The Normative Framework Needed for Decision
Every company, as part of its articles of incorporation, is supposed to have articles of association regulating its internal relations, and it constitutes a contract for all intents and purposes between the company and its shareholders and between them (see sections 15-17 of the Companies Law, 5759-1999 (hereinafter: the "Companies Law"); Civil Appeal 3051/98 Nadrin v. Discount Investment Company Ltd., IsrSC 59(1) 673, 696 (2004); Zohar Goshen and Assaf Eckstein Corporate Law 68 (2023) (hereinafter: "Goshen & Eckstein")). The uniqueness of the Articles of Association as a contract requires that general principles of contract law apply to it, for example, its interpretation is done according to the intentions of the parties (section 25 of the Contracts (General Part) Law, 5733-1973). Among these principles, it was clarified that what is not written in the articles of association should not be inserted into the regulations, see other municipal applications 54/96 Hollander v. Hamidad HaDish Software Ltd., IsrSC 52(5) 689, 673 (1998): "In view of the protection of the investors' reliance interest, the court must adhere to the written version of the regulations, and not try to trace some hidden intention hidden from view."
In addition to the articles of association, and many times, the shareholders choose to draw up a founders' agreement or a shareholders' agreement, the purpose of which is, among other things, to anchor the contractual agreements, the principles of management, the mutual obligations between them, and more. Although such agreements are not part of the company's constitutional documents, when they are drafted lawfully, they have binding contractual validity for all intents and purposes and the principles of general contract law apply to them, as long as they do not contradict cogent legal provisions or harm the public interest (regarding the relationship between the company's articles of association and a shareholders' agreement, see at length Opening Stimulus (Economic) 42521-11-14 Raphael v. Ben-David, pp. 6-7 (Nevo, July 25, 2016)).
- The defendants claim that the agreement also applies to DHS, so that "it was clear to all that all the activity deriving from the partnership between the parties was covered by the partnership agreement signed between them, with all its clauses, and by virtue of that agreement and by virtue of those understandings, they operate from that moment on" (see the defendants' summaries at paragraph 108) and that: "The intention and legitimate expectation of the parties was that the separation mechanism that they set out in the partnership agreement would also apply to the parties in connection with DHS, with all that this entails, and Kotzer did not argue otherwise in real time" (see the defendants' summaries at paragraph 109). Is there indeed a place to apply the agreement to DHS or at least to apply the separation clause to DHS? As I have already mentioned above, the answer to this is no, and I will explain.
Application of the Rule to the Facts of the Case
- In the case before us, the agreement was signed on January 11, 2012, and the DHS bylaws were signed on August 25, 2019, i.e., about 7 years later. In addition, there is no dispute that no additional document was attached to the DHS bylaws . There is also no dispute that the development of the "Huber" was done by MedLife and transferred to DHS "for the purpose of exporting the software activity to Europe in 2020" (see the Tax Authority's decision, Appendix 5 to the Enforcement Claim, pp. 29-30, paragraph 111 of the defendants' summaries), in addition, there is no dispute that the development of the "Huber" was transferred to DHS without consideration, and as a result, a "restructuring" of MedLife was made.
- From a review of the evidence, I have come to the conclusion that DHS and MedLife are companies that deal with tangential but not overlapping fields, see Kotzer's investigation, at p. 53, lines 6-7: "We transferred this to DHS that we established, for the purpose of software activity abroad" and later, on lines 17-24: "We saw DHS as a software company that has various reciprocal relationships, it has an agreement with Zero R, If the company itself is sold... I saw it as an investment that I want to realize in the future, with profits." The gold investigation also does not undermine this finding, see p. 77, lines 22-23: "DHS was solely out of a desire to sell abroad, in order to receive some kind of tax benefit if selling abroad, that is the idea" and later, at p. 78, lines 3-8: " Now, correct me if I don't understand correctly, but it's kind of a spin-off, right? When you say you wanted to establish a new business in the field of software in Europe and therefore you created a separation, you say tax considerations between MedLife and DHS. I mean, you've created a new entity for that matter, right? That's how I understand it. A. Yes."
- I will clarify that the fact that the companies are separate companies does not negate the fact that there may be a web of agreements between the companies, such as the payment that MedLife receives from DHS for its services, or the fact (which was claimed by the defendants) that DHS did not employ employees on a day-to-day basis and that the overheads of its management were placed on MedLife's doorstep. Even if the facts are not true, this does not prove that DHS is an "inherent part of Madlife" (Defendants' Summaries, paragraph 111).
