In many cases, a minority shareholder in the company feels that the controlling shareholder is oppressing the minority rights. Often, the minority holder is unable to influence the activity of the company and its rights are deprived. What can the minority shareholder do in such a case?
Many cases deal with situations of unfair distribution of resources in a company in the relationship between the controlling shareholders and minority shareholders. The Israeli Companies Law provides that one may can get relief when the company is managed in a manner that constitutes oppression of any of its shareholders. The Court may, at the request of a shareholder, issue directives as the Court sees fit in order to remove or prevent any such oppression and the law gives the Court broad discretion regarding the remedy granted, although the Courts held that usually the remedy would be one in which the oppressing shareholder is required to purchase the shares of the oppressed shareholder.
The test for the existence of oppression is the legitimate expectations test – were the legitimate expectations of the shareholders jeopardized. The question of what are the legitimate expectations is dependent on the circumstances of the case and the nature of the specific company.
In a judgment recently given by the Economic Department at the Tel Aviv-Jaffa District Court a minority shareholders was diluted by allocating additional shares to the controlling shareholder. The minority shareholder claimed that the controlling shareholder withdraw funds from the company over the years by excessive salaries and management fees, hiring family members for high salary, financing personal expenses and transacting with other companies held by the majority shareholders – all without receiving the necessary corporate approvals and by infringing the legitimate expectations of the minority shareholder. After examining all the arguments of the plaintiff, the Court held that indeed funds were illegally withdrawn and the dilution of the shareholder was not required had such funds not been illegally withdrawn. Thus, it is a classic case of oppression of the minority shareholder and the proper remedy is the purchase of the shares of the plaintiff by the defendant pursuant to a company valuation that takes into account the oppression.
A valuation that takes into account the oppression means a valuation of the company as it should have been but for the acts of oppression. i.e. one checks the what was the value of the company at the date of filing of the claim and add to it the reduction of value due to the oppression acts. If it is found that the control holders took actions to reduce the company's value in expectation that minority shareholder will file a claim, the Court will examine the value before such actions and not at the time of filing the claim.
It is important to emphasize that shareholders disputes is a complex issue that often requires the use of both attorneys and accountants and the preparation of such a court case need commence long before one approaches the Court. Thus, it is important to consult with an attorney specializing in the field as soon as it is suspected that the rights of the minority are being oppressed.