Legal Updates

In a company where shareholders draw the same salary it does not make sense to continue doing so if one retires and the other continues to manage

January 10, 2022

After decades a part of a group of companies was acquired by a third party and one of the two shareholders retired and left the other to continue running the business. About 15 years later, the retired shareholder discovered that the other shareholder withdrew funds from the company as management fees in excess of amounts evenly distributed.

The Supreme Court held that after the retirement of one of the shareholders there is no longer room for an equal distribution of management fees. The contract between the parties is a "relationship contract", i.e. a contract that regulates a long-term relationship, in which the relationship between the parties changes over time, and must be interpreted on the basis of this fact. Here, for 35 years the parties were equal shareholders until most of the company's activities were sold for millions of shekels and one of the shareholders ceased its commercial activities in the company and the other continued to work in it as an active manager. In this situation, it makes no commercial sense for the two to be entitled to continue to share their salaries and management fees equally, as if nothing had happened and one would be considered to have "volunteered" to continue working and running the companies for 14 years without pay. Therefore, the correct interpretation is that once one of the parties has ceased to participate in management, there will be no equality in the withdrawal of management fees.