The Israeli Supreme Court has ruled that anti-dilution
protection contained in a shareholders agreement
("Agreement") to which the company
("Company") was not a party and had not
adopted, and which provided for the maintenance of the percentage
of shares held by a shareholder in the event of a future share
issuance (as opposed to anti-dilution provisions with respect to
future share issuances at a lower value than a fixed threshold),
was unenforceable. .
The case before the Court involved a founders agreement that
provided that a specific founder was not required to make
additional investments in the Company. The Israeli District Court
("Lower Court") had held that the above
arrangement implies that the shareholder would also maintain his
present percentage ownership in the Company without any dilution
and the Lower Court found that the Agreement was enforceable. The
Israeli Supreme Court ("Court")
overruled the Lower Court decision.
In its ruling, the Court noted that there are four types of
documents in which shareholder anti-dilution protection can appear:
Articles of Association, agreements to which a company is a party,
agreements approved by a company post facto, and agreements to
which a company is neither a party nor has approved.
Articles of Association are treated as agreements between a
company and its shareholders and between the shareholders amongst
themselves. Anti-dilution provisions included in Articles of
Association are enforceable against the company.
Companies can also be bound by anti-dilution provisions included
in an agreement to which the company is party, even where the
company's Articles of Association do not contain parallel
Anti-dilution provisions can also be enforceable against a
company when included in a founders agreement entered into prior to
the company's incorporation, provided that the company
subsequently approves the agreement following its
Provisions relating to anti-dilution protection are sometimes
also included in agreements to which a company is not a party, such
as founders agreements preceding incorporation, or agreements
providing anti-dilution protection to investors that are concluded
after incorporation. As a general rule, contractual anti-dilution
protection will not bind a company to the extent that the company
is not a party to the respective agreement and has not approved it
The Court ruled that in any event, the right to anti-dilution
protection is limited and cannot be used to undermine principles
contained in corporate law, such as the obligation of shareholders
to act in good faith, and with respect to the controlling
shareholder, also fairly, towards the company. The Court indicated
that the greater the power of a shareholder to influence a company,
the greater the shareholder's responsibility to use its power
to advance the company's interests.
The Court observed that anti-dilution protection not enforceable
against a company may still be enforceable against other
shareholders who are party to a shareholders agreement. However, it
is not reasonable that such obligations will be for an indefinite
On account of the foregoing, the Court held that the Company in
the present case was not obligated to honor the anti-dilution
protections that were contained in a founders agreement which the
Company had not approved, and that the other founders were also not
bound by such agreement because the Court found their obligations
to have expired with the passage of time.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Provisions of the Companies and Allied Matters Act (CAMA) and a Company's Article of Association ("Articles") provides for the transfer and transmission of shares of the shareholders of the Company.
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