When you say no, what do you mean? – on negative personal interest in corporate voting

When you say no, what do you mean? – on negative personal interest in corporate voting

Doron Afik, Esq.
November 6, 2023

Those who are affected by a personal interest should not participate in the vote (although a director can vote if the majority of the board is affected, and then a general meeting resolution is required, and a shareholder can vote when affected by a personal interest if he declares it), but what about a "negative personal interest" - a situation in which the expectation is that a director or shareholder will vote against a decision simply because he is in conflict with someone who has a personal interest in it?

The Israeli Companies Law defines a "personal interest" broadly and the Supreme Court even stated that it is "an open definition that looks to the future and which is intended to be filled with content on a case-by-case basis", when it convicted Shlomo Eisenberg in 2005 of the criminal offenses of fraud, false recording in corporate documents, offenses under the Securities Law and other offenses because when voting in a public company he controlled he did not disclose that some of the shares he classified as not affected by personal interest were indeed affected, thus illegally approving a transaction.

In other cases involving public companies, it was found that a personal interest can arise even when a person does not have an interest in the transaction being approved, but to the contrary: when a shareholder, usually a minority holder, has an interest in the transaction not being approved - for example in the case of a proxy fight a shareholder which regularly votes against the position of the controlling owner and because it is a public company there are cases where a special majority is required among those not affected by a personal interest. In such cases, the Court sometimes ordered that the minority shareholder is not allowed to vote at all.

In a case discussed in the District Court of Haifa in September, 2023, the Court went several steps forward (or maybe better described as it trampeted forward while trampling on corporate law and the principle of non-interference of the Court in the discretion of the corporate institutions of a private company when there are no public investors who might be harmed), and stated that the rule applies not only in public companies but also in private companies and not only to shareholders (who, as mentioned, are required to declare their personal interest and then are allowed to vote and in a public company even sometimes their vote is decisive, due to the untainted majority requirement) but also to directors. The same case dealt with a private company held by two shareholders in equal shares and which was managed as a partnership and due to a conflict between the shareholders the Court already exercised its power to prevent oppression and gave instructions for the management of the company. As this is a shareholder dispute in a private company that is managed as a kind of partnership, the court Could have simply given additional instructions to the management of the company (as it finally did) and the verdict was not required to analyze the issue at all, so the entire verdict is an obiter dicate (irrelevant statement).

In conclusion, when a shareholder says "no", sometimes the Court in a public company may find that that shareholder said "no" for extraneous considerations or, as the Honorable Judge Michal Agmon-Gonen (cited with agreement by the Supreme Court) beautifully defined it: non-interference of the Court in such situations may lead to the approval of bad deals with a minority shareholder who is blackmailer (and again, because in a public company in some cases only the votes of the untainted shareholders are counted and thus a minor shareholder may actually become the control holder for the purpose of that vote). These considerations do not necessarily exist in a private company, and certainly not in a company that is managed as a kind of partnership, where caselaw allows such a shareholder to be extortionate and demand the dissolution of the company for any reason, there is no reason to allow this blunt intervention of the Court in the management of the company. However, certainly until the issue is clarified by the Supreme Court, it is vital to receive regular advice from a lawyer with expertise in the field in any case of a shareholder conflict that may cause arguments regarding the ability of a shareholder or a director to vote.