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Managing The People Liability In Family Firms

26th October 2015 Peter Brewer, Clarke Willmott LLP

Quasi-partnerships and how to avoid disputes in the family business.

The biggest asset and the biggest liability of any business is its people; people can be a liability as they have a tendency to fall out with each other. This can particularly be the case when the people involved have known each other for some time or they are related to each other.

Most disputes can be resolved but what happens if there is no resolution? What happens if those in dispute are also the shareholders in the same company, for instance in a family business? And what happens if one party starts to behave in an aggressive or prejudicial way towards the other?

There is an established legal concept that can help in these cases: quasi partnership.

In small companies with a relatively straightforward shareholder structure, and where the shareholders have a relationship of mutual trust and confidence and a reasonable expectation that they will participate in management - often a characteristic of family businesses - then the company is likely to be deemed a “quasi partnership”. 

Why is this important? If a shareholder feels that they are being treated unfairly then they can seek an order that the majority shareholders have conducted themselves in a way that is unfairly prejudicial upon the interests of the other members. It is relatively easier to obtain relief in a quasi partnership than it is in a normal company; this is because the relationship of trust and mutual confidence and the expectation of participation in management are fundamental to the position of the shareholders within the quasi partnership and a denial of those rights would generally be both unfair and prejudicial. 

The Court has a very wide range of remedies that it can grant to a wronged shareholder who brings a claim alleging unfair prejudice; however the most common is the buy back of the wronged shareholder’s shares. Importantly, if a shareholder’s shares are in a quasi partnership then they will be valued without any discount applied for them being a minority interest in a private company. This can have a substantial impact on the financial value of the shares. 

In conclusion, if you are a director and a shareholder of a business which you think might be a quasi partnership, and you have been locked out of the management or believe that your majority shareholders are treating you in an unfairly prejudicial way, then you should seek  legal advice on the rights you have and the remedies you can obtain on account of the nature of your business. 

 

About the Author - Peter Brewer is an expert in commercial and private litigation for Clarke Willmott, LLP.  For more information visit their websiote at www.clarkewillmott.com

 

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