealed information, or put another interest ahead of the company. In some circumstances, this conduct may lead to allegations of breach of fiduciary duty.
What Is a Fiduciary Duty?
Under section 134 of Ontario’s Business Corporations Act (OBCA), directors and officers must act honestly and in good faith with a view to the best interests of the corporation. They must also exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.
Although these obligations are related, the fiduciary duty is distinct from the duty of care. The Supreme Court of Canada has described the statutory fiduciary obligation as requiring directors and officers to act honestly and in good faith toward the corporation. Among other things, this includes avoiding conflicts of interest, refraining from abusing a corporate position for personal benefit, and maintaining the confidentiality of information obtained through that position.
Importantly, the fiduciary duty of directors and officers is owed to the corporation itself. It is not automatically owed individually to shareholders, creditors, employees, or other stakeholders. That distinction can significantly affect how a closely held company dispute is characterized and what remedies may be available.
Why Fiduciary Disputes Are Common in Closely Held Companies
In a small private company, corporate relationships frequently overlap. Two shareholders may each own 50 percent of the business while also serving as its only directors. A founder may hold a controlling interest while other family members hold minority shares. Business partners may divide responsibility for sales, finances, operations, and customer relationships without much formal oversight.
These arrangements can operate effectively while trust remains intact. If the relationship breaks down, however, the concentration of power may provide opportunities for one participant to take actions that another believes are contrary to the corporation’s interests.
A fiduciary dispute can therefore arise alongside broader disagreements about corporate control, compensation, access to records, dividends, business valuation, management decisions, or the future of the enterprise.
Common Allegations of Breach of Fiduciary Duty
The circumstances surrounding each company are different, but certain allegations occur repeatedly in private-company litigation. One example is self-dealing, such as a director causing the corporation to enter a transaction that disproportionately benefits that director or a related business. Questions may also arise where corporate money or property is allegedly used for personal purposes.
Another common issue is the alleged diversion of corporate opportunities. For example, a director or officer may become aware of a potential customer, acquisition, contract, property, or other opportunity through the corporation and then pursue it personally or through another company.
Disputes can also concern allegedly excessive compensation, payments to related parties, undisclosed conflicts of interest, misuse of confidential corporate information, diversion of customers, or transactions designed primarily to benefit one participant at the corporation’s expense.
The Corporation’s Interests Come First
The fact that a director is also a shareholder does not change the fundamental nature of the director’s fiduciary obligation. In Peoples Department Stores Inc. (Trustee of) v. Wise, the Supreme Court of Canada confirmed that directors and officers owe their statutory fiduciary obligation to the corporation. The Court explained that the corporation’s interests should not simply be equated with the interests of one particular stakeholder group.
The Supreme Court reaffirmed this approach in BCE Inc. v. 1976 Debentureholders. It described directors’ fiduciary duty as a broad and contextual obligation requiring directors to act in the best interests of the corporation. Depending on the circumstances, directors may consider the interests of shareholders, employees, creditors, suppliers, consumers, governments, and other stakeholders while determining what is best for the corporation.
This distinction can become particularly significant when directors themselves are divided into competing shareholder groups. A director’s desire to protect their investment does not displace their responsibilities when exercising powers as a director.
Is Every Unfair Shareholder Dispute a Fiduciary Breach?
No. A shareholder may believe they have been treated unfairly without necessarily establishing that a fiduciary duty owed to the corporation has been breached.
For example, a minority shareholder may complain that they have been excluded from management, denied anticipated participation in the business, or disadvantaged by decisions made by controlling shareholders. Depending on the circumstances, these allegations may be more closely connected to Ontario’s oppression remedy than to a claim belonging to the corporation for breach of fiduciary duty.
Section 248 of the OBCA permits a complainant to seek relief where corporate conduct is oppressive, unfairly prejudicial to, or unfairly disregards the interests of certain stakeholders, including security holders, creditors, directors, and officers.
