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Adv. Moshe Kahn*

The control in a company, whether private or public, has a clear economic value. The value of the shares of the control group is always significantly higher than the value of the shares of the other shareholders. This is the “control premium” that is paid in exchange for the ability to direct the activities of the company, to determine its agenda, its mode of operation, the distribution of its profits, and, mainly, the identity of the persons standing at its head.

These are the issues that are usually at the center of most conflicts between shareholders in companies. Naturally, conflicts between shareholders and officers cause damage to the company, its image, and even to its business.

Such conflicts are not easy to resolve and become more complex in companies where no formal arrangements have been made in advance to prevent a deadlock in the management of the company due to the shareholders – founders being (former) close friends or family members. In this kind of company, it is not common to make written arrangements (articles of association, shareholders agreement) governing the relationships between shareholders and mechanisms for resolving disputes and preventing deadlocks.

In disputes that arise between shareholders in such companies, also deep emotional baggage may surface that can affect the intensity and duration of the conflict.

In extreme cases, power struggles may develop into chaotic situations and may cause the company severe damage to its business, due to the effect it could have on engagements with third parties (customers, suppliers, and employees). When managing a struggle, it is very important to remember that, under the Israeli Companies Law, a director and every officer owe a fiduciary duty first and foremost to the company and not to the individual shareholders. Failure to comply with this rule could expose the director/officer to personal liability. Israeli court rulings have also recognized the fiduciary duty of shareholders to each other and the law in Israel grants relief also to minority shareholders who have been “deprived” by the majority shareholders.

In view of the above, it is important to remember that any unilateral action taken by a party to a dispute needs to reflect the good of the company. Any action that is contrary to this rule, as aforesaid, may expose the party performing the action to personal liability.

In any power struggle between shareholders in a company, it is important to see things one step ahead, in order to minimize the internal and external damage caused to the company, as well as the personal exposure of the relevant parties. For this reason, an extreme action such as a sweeping refusal by an officer to approve payment to suppliers and employees, for reasons related to the conflict, is not recommended.

Sometimes a decision is made to dismiss certain employees in the context of a dispute between the shareholders. Here also it is important to ensure that the dismissal is for the good of the company and in accordance with the law, in order to prevent exposure to personal liability.

A common way of resolving power struggles is by appointing an arbitrator who is authorized by the parties to resolve the disputes and to award temporary injunctions necessary for the continued management of the company, for as long as the conflict exists. The advantage thereof is that usually, the arbitration proceedings are not public. On the other hand, conducting the dispute in court would allow customers, suppliers, and employees of the company and any other party engaged therewith, a “peek” into its poor managerial state, which would undoubtedly harm it.

Common solutions for ending power struggles in companies include purchasing the holdings of one party by the other party, for example through BMBY (Buy Me Buy You), purchasing the holdings of the disputing parties by an external party, or alternatively, separation of the parties’ activities, to the extent this is possible.

The road to reaching the aforesaid solution is long and is of course dependent on the circumstances of the case. However, the parties should avoid “throwing out the baby with the bath water” by causing irreversible damage to the company.

March 2012

* Adv. Moshe Kahn specializes in Business Law. He is licensed to practice law both in Israel and in the U.S. and is the founder of the Moshe Kahn Advocates  law firm in Tel Aviv

Moshe Kahn, Advocates,
Beit Amot Hashkaot, 7th Fl. 2 Weizmann St. Tel Aviv, 6423902.
Phone: +972-3-6914775

Israeli Business Law משפט עסקי