What Is a Quasi-Partnership and Why Does It Matter in a Shareholder Dispute?

Why the Concept of Quasi-Partnership Is Central to Many Shareholder Disputes

The concept of a quasi-partnership is one of the most important and frequently encountered ideas in shareholder dispute law. Whether a company operates as a quasi-partnership determines whether informal understandings and personal expectations between shareholders are recognised by the court as legal rights, or whether the majority is entitled to rely strictly on the formal constitutional documents regardless of the expectations those arrangements created.

In a quasi-partnership, the court looks beyond the articles of association and any formal shareholders’ agreement to the personal relationship between the shareholders and the expectations that relationship generated. This can be decisive in an unfair prejudice petition, because it determines the scope of the legitimate expectations the minority shareholder can rely on and therefore the range of conduct that may constitute unfairness.

This page is part of the Shareholder Disputes Knowledge Guide. If you need legal advice on a shareholder dispute see my direct access barrister page.

What Is a Quasi-Partnership?

A quasi-partnership is a private company that, despite being incorporated as a limited company, operates in practice on the basis of personal relationships, mutual trust and an understanding of shared participation in management that is more characteristic of a traditional partnership than of a company with separate management and ownership. The term was first used by the House of Lords in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, which remains the leading authority on the concept.

The key characteristics of a quasi-partnership identified in Ebrahimi and developed in subsequent case law include the following. First, the company was formed or acquired on the basis of a personal relationship involving mutual confidence between the shareholders. Second, there is an agreement or understanding, express or informal, that all or some of the shareholders will participate in the conduct of the business. Third, restrictions on the transfer of shares mean that a shareholder who is excluded from management cannot simply sell their shares and walk away from the company.

All three characteristics do not need to be present in every case. The courts look at the overall picture and ask whether the relationship between the shareholders, and the basis on which they invested, has the characteristics of a partnership even though the vehicle used is a limited company.

Why Quasi-Partnership Status Matters

In a company that is found to operate as a quasi-partnership, the court takes into account informal agreements and expectations as well as the formal constitutional documents when assessing whether conduct is unfairly prejudicial. This significantly expands the scope of the unfair prejudice jurisdiction.

In a straightforward company without quasi-partnership characteristics, shareholders are generally entitled to rely on their strict legal rights under the articles and the Companies Act. A majority shareholder that removes a co-shareholder director from the board in strict compliance with the articles has not acted improperly in formal terms, even if the removal is damaging to the minority’s interests.

In a quasi-partnership, the same act may constitute unfair prejudice. Where the company was founded on the basis that both shareholders would participate in management, and that expectation was part of the commercial bargain on which the minority invested, the exercise of strict legal rights to exclude the minority from management may be inequitable and therefore unfair within the meaning of Section 994. The informal understanding creates a legitimate expectation that the court will protect.

Common Situations Where Quasi-Partnership Arguments Arise

Quasi-partnership arguments most commonly arise in family businesses, small professional partnerships that have incorporated, and joint ventures between two or three individuals who set up a company together on the basis of personal trust and a shared intention to run the business together. In each of these situations, the relationship between the shareholders predates or operates alongside the formal corporate structure and creates expectations that the formal documents do not fully capture.

The classic quasi-partnership dispute involves two or more founders of a business who have always run it together and shared in its management and profits. When the relationship breaks down, one party uses their majority position or board control to exclude the other from the business, stop their remuneration, and block any exit on fair terms. The excluded shareholder cannot sell their shares easily because private company shares are illiquid and the articles restrict transfer. They have no formal written agreement to rely on because the business was always run on trust. The quasi-partnership concept gives the court the tools to intervene.

Family businesses are particularly fertile ground for quasi-partnership arguments. Where a family company has operated for generations on the basis of shared family expectations about participation, profit sharing and how the business will be passed on, those expectations may form part of the commercial basis of every family member’s shareholding even where they were never set out in writing. For more detail on family business disputes see the family business disputes knowledge hub.

