Legal Updates

A minority shareholder who reserves a veto right may be subject to a duty of fairness

April 14, 2021

Shareholders entered into a founders agreement for the purpose of establishing a company, which stipulated that a minority shareholder would have an antidilution protection. At a later stage, an investment agreement was executed for the purpose of raising capital, which explicitly stipulated that that it revokes any previous agreement, and the shareholder was diluted as he did not invest additional funds.
The Court held that the shareholder is no longer entitled to an antidilution protection. Israeli law imposes a duty of fairness on shareholders in a company, when such duty may also apply to a minority shareholder who demands to reserve himself a veto right in one form or another, in a manner that may, under certain circumstances, perceive him as a "decision maker". This is because the use of such a right constitutes an undermining of the good of the company and the purpose of the law. Here, beyond the fact that in entering into the investment agreement, the minority shareholder agreed to waive his antidilution protection, the duty of fairness requires an explicit statement regarding the antidilution protection that will also be acceptable by the new investors and such a statement was not included in the agreement. Thus, the minority shareholder is no longer entitled to an antidilution protection.