Legal Updates

A founders agreement defining responsibilities of shareholders in the company may be terminated if a party did not fulfill its responsibility

October 3, 2017

Two friends, a business man and a fashion designer, established a business for sale and lease of evening dresses and bridal gowns and executed a founders agreement under which the businessman was in charge of all the administrative and economic aspect of the business and the designer was in charge of all the designing and manufacturing aspect.  A Tax Authorities investigation revealed serious findings and material failures in the management of the accounts of the companies established, and in the wake of which the designer canceled the founders agreement on the grounds that this was a fundamental breach by the businessman.

The Court rejected the claim filed by the businessman and held that when parties divide between them the areas of responsibility in a manner under which each party is solely responsible for a different aspect and in fact acted in such manner, mutual reliance is created by one on the other.  The designer would not have entered into the founders agreement had he known that the businessman would manage the financial aspect of the companies in a manner that is in complete contravention of the provisions of the law and was therefore entitled to terminate the founders agreement and act to liquidate the companies.