Legal Updates

In an investment in a company by an investor with personal relationship higher disclosure obligations apply

May 28, 2019

An investor lent money to a company under a loan agreement and concurrently signed a non-binding memorandum of understanding regarding investment, which expressly stated that it does not oblige until the signing of a full agreement. The investment agreement was never signed, and the investor demanded repayment of the loan both from the company and personally from its two shareholders, the chairman of the board of directors and the CEO, due to misrepresentations given as to the company and the concealment of information.
The Court accepted the claim and held that the company, its shareholders and officers must personally refund the money. Misrepresentation is a representation (whether actively or by not disclosing vital data) showing a reality that is incompatible with the actual reality, whether it was made negligently or with the intent to mislead. Here there was a relationship of trust between the parties, which increases the disclosure obligations in the negotiations and the fact that a party could discover information on its own does not diminish the responsibility of the other party to disclose it. Thus, for example, it was not disclosed that the company acts as a "pyramid" in respect of deposits of new customers, which are used regularly to cover its expenses, it was not disclosed that the company has a negative cash flow and routinely uses short-term loans of its shareholders and it was not disclosed that prior to signing the agreement the company’s status deteriorated. Thus, the company's shareholders are personally liable due to piercing of the corporate veil and the company's officers are personally liable for their conduct in the negotiations.