You have set up a startup with partners. Defining the method of separation between the founders of a business venture, a technological venture, or other ventures as well, is a complex issue that is usually regulated within the framework of a founder agreement between the partners.
Many times, entrepreneurs do not communicate within the framework of a founder agreement, or the founder agreement does not refer to the manner of separation between the parties, and later, during separations, the parties are faced with complex questions, among other things regarding the ability of one of the parties of a certain venture to establish a new business that directly competes with the venture.
A ruling received in the district court a few months ago, tries to settle and regulate matters while making relevant diagnoses regarding the obligations imposed on the entrepreneurs, including by virtue of the Companies Law, 5759-1999 (The Companies Law), as well as the court’s ruling regarding appropriate remedies.
In general, many times founders sign a founders’ agreement that regulates the key issues and agreements between them for management of the venture and the manner of their holdings in the venture, agreements that are of course subject to conditions and agreements with future investors and partners.
Main mechanisms in these agreements refer, inter alia, to the role of the entrepreneurs in the venture, financing of the venture, the field of activity of the venture, agreement on a budget (even if initial), the manner of making decisions in the venture, limitations on the partners’ holdings in the venture (re-purchase mechanisms, right of first refusal, joining obligations, bring along etc.), as well as veto rights of each of the parties on essential decisions and more.
One of the main mechanisms in founders’ agreements concerns the manner of separation between the parties, or the separation of one of the partners from the venture, and his duties towards the venture and the remaining partners in it. In this context it is important to note that a classic mechanism of separations is the pricing mechanism between the parties (BMBY) which the courts have often called into the relationship between the parties and this is to reach a decent and economically efficient solution. However, in most of the ventures that have already been incorporated as companies, upon entry of investors into the company, the above mechanism becomes irrelevant.
From a normative point of view, it is important to note that with the association of the venture as a company, various obligations apply to the partners in the venture and the company: starting with the duty of controlling owners to act fairly (see article 193 of the Companies Law), moving on to their duties as shareholders to act in good faith and in an acceptable manner (see article 192 of the Companies Law), and ending with their duties as officers of the company, who owe, among other things, a fiduciary duty to the company (see article 254 of the Companies Law).
In the Tzur Case, which was decided in the district court a few months ago, a discussion was held regarding the obligations of a partner in relation to his former partner in a venture that was not successful. It was a venture that was incorporated as a company, the entrepreneurs were the shareholders of the company and served as directors. A short time later, the venture was not successful and the company ceased operations. Later, one of the partners (for the sake of simplicity we will call him the second partner) founded a venture that operated in the same field of activity as the venture that was closed, hence the claim of the first partner to the venture.
The court focused its decision on the second partner who founded the second venture (while not accepting the claims against the other partners in the second venture). In summary, we note that the court analyzed the situation through the duties of the second partner towards the first venture (which was incorporated as a company) and towards his partner in the same venture, not to compete with the company’s business and not to take advantage of a business opportunity the company. Moreover, the court determined that in private minority companies, it is even possible to expand the obligations of the second partner towards a future field of activity for which there was an agreement and expectation of the partners in the first venture to operate in the future.
A concretization of the judgment will lead to several main conclusions:
First, despite the fact that the first venture was not successful, the obligations of the partners remain.
The duties of the partners extend to the various roles they fulfill: controlling owners, shareholders and of course office bearers (directors). In their last role, the court applied non-compete obligations to the second partner as well as the duty of that partner not to take advantage of the company’s business opportunity while the court analyzed the unjust use made of the assets and resources of the first company.
Finally, in the Tzur Case, the parties to the first venture never agreed on a separation mechanism, and the negotiations that were conducted on this very issue were not completed. This issue was also the responsibility of the second partner who founded the second venture, and the fact that the first company was not dissolved did not help him.
With the establishment of a venture (and even more so, a technological venture – a start-up), many times the entrepreneurs advance in the main occupations of the venture, and do not think about a possible separation of one of the partners in the venture. It is important to stop and agree on the mechanism that will help all the partners (those who stay and those who leave) stand up for their rights and create certainty, and this will surely help prevent future friction and help to raise future capital for the same venture.
A pricing mechanism (BMBY) can distill a decent solution to cases where partners part ways in a successful venture that can be given a price tag relatively easily. Regarding partners who separate from the venture they founded, and it is not possible for one reason or another to have a pricing mechanism in it, it makes sense to impose restrictions on some of the holdings of the departing partner, and on the other hand to price his remaining holdings. This will increase recognition and will also help the project continue to exist with of future investors.
It is important to note that the aforementioned rule also applies to changes that are required even in cases where the venture was not finally incorporated as a company both by virtue of wealth creation laws, and in the relevant changes also by virtue of partnership laws.
Please contact us for further information:
Adv. Hanan Efraim Adv. Hadar Yair
Office: 03-691-6600 Office: 03-691-6600
 CC 29021-08-20 Tzur v. Empirical Hire Ltd. Et. al. (The Tzur Case)
 See in this context CAA 5596/00 Shulamit Stavy v. Shauli Nahoussi, ruling 54(1), 149, and CA 4588/19 Rajada Asad Kardosh-Salem v. Kardosh & Co. Ltd.
 See article 39 of the Partnership Order (new version), 5735-1975