Legal Updates

The common method for separation in a shareholder dispute due to loss of trust is through envelopes bidding between the parties

December 14, 2021

Shareholders in a company that was establish for execution of an urban renewal project got into a conflict and demanded separation of powers due to loss of trust, but were unable to reach an agreements as to how the separation should be carried out.

The Court held that the common method of separating forces in the event of loss of trust is by a bidding mechanism between the parties. When there is no opression but there is a need for separation of powers due to loss of trust between shareholders, the Court may instruct that one party will purchase the shares of the other. The common methods for separating forces are: A. BMBY – in which the party seeking the separation of powers sets a price tag for the entire company and then the other party may choose whether to sell its shares at the offered price or, alternatively, purchase the bidder's shares at that price; or B. Envelopes - a bidding procedure is held between the parties, in the framework of which each of the two parties submits, simultaneously, a sealed envelope in which each set a value for the entire company according to which it is willing to purchase the shares of the other party. The party whose bid is higher will be obligated to exercise its bid and purchase the other party's shares at the value offered. In general, the preferred method among bidding methods in case of separation due to a loss of trust is the envelope method. Here the relationship came to a dead-end and did not allow the company nor its projects to be properly managed. However, this is not a case that justified a preference for a BMBY mechanism, a mechanism of forced purchase or a mechanism of division of assets and therefore, the separation would be by envelopes.