The damage and the causal connection
- In order to determine whether damage was caused to the company and whether there is a causal connection between the negligence of the directors and the damage - to the extent that it was caused, we must, at this stage, hold a discussion on the question of whether the decision to transfer the funds to the subsidiary in the relevant years benefited the company or harmed it. This question deals with the content of the decision made by the board of directors and its reasonableness, as opposed to the manner and process of making the decision, which we discussed above.
The trial court ruled that the decisions to transfer the funds to the subsidiary between the years 2000-2002 caused damage to the company and that they were not justified:
"To the extent that this transfer did not lead to the 'prosperity' of the subsidiary... It could be said that this was a mistaken judgment on the part of Pinkowitz... However, from 2000 onwards, there was no justification for the continued operation of the 'manufacturing' factory, and even in light of the number of residents employed in it (less than 10% of the residents in the village), it did not justify its continued existence for the purpose for which it was originally intended. There was certainly no room to continue to inject money into the subsidiary, as if it were a bottomless pit. The continued flow of funds - when Pinkowitz is aware of the serious economic situation of the subsidiary and the lack of purpose in investing the funds - constitutes a breach of fiduciary duty and caused material harm to the company" (at paragraph 154 of the trial judgment).
With regard to this determination, the directors argue that the trial court erred, and that the transfer of funds from the company to the subsidiary should not be regarded as a "damage", but rather a financial investment intended to realize the company's goals and provide an employment solution for the poor in the village. It was also argued that even given that some of the investment in the plant in recent years was not justified or reasonable, the plaintiffs were the ones who had to prove the reasonable cost of operating the plant, and what was the reasonable rate of the company's support for it. Since they did not do so, it was argued, it was not possible to determine the damage caused to the company.
- I am unable to accept these arguments. Once I have reached the conclusion that the directors breached the duty of procedural care towards the company, and the actions were approved without the directors being fully informed about them and without being exposed to the full and relevant information for the purpose of making the said decisions, the burden of proving that the content of the decisions in question was reasonable and that these decisions did not cause harm to the company, shifts to the directors themselves (compare: Civil Appeal 3136/14 Kabiri et al. v. IDB Development Company Ltd., in paragraphs 46 and 56 (January 28, 2016); Derivative Claim (Tel Aviv) 13663-03-14 Newman v. Financialtech Ltd., at paragraphs 59-62 (May 24, 2015)). This is also how the business judgment rule works in other legal systems:
"The degree of success of the plaintiff at the procedural stage determines the substantive aspect of the level of judicial review that the court will exercise. Compliance with the burden is required in any claim against the director on the grounds of a breach of fiduciary duty, and if the plaintiff has not met the burden, the presumption of business judgment blocks any claim against the director, except in particularly exceptional cases. On the other hand, if the plaintiff met the burden and refuted the presumption of business judgment, a claim is possible for a breach of the duty of good faith, the duty of care or the duty of trust, as the case may be, and the standard of judicial review rises to the high level of examination of the complete fairness of the action or transaction towards the company and its shareholders. In this case, the director has the burden of proving the absolute fairness of the transaction, including conducting a fair process and obtaining the best price that the company could have obtained in the circumstances of the transaction" (Sharon Hanas, "The Business Judgment Rule," Iyunei Mishpat 313, 325 (2009); emphases added, Z.Z.).
- Transferring the burden to prove the absence of damage or causal connection to directors who breached the procedural duty of care imposed on them, indeed deviates from the usual "burden regime" in proving a negligence claim, but it combines and reconciles the procedural duty of care with the substantive duty of care imposed on directors of the company. According to the other possibility, of the usual "burden regime" in a negligence lawsuit, each of the duties - procedural and substantive - would have stood on its own feet, and would have been examined fully and separately. In my view, the first option is preferable, inter alia, due to the problematic nature involved in exercising judicial review of the content of the board's decisions, as detailed above.
