Insights

How to Minimize Potential Destruction to a Business by Removing a Non-Performing Partner

Published: January 19, 2026

Category: Business Law

Ideally, when incorporating a new company with more than one principal (directors or shareholders – often commonly referred to as “partners”) when starting a business, the owners should enter into a unanimous shareholder agreement between them that would set out what is to be done in the event of a breakdown in their relationship, or if an outside party later approaches them with a desire to buy into the enterprise.

In this way, the original “partners” have a process in place that will hopefully minimize any costs to them should there be a future breakdown in their relationship and to be able to limit who can buy into, and have control of, the business.   This agreement would not only cover situations where there was some type of adversarial dispute between the partners, but also where one of them may become disabled, pass away or involved in matrimonial litigation with a spouse who is then claiming an interest in the business.

Often in commercial litigation involving shareholders of a successful small to medium size corporation, the dispute that arises – which often causes the disruption to business operations as well as substantial legal and other professional costs threatening its viability – could have been resolved in a relatively straightforward and cost-effective manner if a shareholder agreement had existed.  As these agreements set out the parties’ rights and obligations in the event of a dispute in contributions or management of the business, they can be invoked to allow one owner to be bought out by the others, a wind up of the business, or other remedies without the need to become involved in costly and drawn-out court litigation.  Having a shareholder agreement in place is the most efficient and least disruptive manner to remove a non-performing partner and every person who is contemplating starting a new business with partners through a corporation should seriously consider having one in place from the date of start up.

When representing clients in shareholder disputes that have gone to court, I often hear of regrets from them that they did not have a shareholder agreement in place for the company.  I also hear the same reasons why such an agreement was not signed:  most common are the legal costs for it at the time and the fact that the parties all trusted each other (and sometimes are family members), and did not think they would ever be in an internal dispute or did not want to “rock the boat” by raising the possibility that they would fight in the future.   Resolving disputes through litigation will likely cost each partner much more in legal fees than drafting a comprehensive shareholder agreement upfront.  Moreover, establishing an agreement does not indicate mistrust between partners; rather, it reflects proactive planning for the future of their emerging enterprise to optimize returns. Engaging in business necessitates contracts to facilitate effective operation and strategic planning.

Without a shareholder agreement in place removing a non-performing partner without his or her consent becomes that much more difficult.  While there are provisions under the Ontario Business Corporations Act and similar federal legislation that allow for the unilateral removal of a shareholder including calculation of the share price and mechanism under which this can done (including interim steps pending finalization) these can be time consuming, costly and interruptive to the operations of a business.  There are very few, if any, business owners who would rather be in court fighting than working on growing and maintaining their business, and overall revenues are often affected when court proceedings are brought.   Obtaining a court order to remove an underperforming partner requires evidence, often including detailed financial records and operations information. This process can reveal sensitive information that competitors or customers might learn about, potentially harming revenue.

Overall, the most efficient way to remove a non-performing partner is to have in place a comprehensive shareholder agreement that will govern what will occur in those circumstances and to act in accordance with that contract.  Otherwise, if there cannot be a negotiated resolution, a court proceeding in which comprehensive evidence is presented as to the performance issues of the impugned partner in a manner which will lead to an appropriate court order for the person’s removal will need to be brought.

At Steinbergs LLP, our lawyers have both extensive experience in drafting shareholder agreements for all type of businesses (which can still be done after incorporation) and in representing those who find themselves involved in potential or actual litigation over shareholder disputes.