“Being realistic can be visionary”: Lessons in the school of shareholder and partnership disputes

Shareholder and partnership disputes are highly charged affairs. Although the circumstances in which such disputes arise are diverse, the stage on which they play out will commonly be a relationship of trust and confidence (to one degree or another) established between individuals over a lengthy period. The failure of such a relationship is going to be painful.

In its definition, the ‘trust and confidence’ at stake should not be misunderstood to necessarily arise from a relationship of affection (although that is possible) or entirely common interests (though that again may be the case), but one that is at the very least centred on a bargain of mutually aligned interests. When the alignment of interests diverges, the values in the bargain are tested and trust and confidence can evaporate quickly and irrevocably.

At that point, a fight for control of the assets at stake may well follow. When that happens, if the agreed legal mechanisms for the regulation of the relationship (whether the constitution of the company and any shareholder agreement or the agreed terms of the partnership) do not provide a managed route to an equitable separation of interests, the divorce that follows can be highly problematic and very costly for both parties, as resort is had to the tools for resolution offered by company or partnership law and a call is made for adjudication by the courts.

A court’s approach to a broken relationship

The levers of control offered by the constitution of a company are not inviolable. Where the vehicle for fulfilment of the venture is a company, but the character of relationship is one of partnership, the courts may apply an amphibious approach to determining whether there has been an irretrievable breakdown in trust and confidence between the players and treat the company setting as a ‘quasi-partnership’. Where there is a quasi-partnership, all matters that occur between the parties are relevant and admissible for the court’s adjudication of the merits and nuances in the conduct of the parties can be highly influential in whether and what relief may be directed by the court.

The reality is that if a shareholder in a quasi-partnership complains to the court that they are being unfairly excluded from management of the company at the hands of a co-shareholder who has control of the reins of the business, they may have a long wait to make their case and, all the while, they cannot expect the commencement of court proceedings to freeze-frame events. Unless and until the case is settled or the court has had its say, months if not years later, the drama that has led to the claim may well continue to develop. For both parties, but principally for the complainant, if not settled early, the litigation can be a long haul.

All facts to be considered

A recent decision of the Privy Council (Lau v Chu [2020] UKPC 24, Privy Council on appeal from the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) 12 October 2020) has however helpfully affirmed the principle that when exercising its discretion whether to grant relief to a petitioning shareholder, all relevant matters at the time the case is heard should be considered by the court – not just the circumstances prevailing when the proceedings began. This does as least mean that the respondent cannot proceed without accountability pending trial.

“He said, she said” – Is being at fault a bar to obtaining relief?

The Lau v Chu decision also clarifies another point. As is the case in a divorce, it is very rare for one of the parties to be entirely blameless in the failure of the relationship; a respondent to a claim may well allege that the protagonist who is petitioning the court has responsibility for what has passed. Irrespective of the validity of anything alleged against the respondent, they may contend that the complainant has conducted themselves in an improper or unlawful way and on that count alone, should not be granted relief. The respondent will turn to the doctrine of the law of equity that a person can only avail themselves of relief if they approach the court with ‘clean hands’. The Privy Council has again helpfully clarified that although the ‘clean hands’ principle stands, a petitioner’s contributory conduct should not bar them from seeking relief unless it was solely responsible for the irretrievable breakdown in trust and confidence between the parties.

Lessons in mitigating risk

Although commercial relationship breakdowns are an unwelcome fact of life, if there is any lesson to be learned from what are surprisingly frequent cases, it is to ensure at the outset of a venture that a suitable documented framework for the relationship is established on a legally binding basis; one that is designed with a realistic eye to how a parting of the ways will be managed if it all goes horribly wrong. This is just plain ‘prudence’ to mitigate the risk of a lengthy, painful, and potentially catastrophically expensive battle in court.