Running a closely held family business in Ontario often relies on trust, informal arrangements, and the assumption that “family” means safety and shared long-term goals. But when a family member‑shareholder commits fraud, that trust can evaporate overnight, leaving everyone scrambling to protect the business, their investments, and their legacy.

The recent Ontario Superior Court decision of Tari v. Darolfi, 2025 ONSC 5104, is a cautionary tale for Ontario family business owners and shareholders. It demonstrates how serious misconduct by a shareholder-employee can devastate a family enterprise and how informal gifting of shares, loose governance, and a lack of written agreements can backfire and erode careful estate planning when a dispute involves litigation.

This article explains what Ontario family business owners and shareholders can do now to reduce their legal and financial risk. If you own or manage a closely held family company in Ontario, these lessons are directly relevant to you.

Case background

The plaintiff married into a family that operates several closely held businesses. The patriarch, one of the defendants, built the businesses from scratch and intended to pass them down to his son and son-in-law.

The plaintiff was employed by the family businesses for nearly three decades and was gifted shares in an operating company and two holding companies that own real estate. These shares were gifted informally with no written conditions or formal shareholders’ agreements. The arrangement reflected an intention that the patriarch’s life’s work would remain within the family.

How did the fraud happen?

The relationship fractured when the defendants discovered that the plaintiff had orchestrated an elaborate and systematic fraud of not only his spouse but also the family businesses. Beginning around 2014, while overseeing a major construction project, the plaintiff fabricated vendor invoices from non-existent companies.

The embezzlement scheme was deceptively simple: the plaintiff would authorize invoices from these fictitious vendors, which the companies would pay by cheque as an expense, and the plaintiff would collect the funds in cash, minus roughly 10% paid as commission to individuals who participated in the scheme. The plaintiff pocketed over $500,000 in the process, but no products or services were actually delivered. The plaintiff had also used corporate funds to pay for work done at his and his parents’ personal residences.

The plaintiff refused to pay the money back when confronted, and was terminated and excluded from the family businesses to prevent further prejudice.

Can an Ontario family business dismiss a shareholder‑employee for fraud?

The lengthy decision addressed the various claims made by the plaintiff, as well as the family’s counterclaims:

  • Just cause for termination: Once discovered, the fraud provided overwhelming grounds for immediate termination. Justice Steele applied the Supreme Court’s test from McKinley v. BC Tel, 2001 SCC 38, which examines whether an employee’s dishonesty caused a breakdown in the employment relationship. Here, it plainly did. The plaintiff had used his authority to systematically defraud his employer.
  • Oppression claims: The plaintiff alleged he had been oppressed by his removal from the companies and exclusion from corporate decisions. The Court rejected this argument. The businesses had never operated formally, with no regular board or shareholder meetings. The plaintiff, having participated in (and benefitted from) these informal arrangements for decades, could not suddenly claim oppression because he had lost his standing through his own tortious conduct.
  • Fiduciary breach: As a director and officer, the plaintiff owed the companies a fiduciary duty to act honestly, in good faith, and in the companies’ best interests. His theft was a blatant breach. Following precedent from cases like Strauss v. Wright, Justice Steele confirmed the plaintiff’s removal as director and officer, noting that “no one who breaches his fiduciary duties to a corporation in circumstances such as these can reasonably expect to remain as an officer and director.”
  • Buy-out: There were no formal shareholder agreements establishing the right to a buy-out. Because the articles of incorporation restricted transfers without board approval, and due to his fraudulent conduct, the plaintiff was not entitled to a buy-out from the holding companies where he owned 25% of the company’s shares. Had a buy-out been ordered, a minority discount would have applied.

With respect to the operating company, where he owned 50% of the shares, although the Court did not find the exclusion to be oppressive, it crafted a remedy to save the business where the plaintiff was entitled to a buy-out. The Court took this approach because it was impractical to have continued co-ownership. This buy-out was to be based on the February 2020 value of the company (when he was dismissed for cause), so that he would not benefit from his own wrongdoing due to the increase in value.

The Court decided that an independent jointly-retained valuator would establish the value of the shares. The Court also rejected the argument that the operating company should be wound up and sold, given it was viable and employed many people.

  • Fraud, deceit, and conversion: Justice Steele found the plaintiff liable for over $553,000 in fraudulent scheme proceeds and an additional $17,900 for falsified personal home renovation invoices. She imposed equitable tracing orders and disgorgement of profits, ensuring that the plaintiff cannot shelter his ill-gotten gains and that his assets worldwide are available for enforcement.
  • Conditional gifts: the family argued that the share gifts were conditional on the plaintiff remaining part of the family and fulfilling his fiduciary duties, and were given for no consideration as part of estate planning. The Court did not grant this relief because no written conditions existed and because the plaintiff was involved with the family businesses for an extended period.

Can a dishonest minority shareholder claim oppression?

Given that the plaintiff was dismissed for cause as a consequence of his fraud and breach of fiduciary duties, his removal as an officer and director from the companies was confirmed, and he was ordered to disclose his worldwide assets and be subject to an Examination in Aid of Execution.  Further, the Court ruled that the fraud judgment will survive bankruptcy.

However, despite his illegal conduct, the plaintiff was allowed to keep his shares.

This decision has implications for closely held family businesses and estate planning, in that even generous gifting of shares (with no consideration) does not offer protection when the recipient intends to and commits serious fraud that prejudices the family businesses. In the cases of inter-generational share gifts, an agreement should be executed to protect the businesses in the event of fraud or dishonesty.

It also shows that business informality – even while sometimes convenient in the short-term – can work against all parties when disputes arise. As a result, the family parties were dragged through years of litigation and incurred the legal costs of a month-long trial.

Key lessons for business owners

For Ontario family business owners, the judgment reinforces several practical lessons:  

  • Document shareholder arrangements: document shareholders’ agreements in writing to record expectations and related conditions, especially where shares are gifted to family members or in‑laws. Consider detailed provisions dealing with bad‑faith conduct, fraud, or serious breaches of duty, including forced buy‑outs and share forfeiture mechanisms.
  • Strengthen governance and oversight: Move away from informal, handshake‑based management of the company. Establish regular board and shareholder meetings, keep minutes, and implement clear approval processes for large expenditures and projects.
  • Use regular audits and financial controls: Adopt formal internal controls, including financial audits, segregation of duties, and vendor verification steps, particularly where a single family member has significant control over spending or construction projects.
  • Understand the limits of the oppression remedy: Minority shareholders should recognize that oppression remedies protect reasonable, lawful expectations, not a right to exit, liquidity, or continued control, especially where the shareholder has engaged in fraud or dishonesty.

Key lessons for minority shareholders in family companies

For minority shareholders in closely held Ontario corporations, this case is also instructive:

  • Courts will not use oppression remedies to help a shareholder profit from their own wrongdoing or regain a role lost through serious misconduct.
  • Without a negotiated shareholders’ agreement that provides clear exit rights or buy‑out mechanisms, a minority shareholder may have limited options to force a liquidity event, even after a relationship breaks down.

Practical next steps

If you own or are part of a closely held family business in Ontario, this decision is a reminder that trust and informality are not enough once a dispute arises or misconduct is uncovered. Proactive legal planning can significantly reduce the cost, disruption, and uncertainty your family faces if a conflict or allegation of fraud emerges.

To review or update your family business structure, shareholder agreements, or estate‑planning strategy, contact our Commercial Litigation team to protect both the business and the underlying family relationships.