Transactions in which the controlling shareholder acquires the minority shares in a public company in order to make the company a private one are known as "Going Private" Transactions.
In such transactions, there is an inherent conflict of interests between the controlling shareholder, who wants to acquire the minority shares at a low and attractive price, and the investors from the public, who wish to receive a fair return for their shares. This conflict of interests is enhanced when the transaction is executed through a merger. In that case, the controlling shareholder is actually "playing" two contradictory roles - the buyer and the controlling shareholder of the target company, who normally appoints a majority of its board of directors.
Recent years have seen an increase in transactions of this type in Israel. In order to deal with the above-mentioned conflict of interests, the courts in Israel may embrace, to some extent, the apparent trend in the courts of Delaware whereby, when a going private transaction with a controlling shareholder is approved by a special, independent committee of the board of directors, which examines the transaction and negotiates its terms, and also by a majority of the minority shareholders, the transaction would be reviewed under the business judgement rule. In other words, in cases where the court finds that the process of approving the transaction was proper, it will tend not to examine the transaction on its merits.
Recently, two different matters were brought before the Economic Department at the Tel Aviv District Court regarding the special committee established by the board of directors. According to the court decisions, the role of the special committee is to conduct genuine negotiations on the transaction in order to simulate, as much as possible, a deal at arms'-length between independent parties, while neutralizing the connection to the controlling shareholder.
As part of the decisions, the court noted the criteria that the special committee should meet and which the court would consider when examining the activities of the special committee:
- The special committee has to be independent in terms of its composition;
- The special committee has to appoint experts and professional advisors who will provide it with advice concerning both the legal and the business-economic aspects (which advisors must be independent);
- The special committee should have full authority to negotiate the terms of the transaction, let alone manage the negotiations in a manner which would achieve the best possible deal for the company. In this context, the special committee should examine whether there are better alternatives to the transaction with the controlling shareholder;
- The special committee should devote proper time for discussing the deal and managing the negotiations, in accordance with the circumstances of the case and the complexity of the transaction, and allow members to voice their views and present (and discuss) their questions;
- The special committee should have access to all relevant information in order to debate and make an informed decision regarding the transaction in question.
The list of criteria described above can be used as guideline for a board of directors which seeks to establish a special committee in order to approve a going private transaction and, in particular, when determining the special committee's composition, powers and mode of operation.
While the foregoing list of criteria is not exhaustive (and there is no certainty that the court will not examine the merits of the transaction, even if all the criteria are met), a board of directors following the guidelines discussed by the court would increase the likelihood of withstanding judicial review.
The criteria and actions required as part of the special committee's activities naturally vary from case to case, for each company and for each transaction and its circumstances, and the board of directors must be prepared to consider each transaction individually with the assistance of its legal and other advisors.