What to Do When Shareholders Cannot Continue Together?
A dispute in a private company may reach a point where the court does not settle for deciding who is right, but instead chooses a way to separate the parties. These are the main separation mechanisms.
There are disputes between shareholders that can be resolved through a correct business decision, an agreement on the allocation of powers, or by amending an agreement. And there are disputes that have already passed that stage. The company still exists, sometimes even remains profitable, but the shareholders can no longer jointly make basic decisions. In such cases, the court may reach the conclusion that the problem is not a one-off issue, but structural: it is no longer possible to manage the company under the existing ownership composition. In that situation, the required solution is the separation of forces between the shareholders.
The legal basis for this is found mainly in Section 191 of the Companies Law, which deals with the oppression of shareholders. This section grants the court broad authority to issue instructions when the company’s affairs are conducted in a manner that constitutes oppression of a shareholder, or when there is a material concern that this exists. By virtue of this authority, and following the development of case law over the years, courts may, in suitable cases, choose separation mechanisms such as a forced purchase, BMBY, an internal bidding process, or a sale to a third party.
Although the remedy for oppression is not limited only to private companies, such separation mechanisms are especially suitable for situations in which there is a limited number of shareholders involved in managing the company, and they have no simple way to sell their stake on the market. Therefore, discussion of them arises not infrequently in private, family companies, or companies that have characteristics of a “quasi-partnership.” In such companies, the loss of trust between shareholders may be particularly significant. Unlike a public company, where a shareholder can simply sell their shares on the market, in a private company the exit is not always simple. There is not necessarily an external buyer, there is no clear market price, and the connection to the company is also managerial and personal, not only economic.
Separation Mechanisms in Practice
One of the main tools is a forced purchase of shares (Buy-Out). In this mechanism, the court orders one of the shareholders to purchase the other’s share, usually according to a value that will be determined by an expert appointed on its behalf. The expert examines the company’s activity, its assets, its liabilities, and its financial data, and sometimes also the impact of the dispute on its value. A forced purchase is especially appropriate when it is clear which party will continue to hold and manage the company, or when it is found that one shareholder was oppressed and the correct solution is to allow them to leave the company at a fair value.
Another mechanism is BMBY (Buy Me Buy You). This is a mechanism in which one party offers a price for the shares, and the other party chooses whether to sell their shares at that price or to purchase the offering party’s shares at the same price. The advantage of the mechanism is that it is intended to encourage a balanced price offer: whoever offers a price that is too low risks that the other party will buy them cheaply, and whoever offers a price that is too high may be required to pay it themselves. However, BMBY is not suitable for every case. When there are significant gaps in economic power or information, the mechanism may lead to an unfair outcome. Therefore, the court will examine whether this tool is appropriate in the circumstances of the dispute.
Another option is an internal bidding process — a kind of auction between shareholders, in which the parties compete for the purchase of the other’s stake. Such a mechanism may be suitable mainly in a deadlock between parties of similar power, for example shareholders who hold equal shares, when both want to continue with the company and both are practically and economically able to purchase the other’s stake. When an internal sale is not feasible or may entrench an imbalance between the parties, a sale to a third party can be considered. In such a situation, the company or its shares are sold to an external party, and the consideration is divided among the shareholders according to their rights.
In extreme cases, a dissolution solution may also arise, but generally it is not the first solution when dealing with an active company that has business value. Dissolution may harm the company’s value and turn a dispute between shareholders into broader damage. Therefore, when it is possible to carry out a separation that preserves the company’s operations, courts may prefer a mechanism that removes one of the shareholders from the picture but allows the company to continue to exist.
In the end, there is no single method that fits every shareholders’ dispute. The court examines whether there was oppression, whether there is a real deadlock, who holds information and control, and what solution will harm the company’s value the least. Therefore, when a shareholders’ dispute reaches the court, the question is not only who is right, but how to separate correctly — who will remain with the company, who will leave it, and by what mechanism this can be done in the fairest and most efficient way possible.
• The article in cooperation with the Israeli Law website (Psakdin)
• Attorney Adi Tal deals with corporate law
• The article is courtesy of the Israeli Law website (Psakdin)
• ynet is a partner on the Psakdin website
