The section establishes a general and flexible norm that allows the court's intervention in appropriate cases (Civil Appeal 2699/92 Bachar v. T.M. Aircraft Food Industries (Ben Gurion Airport) inTax Appeal v. 1949 Company for Tourism Enterprises and Maintenance Services Ltd., Piskei Din 50(1) 238, 244 (1996) (hereinafter: the T.M.)). This is a "framework provision" that leaves the court with the task of pouring content into the fence (Tzipora Cohen Company Shareholders: Claim Rights and Remedies Vol. II, 93 (2008) (hereinafter: Tzipora Cohen)). Indeed, in a long list of cases, case law has defined the types of cases in which the behavior of the company's managers or controlling shareholder is considered to deprive shareholders of their rights. According to the customary law, "the discrimination of the minority in a company is essentially a situation of unfair distribution of resources in the context of the relationship between the controlling shareholders of the company and the minority shareholders in it" (The T.M.M., at p. 246). The power granted to the court to grant relief in the case of discrimination is based on "the purpose of protecting the minority from an unequal distribution of the profits of the society that the ruling majority seeks to enforce" (Civil Appeal 3298/00 Renewing Pumps in a Tax Appeal v. Eshet, Paragraph 8 ([Published in Nevo], June 26, 2002) (hereinafter: the Matter The Renewer)). As part of the hearing of the tort of discrimination, the court is tasked with examining whether the shareholders' legitimate expectations have been violated, and the question of what is a legitimate expectation may receive different answers according to the circumstances of the case and according to the nature of the company (Civil Appeal Authority 9646/04 Haski Alon Initiation, Construction and Investments inTax Appeal v. Arie Michelson Entrepreneurship Company Ltd., Piskei Din 59(3) 380 (2005); Tzipora Cohen, at p. 120).
- There are those who claim that the right to receive relief for shareholder discrimination is granted only to shareholders in a private company, since in a public company the shareholders can sell their shares and thus be free from the injustice, which they claim has been caused to them (see: Opening Stimulus (Tel Aviv) 275/84 Barki Peta Humphreys (Israel) in Tax Appeal v. Tempo Beer Ltd., P.M. 47(1) 84 (1986)). However, this reasoning should be rejected, since limiting the cause of discrimination in the aforesaid manner is inconsistent with the language of the law that uses the word "company" (i.e., both public and private company), and is not even bound by reality. As Prof. Cohen commented: "Managing the company's affairs in a discriminatory manner may lead to a situation in which there are no buyers for the share, or in less severe cases, a decline in the share price. A shareholder in such a company therefore needs relief in order to restore his situation to the situation he would have been in had it not been for the discriminatory behavior."Tzipora Cohen, at p. 114). At the same time, and as already stated above, the nature of the company may affect the legitimate expectations of its shareholders, and accordingly the question of the existence of discrimination. Thus, for example, it has been determined in the past that in a small private company, which constitutes a "kind of partnership", there is a legitimate expectation on the part of the shareholders for a partnership in management which, as a rule, does not exist in a public or large company (see, for example, Civil Appeal 275/89 Davidson v. Orenstein, IsrSC 46(1) 125, 131 (1992)).
From the general to the individual
- As to the argument regarding the avoidance of distributing a dividend after the sale of Elsynt's activity in the field of medical imaging, as a rule, the refraining from distributing a dividend in a profitable company is not an argument that has the power to establish, in itself, a cause of action for discrimination. This is especially the case in a public company where the accumulation of profits causes the share price to rise, and a shareholder who wishes to realize his investment has the power to sell his shares on the stock exchange. Moreover, as a rule, the company's decision to invest its profits in profit-bearing activity, instead of distributing dividends to its shareholders, does not establish a cause of action. Otherwise, the authority to determine the company's business management policy will be exempted from its managers. At the same time, an argument that concerns non-distribution of dividends may, in conjunction with other factors of significant weight, lead to the conclusion that the company was managed in a manner that discriminates against the shareholders or some of them (Tzipora Cohen, at pp. 147-155). It follows from the aforesaid that Elsint's decision not to distribute the company's profits as a dividend, in and of itself, cannot establish a cause of action for discrimination. However, in principle, the decision not to distribute a dividend is a circumstance that, combined with other events - such as the sale of abusive control or unfair transactions by interested parties - may support a claim of discrimination. In other words, to the extent that there is substance to the appellants' claims regarding these events, then the avoidance of the distribution of the dividend, together with Elbit Simulation's return of its declared intention to make a tender offer, may support the conclusion that an unequal distribution of the company's profits was made. It should be noted that the aforesaid is only a prima facie impression, since this issue will be examined by the trial court in the proceeding on its merits.
