Quasi-Partnership in Family Companies

Quasi-partnership is one of the most important concepts in family business law. Specifically, it describes a limited company that has the legal form of a company but the underlying character of a partnership. As a result, the courts apply additional principles to quasi-partnerships that do not apply to ordinary companies. Importantly, the great majority of family businesses are quasi-partnerships in legal terms. Crucially, whether a particular company is a quasi-partnership often determines the outcome of a family business dispute. As a result, understanding the doctrine is essential for any family business owner contemplating or facing a dispute.

This page explains what a quasi-partnership is, when a family company will be treated as one, why the doctrine matters, and what its practical consequences are. Specifically, it covers the legal test, the leading cases, the impact on remedies and valuation, and the situations where the doctrine does or does not apply.

What a quasi-partnership is

In short, a quasi-partnership is a limited company that the courts treat as if it were a partnership for certain purposes. Specifically, the shareholders have agreed, expressly or implicitly, to participate in the company on terms that go beyond what the articles of association set out. As a result, the company is run on the basis of mutual trust and confidence, in the same way that a traditional partnership is run.

Importantly, the term “quasi-partnership” is not in the Companies Act. By contrast, it is a creation of the courts, developed over more than fifty years of case law. Crucially, the doctrine fills a gap. Specifically, the strict legal rights set out in the articles of association rarely capture the reality of how family businesses are actually run. As a result, the courts have developed the quasi-partnership doctrine to give legal effect to the parties’ real understanding of how they would treat each other.

For the wider statutory framework, see the legal framework for family business disputes.

Where the doctrine came from

Importantly, the modern doctrine of quasi-partnership comes from the House of Lords decision in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. Specifically, the case concerned a company set up by two friends to run a carpet business. They had previously been partners. They incorporated the business but continued to run it on the same equal-partnership basis. After many years, one of the original partners brought his son into the business and the two of them, holding a majority of the shares, voted the third partner off the board. As a result, the third partner had no role in management, no salary and no realistic prospect of selling his shares.

Crucially, the House of Lords held that the petitioner was entitled to a just and equitable winding-up of the company under what is now section 122(1)(g) of the Insolvency Act 1986. Specifically, Lord Wilberforce identified three indicators of a company that should be treated as a quasi-partnership: an association formed on the basis of personal relationship involving mutual confidence, an agreement or understanding that some or all of the shareholders would participate in the conduct of the business, and a restriction on the transfer of shares so that a member could not take his stake out and go elsewhere. As a result, the case established that the strict legal rights set out in the articles of association are not always the whole story. By contrast, the underlying understanding between the parties can have legal force.

The three Ebrahimi indicators

Importantly, the three indicators identified in Ebrahimi remain the starting point for any quasi-partnership analysis today. Specifically, the question is whether the company has the following features.

Mutual trust and confidence

First, the association is formed on the basis of a personal relationship involving mutual trust and confidence. Specifically, this is the foundation of a quasi-partnership. Importantly, it is almost always present in a family business. By contrast, the shareholders in an ordinary public company do not know each other and do not rely on each other. As a result, the family element is often the decisive factor in finding that the company is a quasi-partnership.

Participation in management

Second, there is an agreement or understanding that some or all of the shareholders will participate in the conduct of the business. Crucially, the participation does not need to be equal. Specifically, what matters is the expectation that each participating shareholder will have a continuing role. Importantly, in family businesses this is usually demonstrated by how the parties have actually behaved over time rather than by anything in writing.

Restriction on share transfer

Third, the company’s constitution restricts the transfer of shares. Specifically, this is what locks the parties together. Crucially, in a quasi-partnership, a shareholder who falls out with the others cannot simply sell their shares to a third party and walk away. As a result, the only way out is to be bought out by the other shareholders, often only with their cooperation. By contrast, in a public company, the existence of a market means that a shareholder always has an exit.

