When One Co-Founder Signs a Deal the Board Never Approved

The situation

Dov and Ari had built their Hamilton-based diagnostics equipment manufacturer over eight years, growing it from a two-person workshop to a company doing roughly $9 million a year in revenue. Dov, a pharmacist by training, had led the company's product and regulatory side, making sure the diagnostic devices they built met the standards clinical labs required. Ari, a professional engineer, ran manufacturing and technical operations. A third founder, Ji-ho, held a smaller ownership stake and the title of Vice President, Business Development. All three were directors of the corporation, but only Dov and Ari were registered as officers with authority to sign contracts on the company's behalf above a set dollar threshold.

That threshold existed for a reason. Three years earlier, when the founders brought in an outside investor, they had all signed a unanimous shareholders' agreement — a contract that lets a corporation's owners agree among themselves how the company will be run, sometimes overriding the default rules that would otherwise apply. It required board approval for any single commitment over $500,000, precisely so that no one founder could unilaterally expose the company to major financial risk.

Dov and Ari discovered the problem almost by accident, while reviewing the company's cash flow projections ahead of a bank renewal. A recurring monthly payment appeared on the ledger that neither of them recognized — a lease-financing charge tied to an equipment supply agreement neither had signed off on.

What we found

The company brought the agreement to our team, and the picture that emerged was serious. Roughly four months earlier, Ji-ho had signed a five-year equipment supply and financing agreement with an equipment finance company, committing the corporation to lease payments that totalled approximately $2.1 million over the term of the deal. The equipment itself — additional production line machinery — was not without value to the business, but the company had never approved financing anywhere near that scale, and Ji-ho had no actual authority to bind it to a commitment that size.

Under Ontario corporate law, a corporation can only act through the people authorized to act for it — its directors, its officers, or others given specific authority by resolution. But that authority question has two sides. There is actual authority: what a person is genuinely permitted to do, whether by their job title, a board resolution, or a shareholders' agreement. And there is apparent authority (sometimes called ostensible authority): what a reasonable outsider, dealing with the company in good faith, would believe that person was permitted to do, based on how the company held them out.

This second concept exists to protect people who deal with corporations honestly. A company cannot let someone act as though they have authority, benefit from the deals that person signs when convenient, and then disown the same deals when inconvenient. Courts and the doctrine known as the indoor management rule generally allow a third party to assume a company's internal formalities were followed, unless that third party knew, or had reason to suspect, that something was irregular.

The company's exposure turned on exactly that question: did the equipment finance company have any reason to know Ji-ho's signature wasn't enough? If not, the company could be stuck honouring a $2.1 million commitment it never approved. If the finance company had, or should have had, notice of the restriction, the agreement was vulnerable to challenge.

What we did

1. Pulled the full corporate record. We reviewed the company's articles of incorporation, its bylaws, its director and officer registrations, and the unanimous shareholders' agreement to establish, in writing, exactly who had authority to sign contracts of this size and what limits applied to Ji-ho's role. This gave the company a clear, documented basis for its position rather than a founders' dispute resting on memory and assumption.
2. Reconstructed how the deal was struck. We requested the finance company's internal file on the transaction — correspondence, the credit application, and any corporate documentation it had collected before signing. Equipment finance companies of this kind ordinarily ask for confirmation of signing authority on deals of this size, particularly for a private company without a public trading history. Ji-ho's application materials had listed himself as authorized without board backing, but the finance company's own file showed gaps consistent with a lender that had not made the inquiries a careful lender in that position would normally make.
3. Sent a formal notice disputing the agreement's validity. Rather than simply refusing to pay and waiting to be sued, we wrote to the finance company setting out the basis on which the company considered the agreement unauthorized and, in the alternative, voidable — meaning capable of being cancelled by the company rather than automatically void from the outset. This put the company's position on record early and opened a structured conversation instead of a standoff.
4. Separated the equipment from the financing. The production equipment itself had real value to the business; the five-year financing structure did not need to survive intact for the company to keep it. We used this distinction as the basis for negotiation, proposing that the company retain the machinery on materially different terms rather than fight over the entire deal.
5. Negotiated a replacement arrangement. Facing a real risk that the original agreement would not hold up if challenged, the finance company agreed to restructure. The company kept the equipment under a shorter, lower-cost purchase arrangement worth roughly $650,000, in place of the original $2.1 million, five-year commitment. The finance company avoided a prolonged dispute over an agreement it might have lost outright; the company got equipment it could genuinely use, at a price closer to what the board would have approved in the first place.
6. Fixed the internal governance gap. Once the external dispute was resolved, we worked with Dov and Ari to update the shareholders' agreement and the company's internal signing authority policy — clarifying, in writing, who could sign what, requiring a documented board resolution above a defined threshold, and putting a process in place for the finance company (and any future counterparty) to formally confirm signing authority before a deal of any size closes.

The outcome

The company avoided roughly $1.45 million in financing commitments it had never approved, while keeping the equipment it could actually use on terms the board would have accepted from the start. The restructured purchase closed within about six weeks of the initial notice being sent — fast for a commercial dispute of this size, largely because both sides had a clear incentive to settle rather than litigate an authority question with real uncertainty on either side.

The harder conversation happened internally. Ji-ho's role at the company was restructured; the business development title remained, but signing authority was formally withdrawn and routed through the two officers going forward. The founders chose not to pursue a claim against Ji-ho personally, treating the episode as a governance failure to be corrected rather than a rupture to be litigated — a choice that kept the three of them working together, which mattered to Dov and Ari as much as the financial outcome did.

What made this a clean result was timing. The company caught the problem within months, before payments had piled up and before the finance company had taken further steps in reliance on the deal, such as ordering custom equipment configurations that would have been expensive to unwind. The longer an unauthorized contract runs unchallenged, the more a company's own conduct — continuing to make payments, using the equipment without objection — can start to look like ratification, meaning acceptance of a deal after the fact even without the original authority to make it. Acting early preserved every option the company had.

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