- With regard to the claim regarding the sale of control of Elsynt from Elron to Europe-Israel, this issue raises a complex question regarding the scope of the obligations that apply to the controlling shareholder when selling his shares to a third party. Situations of selling control often sharpen conflicts of interest between shareholders. This is because, inter alia, at the time of the sale of control, the controlling shareholder's relationship with the company and its other shareholders ends, and the controlling shareholder's interest in the relationship of cooperation and trust disappears. Accordingly, the freedom of controlling shareholders to sell their shares to the highest bidder was restricted (see, Irit Habib-Segal Corporate Law 634 (2007) (hereinafter: Habib-Segal)). The issue of the sale of sabotage control has been examined by this court Other Municipality Requests 817/79 Kosui v. Y.L. Bank Feuchtwanger Ltd., Piskei Din 38(3) 253 (1984) (hereinafter: The Kosoi). According to the ruling in that case: "The controlling shareholder is free to sell his share to any buyer, except for a buyer who, in the opinion of the shareholder, is about to take over the company and empty it of its assets" (Name, at p. 286). Yes, it was said in the same matter, that "the truth is that a share is an asset, with which its owner is entitled to do as he wishes. But this desire is not unlimited. It is forbidden to disposition it, which, to the seller's knowledge, will lead to the emptying of the company. A shareholder is not entitled to act according to the approach that 'after the flood.'"Name, 285). These words were said in the circumstances of the transaction discussed in the Kosoi, caused the addition of an explicit provision inCompanies Law regarding the duties of controlling shareholders and the ability to decide to act fairly. The Rule Established in Parashat Kosoi From then on, it was the starting point for examining the content of the duty of fairness imposed on the controlling shareholders towards the company and the minority shareholders. However, the court is rarely required to apply this rule (see: Opening Stimulus (Tel Aviv) 10820/99 Atzmon v. Saar Syon Holdings in a Tax Appeal ([Published in Nevo], 18.11.2003); Civil Case (Center) 8746-10-09CPA Chen Berdichev in his role as trustee of the creditors' arrangement of Afcon Industries inTax Appeal v. Feuchtwanger([Published in Nevo], December 16, 2010). The circumstances of the case before us are different from those discussed in the Kosoi both in the results of the sale of control (as will be recalled, in the Kosoi The sale of control eventually led to the bank's collapse), as well as information about the skills and intentions of the controlling shareholder. In our case, it was not claimed at all that Elron should have known that Europe-Israel would bring Elsynt into insolvency. This was also not the result of the sale of control anyway. The appellants' argument is different. In their view, the sale of control by Elron to Europe-Israel, in a situation in which Elsynt was, in fact, only a "cash fund", and when the future of the tender offer by Elbit Imaging was in doubt, was carried out with a clear conflict of interest between Elron's interest in maximum consideration for its shares in Elbit Imaging, and the interest of Elsynt shareholders from among the public for an equal distribution of the profits. In these circumstances, they argue, the engagement in an agreement for the sale of control, which represented a high control premium, without a promise that Europe-Israel would stand behind the representations regarding the intention to make a tender offer, and even the opposite is true - while Elron was provided with the protection of the right of indemnification in the event that it sued in connection with the intentions expressed in Wortman's letter - constituted a discriminatory move that contradicts the controlling shareholder's obligation not to abuse its power. These circumstances raise questions that were left to be examined in the judgment given in the Kosoi (See, President Barak's remarks Name, at p. 286: "When other problems arise in the future - such as the 'price' of control, whether the consideration for the sale of control belongs to the company itself and whether the basis for the formulation of the obligation is the seller's actual knowledge of the buyer's intentions, or whether it is also possible to suffice with a lack of knowledge where a reasonable shareholder should have known... We will be able to pay attention to them when they wake up"). Even in the present proceeding, we are not required to go into the thick of the matter. As may be recalled, we are dealing with the preliminary stage of a motion to certify a class action. As a result of the aforesaid, it is sufficient for us that the chances of a claim based on a claim for the sale of control are reasonable in the circumstances of the case. The very fact that the questions that will be clarified in the proceeding itself are difficult and complex, and that the appellants will have to go a long way in order to prove their claims, does not, in my opinion, constitute a barrier to the approval of the class action.
