Civil Case (Tel Aviv) 52687-10-23 Estate of the late Alfred Mann v. Auzza Fairchild Technology Venture Ltd.

A lawsuit calling on the court to allow the plaintiffs, shareholders of a public company, to review the ballots of the voters at the company's general meeting, at which a management agreement with the company's controlling shareholder was approved.  The basis of the claim is in the provision of Regulation 10(b) of the Companies Regulations (Written Voting and Position Statements), 5766-2005 (hereinafter: the Written Voting Regulations): A person whose holdings do not reach the threshold required by the Regulations in order to receive an automatic right to review voting data (such as the plaintiffs, although it is possible that the scope of their holdings will increase significantly soon in light of a parallel proceeding), and the company did not allow him to review it, may petition the court in order to be granted permission.  So far, the case law has not been required to determine the criteria when the court comes to examine whether to grant such a request.

Background

1. The defendant, Tauza - Fairchild Technology & Venture in a Tax Appeal (hereinafter: the Company) is a public company whose shares are traded on the Tel Aviv Stock Exchange. She is engaged in investments in companies in the field of technology.  It has no activity and employees of its own, and its management has been carried out for decades by the company Tauza Management and Development in 1991 in a tax appeal (hereinafter: Tauza Management, or the management company), which also currently owns and controls about 19% of the company's shares.  The founder of the company is Mr. Avi Krebs (hereinafter: Krebs), who is also the controlling shareholder and manager of Tauza Management.
2. The additional principal holder of the Company's shares, in accordance with the provisions of the Company's Shareholders' Holdings Report (Appendix 1 to the Plaintiffs' Affidavit, dated April 4, 2023), is the late Mr. Alfred Mann (hereinafter: Mann), to whom the Plaintiffs are affiliated. Mann was a Jewish-American businessman and philanthropist, rich in assets, who invested millions of dollars in the company between 2004 and 2006, in exchange for about 20% of its shares (hereinafter: Mann shares).
3. The company had, during the period relevant to the lawsuit and in accordance with the aforementioned holdings report, two additional institutional investors, who held just over 7% of the share capital each; the rest of the shares were held by the public.
4. Mann passed away in 2016, at the age of 90. Plaintiff 1 is the estate of Mann (and in view of his status, he was not required to be a plaintiff).  Plaintiffs 2-4 (hereinafter collectively: the Plaintiffs) are trustees of the Mann estate, as well as the Administrative Trust established by Mr. Mann (hereinafter: the Trust).  The plaintiffs themselves, there is no dispute, are currently entitled to approximately74% of the company's shares, which are additional shares on top of the MANN shares, which were allocated to Mann shortly before his death and transferred to the plaintiffs, after struggles with the company, after his death (hereinafter: the plaintiffs' shares).  According to the plaintiffs' position today, Mann's shares (i.e., approximately 20% of the company's share capital) were and in any event are now the property of the trust, as opposed to Mann's personally, even if they are registered in the company's shareholders' register, and therefore the shares must be registered in their names, as the trustee's managers.  It could be argued that this is simple enough, but this is not the case: Krebs and Audacity Management have acted and are working to transfer these shares to the presumption of Baza Management, by virtue of a 2013 letter of right of refusal signed by Mann that they are holding in their hands, a move that gave rise to a fierce legal battle in a parallel proceeding (Civil Case 14582-03-22), [Nevo], which is also being conducted before me (hereinafter: the parallel proceeding).  Since the parallel proceeding is related to the proceeding here, a brief reference will be made to it.
5. During 2021, plaintiff No. 3 approached Krebs (as the CEO of the company's management company) in connection with the registration of the shares in the name of the trust. Following correspondence with Krebs and the company's family appellant, Prof.  Yosef Gross (who at the time also owned about 7% of Tauza Management's shares), the plaintiffs approached the company's family appellant at the end of 2021 and requested the registration of Mann shares in their names, in their capacity as trust managers.  The company did not respond.  On the other hand, it was Audacity Management that initiated its approach to the plaintiffs, announcing that their letter had been brought to its attention, and that Audacity Management was holding a "letter of right of refusal" signed by the late Mr. Mann about three years before his death.  The alleged significance of that letter is that any transfer of Mann's shares (including due to his death and including to his heirs) will establish the management of the first right of refusal in relation to that transfer.  According to Tauza Management's position, Mann's shares should be considered as those that have been requested to be transferred to a trust, and this establishes Baza Management the right to exercise the 'right of refusal' and receive the shares of Mann next to it, free of charge.  The company's board of directors convened immediately following that letter, without the knowledge of the plaintiffs, and decided at the end of two meetings to approve the transfer of the shares to the management daring, even though it was further decided that the shares would remain in trust for a "reasonable period of time", in order to allow the plaintiffs to turn to the courts.  The plaintiffs did so, in March 2022, in a lawsuit filed by the company (which indicated that it would not express a position in relation to it), Krebs and Audacity Management, in which defendants were defendants.  The plaintiffs petitioned for remedies that were focused on the cancellation of the transfer and the registration of MAN shares in their names, and even petitioned for interim relief in the matter.  After a hearing on the request for interim relief, the parties there agreed that until a decision is made in aparallel proceeding, the shares would remain registered in a different appeal than the late Mann, without disposition taking place, without the plaintiffs being able to vote by virtue of the shares as long as they did not receive the relief of registering them in their name, and that they could nevertheless take any action if they believed that their rights were violated.  The proceeding here embodies the plaintiffs' view that their rights have now been violated.  The evidence in the parallel proceeding was completed a short time ago, and the case is fixed for summaries, although it is clear that a final decision (i.e., even after a possible appeal), whatever it may be, is likely to come only a little longer.
