Legal Updates

Avoiding a meeting in order to prevent accepting urgent decisions is deemed an action in bad faith

December 8, 2020

A company was established by two parties with a founders agreement stipulating that certain resolutions, including a change in signature rights, require a board meeting in which all three directors are present. When the company was required to appoint attorneys for legal proceedings, the board convened, but one of the directors, who signed an agreement with the other party to the legal proceedings, did not appear and the decision was made without him, in contrary to the founders' agreement. Another board meeting to ratify the resolutions was also held without him after he failed to appear.
The Court denied a motion for interim relief that would prevent entry into force of the decisions. The company was obliged to make urgent decisions and the director's conscious decision not to appear for the meeting was meant to frustrate decisions that were not to his liking and therefore constituted a conduct in bad faith. Oppression in a company is a violation, even if there was no intention to harm, of the legitimate expectations of a shareholder, which are examined according to the nature of the company, the agreements between the shareholders, the requirements of the company, its financial situation, the market terms in which the company operates, the company's history and more. In the case of a private company, which acts as a "kind of partnership", it can be assumed that the legitimate expectations of the parties also include the expectation of joint and equal management of the company. However, protecting the rights of the minority does not mean granting a "veto" right to the minority. Even if there is a veto right for a shareholder or a director in the articles of association or a founding agreement, the veto holder has a duty to act in good faith and in the interest of the company. A director or shareholder who exercises his veto right to advance a personal interest over the interest of the company, breaches the duty of good faith or the duty of trust applicable to him. Here the director has not disclosed the content of the agreement between him and the other party to the legal proceedings and cannot prevent the entry into force of decisions which he has tried to prevent in bad faith by failing to appear for the board meetings.