The Tel Aviv District Court (Economic Department) dealt recently with the question of whether a controlling shareholder of a public company listed on the stock market indices, is prohibited from carrying out share purchase transactions, if such transactions may lead to delisting of the company’s shares from the stock market indices. This question arose in a motion which was considered and granted by the Court, to approve an action as a class action filed by the minority shareholders of Delek Energy Systems Ltd. against its controlling shareholder and officers of the company.
In its decision, the Court reviewed relevant Supreme Court decisions whereby, as a rule, it has been confirmed that every individual is entitled to trade securities freely and as he wishes, since this is a right deriving from the freedom of contract and his proprietary right to his securities, adding that this right also stems from recognition of the importance of maintaining a free and efficient capital market. The Supreme Court decisions have also clarified that, according to the res judicata, the rule about free trade of securities stipulates certain exceptions, intended to handle instances of a market failure – when the market mechanisms fail to adequately protect the basic interests of various stakeholders, particularly minority shareholders or those planning to become minority shareholders.
Indeed, the Companies Law prescribes a number of restrictions on purchases of shares of a public company, including by the controlling shareholder, and these provisions include a precise and unequivocal determination in relation to a purchase of shares above a particular percentage, which obligates the buyer to publish a special or full tender offer. In this regard, the Court ruled that the law per se, does not restrict a controlling shareholder from trying to increase its ratio of holdings of a public company above the 80% threshold – even though such a purchase is likely to have various repercussions, inter alia, of causing the value of the company’s shares to diminish (and not only due to the delisting from the indices, but also due to the actual diminished tradability of the shares).
The Court ruled that, in light of the fact that there is no statutory ban that applies to a share purchase that results in a company being delisted from stock market indices, it is not warranted to prescribe – by way of judicial legislation – an additional obligation on controlling shareholders that constrains their ability to trade their shares.
Nevertheless, the Court ruled that the situation is different when the controlling shareholder’s share purchases are motivated by an intention to cause the share to be delisted from the indices in the interests of benefiting a future tender offer by the controlling shareholder. Such a purchase is likely to give rise to grounds for a lawsuit by the company’s minority shareholders, and the burden of proof that the controlling shareholder’s purchases were for the ulterior motive alleged by the minority shareholders and not for another legitimate purpose, is imposed on the minority shareholders who raise this allegation.
The Court further stated that a controlling shareholder seeking to avoid concerns of being sued on the basis of allegations in respect of its motives, can refrain from performing actions that might cause the share to be delisted from the indices, or obtain the minority shareholders’ consent to his actions.
As for the specific circumstances alleged in relation to the Delek Group, the Court ruled that the set of circumstances substantiates the claim that the respondents had indeed intended to delist the Delek Energy share from the stock market indices and to lower the share price prior to the tender offer they announced shortly thereafter. The Court took into account, inter alia, the importance of the matter of the indices to Delek Energy, and considered the lack of any discussion of delisting from the stock market indices during meetings of Delek Energy’s board of directors – neither before the delisting of the share from the indices nor afterwards.
The Court further found that the directors who held office in Delek Energy on behalf of the Delek Group had been in a state of conflict of interests between their roles in Delek Energy and in the Delek Group. The Court ruled that the fact that the directors, in their capacity as officers of Delek Energy, had favored the interests of the Delek Group over the interests of Delek Energy, constitutes a violation of their fiduciary duty and their duty of care that they owe directly towards the minority shareholders of Delek Energy.