It was noted that the funds that were injected into the subsidiary were used to pay bonuses to Pinkowitz illegally, since the payment of the bonus was contingent on the profitability of the subsidiary. The bonus paid to Pinkowitz amounted to ILS 2,776,800 for the years 1990-2000, despite the fact that with the exception of one year (1996) the subsidiary was in losses. Large sums of money were also withdrawn from the subsidiary's coffers to cover Pinkowitz's trips abroad and for various purposes.
It was determined that Pinkowitz took additional actions that amounted to a breach of trust on his part - including transferring funds to Tikva Switzerland, providing false reports to the board of directors and parents of the trustees about the company's situation, transferring shares in the company to him and his family in a manner that gave Pinkowitz control of the company, and appointing his family members to senior positions in the subsidiary and Tikva Switzerland.
In light of all of the above, the court ruled that even in the absence of any evidence regarding the findings of the police investigation and the income tax investigation against Pinkowitz, it can be determined with certainty that Pinkowitz acted fraudulently and breached the fiduciary duty he owed to the companies under his management, while abusing his authority and power for his personal benefit. It was held that by virtue of his actions, there is room to obligate him personally to compensate the company for the damages he caused it. Pinkovich was ordered to compensate the company in the sum of ILS 1,488,630 - the full amount claimed by the plaintiffs on the grounds of breach of fiduciary duty. The court did not charge Pinkowitz with the cause of negligence, in which it claimed damages of more than ILS 24 million, which was set, for the purposes of a fee, in the sum of ILS 12 million, and did not relate at all to Pinkowitz's liability under the said ground.
C.2. The Trial Judgment - The Other Directors
- As may be recalled, the Derman report shows that the six members of the company's board of directors were Pinkowitz, Horn, Gutwein, Adler, Sharon, and Rebas. The report noted that Horn had been in the United States for many years; Gutwein spent long periods abroad; Adler died; and Sharon did not function in the recent years relevant to the lawsuit. As a result, only two active directors remain on the board, Pinkowitz and Rebas, 86. The trial court ruled that in these circumstances, when in fact the company's board of directors did not act and did not function in the relevant years of the lawsuit, the company did not have a right to sue the directors other than Pinkowitz, and the full responsibility for the company's situation rests with the company itself and on its own.
It was emphasized that a shareholder, "which is the company", cannot argue against directors that he himself appointed because he is aware of their qualifications on the one hand and their limitations on the other. The court added that the shareholders had not fulfilled their obligation under the Articles of Association to elect the members of the board of directors "from time to time", and in fact left the composition of the board of directors that was determined at the time of the company's establishment (in 1965) without examining or discussing the possibility of replacing its members. This obligation, it was determined, is also learned from section 52(a) of the Companies Law, according to which when the board of directors is unable to exercise its powers that are essential for the proper management of the company, the general assembly will be able to assume these powers and act in accordance with them. The General Meeting did not assume these powers, even though the Board of Directors did not function, nor did it appoint additional or alternative directors, as requested in the circumstances of the case. Therefore, it was held, these omissions are sufficient to dismiss the company's claim against the other directors.
- In addition, and as "more than necessary", the trial court ruled that the company's claim should also be dismissed on its merits, as detailed below.
It was noted that from the few minutes presented by the plaintiffs, it appears that until 1998, regular meetings of the board of directors were conducted, and that these minutes were signed by all the directors who participated in the meetings. On the other hand, from 1998 onwards there were no meetings of the board of directors "with a legal quorum" (in the presence of at least five directors, as required by the company's articles of association), the minutes in those years only partially reflect the meeting, and the person who signed them was only Pinkowitz (when in one case Revas claimed that his signature was forged). In this context, it was determined that there is no doubt that the directors who acted from 1998 (Rebas, Gutwein - during part of the period, and Sharon - to the extent that he functioned) were not aware of Pinkowitz's actions or the situation of the subsidiary. It was also held that there was no reason that could justify suspicion on the part of these directors of improper conduct on the part of Pinkowitz or of monitoring his actions. It was clarified that Pinkowitz had served as the company's CEO for many years, worked for the company's benefit and led to its prosperity, and therefore there was no suspicion that he had suddenly changed his mind. The court relied on the statements of Rebes and Gutwein, according to which they relied on the reports they received in real time from the financial professionals, and never heard any reservations from them, and therefore believed that the financial situation of the company and the subsidiary was in order. In any event, insofar as there is room for such suspicion, it should be aroused by both the shareholders and the parents of the sponsors, who have received full information about what is happening in the company and its financial statements.