"Indeed, despite the many theoretical justifications for this, an uncomfortable feeling may arise in cases such as the case in which we are dealing with a defect, when there is a defect in the conduct of a certain person who was negligent in his actions, or in the conduct of an unknown person who breached a contract with another, but in the end it was not proven that damage was caused, and the negligent or violator comes out almost unharmed despite their conduct. However, this is the legal framework in which we find ourselves, these are the laws of obligations, and in accordance with them and the rationales underlying them, we must rule. This, of course, is with the exception of cases in which the legislature itself permitted compensation without proof of damage (see, for example, section 7A of the Prohibition of Defamation Law, 5725-1965; section 6 of the Prevention of Sexual Harassment Law, 5758-1998; section 29a(b)(1) of the Protection of Privacy Law, 5741-1981)" (see: Civil Appeal 4948/13 Adv. Harkabi v. Avni (Nevo, March 15, 2015), in paragraph 3 of the judgment of Justice Rubinstein).
Has the duty of loyalty been breached?
The Normative Framework
- The duty of allegiance is the main foundation of a relationship of faith. This duty imposes on the trustee to act in the best interest of the beneficiary with total devotion, while withdrawing any personal or foreign interest from the interest of the beneficiary. As ruled in other municipal applications 817/79 Kosui v. L. Bank Feuchtwanger Ltd., 38(3) 253, 278-279 (1984), "The law imposes a duty of trust on the holder of the power, and thus it helps 'to create supervision and to impose restraint on the holder of the power in the exercise of the force.'" The duty of trust includes two rules of conduct: the prohibition of conflict of interest and the duty of full disclosure (see section 8(1) of the Mission Law and section 254(a)(4) of the Companies Law), which together create a preventive legal regime designed to "prevent the evil before it occurs" (a. Barak, "Conflict of Interest in the Fulfillment of a Position", Mishpatim 10, 11, 12 (1980)). The law further states that if there is a concern that the fiduciary has breached his duties, the burden shifts to the fiduciary to show how he fulfilled his obligations in good faith and without fear of the influence of another matter, or to bear responsibility for his omission, unless he received informed and full consent from the beneficiary to act as he did. (See: Amir Licht, "American Pie - 'Increased Examination', 'Shifting the Burden' and the Essence of Beliefs" (12.1.2017)).
00Duty of Loyalty to Shareholders?
- Our case, as stated, is not about the claim of breach of the defendant's fiduciary duties towards the company, but rather towards the plaintiffs, shareholders in the company, and therefore it is necessary to examine in advance whether the defendant has a fiduciary duty towards them at all. In the Kot case, (Civil Appeal 741/01 Kot v. Estate of the Late Eitan, 57(4) 171 (2003)), it was held that in certain circumstances, an officer may also owe a fiduciary duty to an individual shareholder, where a special relationship is created that establishes such a duty, whether on a contractual basis, or against the background of a mission relationship or against the background of other circumstances, which indicate that the officers assumed responsibility for their conduct as aforesaid. or where the line of justice and general principles of good faith require that such liability arise (see also: Yosef Gross, Directors and Officers in the Age of Corporate Governance, at p. 185).
- This rule has been criticized in the literature (see: Amir Licht, "From Your Destroyers and Your Destroyers Came Out of You - When Did a Duty of Trust Arise Towards a Shareholder and in General" at the end of the sentence of December 26, 2022) The object of Prof. Licht's criticism is the words of Justice Procaccia in the Kot case, according to which:
"The provisions of section 9627(b) of the Companies Ordinance [currently 254(b) of the Companies Law] do not reflect a revolution in the existing law, and they do not establish the principle of a general duty of trust of a manager towards an individual shareholder. However, they are an opening through which the developing principles of extending managerial responsibility to other parties outside the company, including private shareholders, can be introduced, carefully and gradually. Since the law recognizes, as a rule, the principle that the power to control the property of another gives rise to liability and fiduciary duties on its part, it is necessary in appropriate circumstances to extend such liability to parties beyond the company as well, with a proper balance between this duty and the central value of the director's fiduciary duty - the protection of the company's interest and its interest" (Civil Appeal 741/01 Kot v. Estate of the late Yeshayahu Eitan, 57(4) 171 (2003); At the end of page 183 of the judgment of the Honorable Justice Procaccia)