The Undisclosed Interest a Lender's Due Diligence Team Found First

The situation

The email from the lender's law firm arrived on a Thursday afternoon, three weeks into what had otherwise been a smooth financing process. It flagged, in careful and deliberately understated language, that the due diligence team had found something in the company's contract files that had not appeared anywhere in the disclosure package: a standing supply agreement between the company and a vendor that, according to a registration search the lender's counsel had run, was partly owned by one of the company's own directors.

Oksana had taken over the surveying and insurance adjustment business her parents built, growing it into an established operation generating between one and five million dollars a year in revenue. The company was seeking financing to fund an expansion, new equipment and a small acquisition of a complementary surveying practice owned by Vartan, a semi-retired surveyor looking to wind down, and had been working with the lender's team for weeks on what everyone assumed was a straightforward file.

The director in question was Andriy, who had joined the board several years earlier and had, separately and before joining, held a minority stake in a small equipment and materials supply business that the company had continued using as a vendor for field equipment. Nobody on the company's side had treated this as a secret exactly, but nobody had formally disclosed it either, and it had never been raised, recorded, or approved at the board level in any documented way.

Oksana's first reaction, reading the lender's letter, was that this had to be a misunderstanding, since Andriy's stake in the supplier was small and the arrangement had never struck anyone internally as improper. Her second reaction, once she thought back over how the arrangement had actually come about, was to wonder how something this basic had gone unaddressed for as long as it had.

The company Oksana ran was, by this point, a real fixture in its field, handling insurance adjustment work alongside land surveying for a client base built over two generations, first by her parents and then expanded under her own direction. She had spent years professionalizing parts of the business her parents had run more informally, updating contracts, tightening billing practices, formalizing how new staff were brought on, and had generally assumed the corporate side of things, the board, the minute book, the governance formalities, was in reasonably good shape by the time this financing process began. The lender's letter suggested otherwise, at least in one specific corner of the file nobody had thought to look at closely.

The problem

Under Ontario corporate law, a director who has an interest in a contract the company is entering, or continuing, is generally required to disclose that interest to the board and, depending on the circumstances, to refrain from voting on it. The purpose is not to forbid these arrangements outright, related-party dealings are common and often perfectly reasonable, but to make sure the rest of the board and, ultimately, the company's owners know about the interest and have had a fair chance to evaluate it on the merits rather than discover it later.

What made this situation harder was not the underlying arrangement itself. The pricing the company paid the supplier appeared, on a quick comparison, to be roughly in line with what other vendors charged, and there was no obvious sign Andriy had used his board position to steer favourable terms to the business he partly owned. The problem was procedural and it was serious precisely because it was undocumented: there was no board resolution disclosing the interest, no minute recording that Andriy had recused himself from any related decision, and no record that the rest of the board, or Oksana as majority owner, had ever formally considered and approved the relationship.

For a lender putting new money into the company, that gap read as a red flag regardless of whether the underlying terms were fair. An undisclosed related-party arrangement raises the possibility, however unlikely in this case, that other undisclosed interests exist, and it exposes the company to a future argument that the contract could be challenged or unwound precisely because the proper process was never followed. Left unaddressed, it also risked slowing or derailing the financing altogether, since lenders are cautious about closing deals with unresolved governance questions sitting in the file.

The company's original accountant, who had handled its books for years and had known in general terms that Andriy had some connection to the supplier, had never flagged it as a corporate governance issue requiring board-level disclosure, treating it instead as simply another vendor relationship to note for tax purposes. That gap, an accountant's job being to track the numbers rather than the governance formalities around them, was exactly how something this basic went unaddressed for years without anyone intending to hide anything.

There was also a timing pressure that made the problem sharper than it might otherwise have been. The financing had a target closing date tied to equipment lead times for the expansion, and the acquisition of the complementary practice had its own separate closing schedule that depended on the financing coming through first. A delay caused by unresolved governance questions would not just be an administrative annoyance; it risked pushing the entire sequence of transactions back, potentially costing the company the acquisition opportunity altogether if Vartan grew impatient waiting for financing to close and decided to sell to someone else instead.

