Legal Updates

Approving an Investment in a company under a valuation lower than its real value may constitute oppression of the minority

March 31, 2020

As part of a shareholders' general meeting it was decided to raise funds by an internal round at a pre-money valuation of USD 700,000 while a minority shareholder contended that the real value of the company is USD 36 million.
The Court accepted the motion for temporary order preventing the dilution of the shareholders until a decision in the case itself. A decision regarding an investment in a company is related to its internal management and will normally not be interfered with if was duly made. However, in cases of conflict of interests, one's discretion should be examined through a stricter scrutiny. As for a decision approving an investment in a private company, one need examine the necessity of the investment and whether the company has alternatives measures to raised funds in a manner that will not jeopardize minority rights, and whether the shares are being issued at their real value. Reviewing the necessity of the investment stems from the fact that when an unnecessary investment is made in a company, it may harm shareholders who decide not to participate in the investment but in such a case raising pursuant to the real value does not affect the holdings' value but only thee percentage in the company. In contrast, investment at a lower value may be deemed oppression of the minority. Because the company urgently needs funding the investment will be made without diluting the shareholders and at a later case the value of the company will be reviewed and pursuant to such, whether the investment round constitutes oppression of the minority.