Importantly, the three indicators do not all need to be present in every case. Specifically, the courts have made clear that the doctrine is flexible. By contrast, the presence of all three is strong evidence that the company should be treated as a quasi-partnership.

Why family businesses are typically quasi-partnerships

Crucially, the great majority of family businesses meet the Ebrahimi test. Specifically, family members go into business together on the basis of mutual trust and confidence. They expect to participate in the management of the business. They are usually unable to transfer their shares freely because of restrictions in the articles, the existence of a shareholders’ agreement, or simply the absence of any third party that would buy a minority stake in a family business.

As a result, the default position in a family business is that the company will be treated as a quasi-partnership. By contrast, in some cases the parties have specifically structured their arrangements to avoid the doctrine. Importantly, this is rare in family businesses and would normally require very clear evidence of an intention not to operate on quasi-partnership terms.

Why the doctrine matters

Importantly, whether a company is a quasi-partnership matters because the legal consequences are very different. Specifically, the doctrine has three main practical effects.

Legitimate expectations beyond the articles

First, the shareholders in a quasi-partnership are taken to have legitimate expectations beyond the strict legal rights set out in the articles of association. Specifically, these expectations can include participation in management, access to information, and a fair share in the rewards of the business. Importantly, this means that conduct which would be unobjectionable in an ordinary company can be unfairly prejudicial in a quasi-partnership. As a result, the unfair prejudice route is significantly more powerful in a quasi-partnership case. For more on this, see unfair prejudice petitions in family business disputes.

Just and equitable winding-up

Second, where the relationship of mutual trust and confidence has broken down, the court can wind up the company on the just and equitable ground under section 122(1)(g) of the Insolvency Act 1986. Specifically, this is the remedy granted in Ebrahimi itself. Importantly, just and equitable winding-up is a remedy of last resort because it destroys the value of the business. As a result, it is rarely the right outcome in practice. By contrast, the existence of the remedy gives the court significant leverage to encourage settlement on more constructive terms.

Share valuation without minority discount

Third, and most importantly for many cases, where the court orders a buyout of a quasi-partner’s shares, it usually values them without applying a minority discount. Specifically, the court treats the shares as a proportion of the overall value of the business rather than as a separate minority stake. As a result, the petitioner receives the proportional value of the company. Crucially, this can produce a substantially higher figure than would otherwise be the case. For more on this, see family business valuation in a dispute.

The leading case on no minority discount

Crucially, the leading authority on the no-minority-discount rule is Re Bird Precision Bellows Ltd [1986] Ch 658. Specifically, the Court of Appeal held that in a quasi-partnership case, the shares should ordinarily be valued without applying a minority discount. Importantly, Nourse J at first instance had reasoned that the parties had agreed at the outset to participate on equal terms, and the court should not allow the majority to use the form of incorporation to defeat that agreement. The Court of Appeal upheld this approach. As a result, the rule has been the starting point for quasi-partnership valuations ever since.

Importantly, the rule is not absolute. Specifically, the court retains a discretion to apply a discount where it would be fair to do so. By contrast, the burden is on the party arguing for a discount to justify it. Crucially, the case law since Bird Precision Bellows has confirmed that a minority discount is the exception, not the rule, in quasi-partnership cases.

When a quasi-partner can be required to take a discount

Importantly, there are situations where even a quasi-partner can be required to accept a minority discount. Specifically, this typically happens where the petitioner’s own conduct has contributed to the breakdown of the relationship. The leading authority is Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), in which the court applied a discount in a case where the petitioner had engaged in conduct that the court considered relevant.

More dramatically, in Davies v Lynch-Smith and others [2018] EWHC 2336 (Ch), the court applied a 60 per cent discount to the petitioner’s shares. Specifically, the court took the view that the petitioner had behaved in such a way that he should be treated as a willing seller of his shares rather than as someone being forced out. As a result, the case is a salutary reminder that quasi-partner status does not protect a petitioner whose own conduct has been part of the problem.

