The Israeli Corporate Law acknowledges the phenomena of mergers and reverse mergers and has adopted a number of rules of finance and good faith with regard to shareholders voting on specific matters.
In a recent case a large Israeli holding company (IDB) was a 60% shareholder in a public Israeli company (A). IDB had recently signed an agreement with a Chinese company through which the latter would purchase the shares held by the public in A and part of IDB's shares, through a reverse merger. As part of the deal, IDB was granted a put option to sell the remainder of its shares in the merger company (a private company), with terms valued between $150 million and $300 million.
The deal was initiated by IDB and was presented to the shareholders of A for approval. A minority shareholder of A filed a lawsuit at the Commercial Court and demanded damages. The court decision supported his allegations.
The court (under Judge Dana Keret Mayer) decided that the rule of fairness and equity should prevail in mergers, and that all shareholders of the public company (A) should be paid the same price for each share. In the current structure of the deal, IDB received an extra benefit that was not shared with the other shareholders. The court ruled that this disparity had no sound background and therefore should not be approved. It was decided that the extra benefit that had been received by IDB should be reallocated between the other shareholders of A.
This bold decision may be a cornerstone for future mergers, as it demonstrates a fundamental rule of equity and fairness between shareholders in mergers, through which the consideration should be allocated fairly between them.
For further information on this topic please contact Yoram L Cohen at Yoram L Cohen Ashlagi Eshel Law Offices by telephone (+972 3 693 1900), fax (+972 3 693 1919) or email ([email protected]).