6. The Company, in its defense, is the subject of another dispute (and, according to the Company: ahead of time), between the Company itself and some of the plaintiffs, in connection with the alleged breach of fiduciary duties of some of them in connection with a certain merger agreement of Bioness Inc. (Hereinafter: Beyoncé), in which the company has shares.  The Company, as a minority shareholder in Beyoncé, filed a class action in the United States in 2022 against the plaintiffs 3-4 herein (hereinafter: the Beyoncé proceeding).  According to the company, the current lawsuit is intended only to advance the plaintiffs' interests within the framework of the Beyoncé proceeding.
7. Since the filing of the parallel proceeding, the plaintiffs on the one hand, and Dawaza Management and the company on the other, have been investing their time in a vigorous legal battle, one of the stages of which is the proceeding here.
8. The plaintiffs describe that shortly after the filing of the parallel proceeding, they approached the company in connection with payments of over ILS 40 million that the company had paid to Bada Management, by virtue of the management agreement, which was not lawfully approved, the plaintiffs' position. The company rejected the request.  The plaintiffs decided to turn to the Israel Securities Authority.  This, it appears, informed the company that the management agreement expired in accordance with the law when Amendment 20 to the Companies Law came into effect (an amendment from 2012 that added in section 272 of the Companies Law transactions requiring special approvals).  According to the ISA's position, the management agreement should be viewed as not being lawfully approved, with its approval requiring the approval of the remuneration committee, the board of directors, and a general meeting in which, inter alia, the same majority of the 'neutral' minority shareholders, as mentioned in section 267a(b) (also in section 275) of the Companies Law.  Therefore, on May 28, 2023, the Company published an immediate report for the summoning of a special meeting, for July 3, 2023, two of the issues of which are the retroactive ratification of the engagement and the funds received by Bawaza Management from 2013 onwards (hereinafter: the ratification of the retroactive payments), and the approval of the Company's engagement in the existing management agreement, from the end of 2022 until the end of 2025 (hereinafter: the approval of the management agreement).  The plaintiffs acted, within the framework of the parallel proceeding, to delay the hearing of these two.  A hearing was held on June 14, 2023, a day after the Israel Securities Authority informed the company that its position was that the management agreement was not lawfully approved, while clarifying that it does not express an opinion on the question of when a meeting should be convened.  By agreement, it was determined that the issue of ratifying the retroactive payments would be removed from the agenda at this stage, while the issue of approving the management agreement for three years until the end of 2025 would remain in place, and for the avoidance of doubt, it was clarified that the plaintiffs would be entitled to vote by virtue of their shares (i.e., 0.74% of the company's share capital), as opposed to by virtue of MAN shares (i.e., about 20% of the share capital).
9. Shortly before the meeting, on June 27, 2023, the plaintiffs requested the company to approve allowing them to review the voting papers and power of attorney that were provided to the company, as well as the excel files relating to the vote, in a manner that would allow the plaintiffs to examine the processing of the results of the shareholders' vote. They also petitioned for the appointment of an observer on their behalf to be present at the special meeting, all in order to ensure the transparency and integrity of the vote counting process.  The company rejected their request.
10. The company's general meeting was held on July 3, 2023, at the offices of Tauza Management. Its manager was a director of the company, Mr. Giora Meyuhas, and the person appointed to coordinate the voting data was the company's attorney, Adv. Dr.  Zeev Hollander.  In the immediate report published by the company, it was noted that the transaction was duly approved.  The details include the number of shares by virtue of which shareholders voted: about 76 million, out of about 114 million allocated shares.  Of these, about 54 million shares were not classified as belonging to personal interested parties (i.e., minus the approximately 22 million shares held by Tauza Management and Krebs himself).  Of the unaffected shareholders (according to the company's count and the statements of those shareholders), about 34 million shareholders (i.e., about 63% of the shareholders defined as neutral, or about 30% of all shareholders in the company) supported the proposal, and holders of about 20 million shares (i.e., about 37% of the neutral shareholders, or about 17% of all shareholders in the company, opposed the proposal).
