Lessons from Recent Ontario Cases on Informal Promises of Ownership
By the Corporate Team at Simmonds Law
In the early stages of a business venture, it’s common for founders to rely on the support of key contributors – consultants, early employees, or even friends – who invest their time, expertise, or money with the understanding that they’ll one day receive equity in return. These promises are often made casually: over coffee meetings, handshake deals, or even in a flurry of optimistic emails and text messages. But under Ontario law, these informal arrangements carry significant legal risk.
Two recent decisions from the Ontario Superior Court of Justice – Sin v. Kela Medical Inc., 2024 ONSC 6767 and Burwell et al. v. Wozniak, 2024 ONSC 5851– underscore the importance of formal documentation when it comes to equity ownership. These cases confirm a long-standing legal principle: equity in a corporation does not exist unless it is properly agreed upon and legally documented.
When Promises Fall Apart: The Sin v. Kela Medical Inc. Decision
In Sin v. Kela Medical Inc., the plaintiff, Mr. Sin, claimed that he had been promised a 15% ownership stake in Kela Medical in exchange for strategic and financial contributions to the company during its formative stages. According to Mr. Sin, the company’s principal repeatedly told him that he would be granted equity once the business was off the ground.
Despite his involvement, Mr. Sin never received share certificates, never signed a shareholder agreement, and was never formally recognized in any corporate records. When relations soured and the company refused to acknowledge his ownership, Mr. Sin brought a claim seeking enforcement of the alleged equity arrangement.
The court dismissed the claim. Justice Akbarali found that while there may have been conversations or informal assurances, there was no evidence of a legally binding agreement. No corporate resolutions had been passed to issue shares, and no documentation existed to confirm the alleged ownership. As the Court explained, corporate shares must be issued in accordance with the Business Corporations Act (Ontario), and ownership cannot be established based solely on expectations or verbal understandings. Without proper documentation and statutory compliance, the alleged equity promise was unenforceable.
Burwell v. Wozniak: Contribution Does Not Equal Ownership
In Burwell et al. v. Wozniak, the plaintiffs – Burwell and others – claimed that they were owed equity in a cannabis startup based on verbal promises made by the company’s founder, Mr. Wozniak. They alleged that in return for their work in helping build the business, Mr. Wozniak had assured them they would receive shares once the company was operational.
Like in Sin, there was no written agreement confirming the allocation of equity. The plaintiffs had not signed shareholder agreements, subscription documents, or received share certificates. Nevertheless, they had worked under the assumption that they would eventually become owners of the company.
Justice Dietrich rejected the plaintiffs’ claims, stating that there was no enforceable contract to grant them equity. The Court emphasized that the alleged promises were vague and conditional, lacking the certainty required to form a binding agreement. Contributions to a company – no matter how significant, do not, on their own, entitle an individual to a share of ownership. In the absence of documentation or formal steps to issue shares, the plaintiffs had no legal claim to equity in the business.
Why Ontario Courts Take Documentation Seriously
These cases are not outliers, they reflect the consistent approach taken by Ontario courts when dealing with claims of undocumented equity. Corporate law imposes specific procedural and statutory requirements for share issuance, including resolutions of the board of directors, proper consideration, and entry into the company’s minute books and share registers. Equity cannot simply be conferred through words or informal understandings, even if both parties believed they had an agreement.
The rationale behind this strict approach is clear. Shareholder rights involve financial value, decision-making power, and legal responsibilities. Courts are understandably reluctant to interfere with a corporation’s formal structure based on uncertain or undocumented arrangements. This ensures stability and predictability in corporate governance and prevents opportunistic or retrospective claims once a business becomes profitable.
Avoiding the Pitfalls: How to Protect Everyone Involved
Founders and early-stage collaborators must recognize that good intentions are not enough when it comes to ownership. If you’re offering equity to someone – whether it’s a developer, investor, or advisor – you must formalize the arrangement through clear, legally binding documents. This includes shareholder agreements, subscription agreements, and proper issuance of shares in compliance with the OBCA. Failing to do so exposes the business to future legal disputes and reputational harm.
On the other side, individuals contributing to a startup should never rely on verbal assurances alone. If you are promised equity, insist that it be documented in writing and reflected in corporate records. Without legal documentation, you may find yourself with no ownership and no remedy, even if you played a central role in building the company.
Conclusion
The decisions in Sin v. Kela Medical Inc. and Burwell et al. v. Wozniak serve as stark reminders that equity must be formalized, not just promised. Courts in Ontario will not enforce informal agreements or unsubstantiated claims to ownership. Whether you are a founder or a contributor, the lesson is the same: document everything, and do it properly from the outset.
