Legal updates

A controlling shareholder is liable if sold shares under terms that put the company at risk of being “looted” of its assets

June 18, 2020

A controlling shareholder sold his holdings to purchasers who eventually caused the collapse of the company.
The Supreme Court held that the controlling shareholder did not breach the fiduciary duty and did not act unlawfully even though the company collapsed after the transaction. A controlling shareholder may be liable in the event of a sale to a “known looter", that is, the sale of shares under conditions that leave the company at risk of being "looted" of its resources. Israeli law states that a controlling shareholder has a fiduciary duty towards the company. The controlling shareholder's fiduciary duty is the duty to consider, among its considerations, the benefit of the company and not only its own. A controlling shareholder will be held liable if knew of circumstances teaching high probability that the outcome of the transaction and selling of the control will be the collapse of the company, even if the purchaser did not have a malicious intent in the first place and even if such did not plan to empty the company from its assets. Here, the group of purchasers were managed by a person accused of serious financial felonies and was in a difficult financial state, but the controlling shareholder made various inquiries which dispelled the concern and it was not anticipated, with high certainty, that the transaction jeopardizes the existence of the company. Also, although the transaction amount was high, it was not excessive or unreasonable and the controlling shareholder did not have any actual information that could raise suspicion as to the purchaser's ability to finance the transaction.