Shareholder Meeting Approval Cures Prior Procedural Flaws
In Nitzba v. Atar the Supreme Court held that approval of a transaction by the general meeting of the shareholders cures any prior flaws in the negotiation and approval of the transaction by the board of directors.
At question in Nitzba was a transaction between a company and an investor, whereby the investor would purchase all the shares of the company, in installments over a 17 year period. The general meeting of the shareholders approved the transaction with a 96% majority.
The Tel Aviv District Court found that there were several flaws prior to the general meeting approval, including ultra vires by the directors, conflict of interest of the directors, and therefore ruled that the transaction was void.
In overturning the district court ruling, the Supreme Court held, in a split decision, that since the general meeting, as an organ of the company, has the power to approve actions even if in the event of ultra vires by the board of directors or in respect of related party transactions, then, even assuming that the district court was correct in its findings of fact, the later approval by the general meeting of the shareholders remedied any flaw in the process.
Chief Justice Barak noted in his minority opinion that although the general meeting can cure prior flaws, the resolution of the general meeting is subject to judicial scrutiny in respect of the minority’s claim that the resolution deprived them of their rights.
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