Commercial Law Attorneys
A shareholder's rights and obligations in a private company
The Companies Act sets out the rights and obligations of shareholders in a private company. For example, a shareholder has the right to sell his shares and enjoy a shareholder analysis of the company’s profits. A shareholder is also given the right to receive information and participate in the decision-making process in the company. At the same time, he also has obligations. For example, he is obliged to act in good faith towards the company and the other shareholders.
Receiving dividends and selling the shares
Company shareholders are entitled to dividends, which are payments that the company transfers to them from profits. This investment’s monetary reward is what motivates an investor to invest in a company. Generally, dividends are paid in cash to shareholders, but they can also be distributed in the form of an asset, for example. With this right, shareholders are also given the right to sell or transfer their shares to each other or a new shareholder. This is in accordance with the law’s provisions and contractual restrictions imposed on the shareholder in the framework of the share purchase agreement. In this context, it is advisable to consult an attorney, who will examine the agreement in general and this aspect in particular, to ensure that the restriction imposed on the shareholder in this context is proportionate and reasonable.
Generally, there are six rights granted to shareholders in the company: vote, ownership, transferability, dividend claim, review of corporate documents, and the right to sue the corporation for wrongful acts.
The right to information
The Companies Law requires each company to present to its shareholders’ information and documents, for example, various financial and business data, so that they can track their investment. However, unlike a public company, the right to access information in a private company is limited. This includes only the relevant information required to decide on a matter up for a vote at the general meeting. The shareholder has no right to request information and documents from the company for information only. It is clear that, unlike public companies, the legislature has given private company-wide discretion regarding the extent of disclosing information to its shareholders. The right to information is usually enshrined in the share purchase agreement. For shareholders to safeguard their investment, it is vital to seek the advice of an attorney who ensures that the limitation on the right to information imposed by the company is reasonable.
The duty to act in good faith
Along with their rights, the private company shareholders also have duties. The main one is the duty to act in good faith towards the company and the other shareholders. For example, the Companies Law prohibits discrimination against minority shareholders by exercising the right of control by making decisions that will worsen the situation of minority shareholders. In the event of an act of discrimination, they may apply to the court for an order directing the company to stop the action of discrimination against them. Moreover, we emphasize that a shareholder’s breach of the duty of good faith and fairness is condemned as a breach of contract and establishes a cause of action against the shareholder.
To summarize: From the above we learn that shareholders in a private company have important and material rights and obligations. Therefore, if you are a shareholder or you are considering investing in a private company, contact us and we will examine the purchase agreement in depth, we will make sure that your rights are fully preserved and we will advise you on how to best fulfill your obligations as shareholders.
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Legal advice to shareholders in private companies
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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.
We’ll be happy to answer any commercial law questions you have by phone at 02-595-3322 or by WhatsApp at 050-443-1343
Our office has many years of expertise in the field of commercial law and corporate law and we will be happy to assist you in matters related to your rights (and obligations) as a shareholder in the company.
