Newsletter 44 – November 15, 2012

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THE LEGAL NEWSLETTER

We are pleased to present another English-language edition of our firm newsletter.  In this edition we provide a brief synopsis of recent court decisions concerning distribution of dividends in reliance upon revaluation of assets, director access to books and records of a subsidiary and shareholder causes of action in situations without individual harm.

The newsletter, which our firm publishes periodically, addresses important practical developments in the field of Israeli corporate and commercial law.  The objective of the newsletter is to create awareness of these developments and of the underlying principles of the issues discussed.  We hope that you will find the newsletter informative and helpful.  Any comments or suggestions are appreciated.  If you need further information or have any questions concerning the issues discussed in this newsletter, please contact either Yoram Shiv, 972-3-607-4777, yoram@sask.co.il, or Alex Berman, 972-3-607-4777, alex@sask.co.il.

You can view previous editions of our newsletter on our website: www.sask.co.il.

Sharir, Shiv & Co., Law Offices

Corporate Law / Distribution of Dividends in Reliance Upon Revaluation of Assets / Supreme Court

The Israeli Supreme Court recently questioned whether a company can meet the Companies Law’s “profit test” to permit a dividend distribution with profit achieved through a revaluation of existing assets.  The Court observed that there is a relationship between the definitions of “dividend” in the Israeli Companies Law and in the Israeli Tax Regulations and that both the “profits test” of the Companies Law and the treatment of income under the Tax Regulations share a common principle – protecting creditors from actions of shareholders.  The Court then noted that while IFRS principles recognize financial gain on revaluated assets as part of a company’s profit (i.e, a “paper profit” even without any disposition of the asset), it is unclear whether such gains should be taken into consideration for purposes of the “profit test”  to allow a dividend distribution.  From a corporate law perspective, the Court suggested that permitting distribution of dividends as a result of accounting gains could harm a company and its creditors.  An accounting gain does not ensure that a company has the ability to pay its obligations to its creditors.  The Court was also concerned that such a position would encourage undue speculation regarding asset valuation.

Corporate Law / Director Access to Books and Records of a Subsidiary / District Court

In a situation where a company had no independent operations and all business activity was conducted through a wholly-owned and wholly-controlled subsidiary and where there was no real distinction between the two entities, the District Court lifted the “corporate veil” between the entities to allow directors of the parent company access to the books and records of the subsidiary.

The ruling related specifically to a director’s right under the Companies Law to receive information about a company, including access to its books and records.  This right of access is intended to allow the director to fulfill his responsibilities.  The Court found that the right of access is axiomatic and that other than in extenuating circumstances the right is not to be denied.  Nevertheless, the Court noted that the right of access is not unlimited and must meet three criteria:  one, access to the information is required to allow the director to fulfill his duties; two, the director is acting in good faith; and three, access to the information will not cause harm to the company.  These criteria ensure that director access to information is utilized for its intended purpose.

Corporate Law / Shareholder Cause of Action Without Individual Harm/ District Court

Where a shareholder suffers damage that is different than damage suffered by the company, the shareholder will have a personal cause of action.  Where damage to the shareholder arises from a decrease in share price or company value – where all shareholders are impacted in the same manner – a shareholder will generally not have a personal cause of action.  In these situations, the damage to the shareholder is secondary to the damage to the company.   Exceptions to this rule are situations where the shareholder has a contractual claim against the company, or where the harm to the shareholder, or group of shareholders, is different from the harm to all shareholders, or in situations of minority oppression.

Thus, in a case where an individual shareholder of a private company brought a damage suit against Bank Leumi related to the bank’s decision not to renew a credit line previously extended to the company, the District Court dismissed the suit by ruling that the shareholder did not have standing.  The Court held that there was no justification for expanding the group of potential litigants to include individual shareholders because of indirect damages incurred by a shareholder through any loss of value of its investment in the company.

 

 This newsletter provides general information and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.