A Director Quietly Moved a Supplier Relationship Into Her Own Company

The situation

Yanni and Baruch met at a call centre in Brampton nearly a decade before any of this started. Yanni worked the phones by day and did small bookkeeping jobs on the side; Baruch, an administrative assistant at a logistics firm, had a knack for finding clients nobody else wanted to chase. They stayed close after Baruch moved on to a different job, meeting for lunch every few weeks and trading ideas about businesses they could start together once they had saved enough to take the risk seriously.

When they decided to formalize their side hustle into a real company, they incorporated together as equal shareholders and brought in a third person, Yael, who had experience with supplier contracts and offered to run that side of the business in exchange for a smaller equity stake and a director's seat. Yael was not an old friend the way Baruch was, but she came recommended by someone Yanni trusted, and her confidence in dealing with suppliers filled a gap neither of them could fill on their own. Within a few months she felt less like a hire and more like the third leg of the partnership.

For the first two years it worked the way these arrangements are supposed to work. Yael handled outreach to suppliers and negotiated the contracts that kept the company's small logistics-support business running. Yanni kept the books current between call-centre shifts. Baruch brought in new accounts. None of the three had built a company before, and the informality suited them: decisions got made over coffee, and nobody bothered with the kind of shareholder agreement or conflict-of-interest policy that a larger company would have had in place from day one.

The friction started small. Yael began mentioning that one of their larger suppliers wanted to 'restructure the relationship' and that she was handling the details personally. Invoices from that supplier slowed, then stopped. When Yanni asked to see the correspondence, Yael said she would forward it and then did not. Baruch, who trusted Yael's judgment on supplier matters, did not push.

It was Yanni, going through the company's bank statements to prepare a year-end summary, who noticed that revenue tied to that supplier relationship had simply disappeared from the books roughly eight months earlier, with no corresponding drop in the volume of work the company was still, informally, doing for that supplier's downstream clients.

Where it went wrong

What Yanni eventually pieced together, and what our review later confirmed, was that Yael had incorporated a second company on her own roughly ten months into the original venture. She had not told Yanni or Baruch. Using the contacts and pricing knowledge she had built while working as a director of the original company, she began quoting that same supplier directly through her new entity, positioning it as a more responsive alternative to the company the three of them jointly owned.

Under Ontario corporate law, a director owes the company a duty of loyalty that includes not taking for themselves a business opportunity that properly belongs to the company, particularly one the director learned about or developed because of their position. It does not matter that Yael used her own time to build the second company, or that no formal contract barred her from doing outside work. What matters is that the supplier relationship, and the goodwill attached to it, had been built using the original company's name, its existing contracts, and Yael's access as a director. Diverting that relationship to a personally owned company is a breach of that duty even without any written non-compete in place.

The twist that made the dispute hard to prove at first was that Yael's own explanation, when confronted, did not obviously contradict the numbers. She described the second company as an unrelated side project and said the supplier relationship had simply ended on its own. It was only once someone sat down and rebuilt the accounting, month by month, cross-referencing bank deposits against the volume of work the supplier was known to still be sending somewhere, that the shape of the diversion became visible. The company's revenue tied to that supplier had not dropped to zero; it had migrated, in stages, into deposits landing in an account that was not the original company's.

By the time Yanni raised it formally, the side company had grown to roughly one hundred thousand dollars in annual revenue, nearly all of it traceable to the relationship Yael had originally been trusted to manage on the original company's behalf.

What made the situation harder to sit with was how ordinary it had all looked from the outside. Yael still showed up to the occasional partner call. She still referred to the original company as 'ours' when it suited her. Nothing about her manner suggested someone actively steering business away from the people who had brought her in, which is part of why Baruch, even after Yanni raised his concerns, was initially reluctant to believe the relationship had been deliberately diverted rather than simply lost to a supplier who had moved on.