- In this context, it should be noted that the decision of the Tel Aviv District Court (Economic Department, Honorable Judge) was recently rendered D. Keret Meir) BClass Action (Tel Aviv) 26809-01-11 Kahane v. Makhteshim Agan Industries in a Tax Appeal ([Published in Nevo], May 15, 2011) (hereinafter: the matter Makhteshim-BasinIn this framework, a question with similar characteristics was examined: In the framework of a merger transaction, a controlling shareholder is entitled to receive from the acquiring party an excess consideration for his shares. The decision determined that the controlling shareholder was not entitled to excess consideration for its share of the shares sold, and that the consideration should be distributed among all the shareholders of the company, including the shareholders from among the public. Among the reasons for the decision, the court noted that in the circumstances of that case, there was a conflict of interest between the controlling shareholder (and the officers appointed on its behalf and engaged in conducting the negotiations) and the shareholders from among the public, and therefore the existence of suspicious signs, such as a glaring inequality between the controlling shareholder and the minority shareholders, justifies the exercise of close judicial review by the court. It should be noted that a settlement agreement reached by the parties to the proceeding, whereby, inter alia, the controlling shareholder would pay the sum of ILS 45 million to the other shareholders, was approved in all its components in a judgment dated August 3, 2011.
In our case, we were not dealing with a merger transaction, but rather with the sale of shares, but the totality of the circumstances surrounding the sale of control supports the conclusion that there was a conflict of interest between Elron and the minority shareholders in Elsynt, and that, prima facie, Elron was aware that following the sale of control there was a high probability that the shareholders from among the public would not receive a fair share of the profits accumulated in Elsynt's coffers. This conclusion is supported, inter alia, by the following indications: the timing and manner of conducting the negotiations between Elron and Europe-Israel, the distance between the field of activity in which Elbit Imaging dealt until the sale of control and the scope of Europe-Israel activity, the financing of the acquisition by way of a leveraged acquisition (Leveraged Buyout), the control premium received by Elron (in exchange for the purchase of less than 40% of Elbit Imaging's shares), the existence of an indemnity clause by Europe-Israel to Elron in the control sale agreement in connection with the possibility that Europe-Israel would withdraw from the intention to make a tender offer, and finally, the investors' reaction to the report about the sale of control by way of a drop in the price of Elsynt's share price below the price at which the share was traded prior to the report of Wortman's letter. It should be clarified that the aforesaid does not determine the factual question, which should be clarified before the trial court, whether the control premium paid to Elron was indeed excessive in height in such a way as to indicate the intention of the acquiring company to benefit from the assets of the acquired company in an unequal manner (for the opinions expressed in the legal literature regarding the legitimate limits of the sale of control, see: Makhteshim-Basin, at pp. 32-34; Irish Habib-Segal Corporate Law After Companies Law The New Volume 2, Chapter 12 (2004)). It should also be clarified that the aforesaid does not set a conclusion on the question of Elron's discrimination of Elsynt shareholders, but all that is said is that the appellants have lifted the burden that was placed on them at this preliminary stage of the hearing. In other words, the chances of a claim on this ground are reasonable.
- The last claim of discrimination presented by the appellants is rooted in the hotel and marina transactions. The situations in which the controlling shareholder of the company stands on both sides of the fence raise the concern that the terms of the transaction will be biased in favor of the controlling shareholder, rather than in favor of the company, and that the negotiators will ignore the interests of the minority shareholders. Thus, for example, in cases where transactions for the transfer of assets are executed between a parent company and a subsidiary, there is a possibility that the consideration for the assets will not match their true value. The case law was aware of the potential harm that exists in these situations, and addressed this in the following words: "In the relationship between a parent company and a subsidiary, the subsidiary sometimes serves as a central conduit for the transfer of funds to the parent company, and not necessarily for the benefit of the subsidiary or its minority" (Matter T.M.M., at p. 248). In view of the aforementioned concern, the legislature has created procedural and substantive tools designed to reduce the fear of abuse. Currently, the procedure for approving unusual transactions of a subsidiary vis-à-vis the parent company (or entities related to it) is regulated in the provisions Chapter Five 30Companies Law, and especially Section 270(4) In conjunction with Article 275 (See also: Regulations The Companies (easing transactions with interested parties), 5760-2000). It should be noted that in the framework of Amendment 16 toCompanies Law, which recently came into effect (published in the Official Gazette on March 15, 2011. Some of its provisions came into effect on May 14, 2011, and some on September 15, 2011), and the conditions for the approval of such transactions were further tightened. The law seeks to ensure a proper decision-making procedure in the company by requiring approval from an independent organ (the audit committee), as well as giving the minority shareholders the power to block moves that do not serve the company's best interests (requiring the approval of a general meeting by a special majority). In addition, from the perspective of substantive law, transactions of this type are subject to the duties of trust and care imposed on the officers, and to the duties of good faith and fairness imposed on the controlling shareholders.
