Commercial Law
Representative dilemma
It refers to the situation in which one is responsible and oversees the affairs of another; he or she must act in the interests of the other and refrain from acting in his or her own interests. The dilemma of the representative arises in many legal situations. However, it is particularly prevalent in corporate law when the good of the corporation is in the hands of the office bearer.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
In recent years, the phenomenon of large companies acquiring and taking over smaller companies has grown significantly. Due to this situation, companies are required to develop defense tactics that will prevent hostile takeovers by outside investors, since this is the greatest fear of any company. This is a situation in which the investor buys the majority of the company’s shares without her consent or coordination, and therefore he is able to take control of the company. To solve this problem, poison pill mechanisms are established in the articles of association of the company, which have different forms but have the same purpose: preventing an unauthorized takeover of the company.
The representative's dilemma - what is it?
In law, a limited company is a separate legal entity, which can sue and be sued, but it is not flesh and blood and is operated by the officers who work for and on behalf of it. Office bearers are required to fulfill their duties in a manner that serves the company’s interests, and under the law of companies, their actions are considered the corporation’s actions. Although it appears simple, office bearers can often find themselves in conflict between their personal interests and the interests of the corporation in practice. It is also possible that the shareholders themselves may be in conflict with such matters, such as the creditors of the company. Generally, the solution to this problem is to use supervision and control measures such as company articles of incorporation, the board of directors, the audit committee, and sometimes even the intervention of the court, for example, in a lawsuit to reveal the true nature of a company.
As we stated at the outset, the representative’s dilemma is a problem faced by all office bearers within an organization. Let me give you an example. Many companies reward their managers based on their performance and profitability. As a result of this situation, employees may take unnecessary risks, which are not in the company’s best interests. There is a common representative’s dilemma where the office bearer must decide between the company’s interest and his own. Another possibility is to present an opposite problem, in which a corporate manager avoids taking risks out of fear that he will lose his position, while the shareholders desire controlled risk taking in order to increase the company’s profitability. An example of the representative’s dilemma is when the company’s decision makers are required to decide whether to enter into a deal with interested parties? There may be situations in which the company enters into a service provision or product supply agreement with an officer, shareholder, or a relative of the officer or shareholder. Does the agreement serve the company’s best interests? Could it be the stakeholder’s personal interests?
Shareholders' dilemma
Shareholders can also find themselves in the dilemma of the representative, for example, between the creditors and the shareholders. Shareholders want the company to take risks in order to make a profit, and they are not afraid to do so due to the separate legal personality of the corporation, which protects, in general, their personal pocket. In contrast, the creditors of the company wish to ensure repayment of the company’s debts and, therefore, avoid taking certain risks in order to keep the enterprise solvent. What is the solution to this dilemma? It may be necessary, for instance, to establish capital preservation rules to ensure that a portion of the company’s capital will be retained in order to pay off its debts. In some cases, creditors may also be able to demand the lifting of the corporate curtain, thereby allowing them to bring a personal claim against shareholders.
How can legal assistance help you?
A company or corporation, no matter how large or small, needs ongoing legal support in order to comply with its legal obligations and to operate in an efficient and effective manner from an economic, organizational, and legal standpoint. Our services are offered and we invite you to utilize them. With the help of our commercial law and company law departments, we will be able to provide you with a full legal protection belt and a full professional envelope. Furthermore, this includes providing answers to various legal issues that arise in the course of the company’s daily activities, such as the representative’s dilemma. An attorney will present various mechanisms for the board of directors to supervise and control the representative, which will provide a satisfactory solution to the representative’s problems, if they arise.
It is our pleasure to invite you to seek legal advice on the options available to you to protect your company.
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.
