Hast thou killed, and also taken possession? If you are an officer and the company suffered no loss – all’s well

Hast thou killed, and also taken possession? If you are an officer and the company suffered no loss – all’s well

March 20, 2021

A company pays a 100 grand a month for cleaning services. The new CEO replaces the clean-up team with another service provider that charges only 75 grand a month, but "neglects" to disclose that the new service provider is his childhood friend. This is certainly a blunt breach of trust, but is the officer obligated to compensate the company?

Israeli Companies Law imposes obligations on company officers to ensure that their actions will serve the benefit of the company. Thus, company officers are subject to a duty of care and a duty of trust, according to which the director must act in favor of the company as well as refrain from taking actions which may cause a conflict of interests between the company and his personal interest.

The Law stipulates that a breach of the fiduciary duties is deemed a breach of contract with the company and therefore, generally, when no damage is caused to the company, its officers may not be obligated to compensate it. Thus, for example, in a case held in the Tel Aviv Economic Court in July, 2019, although directors of a company distributed dividends in a manner that got the company into debts, they were not ordered to compensate the company because finally no damage was caused. It should be noted that under certain circumstances criminal liability may be imposed on officers who did not act in favor of the company. However, this will be applied in extreme cases where the officer acted in a conflict of interests in order to fraudulently obtain something or committed offenses under the Israeli Securities Act.

In practice, this legal situation, coupled with the fact that the wheels of justice turn slowly and Courts tend to try and promote compromises to save the need to hear cases, encourages corporate fraudulent management (as long as, of course, it is difficult to prove the damage caused to the company). Or, in Mafia jargon: You can hit, just don't leave any marks ...

It seems to be that correct solution is for the legislature is to stipulate a statutory compensation which does not require proof of damage, as exists in defamation offenses, breach of privacy, commercial torts and in some cases also in breach of protective labor laws or, alternatively, to stipulate punitive damages. Alternatively, until the legislature does this, Courts may use the tool of imposing "legal costs" on an officer who has misconducted in order to, at least partially, indemnify the company for its expenses. This tool may not indemnify the company for its full damage, but may at least deter other officers from acting against its benefit. This is in contrast to the current situation, in which companies refrain from initiating proceedings due to their high cost which may not be reimbursed even if the company triumphs the case.

In any case, it is very important for the company to be regularly accompanied by a lawyer with experience in the field of corporate law who can help monitor the conduct of officers and ensure their proper conduct, as well as ensure other mechanisms that will at least reduce the risk of breach of fiduciary duties.