Oppression of a minority shareholder is often carried out through otherwise lawful actions of the majority in exercise of their strict legal rights. This can leave a minority shareholder unable to point to a clear breach of his/her rights, and shield a majority shareholder from complaint. A common example is the removal of a minority shareholder from management through the legitimate exercise of voting rights.
However, if it can be established that the relationship between shareholders amounts to a "quasi-partnership" then broader equitable principles can be introduced, to enable a court to find that otherwise lawful actions are in fact oppressive. Where a quasipartnership exists, a court can give effect to expectations and informal understandings between shareholders as to how the company is to run, even if these conflict with the majority's strict legal rights.
HOW DOES A QUASI-PARTNERSHIP COME ABOUT?
A quasi-partnership exists where shareholders go into business together on foot of a relationship of mutuality, trust and confidence – a relationship similar to that found in a partnership. A useful approach is to ask if the company is a mere vehicle for the shareholders' mutual ambitions; if so, it fits the paradigm of a quasi-partnership. Quasi-partnerships are most commonly found where:
- »» partners decide to convert to a company to avail of limited liability, and continue to operate as they did before; or
- »» a business venture that could otherwise have been a partnership is established as a company but is run as a partnership.
Other commercial relationships can evolve into a quasi-partnership. A company, that begins life as a purely commercial arrangement, can become a quasi-partnership over time. Likewise, a company that begins life with all the hallmarks of a quasi-partnership can develop into a purely commercial arrangement as it evolves. The following characteristics indicate a quasipartnership:
- an association formed on the basis of mutual trust and confidence;
- an understanding that all or certain of the shareholders will participate in the management of the company; and
- restrictions on the transfer of shares, so that the quasi-partner cannot freely exit.
The High Court has recently emphasised that the mere existence of a friendly relationship does not substantiate the existence of a quasi-partnership. In Hamill v Vantage Resources Limited, the applicant argued that because he and the majority shareholder had been friends before he acquired shares in the company, they had a special relationship of trust and confidence akin to a partnership. The court disagreed, referencing the formal manner in which the applicant had entered the company, through a detailed shareholders' agreement.
Cases such as Hamill demonstrate the difficulty in arguing quasi-partnership where there is a shareholders' agreement in place. While not always conclusive, the existence of formalised arrangements that define shareholder rights, will generally operate to preclude the court from allowing unstated expectations and understandings to govern the operation of the company. If, for instance, a shareholders' agreement provides a mechanism for the disposal of minority's shareholding, it would be extremely difficult to prove a legitimate expectation/understanding or informal agreement that the minority should not be excluded/removed from the business – in fact, his/her exclusion/removal has been specifically envisaged.
WHAT ARE MINORITY SHARES WORTH IN A QUASI-PARTNERSHIP?
The presence of a quasi-partnership can affect the valuation of shares should a court decide to resolve the matters complained of by ordering the majority to buy out the minority's shares, or if a settlement is reached on that basis.
Where a quasi-partnership is found to exist, the courts may direct that a minority discount should not be imposed when valuing the minority shareholding. Valuation issues will be further discussed in Part IV to this Guide.
IMPACT OF FINDING THE EXISTENCE OF QUASI-PARTNERSHIP
If a quasi-partnership is found the court can override strict legal rights to give effect to otherwise unenforceable agreements and understandings as to how the company is to be run and the minority's place within it. In these circumstances, oppressive conduct may be found where members:
- are precluded from participating in management where there is a legitimate expectation that they would be so included; or
- engage in conduct which would result in an irretrievable breakdown the trust and confidence between them.
In the Hamill case the court confirmed that the conduct of the majority in a quasi-partnership should be considered as a whole. Complaint as to one particular act might on its own seem petty or inconsequential; it is the cumulative effect of several acts taken together that matters.
In the case of oppression in quasi- partnerships, particularly where there are equal shareholdings, the courts may be more likely to consider an order that the company be wound up, on the basis that the very existence of the company is interdependent on the participation of the quasi-partners.
In Part III to this Guide, we will look at the circumstances in which the courts might agree to hear an application regarding shareholder oppression in camera.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.