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The recent High Court decision in THJ Systems v Sheridan provides an interesting illustration how courts will assess the rights for one member, or a majority, to expel another.

The case involved a falling out between two businessmen. Andrew Mitchell was a software developer and owner of THJ Systems, and Daniel Sheridan was a retired option trader in the US who also ran an option training and mentoring business.

In 2008, Mitchell started traded options in his spare time, and shortly afterwards joined Mr Sheridan’s training programme.

In the background, Mr Mitchell developed some software “OptionNET Explorer” to help risk profile option trading and around 3 – 4 years later Mitchell and Sheridan entered into a joint venture to provide software, training and education on option strategies. 

The agreement concluded in April 2011, and was to be operated through a Limited Liability Partnership (LLP). The agreement included an exclusive worldwide licence from THJ Systems for the LLP to use the OptionNet software for teaching, seminars and presentations subject to displaying an agreed form copyright notice on various uses of the software.

The business relationship broke down in 2015 due to numerous reasons, but critically because proper copyright notices were not been displayed on Sheridan’s use of the software. It culminated in Mitchell serving an expulsion notice on Sheridan. Sheridan’s response was, amongst other things, that as a serving member of the LLP, it should have been included in the LLP meeting to expel. As it was not, the expulsion was invalid.

The judge agreed to imply new words into the LLP agreement, that the power to expel could apply without taking account of the member being expelled. After all who could consent to their own expulsion (if they disputed the expulsion).  The judge noted before expulsion could be triggered there are import pre-conditions which have to be met.  For example, had a member committed a material breach of the agreement.  The court looked at numerous examples and tests of the pre-conditions. The point being, if an expulsion was a sham, the pre-condition would not have applied and the expulsion would not have been valid.   

The case is interesting because so many businesses operate with two shareholders who are also the two directors. Often the businesses are structured to be deadlocked (everyone must agree or no business can be undertaken) or agreements are entered into with restrictions, such as, on adding or removing members.

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This case helpfully adds authority for deadlocked businesses, which actually have expulsion provisions in their shareholder, partnership or LLP agreements, to restrict estranged members/partners, who have committed serious defaults, from blocking their own removal.  However, as always, interpretation can turn on the specifics. If you want to consider the likelihood of your shareholder or partnership agreement standing up to scrutiny, or if you have a partner who is no longing performance, do consider getting in touch. 

To read the case, click here.

This article is not AI-generated.