Increased Minority Shareholder Protection And The Quasi Partnership

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...