What is a quasi-partnership and what is its legal relevance?

By Tom Esler, partner mfg Solicitors.

A quasi-partnership is a term or concept which will most typically arise in the context of shareholder disputes and more specifically as a fundamental assertion by a minority shareholder who is pursuing a minority shareholder action alleging unfair prejudice based on their exclusion from the management of the company in direct contravention of their expectation of management as derived from the quasi-partnership nature of the shareholders relationship.

Companies are governed in the first instance by their articles of association, express agreements between shareholders, and another formal legal rule.

A court finding that a company is a quasi-partnership will allow a Court to impose further equitable rights to shareholders beyond normal corporate governance.

A court will make a finding of quasi-partnership based on a factual assessment of the shareholder relationship and whether it can establish that the relationship between the shareholders was based on mutual trust and confidence and an understanding that all shareholders would participate in management. This will normally require a retrospective assessment of the Company formation. Usually, a quasi-partnership will be derived from a former partnership or family business.

If a quasi-partnership can be established then a shareholder can require a Court in an unfair prejudice action to uphold their equitable rights, specifically their expectation to participate in management, over and above other corporate governance rules.

A finding of unfair prejudice could also result in an enhanced share valuation if, as is the normal outcome on a successful unfair prejudice petition, a judge was to order that the majority shareholders buy out the minority shareholder. That enhancement being a fair share valuation without the normal discount for the minority shareholding.

Company law does not give any shareholder the right to have their shares purchased. There may be some provision as to shares transfers in the Company Articles or in a Shareholders Agreement but there is rarely any right to force a share purchase at fair value. A minority shareholding, in a limited company, does not usually have any significant value, on the open market, as a minority share. Fair value is normally defined as the value of the entire company shareholding as likely to be paid by a willing buyer to a willing seller on the open market.

If you require further advice regarding quasi-partnerships, minority shareholding or unfair prejudice petitions please contact Tom Esler on 01562 820181 or email tom.esler@mfgsolicitors.com