Legal Updates

A person acting without good faith may not file a derivative claim in a company

September 30, 2021

A woman whose son worked for the Israeli Electric Company (IEC) and whose termination resulted in legal proceedings against the IEC, purchased an IEC share and demanded documents from the IEC for the filing of a derivative claim - a claim on behalf of the company against its officers – following a settlement between the IEC and former employees who were convicted of bribe, which settlement was executed prior to the purchase of the share.

The Court denied the motion for documents in preparation for a derivate claim. Generally, company shareholders cannot exercise company power of claim, except within the framework of their rights in the company. An exception to the rule empowers shareholders to act on behalf of the company and exercise its power to file a claim against a third party where there is a concern that company officers have refrained from acting for the benefit of the company due to conflict of interest or while breaching their obligations to the company. An ancillary right to the right to file a derivative claim is the right to first receive documents from the company due to inherent information gaps between the company and its shareholders. However, filing such a claim, as well as receipt of documents, require the pre-approval of the Court, where the date of purchase of the shares and the circumstances of the purchase, as well as the shareholders’ good faith, may affect the approval. Here, the shareholder purchased the share many years after the settlement, did not provide an explanation for the purchase of the share and did not attach documents relating to the purchase, in a manner that raises concern that the purchase of the share was intended to strengthen her son's claim. Therefore, the motion for documents was rejected.