Legal Updates

Despite the prohibition on champerty, a right of claim in torts may be transferred when merging companies

August 9, 2020

A mother company and a subsidiary merged by acquiring the full activity of the subsidiary (the target company) by the mother (the acquiring company) and then liquidating the target company. The acquiring company later sought to file a tort claim under a right of action that existed for the target company.
The Court held that the right to sue was transferred to the acquiring company. The asset purchase agreement is generally worded as transferring all the assets and rights related to such. A key principle in the interpretation of a commercial contract is that its purpose is to achieve reasonable and logical results and the general wording is consistent with the business logic behind the acquisition - reorganizing the group while maximizing profit by absorbing all subsidiary rights and dissolving the subsidiary. Thus, a reasonable interpretation is that the rights of claim also passed and did not expire due to the merger. The Israeli Torts Ordinance prohibits the transfer of a tort right (or champerty) in the period between the occurrence of the tort and the date of the judgment, except "by virtue of the law", in order to prevent "trade" in tort claims and especially when it comes to personal claims. Here, it is true that no ordinary merger was carried out between companies (in which case it is a transfer by law) but the sale of all the rights and liquidation, but in the case of a sale by a liquidator it is an exception to the prohibition on sale of a tort right of claim. There is no justifiable reason to deprive the acquiring company of the right to sue only because it has chosen the route of acquiring the company's assets as part of a procedure of voluntary liquidation of the company instead of a route of an ordinary merger.