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.
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
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
Class Action 35879-05-14 Zolty vs. Delek Group Ltd.
et al. (issued on 20.2.2017)
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guide to the subject matter. Specialist advice should be sought
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