2020-06-10
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Quasi partnerships

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Posted by Daniel Jennings on 10 June 2020

Daniel Jennings - Defamation Disputes Lawyer
Daniel Jennings Partner

What is it, and would you know if you're in one?

Quasi partnerships sound like a complicated legal term, yet it is, in fact, a straightforward concept.

The variety of companies within England and Wales is wide, ranging from large PLCs to a small family business. The reality of it is, as we have mentioned elsewhere, the details of a particular company and its circumstances can be critical to what remedies are available to that company and its members.

A quasi partnership arises typically in the context of unfair prejudice and special rules apply to this form of company. A company does not become a quasi-partnership because members decide that it should be. The members of the partnership don't do anything to make it a quasi-partnership. There is no requirement for any specific documents or other arrangements; it is just a question of fact, is it or is it not a quasi-partnership?

The first point to clarify is this form of company has nothing to do with partnerships and partnerships law. It is a limited company established in the way that all limited companies are but has some characteristics that make it similar to a partnership.

The key concept is one of good faith and mutual confidence. A company that is established based on mutual trust and confidence between the founding members can be a quasi-partnership. A quasi partnership recognition that a company has been formed due to the close association between its individuals. The individuals will expect to have full involvement in the management of the company; and some degree of control over who can and cannot be a member of the company; it is such that they should have their own special set of rules.

This is perhaps a rare example of the law adapting to reality and recognising that a company established between members of a family or long term close friends should not be regulated in the same way as a large multinational company.

A company continues to be governed in the first instance by its articles of association; and then any express agreements between the shareholders whether it is a quasi-partnership or not; however in some circumstances, particularly the protection of the rights of shareholders other important principles apply.

The two most essential elements of a quasi partnership are considered below.

1. A personal relationship involving mutual confidence

This is arguably the most crucial factor. Defining whether a personal relationship does or does not exist can sometimes be straightforward and at other times, more complicated, however, it is always essential.

A limited number of company members does not make a company a quasi-partnership. The key is that there must be a personal relationship rather than merely a commercial relationship between the members; most often, companies involving family or friendships that can be quasi partnerships.

Equally important is establishing mutual trust and confidence. The extent of that will vary from company to company. However, it is critical to establish trust and confidence for a company to be a quasi partnership.  

2. Understandings or agreements between the members

It is crucial to understand the agreement between company members. However, rarely is a clear and straightforward shareholders agreement in place, which leaves little room for debate or argument.

Agreements most often arise in two ways; the first is over a carefully drafted and negotiated shareholders agreement containing lengthy and complicated provisions to govern the relationship between the members.  

Where an agreement exists, it can be used to establish the rights that a member has; albeit that will not always determine matters. For example, where one shareholder was legally represented and another not in entering into a shareholders agreement, the unrepresented party might well successfully argue that their expectations and understandings were not adequately recorded. 

The alternative is the understanding that the parties reached an agreement when the company was formed or when they became members. This may not be formally written down; rarely would one expect a family-owned business to have documented this kind of agreement. Those understandings and the legitimate expectations of the shareholders are vital; however and matters will often turn upon them.

Importance

The reason why quasi partnerships are so important is that their unique characteristics mean that special rules apply to them within the scope of unfair prejudice petitions and shareholder remedies generally. It is therefore critical to establish whether you are a member of a quasi-partnership or not.

Different rules also apply for the valuation of a party's shareholding in a quasi-partnership given the usual order in a successful unfair prejudice petition is for the majority to buy out the minority's shares. How that is valued is critical to the return that a shareholder receives.

If you might be a member of a quasi partnership, therefore it is vital to find out to understand your rights and remedies.

About the author

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

Daniel Jennings

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

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