Given the steady flow of petitions into the Cayman Islands Grand Court seeking the winding up of companies on the just and equitable basis,  the recent decision of the English High Court in Smith v Smith and Clive Smith (Oxford) Ltd  EWHC 1035 (Ch)  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”.  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,  the Court considered the decisions in three earlier “family company” cases: Fisher v Cadman  1 BCLC 499; Waldron v Waldron  EWHC 115 (Ch); and Dinglis v Dinglis  EWHC 1664 (Ch).
- In Fisher, three siblings inherited the shares in a company from their parents: the two brothers together held a majority and controlled the company, and the sister did not participate in running it. The Court there found that equitable constraints did apply to the brothers’ operation of the company and dealings with their petitioning sister; and furthermore, that the relationship could be described as a quasi-partnership, notwithstanding that some typical features were absent. The company had begun life as a clear quasi-partnership involving the parents and the two sons, and was found effectively to have continued as such after each parent had passed on. Its affairs were also handled very informally throughout, reflecting a common understanding on all sides that the Articles were not a complete and exhaustive statement of how the relationship between the members inter se, and between the members and management, should be conducted.
- Waldron concerned a company which had been established by the parents of four siblings, in which the shares were transferred by the parents to the children over time. The issue was whether the siblings’ relations regarding the affairs of the company were governed by equitable considerations which precluded the managing director brother from dismissing two of his brothers from their employment with the company. The Court noted that more than the ownership of shares by immediate relatives, and even their respective appointments as officers of the company and/or employment within it, was required to establish that equitable considerations were present: “Where the equitable considerations are said to derive from an agreement or understanding between members of a company a degree of precision is required”. The Court there considered that the family element in the relationship between the three brothers as officers and employees of the company was significant, and that equitable constraints had arisen between them.
- In Dinglis, a father originally owned 99 of 100 shares in a company. Years later, he transferred some shares to his children, but retained a 64% shareholding. Several more years later, his son, to whom he had given a 12% shareholding, became a director of the company and assumed increasing responsibilities with respect to it. More than a decade after the son had taken on that role, the father removed him as a director. The son contended that the company had become a quasi-partnership, and that the father had been constrained from removing him. The Court ultimately held that such a case had not been made out. Having observed (as in Waldron, above) that “the mere fact that a company is a family company does not result in the conclusion that it is a quasi-partnership, in which the exercise by the majority of their legal rights are [sic.] subject to equitable constraints”, it considered whether the son had “shown sufficiently clearly on the evidence the existence of any agreement or understanding, binding in fairness and equity, that he would be entitled to participate in the management… for so long as the business… continued (or at least, so entitled in the absence of an appropriate offer to purchase his shareholding)?” It found that the father had not relinquished majority control of the company by gifting shares to the children, having instead been motivated by a desire to provide for his family; moreover, he had remained sole director of the company at that time. But more importantly, the son had been unable to demonstrate any agreement or understanding that the father’s right to remove him from management had been curtailed – and the Court observed that any such agreement or understanding would have been inconsistent with several other contemporaneous matters, including evidence which one daughter had given in related proceedings (also noting that neither daughter had given evidence in support of the son’s position in the instant case).
In the light of those authorities and on the facts before it, the Court in Smith went on to conclude that the company there had become a quasi-partnership between the mother and son, or at least one in which the mother was subject to equitable constraints vis-à-vis the son, having regard to 11 factors which supported that conclusion. These included, in addition to the matters already noted above, that:
a. the parents had intended that the son should succeed them;
b. to that end, the son had been appointed as a director, and then encouraged by the father to give up his studies and other business endeavours to work in the company;
c. the mother had represented to a bank, in mortgage application documents prepared for the son (well before the father’s death), that the son would likely receive shares in the company within a few years;
d. the son was involved in decision-making within the company as part of the succession plan;
e. it was at least implicitly understood that the son would remain employed and involved in managing the company for so long as he remained a shareholder;
f. when the relationship had broken down, the mother had offered to split the business with the son;
g. the company had always been run informally, with no formal or regular board meetings and no formal contracts or terms of employment, due to the relationship of mutual trust and confidence which existed between the mother and son (as the mother accepted in cross-examination); and
h. the Articles enabled the mother to refuse registration of any transfer of the son’s shares.
Smith and the prior authorities which it considers thus make clear that, where a petitioner contends that the relevant family-owned company was a quasi-partnership at the material times, evidence of the alleged agreement or understanding between the putative quasi-partners is likely to be crucial to the success of that case – and consequently to avoiding the application of a minority discount to any valuation of the petitioner’s shares if, as an alternative to winding up the company, a buyout order is made. Given the highly persuasive nature of English authority in the Cayman Islands courts generally, it is to be expected that the Cayman Islands Grand Court will continue to take such an approach when presented with such cases.
 As we recently noted in our article “An ‘Unprecedented’ Just & Equitable Winding Up of a Solvent Cayman Islands Captive – Re Virginia Solution SPC Ltd”, 29 April 2022,
 Which the Cayman Islands courts would treat as persuasive authority.
 See Re CVC/Opportunity Equity Partners Ltd  CILR 77 (a decision of the Privy Council on appeal from the Cayman Islands Court of Appeal).
 Incl. Ebrahimi v Westbourne Galleries Ltd  AC 360; O’Neill v Phillips  1 WLR 1092; and Strahan v Wilcock  BCC 320.
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