Crucially, the lesson for family business owners is that conduct matters. Specifically, even a strong unfair prejudice case can be undermined by the petitioner’s own behaviour. Importantly, taking early advice from a direct access barrister can help avoid steps that later prove costly.

When a company will not be treated as a quasi-partnership

By contrast, not every closely-held company is a quasi-partnership. Specifically, the doctrine does not apply where the relationship between the shareholders is purely commercial, or where the parties have specifically agreed not to operate on quasi-partnership terms. Importantly, the leading authority on this is Re Sam Weller & Sons Ltd [1990] Ch 682, which made clear that the doctrine is not confined to two-person companies but does require the underlying personal relationship.

Specifically, the following are situations where a company is less likely to be treated as a quasi-partnership.

• First, where the shareholders are at arm’s length and have no personal relationship.
• Second, where there is a comprehensive shareholders’ agreement that sets out the parties’ rights and obligations exhaustively. As a result, the parties have signalled that the strict legal rights are the whole story.
• Third, where the company has multiple unrelated investors who have invested on the basis of a fixed deal rather than a continuing personal relationship.
• Fourth, where the shareholders have inherited their shares without any direct personal relationship with each other. Importantly, this can be a difficult question in multi-generational family businesses.
• Finally, where the shares can be freely transferred. Crucially, the absence of any share transfer restriction is often a strong indicator that the doctrine does not apply.

Multi-generational family businesses and the doctrine

Importantly, the doctrine raises particular questions in multi-generational family businesses. Specifically, the original founders may have set up the business on quasi-partnership terms. By contrast, by the third generation, the company may have a pool of cousin-shareholders who have never met each other and have no direct personal relationship. As a result, the question is whether the quasi-partnership character of the company can survive across generations.

Crucially, the courts have generally taken the view that the doctrine can extend across generations where the underlying conditions are preserved. Specifically, where the next generation has inherited shares on the basis that they will continue to participate in the management of the family business, the quasi-partnership relationship can be carried forward. By contrast, where the next generation has simply inherited financial interests with no expectation of management participation, the company may have ceased to be a quasi-partnership. Importantly, this is one of the areas where careful planning at the time of generational transfer can preserve or change the legal character of the business.

For more on the generational dynamics, see the next generation in family business and the passive shareholder.

How the doctrine interacts with shareholders’ agreements

Importantly, the existence of a shareholders’ agreement can affect whether a company is treated as a quasi-partnership. Specifically, a comprehensive shareholders’ agreement that sets out the parties’ rights and obligations in detail may be evidence that the parties intended their relationship to be governed by the agreement rather than by the doctrine. By contrast, a thin or basic shareholders’ agreement is unlikely to displace the doctrine.

Crucially, family businesses considering a shareholders’ agreement should understand the implications. Specifically, an agreement that codifies the existing quasi-partnership relationship can preserve the protections that the doctrine provides. By contrast, an agreement that purports to exclude the doctrine should be entered into with caution and full understanding of the consequences. For more on this, see shareholders’ agreements for family businesses.

What the doctrine means in practice

Crucially, the practical consequences of quasi-partnership status are significant. Specifically, for the minority shareholder, the doctrine provides three main benefits.

First, the unfair prejudice route is more powerful. Specifically, conduct that would not be unfair prejudice in an ordinary company often is in a quasi-partnership. Second, the valuation is more favourable. Importantly, the no-discount rule can produce a substantially higher figure than would otherwise apply. Third, the just and equitable winding-up route is available as a remedy of last resort. As a result, the minority shareholder has significantly more leverage than they would in an ordinary company.

By contrast, for the majority shareholder, the doctrine imposes higher standards of conduct. Specifically, the majority cannot rely on the strict legal rights set out in the articles. Crucially, conduct that complies with the articles can still be unfairly prejudicial if it breaches the underlying understanding between the parties. As a result, the majority needs to act with greater care than would otherwise be required.