- In our case, the hotel and marina transaction was approved by the Elsynt Board of Directors and the Audit Committee. At the relevant date of the lawsuit, as will be recalled, it has not yet entered into the Companies Law to its validity. A request submitted to the Haifa District Court for a temporary injunction instructing Alcint to convene a general meeting of its shareholders for the purpose of discussing and voting on the approval of the transactions by a special majority, was rejected. However, the principles of substantive law, which prohibit the controlling shareholder from harming the legitimate expectations of the minority shareholders and distributing the company's resources unequally, applied then as well as today. The totality of the circumstances surrounding the decision to engage in the hotel and marina transactions raises reasonable concern that the transactions were carried out in deviation from the aforementioned principles. These circumstances include, inter alia, the agreement for the sale of control from Elron to Europe-Israel, with its inherent complexity (the control premium, the indemnity clause); the proximity of the timing between the sale of control, Elbit Imaging's return from the intention to make a tender offer, and the engagement in the hotel and marina transactions; In addition, the capital market's reaction to these events in the form of a drop in the share price may also indicate that investors' expectations have been exceeded. Therefore, in my opinion, the hotel and marina transactions establish, on the face of it, a reasonable concern of deprivation of minority shareholders. The implications of not bringing the transactions to the approval of the shareholders' meeting will be discussed at length below, in the section in which the issue of the burden of proof will be examined.
- At this preliminary stage, the aforesaid is sufficient to determine that the sale of control of Elron to Europe-Israel and the execution of the hotel and marina transactions (with the decisions not to distribute dividends or make a tender offer) are likely to establish for the appellants a cause of action concerning the deprivation of the minority shareholders in the company. To examine the fulfillment of the conditions set forth in the law, we will now proceed. As may be recalled, with respect to the grounds stemming from the decision not to distribute a dividend after the realization of Elsynt's assets and the sale of control of Elbit Imaging from Elron to Europe-Israel, the trial court ruled that since these events occurred prior to the determining date for the formation of the group (September 6, 1999), "the questions that require clarification in connection with these events are, therefore, not common to all the members of the class" (paragraph 37 of the trial court's decision). With regard to the hotel and marina transaction incident, the court ruled that the appellants did not meet the burden of proving that, prima facie, they suffered damage as a result of it. With regard to these determinations, my opinion is that the appeal should be accepted and for the reasons that will be set forth below.
Lack of uniformity among group members
- We began by presenting the trend taken by the legislature in the legislation Class Actions Law, not to create difficulties for the potential class plaintiff where the public interest justifies the clarification of the claim in a class proceeding. We have also mentioned the many tools granted to the court in the law, which allow it great flexibility in defining the class, the grounds and the remedies. In view of this, it appears that there was no room in the circumstances of the case to suffice with the reason for the lack of uniformity between the class members in order to dismiss the motion to clarify the causes of action mentioned in the framework of a class action.
