A recent endorsement from Justice Myers, Surace v. Reis, 2026 ONSC 2251, is a cautionary tale that lands squarely in the wheelhouse of transactional counsel. The judge praised the parties for doing a very clever thing when, instead of litigating, they papered an orderly exit through a unanimous shareholders’ agreement (USA). The agreement still ended up before the Commercial List, with a $2,248,328 disgorgement order against the departing shareholder and his new company.

The Wind-Down Agreement

Nick Surace, age 82, owned 51 percent of V.G.A. Carpentry Limited (VGA). Jason Reis, his younger active partner, owned 49 percent through his holding company 1905247 Ontario Inc. and ran day-to-day operations. After Reis discovered that Surace had been removing funds from the company, the parties signed a USA dated October 1, 2022. The deal was simple and sensible,      VGA would complete fifteen named jobs on Schedule “A” representing roughly $26 million in revenue, repay agreed-upon shareholder loans on Schedule “B,” and then dissolve. Reis was free to incorporate a new company, the Dupont Carpentry Limited (DCL), to take on new work and to hire VGA employees once the legacy jobs were done. A non-interference clause in Article 9.1 prohibited 1905247 Ontario Inc., Reis and DCL from soliciting or enticing away the Schedule “A” jobs but allowed it to pursue any other work. Two directors, two signatures on every cheque and binding document, GAAP books, full transparency without concealment or suppression, and mutual personal indemnities for breach. On paper, an excellent piece of drafting.

Where Performance Failed

What went wrong is precisely what the agreement did not police. Reis began running DCL almost immediately, using VGA’s employees on DCL projects while continuing to bill their time to VGA. DCL’s gross margins in its first two reporting periods ran at 40 to 50 percent, which was exceptionally high compared to the VGA’s historical margins for doing identical work, a tell that the labour cost was being parked on the wrong ledger. Reis walked away from two Schedule “A” projects unilaterally, the Gillam and Westbank, the latter representing roughly $5 million in remaining revenue, without obtaining Surace’s signature as the agreement required. He diverted approximately $125,000 of VGA receivables into DCL’s bank account. He stopped remitting employee source deductions, HST, EHT, and WSIB premiums, accumulating roughly $2 million in arrears, and he let the books deteriorate to the point that the court found a total lack of accurate, up to date and reliable information by the time an interim receiver was appointed.

Prophylactic Disgorgement

Justice Myers found Reis liable for both oppression under the Ontario Business Corporations Act and breach of fiduciary duty. The judge declined to award damages on a project-by-project basis because the comingling Reis created made any such exercise unaffordable and speculative. Instead, borrowing from the equitable doctrine of breach of confidence, the judge ordered prophylactic disgorgement of Dupont’s profits during the period Reis acted in conflict, citing Extreme Venture Partners Fund I LP v. Varma, 2021 ONCA 853.. The reasoning is striking, a fiduciary’s poor record-keeping cannot become a shield against accounting, and where the wrongdoer’s own conduct obscures the loss, the court will measure the gain instead. Reis and DCL were held jointly and severally liable, and Reis was further ordered to honour a side agreement requiring him to mortgage his residence behind CIBC’s exposure to Surace’s home.

Drafting Lessons

1. A no-interference covenant in the abstract is not enough where the same workforce, supplier base, and goodwill straddle the old and new entities. Build in express labour-allocation mechanics, contemporaneous timesheet obligations, and audit rights exercisable on short notice during the transition.
2. Two-signature requirements can be useful, but cannot deal with co-option of non-monetary resources. Liquidated damages, automatic step-in management rights, or independent monitor triggers when signatures are missed give the non-operating shareholder a credible response short of an oppression application.
3. “Transparency without concealment or suppression” is a fine recital but should be supported by hard deliverables, scheduled financial reporting, named external accountants, and a contractual right to compel preparation of the books at the breaching party’s cost.
4. Where the operating shareholder is permitted to launch a competitor, expressly address the springboard risk, prohibit billing the new entity’s labour to the old, require an arm’s-length transfer-pricing protocol, and consider a profits-disgorgement remedy as a contractual default.
5. In any transition involving guarantees secured against personal residences, include automatic acceleration of the counter-guarantee and registration rights so the non-defaulting party is not left scrambling.

Takeaways for Transactional Counsel

Drafting an exit is not the same as drafting an enforcement plan. Surace v. Reis rewards parties who anticipated the deal but punishes the assumption that good-faith performance would follow. Build the policing mechanism into the document, assume the active shareholder will be tempted to springboard, and give your client tools that work without a two-day Commercial List hearing. When you cannot prevent the bad behaviour by contract, at least ensure the agreement allows your client to identify it early, prove it cheaply, and recover on a basis that does not depend on reconstructing books the other side has allowed to rot.