Legal Updates

A controlling shareholder conflict of interest transaction will not be canceled if a long time has elapsed

February 3, 2021

A controlling shareholder in a company entered into a combined transaction affected by a conflict of interest for the allotment of private shares and the sale of the shares, for the purpose of creating a controlling stake. The transaction took place about 6 years ago, using insiders information about negotiations he conducted in his capacity as the controlling shareholder of the company and without informing the board of directors.
The Court held that although the transaction was made in a conflict of interest and in breach of the controlling shareholder's duty of fairness, it should not be annulled due to the lapse of time from the date of execution but an expert should be appointed to examine the damage to the company. Israeli Companies Law applies to a controlling shareholder of a company the duty of fairness, and non-disclosure of a personal interest by the controlling shareholder constitutes a breach of this duty. In doing so, a controlling shareholder is required to make the required balance between his personal good and the good of the company. To ensure the existence of this balance, the law sets a "triple approval mechanism" to conflict-of-interest transactions that require approval of the audit committee (in a public company or when such a committee exists), the board of directors and the general meeting, to ensure that the transaction serves the company first and foremost. As a rule, such a transaction that was not duly approved by the said mechanism, is void in principle. Nevertheless, the circumstances of each case should be examined, as there may be cases where it is not justified to cancel the transaction. e.g. passing of time since the transaction, when significant changes were made to the share price, the company and third parties relied on it, and so on. Here, the controlling shareholder entered into the transaction without informing the board of directors of the details of the negotiations that preceded the board of directors' decision to approve the allotment, when he had a clear interest in allocating the shares at a low price and selling his shares at the highest price. Nevertheless, due to the passage of time and the fact that the company continued to exist and has since operated on the basis of the allotment, the cancellation of the transaction should not be ordered and an expert should be appointed to examine the damage for which the shareholder is to compensate.