How to know if your company is a quasi-partnership

Importantly, the question whether a particular family business is a quasi-partnership is fact-specific. Specifically, there is no fixed checklist. By contrast, the indicators identified in Ebrahimi remain the starting point, with the courts taking a flexible approach to the application of the test in any particular case.

As a guide, the following features are typically present in quasi-partnerships.

• First, the shareholders are family members or close friends. Specifically, the company was formed on the basis of personal relationships.
• Second, the shareholders all expected to participate in the running of the business, or expected each other to do so on agreed terms.
• Third, the shareholdings reflect what the parties contributed, whether in capital, work or expertise.
• Fourth, decisions have historically been taken collegiately rather than by strict application of majority rule.
• Fifth, the company’s articles or a shareholders’ agreement restrict the transfer of shares.
• Sixth, the parties have always treated the business as a joint enterprise rather than as a passive investment.
• Finally, the company has not had third-party investors who deal with the business at arm’s length.

Importantly, where most or all of these features are present, the company is very likely to be treated as a quasi-partnership. Crucially, this is the position for the great majority of family businesses in England and Wales.

Frequently asked questions

What is a quasi-partnership?

In short, a quasi-partnership is a limited company that the courts treat as if it were a partnership for certain purposes. Specifically, the shareholders have agreed to participate in the company on the basis of mutual trust and confidence, expecting to share in the management of the business and being unable to transfer their shares freely. As a result, the courts apply additional protections to the shareholders that do not apply to ordinary companies.

How does a company become a quasi-partnership?

Typically, a company becomes a quasi-partnership through the way it is set up and run. Specifically, the leading authority is Ebrahimi v Westbourne Galleries Ltd, which identified three indicators: an association formed on the basis of personal relationship involving mutual trust and confidence, an agreement that some or all of the shareholders would participate in the conduct of the business, and a restriction on the transfer of shares. Importantly, the great majority of family businesses meet this test.

Why does quasi-partnership status matter for share valuation?

Crucially, in a quasi-partnership case the court usually values the shares without applying a minority discount. Specifically, this means the petitioner receives the proportional value of the company. By contrast, in an ordinary company a minority shareholder would typically receive a discounted price. The leading authority is Re Bird Precision Bellows Ltd [1986] Ch 658. As a result, the difference in value can be substantial.

Can a family business avoid being a quasi-partnership?

In principle, yes. Specifically, a comprehensive shareholders’ agreement that sets out the parties’ rights and obligations exhaustively, combined with conduct consistent with that agreement, can displace the doctrine. By contrast, this requires careful planning and an understanding of the consequences. Importantly, most family businesses benefit from quasi-partnership status because it protects minority family members. As a result, deliberately excluding the doctrine is rarely the right strategy.

Can quasi-partnership status survive across generations?

Yes, in many cases. Specifically, where the next generation inherits shares on the basis that they will continue to participate in the management of the family business, the quasi-partnership relationship can be carried forward. By contrast, where the next generation simply inherits financial interests with no expectation of management participation, the company may have ceased to be a quasi-partnership. Importantly, careful planning at the time of generational transfer can preserve or change the legal character of the business.

Further reading on this site

• Family Business Disputes (main page)
• The Legal Framework for Family Business Disputes
• Unfair Prejudice Petitions
• Shareholders’ Agreements
• Family Business Valuation
• The Have and Have-Not Pattern
• The Passive Shareholder
• The Next Generation
• Why Mediation Is Usually the Right Starting Point
• The Most Important Family Business Cases
• Unfair Prejudice Claims and Derivative Actions
• Direct Access Barrister

Get advice on your situation

Whether your family business is a quasi-partnership and what the consequences are for any dispute is often the single most important question. Specifically, the answer can determine whether you have a strong unfair prejudice claim, whether the valuation will be favourable, and whether the just and equitable winding-up route is available. As a result, early specialist advice is one of the most valuable investments you can make. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers the quasi-partnership doctrine in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.