Legal Updates

The envelopes method is the preferable mechanism when shareholders are separating willingly and neither party was oppressed

January 17, 2021

Two shareholders holding equal shares in a company have reached a conflict and a general loss of trust which necessitates the separation of the parties’ partnership in the company. The parties agreed to separate but disagreed about the separation mechanism.
The Court held that the parties are to dissolve the partnership through a bidding process using the envelope method. When a company is managed as a partnership and the partners reach a complete loss of trust which does not allow the company to continue operating, and neither party has an advantage in acquiring the company over the other, it is customary to separate by conducting a bid between the parties, allowing one party to buy the other party’s shares. There are three common methods for performing such bidding. The first method, known as the BMBY method (buy me buy you), allows one party to make and offer and the offeree may either accept the offer or purchase the bidder's shares at the same price. The second method, known as the “Texas shoot out” or the “envelope method”, requires both parties to submit bids, which open simultaneously and the higher bidder exercises his bid and purchases the shares of the other party. The third method is to perform the bidding through an external objective valuation. The BMBI method is suitable for cases where there is an oppressed side and allows the oppressed side to actually turn the tables on the oppressor and purchase its shares. Similarly, the objective valuation method is also more suitable for cases of “forced purchase” in which one of the parties is obliged to purchase the shares of a minority shareholder who was oppressed. The envelopes method, on the other hand, is best suited for cases where the parties have mutually decided to separate and when it is not possible to indicate that one of the parties was oppressed by the other party. Here, because neither party was oppressed in any way, and because each party holds 50% of the company's shares in a way where neither side is given a significant advantage over the other which tips the scales in favor of either party, the dissolution of the company shall be a bidding process through the envelope method.