What is a quasi-partnership – you may be asking?
Good question, but it is not as rare or complex as it might sound. This concept is applied to limited companies that are limited companies by constitution but are, in substance, run as if they are a partnership.
The following indicators are things to look for when considering whether or not a limited company is a quasi-partnership:
The existence of non-shareholder directors. Typically, a quasi-partnership will be a company in which all directors are shareholders or, if there are shareholders who are not directors, they will usually be close family members of the directors who hold shares for tax planning purposes. Conversely, the existence of non-shareholding directors and non-executive directors would indicate the business is run on a more corporate basis and is not a quasi-partnership.
A close working relationship between directors. An indication of quasi-partnership will be a close working relationship between directors and a hands-on management style in which all shareholder directors are involved in running the business day-to-day.
An absence of a formal shareholders’ agreement. A key feature of partnership is a high level of trust between partners. Therefore, companies that operate without a shareholders’ agreement of any sort could be deemed to exhibit similar characteristics of a partnership.
Funding by directors. Partnerships are generally funded by the partners. Therefore, limited companies with a high level of director loans into the business exhibit similar characteristics of a partnership.
Funding of directors. Partnerships often fund the personal expenditure of partners and charge these expenses to the partner capital or current accounts. Therefore, limited companies with a high level of director expenses charged to their loan accounts exhibit similar properties to a partnership.
Size. A company does become more corporate in look and feel the bigger it gets. It therefore follows that a company deemed to be a quasi-partnership is most likely to be of a size comparable to a family run partnership.
So why does it matter?
When performing a minority shareholding valuation the valuer will consider a level of discount to apply to the minority shareholding to reflect the fact that the holding is small. i.e. minority shareholders, depending on the number of shares held, will lack power to influence, will have to rely on others to join forces, can get out-voted on contentious matters etc. All together the shares will not be worth a simple pro-rated value of the whole company.
Discount factors of anything up to 90%+ can be applied to minority holdings.
Compare that to a company that is deemed to be a quasi-partnership.In this instance any minority shareholdings will be valued at the simple pro-rated value with little or no discount.This, therefore can have a very significant impact on the value attributed to shares in a minority situation.It is therefore key for the valuer to assess the quasi-partnership point carefully.In contentious valuations it is often left for the courts to determine if the quasi-partnership situation exists.