What we did

1. Confirmed the scope and history of Andriy's interest. We reviewed the supplier's corporate records and Andriy's ownership stake directly, rather than relying on secondhand descriptions, to establish precisely when the interest arose, how it had changed over time, and how long the supply arrangement had been in place relative to Andriy's board appointment, so nothing in our account of the file could later be challenged as incomplete.
2. Assessed the actual pricing against market comparables. Before addressing the governance gap, we had the company gather quotes and invoices from comparable suppliers to confirm the pricing the company paid was genuinely competitive, which mattered both for resolving the lender's concern and for knowing what we were actually dealing with before drafting anything or making any representation to Oksana, the board, or the lender's counsel.
3. Prepared a formal disclosure of the interest for the board. We drafted a written disclosure setting out Andriy's interest in the supplier in full detail, to be placed before the board and recorded properly, rather than continuing to treat the relationship as common knowledge that did not need documentation just because everyone involved already assumed the others knew, which is precisely the assumption that had let the gap sit unaddressed for years.
4. Arranged a board meeting to consider and ratify the arrangement. With Andriy recusing himself from the vote as the law requires for an interested director, the rest of the board formally reviewed the pricing comparison and the history of the relationship, and passed a resolution approving the ongoing supply arrangement on its merits rather than out of habit or convenience.
5. Documented the ratification clearly enough to satisfy the lender. We prepared the minutes, the disclosure record, and a short explanatory memo for the lender's counsel showing the interest had now been fully disclosed, independently assessed, and properly approved by the disinterested directors, closing the exact gap the due diligence team had flagged in their original letter and giving the lender something concrete to rely on rather than a verbal assurance.
6. Put a standing disclosure process in place for the future. To prevent the same issue recurring with any other related-party relationship, we helped the company adopt a simple annual practice where each director confirms in writing any outside interests that could touch the company's contracts, reviewed at the board level every year rather than left to whoever happens to notice, which is how this particular gap went unaddressed for so long in the first place.
7. Briefed Oksana on how to handle the lender's remaining questions. We prepared her to speak to the lender's team directly about the steps taken, so the conversation could move from a flagged risk to a resolved one, without the lender's counsel needing to chase further clarification themselves once the disclosure package went back to them for a final look, which kept the file moving toward closing rather than sitting in a queue awaiting a follow-up call.
8. Checked whether any other related-party relationships existed that had not been raised. Rather than treating Andriy's interest as an isolated find, we asked the board directly whether any other director or officer held an outside interest touching the company's contracts, confirming there were none, which let us represent to the lender in writing that the file was now genuinely complete rather than merely partially cleaned up around one identified problem.

The outcome

The financing closed roughly on its original schedule, with only a short delay while the disclosure and ratification process was completed. The lender's counsel confirmed the documentation resolved their concern, and the issue that had briefly threatened to stall a months-long negotiation ended up as a closed item in the final file rather than an ongoing complication.

Because the pricing comparison held up, the company did not have to renegotiate or terminate the supply arrangement, and Andriy continued as a director with the relationship now properly on the record. No claim was ever made against the company or against Andriy personally, because the gap was closed before it had the chance to turn into one; this was prevention rather than damage control, the problem caught and corrected before it produced any actual loss.

The standing disclosure process adopted afterward changed how the board operates going forward, a small annual exercise that costs little time but closes the exact gap that nearly complicated a significant financing deal. Oksana's view afterward was that the arrangement itself had never really been the issue; the absence of paperwork around it had been the entire risk, and that risk was now considerably smaller.

The acquisition of Vartan's practice, which had depended on the financing closing on schedule, proceeded without the delay everyone had briefly worried about, since the disclosure and ratification process added only about a week to the overall timeline rather than the months a contested governance dispute might have cost. Andriy, for his part, was relieved rather than defensive once the process was explained to him; he had never thought of the supplier relationship as something requiring formal sign-off, and understood immediately why a lender reviewing the file from the outside would see it differently than someone who had lived inside the company for years.

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