Legal Updates

Appointment by a shareholder of an incompetent director may prevent a contention of lack of data on the company

March 12, 2020
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Past shareholders in a pharmaceutical company which made an “exit” claimed they pre-sold their shares for a dime, because during board meetings the directors appointed on their behalf, who lacked expertise in the specific field, were presented with false and partial reports regarding the company's financial condition. The past-shareholders therefore claimed damages reflecting their part in the “exit”.
The Court held that the past shareholders are not entitled to damages, as the cheap sale was made due to lack of expertise of directors appointed on their behalf, and not due to false presentations. Israeli Companies Law sets an obligation to draft minutes during board meetings, in order to reflect the discussion and attendees' position, so that those who did not attend the meeting may be kept posted. However, it is not obligatory to detail the entire course of discussion. By virtue of the duty of care of the director towards the company, the director is required to meet two conditions: The existence of a proper degree of skill and competence, and the taking of reasonable measures to obtain information regarding the feasibility of the actions which are brought for approval. For a director to fulfill such obligations, the law grants vast powers, such as the right to receive company's documents and inspect its assets. Therefore, a director may not be exempted from the responsibility for decisions made by him on the grounds of incompetence to serve as such. Here, in view of the conduct of the pharma industry, not every mere discussion with a potential purchaser needs to be reported to the board, and such contacts were adequately addressed as indicated in the minutes. The past shareholders themselves were aware that the directors appointed on their behalf were incompetent to act as such, as they lacked the necessary expertise. Under these circumstances, they were expected to take additional measures, such as strict adherence to participation in board meetings, but in practice have not managed to do so. Thus, the past shareholders are not entitled to damages.