The Limits of Quasi-Partnership

Quasi-partnership status is not available in every private company, and the courts are careful not to allow the concept to expand beyond its proper limits. In larger companies with more formal governance structures and more commercially sophisticated shareholders, it becomes harder to establish that the company operated on the basis of the mutual trust and personal relationships that characterise a quasi-partnership.

The courts have also emphasised that quasi-partnership status does not give minority shareholders a veto over all management decisions, or entitle them to insist that the business be run exactly as they would prefer. What it does is require the majority to act in a way that is consistent with the legitimate expectations generated by the personal relationship between the shareholders and the basis on which they originally agreed to invest together.

It is also important to note that shareholders do not generally owe each other duties of good faith simply by virtue of being shareholders. Such duties arise specifically in the quasi-partnership context, or where they have been expressly agreed. Outside those situations, a shareholder is entitled to act in their own interests and to exercise their legal rights accordingly.

Legitimate Expectations in Quasi-Partnerships

The concept of legitimate expectations is closely related to quasi-partnership status. In a quasi-partnership, the legitimate expectations of shareholders go beyond what is formally provided for in the articles. They include the informal understandings and agreements that shaped the commercial relationship between the shareholders at the outset and that the minority relied on when agreeing to invest.

Common legitimate expectations in quasi-partnership companies include the right to participate in management, to receive a salary or remuneration from the business, to be consulted on important decisions, to share in profits through dividends, and to have the ability to exit the company at a fair value if the relationship breaks down. Where any of these expectations is defeated by the conduct of the majority, and that defeat was not anticipated or agreed as part of the original commercial bargain, the resulting conduct may constitute unfair prejudice.

Published Resources

My book Shareholder Disputes: A Practical Guide for Business Owners, Directors and Family Businesses examines the quasi-partnership concept in detail, including how it was developed in the case law from Ebrahimi through to modern decisions, and how it applies to the Whitcombe Family Business case study that runs throughout the book.

See all books.

Frequently Asked Questions

Does my company need to be described as a quasi-partnership to rely on the concept?

No. The courts apply the quasi-partnership analysis wherever the characteristics are present, regardless of how the company describes itself. What matters is whether the company was formed and operated on the basis of personal relationships, mutual trust and an expectation of shared participation in management.

Can a company with a formal shareholders’ agreement still be a quasi-partnership?

Yes. The existence of a formal shareholders’ agreement does not prevent a company from being a quasi-partnership. The court will consider the overall nature of the relationship between the shareholders, including both what is written down and the informal understandings that sit alongside the written documents.

What happens to a quasi-partnership when the relationship between the shareholders breaks down?

When the personal relationship that underpins a quasi-partnership breaks down irrecoverably, the courts often take the view that the commercial basis of the company has broken down with it. In those circumstances, the appropriate remedy is frequently a buyout that allows the parties to go their separate ways at a fair value, rather than a remedy that attempts to restore a working relationship that no longer exists.

Is a family company always a quasi-partnership?

Not automatically. A family company will usually have the characteristics of a quasi-partnership where it was formed and operated on the basis of personal and family trust, shared participation in management and informal expectations about how the business would be run and how value would be shared. However, larger family companies with more formal governance structures may have characteristics closer to an ordinary company, making quasi-partnership arguments harder to establish.

Get in Touch

If you are involved in a shareholder dispute in a family business, joint venture or small company run on the basis of personal relationships, I would be glad to discuss whether the quasi-partnership concept applies to your situation and what options may be available.

Call 020 4538 0246, use the contact form below, or book a call directly.

Important disclaimer: This page is provided for general information and educational purposes only and does not constitute legal advice. The content may not be legally accurate for your specific situation. You must not rely on anything on this page in respect of your legal rights. The law in this area relates to companies registered in England and Wales only. Always seek independent legal advice from a qualified specialist before taking or refraining from taking any action. The author accepts no responsibility for any decisions made or outcomes arising from use of this material. If you would like specific advice on your situation, contact me here.

What is a quasi-partnership and why is it relevant?