On Ostriches and Mergers and Acquisitions and Yes, You are Liable Even if You did not Know

On Ostriches and Mergers and Acquisitions and Yes, You are Liable Even if You did not Know

Doron Afik, Esq.
January 21, 2015

People who act on behalf of a corporation generally understand that they can be personally liable for their actions and act accordingly. However, not everyone understands that as an officer of a corporation may also have passive liability – liability that arises when the officer does not take any action. This is perhaps also the reason why in many, too many, mergers and acquisitions transactions the company utilizes its ordinary lawyer instead of hiring and expert in the field, and sometimes even waive due diligence procedures by experts in the field.

A company has its own separate legal entity and therefore, an officer of the company should ordinarily not be personally liable for offences of the company because it is merely acting as an organ of the company. However, when an officer is personally committing an offence or tort (for example, misrepresentations) the officer will be personally responsible and the corporate veil will not provide shelter. The liability of officers while acting actively is something most officers are aware of. However, in many cases officers are burying their heads in the sand and tend to confirm company transactions without ensuring that the transaction was carried out by an expert in the field and proper due diligence review has been carried out.

There is a long list of Israeli legislation that create personal passive liability of officers. i.e. liability of the officer even if such officer was not involved in the process. Such liability exists, inter alia, in many labor law legislation, environmental legislation, zoning laws and antitrust issues. For example, Israeli Antitrust Law requires the approval of the antitrust authority for certain actions, prohibits other actions and requires reporting in certain cases. The law states that if an offense is committed by a corporation any person who at the time of the offense was an active director or senior administrative employee responsible for the field in which the offense was made will be personally liable unless such person can prove that the offense was committed without his knowledge and that he took all reasonable steps to ensure compliance with the law.

Similarly, our office represented directors of a corporation who were indicted under zoning laws after the corporation purchased a business with a building that was built without a permit. The permit issue was not checked before purchase. Once the business was acquired, the responsibility for the offenses came to the doorstep of the directors, despite (or perhaps because) they did not know about the offence.

How can one avoid passive liability during a merger or acquisition transaction? To act diligently to ensure that the corporation does not make any offenses during the transaction. Ensure that the corporation hires the services of a mergers and acquisitions specialist (and not utilize the lawyer who by chance escorts the corporation but this is not his or her specialty), perform proper due diligence coordinated by the M&A lawyer and in case the company is represented by a large office, ensure that in such office an M&A expert is actually involved and the transaction is not carried out only by inexperienced lawyers and if the office has several departments, all relevant departments are involved in the transaction so that office politics do not cause the transaction not to be properly taken care of. In the end it is not just the responsibility of the corporation and its shareholders but also personal responsibility of the directors and officers under the list of laws that imposing a personal liability.