Friends and families at war: how to resolve or avoid quasi-partnership disputes

Families often go into business together. Sometimes the combination of family and business works well and sometimes it doesn’t. When it doesn’t, one party might say “you’re my father/mother/brother etc”, “you promised X” and “I trusted you.” In legal terms, that person might be saying “we had a quasi-partnership.”

The term “quasi-partnership” is a legal term used to describe a company in which the shareholders have a relationship of mutual trust and possibly an understanding that all or some of them will participate in the conduct of the business. If the court finds a quasi-partnership exists, it might give effect to informal agreements one party relied upon. In one sense, the court is finding that the legal relationship set out in the Articles of Association of a company are not the only relevant relationships – the family relationships matter too.

Where unfair prejudice petitions are concerned, the existence of a quasi-partnership may make it unfair for those conducting the affairs of the company to rely upon their strict legal rights and powers if they have exercised those powers contrary to good faith.

The recent case of Smith v Smith [2022] EWHC 1035 (Ch) is a good example. The majority shareholder (Joan) removed the minority shareholder (Tim) as a director and dismissed him as an employee. Joan had the strict legal right to do so on the letter of the law. Tim argued that the conduct was unfair because they had a quasi-partnership and she had not made a reasonable offer for his shares at the time of the termination of his employment. The court found that a quasi-partnership existed and that Joan’s conduct had been unfairly prejudicial.

What are the takeaways?

1. Just because you are family does not mean you have a quasi-partnership. You can inherit shares but it doesn’t automatically follow that you will inherit a quasi-partnership. The court will look at the specific facts of each case. It is possible to be a family and act on a purely commercial level.

2. You do not necessarily need to be able to point to the exact timing and wording of the relevant promise/agreement. In Smith, the petitioner was promised that he would one day be the majority shareholder. He couldn’t set out the exact timing/wording of that promise but had evidence that both parties acted on that understanding and that he had acted in detrimental reliance on that promise.  

3. Relying on equitable considerations such as the existence of a quasi-partnership is not an ideal starting point. Shareholders should ensure that they set up a business properly in the first case, including entering into a properly drafted shareholders’ agreement. That might minimise one party’s need to rely on equitable considerations even in a family setting.

4. Friends and families go into business with the best of intentions. But not everyone’s intentions are the same and some intentions change over time. Quasi-partnership disputes are fact sensitive so require specialist advice to resolve. Again, they are best avoided by signing up to a shareholders’ agreement in the first place.

If you have concerns about the conduct of fellow shareholders and/or directors then contact our corporate disputes solicitors George Gwynn or Morgan Rees to seek specialist advice on the options available to you.

If you would like advice on setting up a business with family members and avoiding these problems, speak to our corporate partner Sarah Ward.