- The condition regarding the existence of "substantive questions of fact or law common to all the members of the class" appears as follows: In section 4(a)(1) And they In section 8(a)(1) to the law. Naturally, whenever a group of people with a common denominator is formed, there are also aspects that distinguish them from each other. When we are dealing with a class action, in addition to the questions that are common to the members of the class represented, questions may also arise that are not common to them, and sometimes also individual questions that distinguish between each member of the class and the other. According to the case law, "although it is not necessary that all the questions that arise within the framework of the class action should be common to all the members of the class, this does not mean that if there are common questions the class action can be certified, whatever the individual questions that arise within its definition" (Matter Reznik, paragraph 27; and compare Civil Appeal 8268/96 Reichert v. Shemesh, IsrSC 55(5) 276, 296 (2001)). According to the law, the questions shared by the members of the group must be "substantive." The case law interpreted the aforementioned condition as a relative test in which the court hearing the motion to certify the class action examines the scope of the individual issues raised by the lawsuit as opposed to the issues common to the class members. Clear criteria for deciding the degree of uniformity that should prevail among the class members, and on the other hand, what is the degree of diversity among the members that is still "tolerated" within the framework of the class action - have not yet been formulated in our case law (see: Matter Reznikparagraphs 25-27 and the references therein). In any event, it was held that before a court rejects a motion to certify a class action due to the lack of homogeneity between the class members, it should require the possibility of qualifying the action for clarification in a class proceeding through the use of solutions that appear in the law, such as: the power to split the class into sub-groups (section 10(c) ), the possibility of rendering a declaratory judgment in which the common questions of the class members will be decided, while leaving the individual questions to other proceedings, and the authority to give instructions regarding proof of entitlement to relief by the various class members (Section 20(a)-(c) to the law) (see: Matter Reznikin paragraph 27).
- Applying the aforesaid to the circumstances of the present case, leads to the conclusion that the trial court erred in its decision not to examine the possibility of legalizing causes of action by splitting the group into sub-groups, using the authority granted to it for this purpose In section 10(c) 30Class Actions Law. The trial court also erred in holding that the decision of counsel for the appellants to set September 6, 1999 as the determining date for the formation of the group, exempts it from discussing the causes of action that were allegedly formulated prior to that date, including the event of the sale of control of Elbit Imaging and the decision not to distribute a dividend from Elsint profits. In our case, the class of representative plaintiffs can be split into sub-groups that will be composed of the shareholders who held the shares of Elsynt on the dates relevant to these events. There is no reason to place an additional group of shareholders because the decision not to distribute a dividend in itself does not constitute discrimination against the minority shareholders, but only because it is accompanied by other actions that harm the reasonable expectations of the shareholders, as stated above. The decision not to distribute a dividend therefore merges with the other alleged grounds for discrimination and does not constitute an independent cause of action. However, the other causes of action concerning the deprivation of the minority shareholders can be clarified in the framework of a class action by splitting the class represented in the lawsuit into two groups: the group of shareholders who, according to the claim, were harmed by the sale of control. That is, those who purchased and held Elsynt shares prior to February 25, 1999 (the date of signing and reporting the agreement for the sale of control), excluding the defendants; and the group of shareholders who were allegedly harmed by the execution of the hotel and marina transactions. In other words, those who purchased and held shares of Elsynt prior to September 9, 1999 (the date of signing and reporting of the hotel and marina transactions), excluding the defendants. It should be noted that from the reports of the appellants' holdings in the shares of Elsynt (Exhibit to the appellants' exhibits) it emerges that among the appellants there are a number of shareholders who held the shares of Elsynt on the aforesaid dates, and therefore they have the power to serve as representative plaintiffs for the sub-groups.
As a side note, it should be noted that the District Court's determination that shareholders who purchased their shares after the occurrence of any discriminatory event cannot sue for it (paragraph 37 of the District Court's judgment) is not free of doubt. The question of the extent of the relevance of the date of the purchase of the shares to the examination of the right of the shareholder to file a claim for discrimination against the minority is not a simple question. This question has arisen in the past in the matter Bachar In circumstances in which the alleged discrimination revolved around a management agreement through which funds were injected from the company's coffers to the controlling shareholder's coffers. In the judgment, it was held that the fact that the shares were purchased by the plaintiff after the signing of the management agreement does not negate his right to file a claim for removal of discrimination. Admittedly, in the same matter, the ongoing nature of the discrimination was a central consideration in the decision to recognize the right of the minority shareholder to claim. However, there are weighty reasons to support the right of a minority shareholder who purchased his shares after a discriminatory event occurred, even when it comes to discrimination of a one-time nature, including the need for effective enforcement and the prevention of illegal enrichment (see, Habib-Segal, at pp. 603-605). In any event, in the circumstances of the present case, I would like to leave this issue for consideration. This is in view of the ability that exists in this case to split the class plaintiffs' group into sub-groups.