Mixing Business With Family: Quasi-Partnership In Family Companies

• Published date: 27 May 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Appleby
• Author: Mr Andrew Jackson

Given the steady flow of petitions into the Cayman Islands Grand Court seeking the winding up of companies on the just and equitable basis, ¹ the recent decision of the English High Court in Smith v Smith and Clive Smith (Oxford) Ltd [2022] EWHC 1035 (Ch) ² has perhaps provided a timely reminder as to the circumstances in which a family-owned company may be found to have been operated as a 'quasi-partnership', such that an irretrievable breakdown in trust and confidence between the quasi-partners may justify its winding up; alternatively, a buyout of the petitioner's shares without the imposition of any minority discount.

It is trite law that a quasi-partnership company is one in which the shareholders 'possess rights, expectations and obligations which are not submerged in the company structure'; 'where the legal, corporate and employment relationships do not tell the whole story, and' behind them there is a relationship of trust and confidence similar to that obtaining between partners, which makes it unjust or inequitable for the majority to insist on its strict legal rights'. ³ In the context of a family-owned company, particularly one in which the shareholders are (at most) a few close relatives, there will accordingly be some temptation to assume, against the backdrop of the familial relationship, that the company must have been operated as a quasi-partnership. However, the review of English authority which the English High Court performed in Smith (above) makes clear that any such temptation should be resisted: the manner in which the relevant family-owned company was operated prior to the breakdown will be examined carefully to determine whether the company properly ought to be considered a quasi-partnership.

In Smith itself, the company in question had previously been a quasi-partnership between a husband and wife, who were equal shareholders. Following the husband's death, the wife received his 50% shareholding. Shortly thereafter, she transferred a 20% shareholding to one of their sons who, for several years, had already been a director and worked within the company. The relationship between the mother and son remained positive for several more years, but serious disagreements then arose between them and the son was dismissed from his employment and removed as a director. The son eventually presented an unfair prejudice petition, which the mother vigorously resisted.

In addition to the leading English authorities on quasi-partnership generally...