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When a public company is on the “maintenance list” there is a duty of care of officers towards the minority shareholders

July 12, 2021
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The Tel Aviv Stock Exchange transferred a company to the "maintenance list" after it did not meet the stock exchange's bylaws for minimum public holdings, but returned it to the main list due to the actions of the company's managers to increase public holdings. The company took actions to purchase shares from the public, followed by a takeover bid for all public shares, which was accepted and the company was delisted. Minority shareholders who were forced to sell their shares as part of the takeover bid claimed, intel alia, the breach of the company and the officers, who are also the controlling shareholders of the company, of their duty of care which caused the shareholders to sell their shares at a low price.

The Supreme Court held that the officers breached their duty of care and that they and the company are to compensate the minority shareholders who were harmed by their actions. The transfer of a share to the maintenance list of the TASE means restricting trading in the share, so that it will only take place in the first two stages of the trading day on the stock exchange - the "pre-opening" stage and the "opening" stage. After the company's securities are transferred to the maintenance list, the company has a two-year period available, during which the company must meet certain conditions in order to return to trading on the main list. The said period of time is divided into two periods: in the first twelve months the company must meet certain conditions in order to be transferred back to the main list. If it failed to do so, it is given an additional 12 months, during which time the conditions for its removal from the maintenance list are even stricter than the conditions that applied in the first year of its entry into the maintenance list. If the company fails to meet the required conditions after two years - its securities are deleted from trading on the stock exchange. Due to the apprehension of delisting, managers of a company that entered the maintenance list are expected to act to remove it from the maintenance list and not to purchase shares from the public. A company is directly liable for damages for an injustice committed by its organs and therefore the question of the liability of a company is derived from the question of liability of its officers. Generally, an officer owes a duty of care to the company but not to its shareholders. However, sometimes officers may owe a duty of care to specific shareholders. The entry of a company into the maintenance list of the stock exchange is a scenario that damages the situation of the minority shareholders in a distinct manner from the situation of the company, and even from the situation of the controlling shareholders, and therefore, in cases where there is a real possibility of a company entering the maintenance list (and naturally when the company is already on this list), and when the company's ownership structure raises concerns about abuse of control by controlling shareholders there is a duty of care of directors to the minority shareholders. The duty is to exercise extra caution when performing actions that would normally be deemed "ordinary" in the daily life of a public company and an increased duty to act without the appearance of a conflict of interest, and to make decisions in a knowledgeable, transparent and documented manner. Even in such a case not every entry of a company to the maintenance list means negligence of the directors and the "business judgment rule" prevents a Court from intervening in the discretion of directors as long as they acted in a reasonable procedure, even if they made wrong decisions (or did not make required decisions). Notwithstanding the foregoing, the business judgement rule does not apply when the discretion of the officers was tainted by subjective bad faith or a conflict of interest, or when the decision was in an uninformed manner, or in exceptional circumstances. Here the directors acted in a conflict of interest and therefore the business judgement rule does not apply and the actions they took, which caused the company to enter the maintenance list and not exit it, caused damage to the minority shareholders. Thus, the officers and the company are personally liable for this damage.