- The same is true of the defendants' claim that the establishment of DHS was made by virtue of the provisions of clauses 12.6-12.7 of the agreement, which state that: "It is agreed and clarified by the parties that on matters as detailed below, no decision will be made within the framework of any organ of the company, except with the unanimous consent of all the shareholders in the company.... Changing the Company's Areas of Activity... Sale and/or grant and/or lien of the Company's assets." I am of the opinion that these clauses deal with decisions that are supposed to be made in the affairs of the company itself, i.e., the possibility of changing the areas of Medlife's activities or selling its assets "outwards", but the provision of the prerogative to sell "out" (and even for free) the assets of MedLife (such as the "Huber") does not indicate that it is the same company or that the companies are related to each other, or at least that the parties have agreed that DHS, which owns "Hobar", the provisions of the agreement will apply.
- As stated, these are different companies, and with the establishment of DHS, the parties consciously chose to create a new legal structure - a separate company, with the purely commercial intention of creating a buffer between the marketing activity of the "Hobar" abroad, and the activity of "MedLife" in Israel, a barrier that appears to have nothing wrong, and as evidence of this, it even received the approval of the Tax Authority, and see what is stated on page 3 of Appendix 5 to the enforcement claim in section 1.18 under the main heading: "The facts as we have been communicated" are stated as follows: "The restructuring is intended for a business and economic purpose and is not intended for tax avoidance or improper tax reduction... The activities are unrelated to each other and each of them is expected to continue to develop in separate business channels... The split is necessary for the purpose of raising capital and/or creating strategic and/or other collaborations with local and international investors and/or strategic partners... The company operates in the clinical-medical field, which is a field full of investments and risks, and its split will enable the transfer of operations to a separate entity and the hedging of the business risks involved in activity in this field. Receiving credit and providing collateral for each of the activities separately without mutual commitment between the companies."
- In addition, in light of what is stated in the Tax Authority's position, I cannot accept the defendants' argument that this was a "purely technical" transfer "for the purpose of reorganization" of the businesses, which was done on the basis of the assumption that the rights of the parties as determined in the agreement would be preserved for them. This is a transfer that stems from purely business considerations, with benefits on the side.
So far, I have detailed my conclusion that MedLife and DHS are not "the same entity" in a way that requires the application of the agreement to DHS. It also appears that there is no identification between the agreement and the DHS bylaws (see Appendix 4 to the enforcement claim). While the agreement is detailed and forward-looking, the DHS bylaws are short and lacon. I am of the opinion, as will be detailed below, that the fact that the parties drafted a detailed and specific agreement with respect to Medlife, and chose not to do so with respect to DHS, indicates a "negative arrangement" and in any event, even if this was done inadvertently, it is not the role of the court to shape the contractual relationship between the parties, when they could (as they did in Medlife) clarify this in the basic documents of DHS (and compare, With the necessary changes, in this regard, Civil Appeal 8836/07 Balramoral Investments inTax Appeal v. Cohen, PD 66(3) 577, paragraph 25 of the judgment of Justice Danzinger: "I am of the opinion that the court should not add to the contract terms that the parties did not agree on at the time of their communication and did not see fit to include them in the contract.
- I will mention that the defendants' arguments regarding the common desire to apply the agreement to DHS are oral arguments against the provisions of the bylaws - which is a written document. In order to prove this claim, the testimony of a single litigant - Zahav was brought to testify, who confirmed in his interrogation that there is no document from which the agreement of the parties can be inferred as aforesaid, and no evidence of the existence of any meeting in which the aforesaid was agreed upon, was brought before me.
- See the investigation of Zahav on p. 83, lines 1-13: "S. Yes we will get the documents shortly, don't worry. But this is perhaps the most important meeting in the life of the company, you make a kind of spin, you transfer the core share of the activity to another company, an agreement on 30% that we learned about in retrospect, also the founders' agreement, I understand there was an agreement to import it to the new company. There's no male, no tzala, nothing, WhatsApp, nothing, how do you explain that? A. I remember that I did issue emails, but it was as if we had mostly closed, an email at least, but mostly there was a meeting on this thing sharply and smoothly. No problem, you know what? I'm with you. There was a meeting. We don't know when, we don't know anything, everything is fine. Why isn't there an agreement after the meeting? There is no before me, I understand, a coffee sitting, no problem. After the meeting, you will send out an orderly email. A. Forgotten."
