The Israeli Supreme Court has determined on several occasions that, in principle, whenever the value of the company's shares decreases, the primary loss is caused to the company itself rather than to its shareholders. Hence, since the loss to the shareholders is a secondary indirect loss, they have no personal cause of action against those allegedly responsible to the decrease in the value of those shares. Only when a shareholder sustains a direct loss as a result of a D&O's wrongful act, he has a personal cause of action against that D&O.
In the two leading Supreme Court judgements C.A. 3051/98 Darin v. Discount Investments Co. Ltd. and others, PDI 49(1) 673 and C.A. 90141/03 Greenfeld v. Lesser and others the Supreme Court denied motions to file shareholders' class actions against the companies' controlling shareholders and/or D&Os. The court determined that since the appellants' loss was secondary and derived from the loss of the company, they had no personal cause of action and cannot file a personal claim. The only remedy available to the minority shareholder in such case is to file a derivative claim on behalf of the company.
In the Darin judgement the Court referred to two possible exclusions to the said rulings:
(a) when the loss caused to Plaintiff results from a breach of a shareholder's contractual rights; or,
(b) when the loss caused to Plaintiff results from the deprivation of the minority shareholder's rights.
It should be noted that in both cases, i.e. the Darin judgement and the Greenfeld judgment, the Courts determined that neither one of the exclusions applies.
Nevertheless, in several recent Court rulings, we have encountered instances in which the courts applied the second exclusion thus allowing the filing of personal claims by the company's shareholders in cases where the deprivation of the minority shareholder's rights was involved.
In these Court rulings the focus was on Article 191(a) to the Companies Law (1999) which determines as follows:
"If any of the affairs of the company were conducted in a manner which discriminates against some or all of its shareholders or if there is a substantive suspicion that they will be so conducted, then the Court may - on application of a shareholder - issue instructions it deems appropriate in order to correct or prevent the discriminatory conduct, including instructions according to which the company's affairs will be conducted in the future, or instruction to the company's shareholders under which they or the company, subject to the provisions of Section 301, shall acquire some of its shares".
In C.A. 9646/04 Heski Alon Construction and Investments Ltd. and Others v. Michelson Aryeh the Supreme court cited the Darin judgement, but stated that in cases when the loss sustained by the shareholder relates to the shareholder's discrimination as a minority shareholder, he might have a personal cause of action under Article 191 and will not be obliged to instigate a derivative action.
In C.C. (Tel Aviv - District Court) 1369/99 Nir Meir v. Navon Iftach and others, the Court re-affirmed this position. The Court determined that since the claim filed by one of the company's shareholders related to the deprivation of his rights by the company's other shareholders, and consequently the value of its shares decreased, he has a personal cause of action against the other shareholder based on the loss he sustained as a result of the said decrease.
In most cases of minority shareholders' discrimination, the remedy granted by the Court is aimed to settle the relationship between the Company's shareholders, thus enabling the Company's future operation. Accordingly, the risk the Company's D&O's face in such cases is relatively low.
In this respect we should note that according to the scholar Prof. Tzipora Cohen, article 191 enables the Court to order the person liable for the deprivation of the minority shareholders' rights to compensate those so deprived. Based on this interpretation, the D&O's may be found liable to compensate the minority shareholders.
Accordingly, in many cases where claims are filed under article 191, the D&Os find themselves contributing to settlement agreements reached in an attempt to avoid future claims which may be brought against them if it is determined that the minority shareholders' rights were discriminated against.
To conclude, although in both cases detailed above the result was the filing of a personal claim against shareholders rather than against the companies' D&Os, it appears that the same rationale shall apply when such claim is filed against the D&Os, i.e. D&Os who caused the deprivation of the shareholders' rights are exposed to personal claims which may be filed against them by the shareholders.
Home
