UK: Increased Minority Shareholder Protection And The Quasi Partnership

Last Updated: 7 August 2014
Article by Simon Moore

Every minority shareholder in a company has the right to complain if its rights have been unfairly prejudiced. Common examples of unfair prejudice include directors exceeding their powers, misapplication of company funds, and selective share issues. In most cases, the minority shareholder's rights are contained in the articles of association, the duties imposed on the directors by law, and any shareholders agreement which might exist. Actions in breach of those agreements and duties gives the court the ability to require the majority shareholder to buy out the minority interest at a "fair value", usually fixed at the date of the court order following expert valuation evidence taking account of any value reduction caused by the conduct complained of.

It is very rare for a shareholder in a company whose shares are publicly traded to exercise these rights. This is because that shareholder always has the option of selling its shares into the market, and exiting its investment that way. So unfair prejudice rights are, in practice, only exercised by a minority shareholder in a private company. Here, the two usual problems are, first, that the majority shareholder is often only acting in accordance with its strict legal rights (so although action taken by that majority may be prejudicial, it is not unfair), and secondly when it comes to any buy out price payable by the majority, a minority interest is usually worth much less than the pro rata value of the company (because of the lack of control). But if the relationship between the shareholders amounts to a "quasi partnership", not only is the ability of the minority to exit the company increased, that minority can usually be paid the full, undiscounted, price for its shares.

Quasi partnerships are nothing new – they have existed since 1973 – and they usually have the same defining features:

  • a relationship between the shareholders formed or continued on the basis of mutual trust and confidence,
  • an understanding that they will all participate in the management of the business, and
  • restrictions on the transfer of shares.

If these feature are present, a Court will give effect to informal agreements and understandings which have been relied on even if they do not have strict legal effect. The Courts have also made it clear that a purely commercial relationship can evolve over time into a quasi partnership, and equally a quasi partnership at the outset can evolve into a purely commercial relationship. Essentially, a "quasi partnership" is created by a situation where individuals agree to go into a business venture together, share risk and reward, jointly manage, agree that third parties cannot become involved without their joint consent, and rather than conduct their business via a conventional partnership with the unlimited personal liability that involves , instead decide to do this through holding shares in a limited liability company, and being directors of that company.   

A fact pattern which gives rise to a "quasi partnership" has three key advantages for the minority shareholder enabling it to exit its investment at full value:

  • The first advantage is that unfair prejudice can exist even though the majority is acting within its strict legal rights, and where there is no breach of a legally enforceable agreement or duty. An easy example would be the removal by the majority of a director appointed by the minority interest: under the articles and general company law the majority can usually do this as of right and there is nothing for the minority to complain about. But in a "quasi partnership" this can amount to unfair prejudice if the minority can show a legitimate expectation that it would be involved in the management of the business, even if that expectation is not legally binding.
  • The second advantage is that, usually, an irretrievable breakdown in the relations between shareholders of a company is not unfairly prejudicial, but in a quasi partnership where conduct results in an irretrievable breakdown in the relationship of trust and confidence, that conduct can be unfairly prejudicial entitling the minority to complain.
  • Finally, on a court ordered exit where the majority must buy out the minority, no discount is applied when the minority interest is valued: it is a simple pro rata valuation.

"Unfairness" is judged by the ordinary meaning of the word, and just because conduct is prejudicial does not mean it is unfair, likewise unfair conduct is not automatically prejudicial.  Although the cultural background and expectations of the shareholders can be relevant, both "unfairness" and "prejudice" have to be individually established by objective standards. Simple mismanagement is not enough, nor does it give the minority an exit route from a "deadlocked" company. Typical examples of unfair prejudice in a quasi partnership context include:

  • exclusion of the minority from management of the company, usually by removal as a director. But if the articles or any shareholders agreement provides a mechanism for the purchase of the member's shares at fair value, then it will be hard to prove that the member should not be excluded because the articles have contemplated just such an exclusion   
  • excessive remuneration paid to the majority. This can be difficult on its own for the minority to challenge, but is frequently used if it is clearly excessive given the circumstances of the company
  • inadequate dividends, if the basis on which the shareholders went into business was that profits would be distributed, more so if other shareholders are receiving directors' remuneration   
  • being diluted, although this is harder to do if the minority buys in after the company has been formed without an agreement to retain the existing shareholding proportions
  • alteration to the articles of association. A company has the power to do this by special resolution, but that power has to be exercised bona fide for the benefit of the company as a whole and not for the improper purpose of dilution

But it is important for the minority to remember that the Court is carrying out a balancing act. Misconduct on the part of the minority may result in prejudicial conduct by the majority not being unfair. And even though there is no strict time limit for the minority to bring its claim against the majority, delay in doing this, particularly when combined with accepting benefits from the company with full knowledge of the facts, means there is a significant risk of the court deciding that the minority has either accepted the unfairness, or cannot really have been prejudiced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.