Minority Shareholder oppression
When A Minority Shareholder Is Oppressed!
According to the Companies Law in Israel, shareholders can’t oppress other shareholders and controlling shareholders have to act fairly. In reality, there are many companies where minorities are oppressed or deprived. A majority shareholder abuses their power and causes injustice to other shareholders in the company In this article, we’ll explain minority shareholder oppression and what remedies are available.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
An introduction
Every company should serve the interests of all its shareholders as they have invested their hard-earned money into it. Company law does not distinguish between controlling shareholders and minority shareholders in this matter, but in practice, there is a great difference between them. After all, the majority shareholders are, in many cases, in a situation where they can harm the economic interest, as well as subvert the expectations, of the minority shareholders. In order to prevent abuse on behalf of the majority shareholders, the Companies Law states that a shareholder shall refrain from oppressing other shareholders. Also, a controlling and powerful shareholder has an obligation to act fairly.
Minority Shareholder Oppression - examples
Minority shareholders may be deprived of their rights through an active act or through an omission on the part of the company.
The ruling recognized the following cases as minority actions, for example:
:
- Profits transferred from one company to another with the permission of the controlling shareholders – the controlling shareholders transferred profits to other companies they owned, and the plaintiff had no shares in these companies. Therefore, the controlling owners burdened their other companies with their expenses. During the hearing, the ruling identified any deprivation in the plaintiff’s claim and recognized his right to relief.
- The controlling shareholders transferred the company’s assets to another company that they owned, as well as the funds received as consideration for the company’s services to another company’s bank account.
- Family members of the controlling owners of the company were employed for an unreasonable salary – the ruling found that the needs of the corporation did not take precedence
- Whenever the company generates profits, but minority shareholders do not receive dividends, this is a form of deprivation.
- In the event that essential decisions are made in the company, such as regarding large transactions, without the minority shareholders being able to express their opinions, this is referred to as a minority enforcer by default.
- It was recognized by the court that deprivation and mismanagement of the company had caused financial damage to the company.
- Paying excessive wages to the controlling owner(s) and withdrawing funds from the company’s coffers in large amounts.
The common element in these examples is the abuse of power and position by the company’s controlling owners, resulting in financial injustice for minority shareholders.
The Legal Remedy
The legislator was aware that there may be situations in which the controlling shareholders would abuse their power. Therefore, when a shareholder feels that he is harmed by this, he may turn to the court in order to remover the unwanted oppressive measure. This authority of the courts in this regard appears in section 191 of the Companies Law and gives the court very wide discretion and scope for action in this matter. This has two meanings: first, the term oppression or deprivation can include a wide variety of cases and behaviors and it is not a closed list of acts or omissions. Second, the court may give any directive or instruction that can correct the injustice caused.
In accordance with section 191 of the Companies Law 5799-1999
191. When all or some of a company’s shareholders have been deprived of their rights, or if there are substantial concerns that their affairs will be conducted that way, the court may, upon request of a shareholder, issue instructions deemed necessary to remove or prevent the deprivation, including instructions as to how the company’s affairs will be conducted in the future, or instructions as to which the company’s shareholders will purchase shares from the company in accordance with section 301.
As stated in subsection (a), the court ordered that the changes required by this subsection (b) be incorporated into the articles of association and resolutions of the company, as determined by the court, and that this decision is considered duly accepted by the company.
The following are examples of remedies requested under Article 191:
- The court has the authority to cancel a deprivation decision if it pertains to the decision of a controlling shareholder or someone who acted on his behalf.
- In terms of compensation, the court has the authority to order the person who violated the agreement to compensate the deprived shareholders, in addition to compensating the company for the damages that resulted from the breach.
- The right to review company documents is a limited right granted to shareholders. In the case of deprivation, the court may extend this right.
- An investigator is appointed to investigate suspicions of improper conduct by the controlling shareholders.
- There may be additional remedies available depending on the circumstances.
burden of proof
When a deprivation claim is submitted to the court, the shareholders must prove that the controlling shareholders acted in their personal interest and in a manner that goes against the interests of the minority shareholders. The burden of proof, it is important to emphasize, does not require the minority shareholders to prove that the majority shareholders acted with fraudulent intent or even full knowledge, but rather that their actions or omissions meet the test of the “reasonable person”. That is, the court will ask whether a reasonable person, under the same circumstances of the case, would conclude that the controlling owners are indeed oppressing minority shareholders. If this question is answered in the affirmative, the burden of proof will shift to the defendants, who will be required to show that their activity was in accordance with the law and in the best interest of the company.
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Shareholders’ legal advice
Are you a minority shareholder? Are your rights being violated? We invite you for legal advice to examine the alternatives before you in order to protect your rights.
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
