An Ontario Superior Court judge has set aside an employment contract that a company executive negotiated with himself during a bitter corporate dispute, ruling the agreement represented “blatant” self-dealing that violated court orders and corporate governance principles.
The case involved N.P. and T.C., equal partners in Stanmech Technologies Inc., who became embroiled in a corporate divorce after their business relationship deteriorated. The court had previously issued an injunction requiring both parties’ consent for any transactions outside the company’s ordinary course of business.
Despite this order, C. negotiated and signed an employment contract with Stanmech that granted him significant benefits while excluding P., who held an equal stake in the company.
Self-dealing during court proceedings
The employment contract, signed on Nov. 28, 2024 — one day before the court released its injunction decision — included several advantageous terms for C.:
- An annual salary of $250,000 as CEO
- $250,000 in retroactive compensation for past services
- Eligibility for bonuses up to $500,000 at the board’s discretion
- Unlimited benefits and expenses
- Substantial severance payments if terminated
- A security interest in all of Stanmech’s assets
The court found C. was in a clear conflict of interest, having “negotiated” the contract with himself while serving as Stanmech’s sole director after improperly removing P. from his position.
“There is no dispute that he was in a conflict of interest regarding that contract, having negotiated on behalf of both sides of the agreement and as a result receiving a significant benefit; one denied to P.,” the court stated.
The judge noted that C.’s outside legal counsel had suggested another director handle the negotiations on Stanmech’s behalf, “but of course, there was no other director because C. had ousted him.”
Contract violated ordinary course restrictions
The court ruled the employment contract fell outside Stanmech’s ordinary course of business, violating the previous injunction order. The judge applied established legal tests for determining ordinary course transactions, finding the contract failed to meet any of the criteria.
Key factors considered included whether the transaction:
- Was distinguishable from normal company operations due to complexity or unusual nature
- Arose from a special or peculiar situation
- Required board or shareholder approval
- Was given special notice by the company
- Represented an unusual undertaking rather than routine business
- Reflected standard industry practice
“To the credit of his counsel, C. did not attempt to argue that the Employment Contract was within the ordinary course of business of Stanmech,” the court observed.
The judge found the contract was clearly “a blatant form of self-dealing” that offered C. “an extraordinary series of benefits denied to P.” despite their equal partnership status.
Timing raises additional concerns
The court expressed concern about the contract’s timing, noting C. knew P. was seeking to reverse his removal and regain his position as co-officer and director. Hours after the injunction decision was released, C. caused Stanmech to issue him a $250,000 cheque for retroactive compensation without processing it through the company’s payroll system.
“I agree with P. that this reflected both haste and a risk to Stanmech because of the failure to make those source deductions,” the court stated.
The same day, C. also caused Stanmech to file a lawsuit against P. using the same law firm that advised on the employment contract.
Poison pill effect
The court found the employment contract functioned as a “poison pill” that would unfairly advantage C. in any buyout scenario between the partners. If P. were to purchase C.’s interest in Stanmech, he would inherit a potential wrongful dismissal lawsuit with “substantial damages and enforcement already baked into the Employment Contract.”
The security agreement provision was particularly problematic, as it would “impair Stanmech’s operations until C. was paid the significant benefit he had unilaterally negotiated for himself.”
Court’s remedial orders
Using its jurisdiction under Rules 59.06 and 60.12 of the Rules of Civil Procedure, the court ordered:
- The employment contract be set aside entirely
- C. immediately rescind any registration under the Personal Property Security Act
- Repayment of the $250,000 retroactive compensation (already voluntarily returned)
- Repayment of all legal fees Stanmech paid on C.’s behalf within 14 days
- Future payments to either party require written consent from both or court order
The judge noted that while C. had already repaid the $250,000, it had been recorded as a loan on Stanmech’s books. The court clarified it was repayment, not a loan.
Other requests denied
The court denied several of P.’s additional requests, including:
- Replacing C. as CEO with P., partly because P. was residing in Spain and Stanmech’s operations required hands-on management
- Allowing individual discussions with the company’s key supplier
- Sharing confidential company information with certain advisors
- Amending pleadings to change terms of a separate business deal
For more information, see Penelas v. Cruise, 2025 ONSC 2296 (CanLII).
