Legal Updates

A shareholder who chooses not to supervise the management of the company by another shareholder can not contend oppression of minority

June 4, 2020

A company purchased a commercial building located in Tirat Carmel to renovate and lease its parts to various business owners. The company reached a financial distressed and it turned out that funds from the company were drawn to another company owned by one of the shareholders as well as his family members and the same shareholder even threatened another shareholder and a complaint about the matter was filed with the police.
The Court held that there is no oppression but because of the distrust between the parties separation must be made. The purpose of the provision that prohibits shareholder oppression is to prevent various situations of dividing the company's resources unfairly among shareholders, with the test for this is whether the "legitimate expectations" of the shareholders contending oppression were compromised - a question that is objectively assessed under the circumstances of each case. Among other things, shareholders' expectations are examined given the nature of the company, the agreements between the shareholders, the needs of the company, its economic status, market conditions in which the company operates, the company's history and more. In a company that operates as a "kind of partnership", certain principles that apply to partnerships will apply and thus a distrust between the shareholders of a company that is "a kind of partnership" will suffice to order liquidation of the company and sometimes separation without liquidation is possible, even in lack of oppression. Threats by one shareholder towards the other are not "oppression" but may cause distrust. Also negligence in management is not oppression and a shareholder who chooses to be passive and not participate in management is equally responsible, but in any case the right to claim for negligence in management is the company's and not the shareholders. Withdrawal of funds by a manager of a company also constitutes a cause of action of the company but is not oppression, certainly not when there was access by the shareholders of the company to the bank account but they chose not to supervise. Thus, there is no oppression but there is room to order separation of the parties.