BMBY Bidding Mechanism Between Shareholders As a relief for Resolving Shareholder Oppression

Abstract

The BMBY (Buy Me Buy You) bidding mechanism implements a quick and efficient method to achieve a separation of powers between shareholder groups that seek to separate powers in the corporation they own.

In the legal review below, we will describe the cases in which courts have chosen in recent years to implement the bidding mechanism between parties in certain companies (sometimes as a relief for a claim of oppression by one of the parties), the rationale underlying these court rulings, as well as the different ways in which the mechanism can be implemented.

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Mechanisms for separation of powers between shareholders

Conflicts between shareholders, particularly in private companies, can arise for a large number of reasons, with the main reason being a lack of coordination of expectations between shareholders regarding the manner in which the company is progressing. Another main reason is the desire of a minority shareholder group to be a partner in all the compensation and financial mechanisms that exist in the company, when in most private companies this is concentrated in the hands of the controlling shareholders, and thus, in the absence of a real possibility for the minority to liquidate its holdings and sell them, this creates a conflict between the shareholders.

When disputes in such areas come before the court, it extensively examines the background to the disputes. For example, in cases where the dissolution of the company is requested and another party opposes this and the company is being run in a solvent and proper manner, the court will tend not to dissolve the company but will try to resolve the disputes in other ways (see below).

Another example concerns a company held by two partners, called a ‘partnership-like company’. The main characteristic of such a company is complete equivalence, meaning equal relations even in the company’s organs, at situation that may paralyze its activities when there is a deadlock between its shareholders (who, in most cases, hold 50% of its shares each). In cases where a conflict arises between shareholders in a partnership-like company who, by their very nature, are significant owners in the company, and there is a complete lack of trust between the parties in each other, the court will tend not to resort to a bidding process if the parties are not willing to do so, but will tend to resort to a process of open sale to third parties (see fourth option below).

It is important to note in this context that in addition to the duties imposed on the shareholders of a company as detailed in Section 191 of the Companies Law, 5759 – 1999 (the “Companies Law“) and the reliefs that the court can grant, which we will discuss below, Section 192 of the Companies Law, entitled ‘Duties of Shareholders’, are also relevant, as too Section 193 of the Law, entitled ‘Duty of a Controlling and Decision-Making Person to Act Fairly’.[1]

The options available to the courts

In the Adler case[2], the court listed the four options available to it for a separation of powers:

Dissolution of the company – an extreme relief that will only be used in exceptional cases. The courts have even stated more than once that “a going concern should not be put down”, while noting that a solvent company is not to be liquidated, and that considerations concerning additional parties such as the company’s employees, customers, etc. are, certainly, taken into account. It is important to note that the courts have expanded and even established BMBY bidding mechanisms in cases where there was no agreement that established such a mechanism between the parties, in order to avoid a drastic process of dissolution of the company[3].

Forced acquisition – requiring one party to purchase the other party’s holdings in accordance with an objective valuation. In most cases, this option will be exercised in the event that one party has a significant advantage in knowing the company and the risks inherent in its management, and therefore the logic is that that party will purchase the other.

A bidding process between the parties – an internal BMBY track between the parties that can be conducted in two ways: ‘Russian roulette’, whereby Party A offers to purchase Party B at a certain company price, and Party B can sell its holdings to Party A or purchase Party A’s holdings under the same terms; the alternative to this route is the ‘Texas shut out’ in which both parties submit a bid in a sealed envelope to the court, and the highest bidder wins. The advantage of the envelope method is its efficiency and simplicity, which allows both parties the ability to purchase the other party at a price it determines (of course, there are background considerations and particular circumstances of each case that must be considered on their own merits).

Fourth option – open bidding, an organized process managed in most cases by a professional external party that also involves bidders who are not shareholders of the company, in which a kind of tender is held among all bidders. The process is supposed to ensure that the maximum price is received for the company.

Section 191 of the Companies Law – Providing Relief as a Solution to Shareholder Oppression

The provisions of Section 191 of the Companies Law are broad and substantial, giving the court a very wide range of reliefs for the benefit of a shareholder who has proven to have been oppressed or even if he has convinced the court that there is a substantial fear that he will be oppressed in the future. The law states that the court can give orders on how the company will be managed and can even order other shareholders in a particular company to acquire the company.

It is our understanding that the legislature has granted the court almost unprecedented authority to issue orders and create mechanisms at its discretion in order to eliminate oppression, and to choose from each of the four options detailed above pursuant to considerations such as: the circumstances of the case; the background of each shareholder; the holding percentages of each shareholder; a particular party’s superior economic position in terms of liquidity and financing options; prior familiarity with the company and the risks inherent in its management; the condition of the company and its business; and more.

During the two and a half decades that have passed since the Companies Law was legislated, the courts continued to add more content to the above, and a direct line can be seen between the Stavi case of 2000, the Adler case of 2013, and the recent ruling in the Panda case (the three cases were mentioned above).

Summary

There are significant considerations to be taken and dramatic solutions that can be applied when it comes to resolving a dispute between shareholders in a company. One of the definitive solutions is a separation of powers, in which one party purchases the other’s holdings in the company. When approaching the formulation of such a mechanism, it is important to understand the background of the matter and the circumstances involved, all in order to reach the optimal solution from out of a number of possible routes.

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[1] In this context, see the ruling in Civil Action 4806-22 Gutman vs. Lahav, which was recently given in the Economic Department of the Haifa District Court (the “Panda” case).

[2] Civil Appeal 8712-13 Adler vs. Livnat, opinion of the Honourable Justice Danziger.

[3] See ​​ Civil Appeal Leave 5596-2000 Stavi v. Nahusi (the “Stavi” case).