Many times we encounter investment opportunities, business opportunities. In some cases, we do not have the full amount required to carry it out and we team up with several people to carry it out. In this way, we become partners with others. As a result, when decisions are required, we are not the only ones to make the decisions and nothing will be done according to our will. Sometimes our share in the venture - given the amount of investment - is small compared to the others.
Many times things go well and to our liking and everyone is satisfied over time.
Often, along the way, differences of opinion arise. These too can be overcome through negotiation and discussion. Many succeed in doing so, and those who do have a greater chance of succeeding in continuing the project on the right path.
It often happens that differences of opinion arise from a lack of identity of interests between the majority - especially when the majority is one person or a cohesive group with identity of interests - and the minority.
We will try to bring some of the tools in civil, commercial and corporate law that are available to those who believe that they are being harmed by the "tyranny of majority rule.".[1]
In this article, we will focus on partnerships only. Therefore, although the public sometimes calls the other "partners," they are actually shareholders in the same company and should be treated as such.
End of action with forethought
At the stage of entering into a transaction, it is possible and appropriate to create separation mechanisms for when one of the parties wishes to exit the transaction. There are a number of mechanisms aimed at the exit of a shareholder, while determining the manner in which the shares are transferred to another.
Right of first refusal
Sometimes, parties obligate each other to grant those who remain a first right to purchase outgoing shares - the term commonly used is "right of first refusal.".
There are several technical options for implementing this mechanism, such as comparing an offer from a shareholder interested in purchasing to an external offer from the person interested in exiting/selling his shares.
Ofer Eyalim
Another option is the so-called "Bambi" - a term borrowed from the English "Buy Me Buy You", a term known in our sources as "God or Union" - meaning we cannot/do not want to continue together for one reason or another, therefore - either you buy me or I will buy you. In other words, one of us "left" the company.
To the extent that these mechanisms were determined during the "honeymoon" phase - in the founders' agreement and/or the company's bylaws - their implementation during the separation process will be easier, even technically.
Derivative claim
A derivative claim is a procedure in which one shareholder sues on behalf of the company's officers.[2] - Her. This procedure is intended to be used in cases where the company's interests are harmed, but the company - usually for reasons of control and lack of motivation/conflict of interest of the controlling/majority shareholders - is not interested in suing its organs, who, according to those who believe that the company was harmed by their actions, are responsible for harming the company's interests.
This procedure is a tool that can be used by a shareholder who feels that the majority owners - who are usually also the officers in small companies - are harming the company.
This tool also poses a threat that prevents behavior such as this.
The lawsuit is filed by the shareholder and on behalf of the company, after he contacted the company and asked it to do so, but it refused to do so.
This procedure requires court approval and a minority of applications are approved.
Furthermore, from the outset, this instrument was not intended to resolve disputes between shareholders, but rather as a tool to protect the rights of the company as such. Therefore, although indirectly, the derivative claim tool serves to protect the shareholder's interests.
Minority deprivation
The Companies Law, Section 191 thereof[3] It states that there is a cause of action based on "minority deprivation." The law established this in order to intimidate the majority shareholders and prevent the deprivation of the powerless minority, as well as to provide relief to the deprived through a claim based on this cause. For example, minority deprivation can be expressed in certain cases in the non-distribution of dividends when the company is profitable, the appointment of controlling shareholders to senior positions in the company while providing salaries in fantastic amounts, the setting of favorable interest rates for shareholder loans when the lender is the majority shareholder, who is usually also the owner of the majority, and more.
Lifting the curtain
Although the company is a separate legal entity[4], in certain circumstances it is possible to "lift the veil of incorporation" and directly approach - that is, to personally sue - its shareholders. This method constitutes a threat and a "whip" to the majority shareholders, in order to manage the company in a way that maximizes the benefits of all and is not "criminal". It should be noted that this tool is not unique to shareholders and is open to anyone who has been harmed by the company in a way that the law[5] Allows screen lifting.
Duty of care
An officer is obligated to exercise due care under the Companies Law.[6]. As a result of the above, an officer may be personally liable for damages to the company or to a third party. Sometimes - and sparingly - it is possible under certain conditions, even without lifting the veil of incorporation over the company, to hold an officer of the company liable for an act or omission that he personally committed, when it caused damage to a third party.
The tests by which the court will examine whether the officeholder should indeed be held personally liable for the damage are based primarily on the law of torts, in combination with other legal principles, mainly those on which corporate law is based.
