Are you a shareholder in a small limited company you co-own and operate with close friends or family?
Do you lack formal documents clarifying your relationship and involvement in the company?
Or has the position changed over time?
The Courts may consider you’re in a quasi-partnership with your fellow shareholders without you even realising it, and this may considerably assist you.
A limited company doesn’t require a contract or formal legal agreement to be considered a quasi-partnership by the Court.
So what exactly is a quasi-partnership, and how do they arise?
Quasi-partnerships have nothing to do with formal partnerships or traditional partnership law.
The starting point is that the same law governs a small family-owned company as a large multinational corporation.
The law recognises, however, that small family-run companies operate with a degree of informality.
For example, there may not be formal minutes or rules and responsibilities in the traditional sense.
Such informalities can give rise to a ‘quasi-partnership’.
The Court may consider a limited company a quasi-partnership if it was founded and operated by individuals with close personal relationships in a manner more akin to a partnership than a company.
According to a 2018 Upper Tribunal Administrative Appeals Chamber Decision, a limited company may be deemed a quasi-partnership “if the shareholders [are] bound by personal relationships involving mutual confidence… involved in the conduct of the business, and if the transfer of the shares was restricted at the company’s inception… based on good faith and mutual benefit.”
In practice, family businesses and companies founded by close friends are most likely to be deemed quasi-partnerships.
Even a limited company with Articles of Association that defines a legal relationship between shareholders may still be found to be operating as a quasi-partnership.
The ability to define a small limited company as a quasi-partnership allows the courts to regulate family businesses and companies established by close friends in a different manner from large public companies or multinational corporations.
The principle behind a quasi-partnership is to recognise that personal relationships carry weight and can override defined legal arrangements.
Not all family businesses are automatically considered quasi-partnerships.
Each scenario is different, and every case is examined on its own merits.
What Are The Consequences of a Quasi-Partnership?
If the court finds a limited company to be a quasi-partnership, it can override provisions contained in Shareholder Agreements and Articles of Association.
It also gives the court leeway to set aside some standard shareholder protections typically assumed in a limited company.
The most common consequence of a Court finding a company to be a quasi-partnership is to grant a minority shareholder extra protection against unfair prejudice by majority shareholders.
A minority shareholder may also be able to bring a claim under Section 994 of the Companies Act 2006 on the grounds of the company being a quasi-partnership.
The recent case of Smith v Smith [2022] EWHC 1035 (Ch) upheld the claim by a minority shareholder who had been dismissed as an employee without receiving a fair offer for his shares.
The Court found that the company was a quasi-partnership and that the Director’s conduct had been unfairly prejudicial to the claimant.
Take Expert Legal Advice Quickly if There’s a Dispute
If you run into a dispute with a family member or close friend who’s a mutual shareholder in a limited company, It’s essential to take specialist legal advice immediately.
Conflicts in businesses run by family members or friends often escalate quickly and ill will can become deeply entrenched.
The longer a dispute carries on, the harder it is to resolve.
Not only can this result in excessive legal and court costs, but it makes it much more difficult to run the business effectively.
A shareholder who believes the company is operating as a quasi-partnership can consider pursuing an injunction to prevent another company member from taking a specific action.
In commercial disputes where a shareholder may have a legitimate claim that a limited company should considered a quasi-partnership, act quickly.
Time is always of the essence in this type of dispute.
The courts find that limited companies operate as quasi-partnerships and offer minority shareholders additional protection more often than you might think.
Many small business owners aren’t even aware that the limited company they hold shares in can be considered a quasi-partnership until there’s a dispute.
Personal relationships add a layer of complexity to commercial investments and the running of businesses. Ironically, this means that people are less likely to anticipate future differences of opinion and legal disputes.
If you find yourself at an impasse with a family member or close friend who’s also a company shareholder, it’s essential to take expert legal advice immediately.
If you already find yourself in a dispute, we steer cases to resolution. We’ll position you to secure a favourable settlement or succeed in litigation if you must take that approach.
Get in touch with Helix Law today. We aim to respond to all queries within an hour.
