Legal Updates

Negotiating for a company without involvement of the board of directors and proper legal advice may be deemed oppression of the investors

September 27, 2021

A high-tech entrepreneur raised funds from investor for a company in the cellular field, but for 7 years and despite winning prizes and many negotiations with technology giants, including Sony, LG, Amazon, Motorola, Google, Microsoft, Nokia, Intel, Verizon and others, no transaction was executed due to problematic management, including negating with Google without the presence of a senior office and without a lawyer. The investors, whom neither them nor the board of directors were regularly reported, except sporadic messages to some of them, demanded replacement of the entrepreneur as CEO due to their oppression.

Th Court held that it is oppression and although there is no place to replace the CEO, regular board of directors meetings are to be held and full data need to be regularly given. Oppression is the damaging of the legitimate expectations of the shareholder under the character of the company and the circumstances. Finding that oppression exists depends on the question of whether the result is oppressing and not what the intent of the oppressor was and even if a certain event is not oppressing, the combination of events may result in oppression. Even if an investor knew of the power scheme of a company and the management thereof, unless such investor specifically waived the right of claim, the mere purchase of shares does not create a waiver, estoppel or prevention from raising a contention of oppression. Here, the entrepreneur managed the company himself for years without duly updating the shareholders and unreasonably managing negotiation, including dispatching a person who is not a senior manager of the company to negotiate with Google without proper legal advice. For the proper management of a company it is not sufficient that a shareholder knew things because he was at the company offices or received sporadic email messages but a proper process of notifying shareholder on material issues is required and holding a discussion following which decisions will be made. Here it is an extreme case of failure to manage and bring the potential of the company to materialization while not having due board of directors meetings and receipt of resolution by the entrepreneur only and therefore oppression exists.