A recent case before the High Court illustrates the wisdom of having a shareholders’ agreement in place in small companies. In the case in question, the majority shareholder had paid himself levels of remuneration which meant that the dividends paid to the minority shareholder were less than she felt she should have received. This resulted in a breakdown of trust and confidence between the shareholders such that the only appropriate resolution of the situation was for the majority shareholder to purchase the shareholding of the minority shareholder.
The minority shareholder applied to the Court for a ruling that her shareholding should be valued pro-rata to the value of the company as a whole, contending that there was a quasi-partnership. Normally, valuations of minority shareholdings are discounted because the rights of minority shareholders are restricted. So, for example, a 49 per cent shareholding might be valued at 30 per cent of the total value of the company. However, where a quasi-partnership exists, the minority shareholder would normally receive the undiscounted value of his or her proportionate shareholding in the company.
A quasi-partnership exists where the relationship between the shareholders is personal and based on trust, where the shareholders are all involved in the management of the business and where they provide more input to it than merely advancing capital.
However, in this case the Court found that the necessary elements for a quasi-partnership did not exist and the minority interest should not be valued pro-rata.