Fiduciary Duty and the Oppression Remedy Can Overlap
Closely held company litigation often involves more than one legal theory. In BCE, the Supreme Court explained that oppression cases involve examining the claimant’s reasonable expectations and determining whether those expectations were violated by conduct amounting to oppression, unfair prejudice, or unfair disregard. Relevant considerations can include the parties’ relationships, their agreements, past practices, representations, the nature of the corporation, and general commercial practice.
The same underlying conduct could therefore generate different allegations. For example, a director accused of transferring valuable corporate assets to another company they control could face allegations concerning their fiduciary obligations to the corporation. If the transaction also unfairly harms a minority shareholder’s interests, an oppression claim might arise from related facts.
Whether a claim properly belongs to an individual shareholder or to the corporation can become an important procedural issue.
When a Derivative Action May Be Relevant
Because directors’ fiduciary duties are generally owed to the corporation, the corporation would ordinarily be the party entitled to pursue a claim for a breach of those duties. That can create a practical difficulty when the individuals accused of wrongdoing also control the corporation and therefore have little incentive to cause it to commence litigation against themselves.
The OBCA addresses this situation through the derivative action. Under section 246, a qualifying complainant may apply for permission from the court to bring or intervene in litigation in the name of and on behalf of the corporation or one of its subsidiaries, subject to statutory requirements.
This mechanism can allow alleged harm done to the corporation to be pursued even where those controlling the company decline to act. The procedural and substantive differences between derivative proceedings and personal shareholder claims can therefore play a substantial role in corporate litigation strategy.
Evidence in a Fiduciary Duty Dispute
Fiduciary disputes are often document-intensive. The parties’ competing accounts of why a transaction occurred may need to be considered against the company’s records and the circumstances existing when the decision was made.
Relevant evidence may include shareholder agreements, board minutes, corporate resolutions, financial statements, banking records, accounting records, contracts, emails, text messages, compensation records, related-party agreements, and evidence concerning competing businesses or corporate opportunities.
The chronology can also matter. Records showing when a director learned about an opportunity, when another company was incorporated, how corporate funds moved, or how a disputed transaction was approved may assist in determining what occurred and whose interests were being pursued.
Potential Remedies for Corporate Fiduciary Disputes
The remedies available depend on the legal claims established and the circumstances of the particular dispute. A claim involving breach of fiduciary duty may seek monetary compensation for losses allegedly suffered by the corporation or the restoration of benefits allegedly obtained through the breach. Other relief may become relevant depending on the nature of the conduct and the proceedings commenced.
The oppression remedy provides courts with broad authority to make orders designed to rectify oppressive or unfairly prejudicial conduct. Derivative proceedings likewise give courts powers concerning the conduct of litigation brought on the corporation’s behalf, including directing how the action will proceed and, in appropriate circumstances, addressing where amounts recovered are to be paid.
Fiduciary Claims Can Reshape a Business Dispute
In closely held companies, the line between a business disagreement and corporate litigation can become thin. A dispute that begins over compensation, management authority, a customer relationship, or a proposed transaction can develop into allegations involving fiduciary obligations, oppression, corporate control, or misuse of company assets.
Understanding whose legal interests were allegedly harmed is often central to identifying the nature of the dispute. An alleged wrong against the corporation may raise different issues from unfair treatment alleged by an individual shareholder, even where both claims originate from the same series of events.
Contact Campbell Litigation for Top-Tier Advice in Kitchener-Waterloo Business Litigation and Fiduciary Duty Disputes
If you are involved in a breach of fiduciary duty dispute in Ontario, Richard Campbell of Campbell Litigation provides experienced representation in disputes involving closely held companies, shareholder conflicts, director and officer duties, oppression claims, derivative actions, corporate asset disputes, self-dealing, conflicts of interest, and corporate opportunity claims. Contact us online or call 519-886-1204 to discuss your options.
