The Prince – 2021

The Prince – 2021

Adi Marcus, Adv.
October 25, 2021

In 1513 "The Prince" was written - the famous book about governance written by Niccolò Machiavelli (posthumously published in 1532). Approximately 500 years later, politics, it seems, has not changed much, but as more and more people lose interest in State affairs, more and more people are actually becoming interested in corporate governance.

In most companies there is constant tension, which was given the legal name "The Representative Problem", which is rooted in the power relations between controlling shareholders and minority shareholders and stems from the controlling shareholder's inherent ability to direct the company's activities and the apprehension that it will be used to harm the company or the minority’s rights. The good of the company and the good of its shareholders are not necessarily the same and the fact that a certain action serves the good of the shareholders does not necessarily mean that it is an action that promotes the good of the company. Moreover, the decline over the years in the concentration of control over companies and the strengthening of decentralized patterns, which are manifested, in public companies, in the increase of public holdings, lead to a situation in which many companies operate without a strong shareholder control core. Thus, in the structure of modern society, and especially in companies with a large number of shareholders (including public companies), the Representative Problem often becomes concentrated on the relationship between shareholders and management, and one of the main issues related to this is the information gaps between the two.

In order to ensure the proper conduct of the corporation and to prevent such abuse, corporate governance rules have been created - both under law, by caselaw and in practice - which are the set of norms, principles and rules, binding or voluntary, that apply to a corporation and define how it should be duly managed, where non-compliance may even create personal liability for executives, officers and even shareholders who failed to follow such. As such, in a decision given at the end of October, 2021, which deals with the ripples of the major shareholder dispute in Emblaze, the Supreme Court held that even criminal investigative materials regarding fund withdrawals in a monetary claim against the manager who controlled the company may be disclosed.

A case heard in September 2021 at the Jerusalem District Court dealt with minority shareholders who contended that the conduct of the controlling shareholder and CEO constituted oppression of minority rights. The Court held that the management failed to duly manage the company when it acted without keeping the shareholders involvement and without duly holding board and shareholders meetings, or when it sent a person who is not a senior executive of the company to negotiate with large international entities without the proper accompaniment of a legal adviser. In a public company the case could have ended in personal claims of the public against the manager.

Thus, especially when the company is a public company, but not only, it is vital to act transparently with the shareholders and to duly maintain corporate governance to ensure not only proper conduct but also protection for managers and controlling shareholders from future claims. While it is not advisable to let the legal team run the company instead of the executives, ongoing legal assistance from attorneys with expertise in the field as well as business background which allows them to assist the firm in maintaining good order and corporate governance is extremely important to prevent the possibility of personal claims against the management.