Veto Power of Special Stockholders – part I | Beit Din Eretz Hemda - Gazit | Beit Midrash

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Case: Reuven owns a company (both =pl) that holds the majority of special shares in the defendant company (=def) and sits on def’s board of directors (=bod). The body of special shares holders (=A-1) has veto power over major changes at def, as detailed in def’s charter. Def owns 100% of a subsidiary (=sbsd), which has signed a huge contract with a government agency to provide infrastructure for an area. Pl opposes the deal and wants it paused (leaving time to get the job done if applicable) at least until it can be determined if sbsd can finance the project without def providing the banks collateral. If sbsd cannot manage without def, then pl can veto the deal through A-1. Def claims that breaking the contract with the government would be damaging both directly (500,000 NIS deposit) and indirectly (possible fines, loss of reputation, etc.), so that there is insufficient justification to freeze the project.

Ruling: The first element of beit din’s decision is the question whether A-1 has veto power over sbsd’s major changes.

P'ninat Mishpat (781)

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Sbsd started as a partnership between def and another company. In 2018, when def bought the remaining stake in sbsd, a new charter was written for sbsd, which does not mention whether A-1, through their stakes in def, has veto power in sbsd. Pl claims that considering that def owns sbsd totally and its decisions are taken exactly like def’s are, A-1’s standing should be the same.

Beit din accepts the approach to follow the modern legal standing of corporations, according to which, companies that are incorporated separately are independent companies. Although there is a legal concept that when a corporation is a false facade, we can view it according to the true realities, that is true regarding steps taken in bad faith. In this case, pl is not claiming that sbsd was founded to help def act in bad faith.

The intentions of the sides to a written agreement are crucial to its interpretation (Shulchan Aruch, Choshen Mishpat 61:16). However, when the sides disagree as to what the intentions were, as here, we follow the document’s language (ibid. 15). In this case, the lack of mention of A-1 implies that they do not have veto power over sbsd beyond their regular rights as partners in the parent company. This understanding is strengthened by the fact that when A-1 agreed to def buying the remainder of sbsd, about which they clearly had veto power, they did not ensure their special rights in sbsd by means of stipulation in the new charter.

According to two dayanim, it can be clearly determined that pl does not have veto rights in sbsd’s internal decisions. According to one dayan, the matter cannot be determined conclusively, but since sbsd has freedom to make their own decisions until proven otherwise, pl has not proven his right to restrain them.

Next time we look at whether pl has special rights because of the move’s impact on def.

P'ninat Mishpat