As is known, directors are susceptible to many civil claims, including as part of derivative claims. These claims include allegations of breach of duty of trust, the required non-approval of interested party transactions and more.

In many cases, the action or transaction, subject of the legal proceeding, entails complex legal questions whose answer is not clear-cut.  As a consequence, as part of the deliberation and approval process, the directors request to receive legal opinions.

The question arises whether reliance on a legal opinion as aforesaid could, in appropriate circumstances, negate the liability of the directors and, if so, what action can the directors take in order to overcome the risk that when “doomsday” arrives, the court will confirm their reliance on the legal opinion and find that they have no liability.

This subject was discussed in a ruling that was recently rendered by the Economic Court (Judge Ruth Ronen) in the case of Tsmicha Investments Ltd.  In that case, an application to approve a derivative action was filed against members of the board of directors and controlling shareholders, concerning several investment transactions that were entered into by the company.  It was claimed that the said transactions were unlawfully approved, due to a personal interest of the controlling shareholders. Insofar as there was room to approve these transactions as transactions in which the controlling shareholder had a personal interest, there was room to examine the implication of the legal opinion, which the directors received, on their liability.

The court held that the controlling shareholder did not have a personal interest in the transactions and thus, the transactions did not require “triple approval” in accordance with the provisions of the Companies Law. Despite the fact that in view of the aforegoing the need to examine the implication of the legal opinion became superfluous, the court referred to a number of aspects arising from this issue.

It may be understood from the court’s ruling that, as a rule, the reliance on a legal opinion could constitute a defence for directors where a claim is filed by the company.  The court referred to two conflicting interests in this regard.  On the one hand, there are cases, for example the case discussed in the above said ruling, which involve complex legal questions.  In such circumstances, in the words of the court, “approaching a professional, who has expertise in the field, is legitimate and even desirable.  Thus, one should allow anyone who acts in such manner, to rely on the answers that he receives”. On the other hand, in the words of the court “opening a portal too wide for reliance on an opinion, might be problematical…", including a portal for “shopping” for an opinion.  Moreover, the possible and undesirable result in circumstances in which the giver of the opinion has no liability towards those possibly harmed by its content, is that those persons harmed "will either way find themselves at a loss” (in the words of the court).

The question is, in which circumstances will reliance arguments be accepted, and in which not or, in other words, “what guidance must be given to directors seeking to clarify the legal situation with respect to a particular transaction, so that they can act in order to receive a professional opinion, and know that they are entitled to rely on it also if the conclusion that will be reached therein is not congruous with the position of the court”.  The court lists a number of guidelines (in connection with the ruling and classification of a transaction as an interested party transaction) in this regard, which can be divided into five work stages:

  • The first stage - the identity of those seeking to receive a legal opinion: it was held that the court can give broader trust in a legal opinion if someone who has no personal interest has approached to receive it.  Thus, it is recommended that the approach to a lawyer be made by a body comprising of independent directors, such as the audit committee or the remuneration committee.
  • The second stage - an approach lacking insinuations: one must refrain from making any insinuation, express or implied, regarding the desired result of the opinion.
  • The third stage - selecting the provider of the opinion: one should approach a lawyer who is an expert and possesses authority in the relevant field.  Likewise, the provider of the opinion must not have ulterior motives, including a “personal interest” in the subject of the opinion.
  • The fourth stage - presentment of the facts of the case to the provider of the opinion: it is important that the entire relevant factual basis is presented to the provider of the opinion and that such factual basis be anchored in the opinion.
  • The fifth stage - preparing the opinion and its presentment: a written opinion is preferred, as well as the fact that the opinion be based and reasoned, that it be presented to the directors in a manner that will allow the board of directors to hold an in-depth discussion in relation thereto.  Likewise, it is important that the provider of the opinion will agree to be questioned in court regarding the conclusions reached therein.

It should be noted that contradictory opinions that were given to a company, in and of themselves, will not necessarily negate the reliance argument, but the existence of a contradictory opinion might weigh heavily on the possible exemption from liability (inter alia, on the basis of the fear of “shopping” for an opinion). However, the court has emphasised that, in the case of two contradictory opinions, an approach to obtain a third opinion must not be ruled out and that such approach is even legitimate.

In conclusion, in fulfilling their duty, directors are faced with many challenges, including dealing with complex legal questions.  It is not the role of the directors to opine with regard to such legal questions.  For this purpose, the directors must approach a “credible, experienced and impartial legal advisor … and upon the advice of such advisor being accepted, the directors are entitled (and, perhaps, even obliged) to rely on it”.

In light of case law, it is difficult to predict in which cases the court will rule that reliance on a legal opinion is such that exempts the directors from liability, however, implementing the measures mentioned above, will certainly increase the chances that the court will recognise the aforesaid reliance.