Court Approves Removal of Share Transferability Restriction
In Shai Topaz (Yocht) et al vs. Yocht et al, the Economic Department of the Tel-Aviv District Court discussed whether an action of a shareholder would be considered as oppressing another shareholder in a company. In addition, the court explored, under which conditions are shareholders permitted to change the articles of association (the “AoA“)? Moreover, if it is possible to circumscribe the ability of shareholders to do further changes to the AoA?
The lawsuit deals with two issues that arose from resolutions made by the shareholders of the company regarding the company’s Redeemable B Shares. First, the matter of amending the rights associated with such shares granting them a right to dividends. Second, remove of a non-transferability clause. The claimants, holders of 25% of the company’s Ordinary Shares, claimed that the resolutions were invalid since they oppressed and harmed the minority shareholders, and because they distorted the original intention of the company’s founders.
The “Test of Oppression“, developed by past court decisions, grants the judiciary broad discretion in deciding whether a shareholder’s action is oppressive, by considering the totality of the circumstances and relevant interests, with an emphasis on shareholder’s legitimate expectations, and whether such expectations were breached. The legitimacy of expectations is analyzed taking into account the specific circumstances, including the company’s type (partnership, public or private company etc.).
The court found that the Israeli Companies Law grants absolute power to a company’s shareholders to amend the provisions of the company’s AoA, including the original terms of the company’s AoA. This authority is granted to the shareholder majority as long as the amendments are resolved in accordance with: 1) the terms of the AoA; 2) the rules set forth in the Israeli Companies Law; and 3) the shareholders’ duty to behave bona fide, in the best interest of the company. If the shareholders act outside of these parameters, a court has the power to grant legal remedies to ensure that the actions of the shareholder majority not breach the rights of minority shareholders.
Since the shareholders of a company have the power to configure the share capital of the company to best serve the company’s needs, the fact that a shareholder does not have a vested right to participate in the company’s management is not oppressive in itself. For this specific purpose the Israeli Companies Law grants companies a broad power to issue multiple share classes with different rights associated with each class.
Amendments related with investment rounds, shareholders turnover, M&A etc. require the company to address new circumstances and resolve conflicts that may not have been previously anticipated. Accordingly, while when founding a company it is critical to enter into a founder’s or shareholders agreement and AoA that accurately represent the intentions of the parties, companies are dynamic, and such documents must be dynamic as well. Therefore, in order to avoid conflict as much as possible, we must, at each stage of a company’s development, recognize the unique needs of the company at such time, and to anticipate, to the extent possible, future changes and associated needs.
 The company issued two classes of shares: Redeemable B Shares – having exclusive management rights with a non-transferability clause establishing that they would convert into deferred shares in the event of transfer; and Ordinary Shares – having the right to receive dividends. Notwithstanding the above restrictions, the company made several decisions that allowed for the transfer of the Redeemable B Shares, by changing time after time the terms of the AoA to provide for exceptions to the transferability restriction.
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