Polygon board reaches a deadlock, company seeks court rescue

Will the court rescue Polygon from the deadlock? The real estate company controlled by Kobi Maimon has turned to the Central District Court with a lawsuit to intervene and bring about the appointment of external directors. This comes after more than a year in which it has been operating without a single public representative — a period during which it has published three periodic reports unlawfully, as these were supposed to be approved by the audit committee, which includes external directors.

During this period, Polygon has put forward candidates for the position of external director for approval by the shareholders' meeting in four different votes, but in all of them, the minority shareholders, who oppose the way the company and the controlling shareholder Maimon conduct themselves, voted against their appointment. At the same time, the controlling shareholder opposed the candidates proposed by the minority shareholders. Thus, a situation was created in which a public company operates for over a year without the control of directors who are supposed to represent the public and supervise its conduct, while approving and publishing financial reports in violation of the law.

Apparently, the Securities Authority could have imposed a monetary sanction on the company for the lack of external directors for a period longer than 90 days. However, the very convening of shareholders' meetings intended to appoint external directors, starting from September last year, prevented this, because the law states that a sanction cannot be imposed if the non-appointment is due to the fact that the required majority was not achieved at the meeting. The Authority could have determined that reports published without external directors' approval are considered unlawful and taken sanctions, up to the suspension of shares from trading, however, no precedent for this is known.

A possible solution, which Polygon is approaching, may come from the court. This already brought about a solution to a similar deadlock in 2022, when the court suggested the appointment of representatives who were finally approved by a vote at the meeting. However, last July those two finished their first term. At the beginning of the month, the company itself turned to the Central District Court with a lawsuit to suggest two candidates and order the convening of the shareholders' meeting. Judge Sharon Geller demanded that minority shareholders also be joined to the proceeding.

The deadlock at Polygon exists because both sides hold a veto right. The appointment of an external director for a first term requires a double majority: a regular majority of all shareholders and a majority among the minority shareholders. The controlling shareholder holds 52% of the shares, providing him with a veto, while the second majority requirement neutralizes his vote and provides parallel power to the minority shareholders.

CPA Erez Barak, who advises institutional bodies, suggested in a conversation with Calcalist a permanent solution: amend the law so that the appointment of external directors for a first term is possible only by a vote of an "untainted majority" (minority shareholders with the controlling shareholder's vote neutralized). According to him, this would reduce the involvement of controlling shareholders in presenting candidates and increase the activity of institutional bodies. Barak added that the fear of "tyranny of the minority" can be handled with existing tools regarding fiduciary duties and the appointment of independent directors.