Published in Ha’aretz
By Moshe Kahn
Even during a struggle for control, it is important to maintain lawful conduct and prevent long-term damage to the company. Every action will be weighed against the good of the company. Going to court may harm the company’s reputation. The Israeli court will not permit offensive conduct toward the minority shareholders. Adv. Moshe Kahn, a litigation attorney from Tel Aviv, who specializes in corporate law, provides a guideline for partners in conflict.
Struggles for control in a company are very common in the business world. Control of the company, whether it is a private or public company, has a clear economic value. The value of the shares of controlling shareholders 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 right to direct the activities of the company, to determine its agenda, the identity of the persons standing at its head, and the manner of distributing profits. These are all reasons that are sufficient for giving rise to struggles and conflicts between shareholders for control of the company.
Such struggles, if they get out of control, may often harm the operation of the company, its business, its reputation, and its profits and, consequently, also the interests of the shareholders in conflict. Moshe Kahn, a Tel Aviv attorney, whose firm specializes, inter alia, in Israeli corporate and commercial law, explains what should and should not be done at a time of conflict between shareholders of a company.
These disputes are usually complicated and often carry emotional baggage, explains Adv. Moshe Kahn and they become even more complicated if no arrangements have been made in advance in the articles of association and shareholder agreements to prevent a deadlock in the operation of the company. This is particularly common if the shareholders are close friends (former friends, in such cases) or family members. At the time of establishing these types of companies, the parties do not always set out provisions in the articles of association and agreements to govern the relationships between shareholders and the mode of operation of the company in the event of conflict or dispute, and when they reach a deadlock, they are left in a hopeless situation where the strong dominate.
Moreover, the closer the relationship of the partners was in the past, prior to the conflict, so also will the intensity of the commercial litigation conflict and its duration be adversely affected. In extreme cases, these struggles may cause chaotic situations in the company, affect its dealings with third parties such as customers, employees, suppliers, banks, and service providers, and, bottom line, it will harm the company’s business and reputation.
What is important to understand, explains Adv. Kahn is that also in these situations, you need to act lawfully, without breaching agreements and articles of association. If you abide by them, then even actions such as preventing the distribution of dividends, removal of directors and managers, and amending the articles of the company, maybe considered legitimate actions and ultimately lead to a unilateral resolution of the dispute. However, any such unilateral action taken by one of the parties to the conflict needs to reflect the good of the company, otherwise, the party performing these actions may be subject to personal liability.
It is important to remember, especially amidst a conflict, that under Israeli law, each director and officeholder owes a fiduciary duty to the company and not only to the group of shareholders by virtue of which they act. Any action taken in contradiction thereto may lead to a personal lawsuit against the party taking such actions. Israeli court rulings have also recognized the fiduciary duty of shareholders to each other. Moreover, Israeli law allows protection against ‘minority oppression’ by granting relief to minority shareholders who have been ‘disadvantaged’ by the controlling majority, including by unfair distribution of the company’s resources.
In any such conflict, it is important to see a few steps ahead, in order to minimize the possible damage to the company, as well as the expected liability of those involved in the conflict. Therefore, extreme actions, such as a sweeping refusal by an officeholder to approve payment to suppliers or employees, for reasons related to the conflict, need to be avoided. This is a futile tactic adopted in many conflicts and can cause substantial damage to the company.
It should be noted that it is certainly always possible to bring a dispute before the court, however, prior to doing so, it is advisable to carefully review the agreements and articles of association in order to exhaust other means of resolution, in the board of directors or general meeting of the shareholders. An approach to the Israeli court needs to be very focused and needs to include all of the specific remedies sought. There is no chance that an Israeli court will order the dissolution of a company that is not close to insolvency, merely due to an ongoing dispute between the partners.
When approaching the court, the parties should know that the Israeli court first considers parties in the company’s business environment. Prior to making a determination in the conflict and granting any order, the court will first check the possible effect of the order on the company’s employees, customers, and creditors. Furthermore, although the Israeli court will usually honor the principle of majority rule in the company, it will not normally allow discrimination against minority shareholders. In any event, the court may apply Section 191 of the Israeli Companies Law in order to grant appropriate orders and even to order majority shareholders to buy out the minority shareholders. It should also be noted that an approach to the court can lead to negative publicity which could harm the company and, therefore, if possible, it is desirable to turn to arbitration, whose advantage is that it is not public, thereby reducing public damage and harm to its reputation.
An additional and common process for conflict resolution in companies is through BMBY (Buy Me Buy You), a mechanism whereby each party makes an offer to purchase the shares of the other party, and the highest offer wins. On the other hand, when there is an agreement as to who will buy and who will sell, you can also request the appointment of an external assessor to determine the value of the company for purposes of the purchase of one party by the other party, or the purchase of the disputing parties’ shares by an external party, or bringing in an external party as an investor, or any other separation of the parties’ activities, to the extent possible.
The bottom line is that regardless of which solution the parties choose, they should always avoid 'throwing out the baby with the bath water in a manner that could cause irreparable damage to the company, which will eventually be detrimental to everyone.
Adv. Moshe Kahn specializes in commercial law, corporate law, and litigation. He is licensed to practice law both in Israel and the U.S. and is the founder of a law firm in Tel Aviv.
