Quasi-partnership

How BC law treats it

A quasi-partnership is still a company under the Business Corporations Act, SBC 2002, c 57 (BCBCA), not a partnership. The label comes from Ebrahimi v Westbourne Galleries Ltd, [1973] AC 360, where the House of Lords held that a company formed on mutual confidence, with an understanding that each founder would participate in management and with restrictions on transferring shares, could be wound up on just and equitable grounds when one founder was excluded from management. Under the BCBCA, the finding matters in two places. In an oppression claim under s. 227, the court asks what the shareholder reasonably expected and whether the conduct was oppressive or unfairly prejudicial (BCE Inc v 1976 Debentureholders, 2008 SCC 69). In a quasi-partnership, reasonable expectations can include continued participation in management, a share of profits through salary or dividends, and a fair exit if trust breaks down. The court has broad remedial powers under s. 227(3), and the usual result is an order that one side buy the other's shares at fair value. The court can also order a company liquidated on just and equitable grounds (s. 324). Shareholders generally do not owe each other fiduciary duties, and courts do not apply partnership law to a quasi-partnership. By contrast, people who carry on business in common with a view of profit without incorporating are an actual partnership under the Partnership Act, RSBC 1996, c 348, whether or not they sign anything, and each partner is personally liable for partnership debts.

What it means for your business

Many BC companies start as two or three founders who trust each other and never sign a shareholders agreement. When the relationship fails, the one who is removed as a director or cut off from salary often has leverage through an oppression claim built on quasi-partnership expectations. Those claims are expensive and slow. A shareholders agreement that sets out management roles, deadlock resolution, exit rights and a valuation method is far cheaper than litigating what the founders reasonably expected. Example: Two friends incorporate a Burnaby landscaping company, each holding 50 percent and working full time in the business. When one removes the other as a director and stops his salary, the excluded founder may claim oppression on the basis that the company was a quasi-partnership and seek a buyout at fair value.

Risks and common mistakes

Assuming a quasi-partnership is governed by partnership law or creates fiduciary duties between shareholders. Relying on informal founder understandings instead of signing a shareholders agreement. Removing a founding shareholder from management without considering oppression exposure. Treating an unincorporated business run by two people as a quasi-partnership, when it is a true partnership with personal liability. Ignoring that a court may value the excluded shareholder's shares without a minority discount.