A guide to quasi-partnerships, asset floors, and the ‘add-back’ battleground

Assume you are instructed in an unfair prejudice dispute under Section 994 of the Companies Act 2006. Your client is a founding partner and family member who has been diluted to a 30% minority stake (from an equal tripartite share). The other two siblings, holding 35% each, but have grown into a custom of running the business as their personal fiefdom (and bank account); paying unearned salaries and pensions to their non-working relatives (partners, children etc), drawing lavish expenses, and refusing to share management accounts. Meanwhile, your client is excluded from the boardroom and financially squeezed in terms of drawings (whether as salary or dividends). The principles in this article do not just apply to family companies but potentially to any quasi-partnership company (private shareholding organised on principles of trust and an expectation of participation in the ongoing management of the company).

To make matters more complex, the company is an industrial trading business that appears profit-lean but arguably is highly asset-rich, because the majority have reinvested ten years of surplus cash directly into real property assets held by the company.

When the majority offers a ‘no-discount’ buyout in principle, how do you prevent them from manipulating the valuation? This article outlines the legal principles, expert instruction landmines, and disclosure battlegrounds you must master to secure a fair exit.

1. Defeating the minority discount: the quasi-partnership matrix

The majority’s opening move is always to threaten a 30% to 50% ‘minority discount’ for lack of control and marketability. As an adviser, your immediate task is to establish that the company is a quasi-partnership, transforming the valuation from a depressed market calculation into a strict, pro-rata share of the entire value of the enterprise.

Under the leading House of Lords authority in Ebrahimi v Westbourne Galleries Ltd, a quasi-partnership is defined by three classic equitable features: a personal relationship of mutual confidence, an understanding that some or all members will participate in management, and restrictions on share transfers. Where at least some of these features exist, the starting point established by Nourse J in Re Bird Precision Bellows Ltd is that a minority shareholder forced out by prejudicial conduct is entitled to a pro-rata buyout with zero minority discount.

In family businesses, or similar, the law has evolved to be even more protective. Recent family business authorities, including BM v MB (2025) and JV v MV (2025), confirm that where a family business runs fluidly, members act in concert on key decisions, and the business would commercially be sold as a single unit to maximise price, there is zero commercial or legal rationale for a minority discount.

The danger is that in applying a discount, the Court merely locks in the majority’s oppression.

Furthermore, a previously under-utilised lever is the Marriage Value / 100% Control premium. According to Re Ngage Holdings Ltd decided in 2026, (following Fancourt J in Re Edwardian Group), where purchasing the minority’s shares unites 100% control under the buyers, a minority discount is legally inappropriate. The purchase delivers absolute, unfettered control of the company, and the minority is entitled to a share of the consolidated ‘marriage value’ premium.

2. The valuation arsenal: beyond simple EBITDA multiples

Instructing a Single Joint Expert (SJE) to value the business on a standard earnings-based (EBITDA multiple) basis is a common trap. If much of the profit over the last ten years has been locked up in purchasing freehold warehousing, an earnings-only model completely ignores this accumulated wealth.

Instead, a hybrid, or ‘sum-of-the-parts’ approach may be more appropriate:

• Net Asset Valuation (NAV) Floor: Freehold properties (business premises) must be revalued from outdated book values (historic cost) to current market values. This adjusted NAV serves as an absolute valuation floor.
• Earnings-Based Valuation (P/E Multiple): Standard trading operations are valued on future maintainable earnings. However, the SJE must justify the Price/Earnings (P/E) multiple using the Private Company Price Index (PCPI) rather than FTSE All-Share indices, which are ‘metaphorically on a different planet’ (Southern Counties Fresh Farm Foods).
• The Hybrid Blend: The expert should value the core trading operations on a maintainable earnings multiple and add the current market value of any surplus, non-operational freehold real estate assets.
• The Pound-for-Pound Surplus Cash Rule: Isolate any treasury cash that is surplus to the daily operational needs of the trading business (e.g., retained reserves or corporate savings). Rather than subjecting this cash to a depressed trading multiple, it must be added pound-for-pound directly to the final company equity value, securing an automatic pro-rata cash addition for a putative petitioner.

 3. The ‘add-back’ battleground: normalising the income statement

Before the SJE applies a trading multiple, the company’s reported profits must be normalised to strip out ‘lifestyle’ and discretionary extractions. This is where litigation is won or lost:

• Unearned Family Salaries: Instruct the expert to add back 100% of all salaries, bonuses, and pension contributions paid to non-working family members (spouses) and any other payments that do accord with the strict interests of the business where it can be argued that such payments are a diversion of company wealth and/or in breach of Section 172 duties.
• Excessive Director Remuneration: Compare the majority directors’ packages against standard commercial SME market rates. Any salaries and pension contributions in excess of the market norm must be added back to the maintainable earnings.
• Off-Book Asset Revenues: Capture hidden commercial revenues. For example, if company premises are used by third parties for example for lorry parking or access, or any other purpose these revenues must be traced and added to the company’s trading income.

 4. The disclosure checklist: unlocking the hidden ledgers

A vague document list is a major hazard. To ensure a robust valuation and protect your client, you must demand a highly specific, multi-year disclosure checklist:

• 10 Years of Statutory Accounts: To trace the exact cash invested into the freehold premises over the last decade.
• HMRC Real-Time Information (RTI) Payroll Ledgers: Individual RTI summaries and P11D forms are essential to isolate and extract unearned spouse salaries lumping into ‘total staff payroll’ on Sage.
• Directors’ Pension Statements: Deeds and contribution ledger summaries for Standard Life or equivalent personal pension plans to verify direct company-funded extractions.
• Sage vs. Audited Reconciliation: A strict reconciliation protocol. If management accounts are used for an up-to-date year-end valuation, the brothers must agree to a final audited adjustment in October to prevent balance-sheet manipulation.
• Corporate Savings & Treasury Accounts: Bank statements for all Operational, Savings, and Treasury accounts (retaining multi-currency balances) to identify surplus cash.

 5. Practical tactics

To implement this strategy aggressively, lawyers should adopt three vital pre-action parameters:

1. Pre-Submission Review: Never allow raw financial files to go straight to the SJE. Demand a validation protocol where all documents are exchanged and audited by your client at least seven business days prior to submission.

2. Expose the ‘Equality of Arms’ Violation: If the majority refuses email cloning or bank access, cite O’Neill v Phillips. Lord Hoffmann made clear that a buyout offer is not ‘plainly reasonable’ unless there is absolute equality of information access. Withholding records invalidates their strike-out shield.

3. Deploy the Section 26 Derivative Threat: Threaten a Derivative Action on behalf of the company alongside the Section 994 Petition. The court can order directors—and non-working family members as knowing recipients—to personally repay diverted company funds. This introduces immediate personal financial and HMRC liability, creating massive settlement leverage.

This is intended as an illustrative summary only and is not intended as specific legal advice.

Article by Lauren Godfrey.