The Judgment of Salomon and shareholders disputes

The Judgment of Salomon and shareholders disputes

Yair Aloni, Adv.
July 13, 2022

An entrepreneur with a unique vision and knowledge offered his friend, a businessman, to invest money in a venture and the two set up a company jointly held and managed. After a few years a dispute arose between the two and led to a complete loss of trust between them. The entrepreneur, who came up with the idea, demanded to take over the company due to his deep connection to it while his friend, the investor, demanded to dissolve the company or sell it for the highest bidder. How should this Judgment of Solomon be decided?

In shareholders disputes related to shareholder oppression or a situation of "deadlock" or "loss of trust" arises, Israeli law gives the Court a wide margin of flexibility and discretion in a manner that will ensure the best suitable solution under the circumstances. Sometimes, when there is no dispute that the parties should separate, the sooner the better, the question arises is as to how the separation between the parties should be arranged. Among the possible conventional mechanisms one can found: Dissolution of the company; Compulsory purchase of shares, where one party purchases the other’s shares in accordance with a price to be determined by an external valuer; Performing bidding between the parties in various methods and more. Liquidation of the company as a solution to separation is in most cases considered an extreme remedy and will usually be given only as a last resort and when there is no other solution (for example, when the conflict causes complete deadlock of the company, which does not allow it to function at all).

A party to a dispute may move the Court for separation and demand to receive the other party's shares (through a compulsory purchase) because he has the strongest connection to the company, in his eyes. Thus, for example, in a case heard in February, 2018, the Israeli Supreme Court granted a remedy of compulsory purchase and held that a shareholder holding 50% of a company who owns a boutique winery would purchase the remaining shares held by the other shareholder. In that case, the shareholder who demanded to purchase the other's shares was, among others, the one who established the company and its business. Also, he served as the winemaker of the winery who ran the entire manufacturing process, starting from growing the grapes to complete wine production when both the winery and the vineyard were located on his parcel of land and place of residence. The other shareholder, however, was merely a businessman whose entire connection to the business and the company was financial. Also, he did not show any interest in what was happening in the company and even moved the Court for liquidation of the company.

However, not in every case will a shareholder be able to dictate the terms of separation, through a compulsory purchase, even if he was involved in managing the company. For example, in a case heard in June, 2022, the Court refused to grant a shareholder of a family company relief that forces his brother to sell to him even though he allegedly had a certain advantage over him, as he was the one who ran the company. The Court held that both parties have a deep connection that is more than just financial because it is a family business that was founded by their deceased father and that was inherited to them in equal shares. Therefore, in these circumstances the Court preferred to apply a more equitable separation mechanism through a tender in which the parties would submit their bids simultaneously, and the party bidding the highest bid is the one to purchase the other's share, but the purchase will be made at the second bid price (i.e. according to the lower price of the two offers), so that each has an equal opportunity to purchase the other's shares.

It is important to understand that the Court has a very broad discretion to choose any mechanism and it will usually not be possible to dictate the manner of separation. Going to Court without prior preparation and understanding the full range of alternatives may entail expensive legal proceedings when the desired result can not always be guaranteed. There may also be a situation where the Court appoints as liquidator a person lacking any familiarity with the business or financial understanding and may result in the complete collapse of the business in dispute. Therefore, before approaching the Court, it is advisable to consult a lawyer knowledgeable in the field of shareholders disputes and be well prepared. The same lawyer may also be able to assist in resolving the disputes between the parties and try to avoid at all the need to go to Court.