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Some companies are quasi-partnerships

Although a company is formed and registered in terms of the Companies Act, it is possible that it may, in law, be a "quasi-partnership', in which there is an agreement or understanding that it will be operated as though it were a partnership, and in which the legal relationship between the parties will be akin to that of partners.

When shareholders lose confidence in the directors' management of the company

Where a group of persons enter into a partnership, and they agree that the partnership is to last indefinitely (what the law calls a "partnership at will") as distinct from a partnership formed to last for a limited period, any partner can, at any time, terminate the partnership.

So, for example, if mutual trust and confidence between the partners has broken down, one or more of the partners may decide to end the partnership.

Where the business is being conducted by a company, rather than a partnership, the law does not give a shareholder a right to demand that the company be wound up just because he or she is dissatisfied with the way the company is being managed.

Where, however, the company was formed on the basis of an understanding between the shareholders that their venture would be "in substance" a partnership - which usually means an understanding that they will all be entitled to participate in the management of the company - the law may regard the company as a "quasi-partnership".

The Companies Act says nothing about quasi-partnerships, but it is a concept well recognised by the South African courts.

Where a company is a quasi-partnership, the consequence is that, any circumstances which would have constituted legal grounds for terminating a partnership will be grounds for a shareholder to demand that the company be wound up.

So, for example, if a company is a quasi-partnership, a justifiable loss of confidence in the conduct and management of the of the company's affairs will be grounds on which a shareholder can demand that the company be wound up, and that its business or assets be sold, its debts paid, and the net residue be divided between the shareholders in accordance with the articles of association.

In the recent case of Apco Africa (Pty) Ltd v Apco Worldwide Inc 2008 (5) SA 615, the Supreme Court of Appeal held that the company in question was a quasi-partnership.

Accusations and insults had been exchanged between the shareholders, with accusations that one group had tried to "hijack" the company, and that another group was trying to destroy the company.

The court ruled that some of the accusations were without foundation but that, nonetheless, "the internal disputes, mutual disillusionment and distrust and the consequent breakdown of the relationship between the shareholders of the company have paralysed it".

The company was essentially in deadlock, with some directors refusing to attend board meetings.

The court said that the parties were "hopelessly at loggerheads" and upheld the ruling of the court below that the company must be wound up.

This judgement illustrates that it is often useful for the parties to record, at the outset, in the company's articles of association or in a shareholders' agreement, that the company is to be operated as a "quasi-partnership", so that there can be no later dispute as to whether the company does, indeed, fall into this category.

The legal principles applicable to quasi-partnerships can then be applied, and not merely the general principles applicable to all companies.


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