What we did

1. Reviewed the corporate records first, before any accusation was made. We asked for the incorporation documents, any shareholder agreement, and board minutes for both companies to establish exactly what Yael's obligations were and whether anything in writing addressed outside business activity. There was no formal non-compete, so the case would rest on the general fiduciary duty directors owe rather than a contract term, which shaped which evidence mattered most going forward.
2. Rebuilt the company's accounting from source documents rather than relying on the existing books. Yanni's informal bookkeeping had gaps, so we worked with a forensic accountant to reconstruct revenue and deposit patterns from bank statements, invoices, and supplier correspondence over the relevant period. The accountant cross-referenced known order volumes against deposits to identify where the money should have landed and did not, which is what ultimately made the migration of business visible rather than just suspected.
3. Compared the timeline of the second company's incorporation against Yael's continued role as a director. Establishing that she incorporated the competing entity while still actively managing the same supplier relationship on the original company's behalf was central to showing the opportunity had been diverted, not simply that a similar opportunity arose independently later. Supplier correspondence had also quietly shifted toward her personal contact details around the same time, supporting deliberate timing rather than coincidence.
4. Sent a formal letter setting out the breach and what we were asking for. Rather than starting with litigation, we laid out the fiduciary duty issue plainly, attached the reconstructed accounting, and proposed a resolution, because a negotiated outcome that avoided a lawsuit between three people who had once been close friends was worth pursuing first. The letter gave Yael a defined window to respond before we prepared anything further.
5. Prepared valuation evidence in case negotiation failed. We had the forensic accountant estimate what portion of the second company's revenue was attributable to the diverted relationship, distinguishing it from work Yael might credibly claim she had built through her own later effort, so that if the matter went further, Yanni and Baruch would already have a defensible figure rather than a guess pulled together under pressure.
6. Negotiated directly with Yael's own lawyer over several weeks. Yael disputed the scale of the diversion but, once shown the reconstructed accounting, did not seriously dispute that the relationship had originated with the original company. That narrowed the dispute to a question of value rather than liability, which meant the negotiation could focus on a number rather than reopening the underlying breach each time the parties spoke.
7. Structured a settlement that combined a cash payment with Yael's exit from the company. Rather than fight over an ongoing three-way relationship that had already broken down, we negotiated a clean separation: Yael would pay an agreed sum reflecting a portion of the diverted revenue and would resign her director's seat and transfer her shares back at a nominal value, ending her stake in the business she had worked to undermine.
8. Documented the settlement with a full release to close out any future claims between the three of them. The final agreement included mutual releases so neither side could revisit the dispute later, plus confidentiality terms covering the amount, giving Yanni and Baruch certainty the matter, and the relationship with Yael, was fully closed.

The outcome

The matter settled without a court filing. Yael agreed to pay an amount in the low tens of thousands of dollars, well short of the full value of the diverted relationship but reflecting the real uncertainty in tracing exactly how much of the second company's revenue belonged to the original opportunity versus work Yael had genuinely built afterward through her own effort once the relationship had moved. She also transferred her shares back to the company and stepped down as a director, closing out any remaining claim she might otherwise have made to a future share of the business she was leaving.

Yanni and Baruch did not recover the supplier relationship itself. The supplier had, by then, grown comfortable working with Yael's company directly, and nothing in the settlement compelled it to switch back or explain its side of what had happened. That was the concession both sides accepted going in: the company got compensation and a clean exit from a partner who had breached its trust, not the client whose business had made the dispute worth pursuing in the first place. Getting both would have meant a trial, with no certainty of a better result and years of legal cost neither of them wanted to carry.

What changed afterward was the paperwork. Yanni and Baruch, now sole owners, put in place a basic shareholder agreement with an explicit conflict-of-interest and non-compete clause before bringing on any future partner, and they moved to proper bookkeeping software rather than informal spreadsheets updated between shifts. They also agreed, for the first time, to a standing quarterly review of the company's major supplier relationships between the two of them, a habit neither had thought necessary while Yael was handling that side of things alone. The dispute cost them a supplier and a friendship, but it did not cost them the company, and the business has grown modestly in the two years since without a repeat of the problem.

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