This tool can also be used by a shareholder who believes that the officer did not exercise the required duty of care and harmed the company, or him as a shareholder.
As mentioned, the remedy is given sparingly and proving it is not at all simple.
Duty of loyalty
An officer owes a duty of loyalty to the company and can and does sue for any breach.[7]. The office holder must look after the interests of the company and not his own interests or the interests of the shareholder who appointed him. As well as according to the Companies Law[8] A shareholder must exercise his rights and fulfill his obligations towards the company and towards the other shareholders in good faith and in an acceptable manner, and must refrain from abusing his power in the company. In addition, the controlling shareholder, and sometimes also the other shareholders, have a duty of fairness towards the company.[9].
In conclusion
The minority shareholder in a company has a number of mechanisms that allow him to maintain and uphold his rights, while preventing the majority from abusing its power. These mechanisms are those that must be exercised without any reason at the time of entering into the transaction and without any choice during its business and while being a shareholder.
We would like to conclude with some advice. In small to medium-sized companies, where shareholders begin to bicker, there is a considerable probability that the company will not be able to overcome these bickerings and will reach a difficult commercial situation and sometimes even to the point of financial collapse. Therefore, sometimes the right, good and wise solution - even if sometimes it is not a just solution - is to activate an exit mechanism from the company and leave the shares to "your partners", the other shareholders.
Lawyer Zvi ("Tsiki") Wolfson, is a managing partner in the firm Wolfson Weinstein & Co.' And he is involved in law. Commercial, corporate and corporate law.
[1] Of course, this non-academic legal column cannot apply all legal tools and their full potential, and it is not a substitute for individual legal advice in a given case, but rather it aims to present some principles in a nutshell.
[2] As defined in Section 1 of the Companies Law: ""officer""- General Manager, Chief Business Manager, Deputy General Manager, Deputy General Manager, any person holding such a position in the company, even if their title is different, as well as a director, or a manager directly subordinate to the General Manager;
"" 191) [3]"(A) If the affairs of a company have been conducted in a manner that constitutes a disadvantage to all or some of its shareholders, or there is a substantial fear that they will be conducted in such a manner, the court may, upon the application of a shareholder, give such directions as it deems necessary to remove or prevent the disadvantage, including directions according to which the affairs of the company will be conducted in the future, or directions to the shareholders of the company, according to which they or the company, subject to the provisions of section 301, will purchase shares of its stock.""
[4] The Companies Law, in its Article 4, states: "The legal personality of the company." "A company is a legal personality capable of any right, obligation and action consistent with its character and nature as an incorporated body."
[5] Screen lift:
(a) The level of the corporate veil is any of the following: (1) Attribution of rights and obligations of the company to a shareholder therein; (2) Attribution of attributes, rights and obligations of a shareholder to the company.
(b) Notwithstanding the provision of Section 4, a court may lift the veil of association if the condition prescribed by legislation has been met or if in the circumstances of the case it is just and proper to do so, or if the conditions prescribed in subsection (c) have been met.
(c) A court hearing a proceeding against a company may, in exceptional cases and for special reasons, lift the veil of incorporation if one of the following applies: (1) The use of the company's separate legal personality is intended to frustrate the intent of any law or to defraud or deprive a person; (2) In the circumstances of the case, it is just and proper to do so, taking into account that there was a reasonable basis to assume that the management of the company's business was not in the company's best interest and that it involved taking an unreasonable risk as to its ability to pay its debts.
(d) The threshold level for attributing the company's debts to a shareholder in it will be determined taking into account the company's ability to repay its debts.
(e) The provisions of this section shall not prevent a court from granting other remedies, including the suspension of the right of a particular shareholder in the company to repay his debt, until after the company has fully repaid all of its other obligations.".
[6] Article 252 To the Companies Law States:
(a) An officer owes a duty of care to the company as stated in sections 35 and 36 of the Torts Ordinance [New Version] (b) The provision of subsection (a) does not prevent the existence of a duty of care of an officer towards another person.
Sections 253 and 253A also refer to the duty of care imposed on an officer in a company.
[7] Section (254 A) (2) of the Companies Law states: "An officer owes a duty of loyalty to the company, shall act in good faith and act in its best interest, and, in particular, shall refrain from any action that competes with the company's business.".
[8] Article 192 of the same.
[9] According to Section 193 of the Companies Law.
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