- It should also be noted that the defendants did not even bring Sharoni or the drafters of the articles of association and the submitters of DHS documents to testify for the approval of the Registrar of Companies, Adv. Avi Hai or Adv. Shai Cohen, in order to testify about the circumstances of the drafting of the articles of association and the alleged agreement of the parties to apply the provisions of the agreement to DHS. I will add that Zahav's answer to this matter in his interrogation (on page 81, lines 3-19) was not convincing: "Q. Did you say or someone else said to Attorney Avi Hai, listen, we're establishing DHS, you know how to tell us today it's all taxation, A. Her name? Q. You're telling us today that it's all for tax reasons. Yes. Q. Do you know that the partnership agreement with MedLife is our agreement, it is also our agreement with DHS, did you say such a sentence to him? A. Even if I said it, do you think I remember? I'm not sure I said it and I'm not sure I remember. Q. No, but you explain to us, you write it in an affidavit, it seems clear to all of you, and you say it's a pretty significant step. I'm trying to understand, I understand that there's no agreement. But at least you reflected his desire, you say the desire of all of you, did you reflect that desire to him? A. So at the time, we said we would open a company where the three of us were partners, and that's all. From MedLife and that's it. This testimony is not sufficient to draw the conclusion that the parties' common intention was to apply the agreement to DHS as well.
- To this, I would add that the adoption of the forced purchase mechanism that was stipulated in the agreement, even for shorter rights in DHS, may harm his proprietary rights in DHS, determine the fate of his shares in DHS, including his right to maximize the profit that a shortener can make from the sale of his rights in DHS or harm his ability to receive dividends from DHS in the future, etc. (for the disadvantages of forced purchase, see Goshen and Eckstein, at p. 410).
- In light of all of the above, I determine that the separation mechanism set forth in the agreement (forced purchase) should not be applied to DHS either. At the same time, I am of the opinion that the parties would do well to consider the two alternatives proposed by each of the parties. Thus, Kotzer must remember that in the case at hand, the defendants expressed a willingness to purchase his shares at a value set by an appraiser on behalf of the court (who added ILS 1 million to the defendants' estimate), and thus his concern that this was an unfair price should be allayed. It should also be remembered that the fact that DHS does not have a forced purchase mechanism may leave it unclaimed for its shares. On the other hand, and to the extent that Kotzer does want to remain a shareholder in DHS for pure, non-extortionate motives, the defendants should positively consider his offer to deposit his shares in the trust, so that the regular operation of DHS can be ensured without interference in management.
- For these reasons, and in view of the fact that the defendants sought relief to purchase Kotzer shares in DHS at the price set by an expert in the court; since, on the other hand, Kotzer offered to deposit his shares in trust, I determine that none of the parties may withdraw from this offer within 30 days from the date of receipt of the judgment. If agreements are formulated on the basis of one of the proposals, the parties may notify the court and request that a judgment be given effect to the additional agreement. If no agreements are reached, neither party is bound by its offer at the expiration of the 30-day period and Kotz will remain a shareholder in DHS, all as detailed in this company's documents.
Conclusion
- The defendants will purchase Kotzer shares in MedLife according to the court's expert assessment; Kotzer remains a shareholder in DHS, unless the parties choose to act according to one of the alternatives mentioned in Section 96, within 30 days of receiving the judgment.
- With regard to legal expenses, I have no choice but to refer to what is stated in paragraph 56 above, as well as to Kotzer's testimony, which best describes what happened, to his feelings (p. 37 of the transcript, questions 1-15): "What has happened since then, the day after I finished and wrote my letter of departure before I left, I left on September 30 and on Sunday I received a letter after I had completed all my assignments, I wrote them a summary of all my assignments. On Sunday I get a letter, I suddenly find out that my emails were brutally hacked, Mishael Zahav as he did to other people in the past hacked into my emails, started slandering me, it was the letter, you stole laptops, you stole it, things that didn't exist and weren't created, he started accusing me and I saw that there is something here that you don't finish work like this after 11 years and another 13 years that you know. I realized something was happening. And then a week later I suddenly get it, suddenly Mishael Zahav learned that as a CEO you have to call a board meeting. And then he sends me a taxi home to a board meeting, what's the matter? Doubling our wages. I realized that there was something here that I couldn't control. And that's the essence of this whole thing."
- On the other hand, the defendants encountered a refusal on behalf of Kotzer to operate the agreed mechanism; they encountered a refusal to contact the Institute of Certified Public Accountants; they discovered the matter of using the title of engineer. Against this background, each side stepped up to the barricades, with all means valid, including a complaint to the police, labor court proceedings, and denial of the separation mechanism. I am of the opinion that each party contributed equally to the chaos that was created, and even in the proceeding itself, each party has its achievements and failures - thus, Kotzer was forced to sell his shares at a price set by the court's expert, an offer that the defendants made even before the evidentiary proceeding; On the other hand, I have determined that the forced purchase mechanism does not apply to DHS.
For the reasons listed above, I determine that each party will bear its own expenses.