What makes a company a quasi-partnership?
20 March 2018
Lord Wilberforce’s observation that “a company, however small, however domestic, is not a partnership…” indicates that there are clear distinctions between even the smallest companies and partnerships. However, case law has shown that in some instances the court has been willing to deem companies “quasi” or “in substance” partnerships.
In the recent case of Wootliff v Ruston Turner, a shareholder and former company director was unsuccessful in his attempt to convince the court that the company was a quasi-partnership giving him a legitimate expectation that he would be involved in the day to day management of the business.
The company was the vehicle through which the former director and two other individual directors merged their two businesses. The company also had outside investment from a third party.
The former director was dismissed as CEO and removed as a director. He presented an unfair prejudice petition under section 994 Companies Act 2006.
He did not allege breach of any of the agreements or the company’s articles of association. His claim was that the company was a quasi-partnership and that therefore gave him a legitimate expectation that he would be employed by, a director of and concerned and involved in the management of, the company while he remained a shareholder. Accordingly his dismissal and removal amounted to unfairly prejudicial conduct in the company’s affairs.
The judge held that the relationships between the director/shareholders were not of a sufficiently personal nature to make the company a quasi-partnership and to overlay its governing documents with equitable considerations.
When is a company not a quasi-partnership?
The judge observed that strong working relationships were often required in business and would not necessarily be sufficient to create a quasi-partnership. The relationships between these directors were governed by professionally-drafted documents, and the fact that the merger had required external funding indicated a commercial transaction rather than an association formed on the basis of a personal relationship, involving mutual trust and confidence.
The pre-merger negotiations provided evidence that the merger was commercial in nature: there had been an arm's length negotiation culminating in a professionally drafted share purchase agreement.
This was not a case of a partnership evolving into a corporate body on the basis of a relationship of good faith and trust – the scenario behind many companies that had been adjudged to be quasi-partnerships.
Pooling resources, as in this business merger, is not of itself indicative of a relationship of a personal character or quasi-partnership (it may be a factor, but such a factor has to be set in the context of all the facts).
The judge considered that this business merger was commercial in nature and not an association formed on the basis of a personal relationship, involving mutual trust and confidence. The commercial nature of the merger did not permit room for an overlay of equitable considerations.
What is the benefit of a quasi-partnership?
It is difficult to bring an action against a company’s members or officers if there has been no breach of the company’s articles of association or other relevant agreement. However, members and officers of a company that is a quasi-partnership could be held to a higher standard of behaviour.
In Wootliff, the respondents acted within their powers under the company’s articles of association. The relationships between the parties were not of a sufficiently personal nature for the court to take equitable considerations into account. This meant that there was no reason to impose obligations on the parties above and beyond those contained in the legal documents which had been negotiated and agreed between them.
Our further thoughts on the case
Had the court found that the company was in fact a quasi-partnership, it is quite possible that the outcome would have been different. It is important to remember that the incorporation of a company brings with it new rights and obligations. Strong professional relationships are common, and clearly desirable, in companies. Such relationships alone would not prove the existence of a quasi-partnership. However, if the relationships in question are of a more personal nature, involving mutual trust and confidence, the court may be prepared to look beyond the legal documentation.