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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 with 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.
P'ninat Mishpat (832)
Beit Din Eretz Hemda - Gazit
733 - How to Take Payment from A Guarantor – part lII
734 - Veto Power of Special Stockholders – part II
735 - Veto Power of Special Stockholders – part III
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It is not possible at this point for beit din to decide if sbsd can succeed without def providing collateral, which makes the request for a pause and inquiry one with some merit. The majority of dayanim point out that the officers of a company are obligated to protect the company’s financial welfare, and being forced into giving collateral is likely a dangerous step. On the other hand, it is possible that the risk/reward formula makes it worthwhile. If sbsd goes forward with the plans, it is very possible that def will enter a situation from which it cannot extricate itself cleanly. There are possible damages from freezing the process, but they are moderate considering the amount of time sbsd has to fulfill its contractual obligations to other parties. The minority opinion reasons that by requiring def’s bod to make sbsd pause the project, A-1 are in effect stymieing sbsd, over whom they were not given veto power in any case where the danger to def is minimal.
Pl claims that A-1 needs to positively agree to changes in def, whereas def says that their right is only to demand a meeting of bod and there to veto a proposed move. There are different indications from different parts of def’s charter. Par. 19 speaks about A-1 in the context of describing how votes are handled in the company, which implies that there is a need to have a positive vote of approval. However, it seems that there are stronger indications that A-1 does not need to vote in favor, but only has the ability to veto. First, A-1’s veto power is mentioned in par. 16 of the charter, in the context of an assemblage of the stockholders. The implication is that only through such an assemblage, which A-1 is able to force, they can exercise their veto power.
Furthermore, the agreement can be understood retroactively with the help of what has been practiced until this point. In this case, several decisions that A-1 could have vetoed were taken without A-1 giving its agreement. This indicates that it was understood that A-1 does not have to give explicit approval but can only protest.
We will conclude next time with a look if pl effectively waived his ability to protest.
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