On oppression and tyranny by the minority

On oppression and tyranny by the minority

May 15, 2023

Usually, when we think of the word "oppression" and certainly of the word "tyranny", we associate them, almost automatically, with the word "majority". Namely: oppression by the majority and tyranny of the majority - however, the terms oppression of the majority by the minority and tyranny of the minority are no longer considered unheard-of in our political districts, and, as it turns out, in corporate law as well. In fact, there is a variety of situations in which, even though a shareholder is deemed a minority in a company, it may be determined that he abused his power and that in fact he is the one who must, in the end, compensate the oppressed majority.

In the context of corporate law, oppression or tyranny may have an impact on the legitimate expectations of a shareholder in the management of the company. However, the fact that a particular shareholder holds a minority of the company's shares does not exempt him from responsibility and his right to manage the company may be denied from him. Further, when a conflict between the shareholders is triggered, the Court has a broad discretion on how to resolve the conflict, including on the manner of establishing a separation mechanism, within which the majority can buy the minority's shares and remove them from the company.

Thus, for example, in a case decided in the Central District Court August, 2019, it was held that a minority shareholder who used the company's funds for private needs in a manner that caused failure of the company lost his legitimate expectations for participation in the management of the company. In another case that was decided in the Tel Aviv Court in March, 2021, it was held that a minority shareholder who refused to sign documents in a manner that prevented the company's activities, abused his power in a manner that amounts to oppression of the majority shareholder in the company. Similarly, it was also held in another case in Tel Aviv that when a minority shareholder who also served as an officer and took advantage of a business opportunity of the company for his personal benefit, he oppressed the majority.
However, not any action of the majority that results in a breach of the rights of the minority will necessarily be considered oppression or the tyranny of the majority and it is no sufficient for a minority shareholder to present himself as such and cry "Oppression"! For example, in a case decided in April, 2022, at the Tel Aviv Court, it was held that the dilution of the holdings of a minority shareholder will not necessarily be considered an oppression, such as where it is a necessary action for the benefit of the company, such as raising capital required to balance the company's financial situation.

In light of the above, the fact that a certain person is a majority or a minority in a company, does not constitute a full defense against acts of oppression and tyranny or a clean right of claim - depending on the side on which that person is. Therefore, it is very important to be accompanied by an attorney with experience in the corporate field, both throughout the day-to-day activities of the company and certainly in cases where a conflict has already arisen between the shareholders, and who would know how to draft documents and resolutions in a manner that may prevent or reduce disputes in the future.