- Moreover, the transfer of the burden to the directors in the case at hand, and in other cases in which the plaintiff proved that the duty of procedural care was breached by the directors, is consistent with similar principles outlined in tort law in other contexts. Thus, for example, in a tort claim against a defendant who, through his negligence, created evidentiary ambiguity regarding one of the components of the claim, the court may assume an assumption regarding that component that benefits the plaintiff and impose on the defendant the burden of contradicting this assumption. The "presumption of evidentiary damage" can arise both when the act that caused the evidentiary damage is separate from the act that allegedly caused the direct damage (for example, avoiding medical documentation), and when the evidentiary damage is embedded in the negligent act or omission that according to the claimant caused the direct damage. In the second type of cases, the wrongful conduct is one, but it is the one that caused both the evidentiary damage and the direct damage. Evidentiary damage is expressed in the inability to prove the causal connection between the defendant's proven negligence and the direct damage - for example, when a doctor refrains from performing an examination, and in retrospect it is not possible to determine whether performing the test would have saved the patient. In such a case, there is justification for shifting the burden to the defendant in order to prove, in view of the evidentiary ambiguity created by his omission or actions, that that omission or act did not cause the direct damage (Civil Appeal 9328/02 Meir v. Or IsrSC 58(5) 54, 64-65 (2004); Guy Shani, "The Evidentiary Damage and its 'Punishment': In Praise of a Transition from the Existing Model of Shifting the Burden to Models of Proportionality and Indexation," Mishpatim 41 315, 321, 333-335 (2011)).
Similarly, in our case, too, the plaintiffs proved that the directors approved the transfer of the funds to the subsidiary without proper process, including that the directors were not informed of the scope of the transfers of funds to the subsidiary, that the meetings of the board of directors were not held as usual, that no minutes were recorded proving the considerations that were taken into account prior to the approval of the actions, and that no relevant and sufficient information was collected in relation to the actions in question. In these circumstances, it is also the negligent manner in which the directors acted that created the evidentiary ambiguity, and the difficulty in determining how decisions would have been made had the board of directors conducted a proper and informed procedure. In addition, it is clear that in view of the breach of the procedural duty of care imposed on them, the assumption that the directors acted reasonably and that the content of their decisions did not cause damage to the company is undermined, and therefore it is also appropriate to shift the burden of proof to them that despite the procedural failures, the decisions to transfer the funds to the subsidiary did not cause damage to the company.
- However, the directors did not present an economic opinion proving that the decisions to transfer funds in the amount claimed from the company to the subsidiary in the relevant years were reasonable, nor did they present an economic analysis according to which at least some of these transfers were legitimate and justified. In addition, the trial court ruled that no evidence was presented relating to the use made of the funds transferred to the subsidiary (paragraph 154 of the trial judgment). We therefore do not have sufficient data before us to examine the content of the decisions regarding the transfers of funds to the subsidiary and the reasonableness of these decisions. Therefore, in my opinion, it must be determined that the directors did not shoulder the burden that was transferred to them to prove that their decisions to transfer the funds to the subsidiary, which were made in breach of the procedural duty of care towards the company, were reasonable and did not cause damage to the company. The arguments that the transfer of the funds should be considered a legitimate investment in the subsidiary were made in vain and without any basis anchored in evidence or professional opinions.
- In these circumstances, it should be determined that the plaintiffs' claim as to the amount of damage caused to the company as a result of the transfers of funds to the subsidiary was not contradicted (the calculation of the damage appears in paragraph 19 of the plaintiffs' notice of appeal and relies on what was stated in the opinion of CPA Bilu, who, as claimed, summarized the data appearing in the financial statements of the company and the subsidiary). As may be recalled, both the directors and the insurance company argued that the aforementioned money transfers should be regarded as a legitimate investment that ultimately did not succeed, but I did not find among the claims of the directors or the other defendants a claim denying the amount of the sums transferred from the company to the subsidiary (see, for example, paragraph 56 of the insurance company's summaries in the trial court). Therefore, and in view of my determination that the directors did not meet the burden placed on them to prove that they did not cause damage through their negligence, or that the damage caused was less than the damage claimed by the plaintiffs, the plaintiffs' version as to the amount of the damage must be accepted.
To this, it should be added that the trial court even explicitly ruled that, at least beginning in 2000, there was no justification for the continuation of the plant's activity, and that the continued flow of funds during those years from the company to the subsidiary caused material harm to the company. Hence, even if we adopt the boundaries of the decree drawn by the trial court with respect to the years in which the transfer of the funds to the subsidiary caused damage to the company (2000-2002), the amount is higher than the amount of the claim, which was set at ILS 12,000,000 for the purposes of fees.