Control struggles and conflicts between shareholders

The Levin Law Office

The Levin Law Office is a boutique office specializing in providing litigation services, legal advice and legal support in the corporate, intellectual property, sports law and labor law fields.

Our office advises and provides support for companies, shareholders, employers, employees and athletes in a variety of fields.

The office was established with the aim of being a one stop shop for diverse but interrelated legal services of a commercial and business character. In recent years, the office has dealt with a long list of conflicts between shareholders, including family conflicts of a highly sensitive nature.

The office supports providing personalized service that is tailored to client needs, with special emphasis on discreetness, devotion, thoroughness and uncompromising professional excellence.

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Control struggles and conflicts between shareholders

Managing a company is no trivial matter and often involves instincts, tensions and disputes between shareholders, which sometimes boil over, resulting in lengthy, expensive legal conflicts. A conflict between shareholders may incapacitate a company, irreversibly damage it and its shareholders and sometimes third parties such as suppliers and service providers that become inadvertently drawn into the conflict.

How can a matter be resolved pleasantly and speedily without requiring a legal proceeding? How can the shareholders continue to manage the company so that it can continue to operate and maximize shareholder profits while shareholder conflicts are ongoing?

Sometimes, regrettably, the conflict is so severe that it reaches the level of one or more of the shareholders who are aggrieved by the other shareholders being willing to “sacrifice” the company, even if it is a family company that was established generations earlier, and lead to it being wound up. Major examples are when a shareholder or a director refuses to sign checks of the company, or when a shareholder decides to incapacitate the company by performing various actions such as refusing to sign significant contracts. Another example is when a majority of shareholders decide, based on foreign considerations, to attack these shareholders by preventing distributions of dividends with the aim of having them expelled from the company and taking over their shares. In this state of affairs, the shareholders are unjustly hurt, as is the company, which may be incapacitated and be critically damaged.

Here lies the significant advantage of our office, which operates based on a single goal, of bringing shareholders to a quick, just solution so that personal affairs can be put aside and the shareholders can see to the good of the company. Indeed, sometimes, the conflict is so bad that the company is incapacitated and there is no alternative but to seek relief from the courts.

The courts also tend to avoid liquidation and winding up a company in the case of an economically stable company that has strong activity and is solvent. There are a number of reasons for this. It is important to note that the matters are not only those among shareholders, but third parties that are economically and commercially connected to the company also end up being involved. The company has binding contracts, so priority is given to upholding those contracts and company obligations over clashes between shareholders. Additional priority is given to the interests of the company’s employees who play a significant part in the company’s success, make a livelihood from the company’s activity and enjoy many social rights.

In these circumstances, the courts will always prefer the continued activity of the company over liquidating it only due to a conflict between its shareholders. The solution, therefore, with respect to the shareholder will be different, and not at the expense of the company’s continued activity.

So what are the options of the shareholders before going to court? The first, essential step is to inspect the company’s articles and any other agreement among the shareholders that defines the relationship between them, including their rights and duties, towards each other and towards the company.

The company articles are an elementary document, part of the company’s founding docs, and may be altered from time to time in accordance with the provisions of the law, defining the rights of shareholders. These include the right to vote and make decisions within the company’s regular activity. It is obvious that calling a meeting of shareholders (in cases of making a significant decision) or calling a board meeting (in the case of a regular decision) and making decisions with the necessary majority is always preferable and will spare the shareholders the need of going to court.

In the case of a severe conflict between shareholders, it is reasonable to assume, and experience shows, that a decision cannot be reached, or an unreasonable decision is made by the majority
shareholders of the company that is detrimental to the minority shareholders, which leaves no alternative but to go to court.

As we stated, in the case of a stable company that has economic strength, the court will always prefer not to liquidate the company, but to find a solution that will restore peace to the company and allow it to continue to function regularly.

There is an extremely important “interim period” between the time at which the need for the court’s intervention arises until a hearing is held in court. In this state of affairs, it is necessary to apply to the court for temporary orders to be issued to maintain the company’s existing state and allow it to function as it did until the conflict erupted.

Each shareholder must know that every decision or abstention from making a decision must be done in an acceptable manner and in good faith. Section 192 of the Companies Law 5759-1999 (hereinafter: the “Companies Law”) states that a shareholder is to act in good faith and an in an acceptable manner in exercising his rights and discharging his duties towards the company and the other shareholders, and is to refrain from abusing his power in the company, inter alia in votes in the company and refrain from discriminating against other shareholders. Should he fail to act in the manner stipulated above, the laws relating to breach of contract will apply and the aggrieved shareholder has the right to apply to the court in accordance with the provisions of Section 191 of the Companies Law.

Section 191 of the Companies Law states that “Where the company’s business is run in a way that constitutes discrimination against all or some of its shareholders, or in a way that gives rise to a real apprehension that the company’s business will be run in such a way, the court may, at the request of a shareholder, give such instructions at it sees fit to remove or prevent such discrimination, including instructions for running the company’s business in the future, or instructions to the shareholders of the company under which either they or the company itself is to purchase its shares, subject to the provisions of section 301”.

As may be learned from Section 191 of the Companies Law, the power of the court is not limited and it will give any instruction or order that it considers necessary for removing or preventing the discrimination , including instructions to the shareholder to acquire the shareholders of the other shareholder at the price prescribed by the court.

It is important to note that running of the company by the court for an extended period is undesirable and may harm the company. The conflict is not ended by the act of having the company run by the court, and may actually intensify in this situation. Another important matter that the court takes into account is the relations with third parties that have dealings with the company and the shareholders in the case of a conflict. We should mention that the company has commitments to third parties and sometimes it relies on and is supported by them. An example of this is the banks, to which there are many financial commitments. The latter do not like, to put it lightly, the fact that the company is run according to orders and judicial decisions, and may restrict the company’s credit, with devastating consequences for it. Another example is the company’s regular suppliers, without which the company cannot manufacture anything. If the company has a debt to those suppliers or the company depends on credit from them, there is concern that a claim will be filed against the company or the suppliers will terminate the credit that they have extended to the company.

Therefore, there is often no choice but to apply for court intervention, but this must be done in a wise, effective and rapid manner. Shareholders must think beyond themselves even when there is a major conflict, and find an effective, rapid solution such as selling shares to each other or independently selling the company, and to the extent possible resolve the conflict between the parties and embark on a new route. 

A conflict between shareholders can be avoided or at least its chances of occurring reduced through the company’s foundation documents and agreements between the shareholders. The company’s articles and agreements among the shareholders themselves are of crucial importance, so they must be worded in such a manner that even in a case of dispute and conflict, the immediate solution will be found while allowing the company to continue to function without needing the court’s intervention.

In the case of a conflict between shareholders of a family company, the issue is even more sensitive. Often, the conflict spreads to members of the extended family, some of whom are employees of the company too. In such a case it is almost impossible to run the company except through a third party, which of course will not be acceptable to the conflicting parties. Our office has many years of experience in family conflicts, some of which have ended at an early stage without any need for court intervention.