11. On July 10, 2023, the plaintiffs filed a motion within the framework of the parallel proceeding, in which they petitioned to allow them to review the ballot papers, by virtue of the provision of Regulation 10 of the Written Voting Regulations. If they had held Man shares, then they would have been granted the aforesaid right by virtue of Regulation 10(a) of the Regulations, which establishes the automatic right of perusal to the holder of more than 5% of the shares that are not of the controlling shareholder.  However, according to them, this right also arose for the plaintiffs by virtue of Regulation 10(b) of the Regulations, which states that the court has discretion as to whether to allow the review even to a holder with a lower volume of shares.  I asked the company to examine, and it rejected the request, in its letter of July 13, 2023.  The issue was cleared in a hearing that was in any case fixed in the parallel proceeding, to July 17, 2023, where I clarified that it is not within the framework of that proceeding that the plaintiffs' request for review can be examined, but rather in a separate proceeding, one that will also be brought to my attention if necessary.  I noted that the company can consider the possibility of granting the request, especially when we are dealing with someone who does not dispute that to a certain extent he came in Man's shoes, and thus an additional and burdensome proceeding would be spared.  Needless to say, the company will not eliminate the need for such a procedure.
12. On October 30, 2023, the plaintiffs filed their claim here against the company, a claim that was initially and unnecessarily also directed against Audacity Management (which was deleted from the claim as aforesaid, by consent). They petition for an order instructing the company to allow them to review all the voting papers of the special meeting, including by obtaining a copy of all the voting papers and the power of attorney and by receiving a copy of the data sheet regarding the votes received in the electronic voting system, in accordance with the provision of Regulation 10(b) of the Written Voting Regulations.  The plaintiffs lay out the reasons they find for exercising judicial discretion in order to allow them the requested review.  Among other things, they argue for the importance of shareholder supervision in a very substantial decision, which concerns payment from the public company to the management company that controls it; that the company's management is in a conflict of interest with respect to the management of the meeting; that if the plaintiffs had been registered as Mann shareholders (20% of the share capital), they would have been able to prevent the approval of the transaction; that this is a high rate of 'neutral' opponents, and that it would have been enough for one of the substantial investors to change the way he voted, and even then the decision would have changed; and that the results of the vote raise suspicion of the existence of a personal interest that was not reported in the framework of the voting, taking into account the unusual number of shareholders who saw participation in the vote (about 87% of the company's shareholders).  The plaintiffs add that the receipt of the information also enables the exchange of opinions between the shareholders, a matter to which the written voting regulations are directed.  The company will not be harmed by granting the right to inspect, their position.
13. The company rejected the plaintiffs' claims in its statement of defense. The essence of her arguments: There was no flaw in the vote, which was closely and thoroughly supervised, by the person who conducted and accompanied it.  The Israel Securities Authority also contacted the company after the vote and asked for the documents for the purpose of examining the manner of voting, but did not continue to vote after receiving them, and hence the regulator itself should be seen as the one who checked and found that there was no real concern that there was a defect in the voting papers, the voting or its results.  The plaintiffs do not have a vested right to review, and they should not be allowed to review here as well.  The basic rationale of the voting mechanism by means of a ballot is intended to encourage shareholders to vote by means of a convenient and anonymous tool, and the plaintiffs' request undermines this rationale, violates the privacy of the shareholders who voted by means of ballot papers, and may lead to negative consequences for the use of this tool.  The substance of the decision does not change this conclusion.  In our case, so the company is, the main thing is that the plaintiffs' real motives are to receive the personal details of the shareholders, for the purpose of promoting the widespread, cross-continental dispute between them and the company.
14. The parties, at the request of the plaintiffs and with the court's encouragement, acted to advance the proceeding as quickly as possible. They agreed to shorten the preliminary proceedings, but submitted affidavits of the main witness and heard evidence.  On behalf of the plaintiffs, Ms. Anousha Bustani (hereinafter: Bustani), plaintiff 3, one of the executors of the estate, who even came to Israel from the United States to be interrogated.  On behalf of the Company, the Chairman of the Company's Board of Directors, Dr.  Yehoshua Gleitman (hereinafter: Gleitman), declared.  After their cross-examinations, the parties agreed, and we will discuss the main arguments that need clarification in the following chapter.

Discussion

1. The Applicable Law and Its Purpose
2. The basis of the claim is in Regulation 10(b) of the Written Voting Regulations. Regulation 10 (in its entirety) states as follows:

(a)  One or more shareholders who hold shares at a rate of five percent or more of the total voting rights in the company, as well as a person who holds such a percentage out of the total voting rights that are not held by a controlling shareholder in the company as defined in section 268 of the law, is entitled, by himself or through an agent on his behalf, after the general meeting is convened, to consult the company's registered office, During the usual working hours, in the ballot papers and in the voting records through the electronic voting system that came to the company.