Legal Updates

The definition of the injection of money to company as “shareholders loan” or “investment” is reviewed by the substance and not the wording

April 13, 2023

Two parties founded a company and each invested ILS 500,000 with any future investment agreed to be subject to a dilution mechanism. Once of the founders invested more funds in the company and contended that he gave excessive shareholders loans, which establish a right to indemnity from the other.

The Court rejected the claim and held that the funds invested in excess were not an owner's loan. A shareholders loan is a loan given by one or more of the shareholders to the company, under pre-determined interest and payment conditions while maintaining the status of the holdings in the company, as opposed to an injection of funds into the company against the purchase of shares. The question of whether a particular transaction is considered a shareholders loan is reviewed according to its substance and not its wording. Here, the funds given in excess are part of the initial investment in the company and not a shareholders loan for several reasons: No repayment terms were established; The agreement linked the funds to the shares assigned to each and the parties separated the initial investment from future loans, for which no amount was determined. Therefore, the founder is only entitled to dilution of the other founder.