Disputes among shareholders in a company, or between partners in a partnership, are not unusual. On the contrary, they are almost an inherent part of corporate life, whether in a start-up at its early stages, a long-standing family business, or a publicly traded corporation. While lawyers may immediately recognize legal grounds such as oppression of minority shareholders or related-party transactions, for businesspeople these conflicts translate into everyday realities: deadlock in decision-making, erosion of trust between partners, and a slowdown in operations that may even harm the company’s growth.
Given this, it is essential to establish balanced and efficient mechanisms that can, when needed, address and bridge disputes between the parties, and where necessary, provide for orderly separation processes, all while minimizing the risk of long and costly litigation.
The Legal Perspective
Under Israeli law, the distinction between a controlling shareholder and minority shareholders is critical. Section 1 of the Companies Law defines a “controlling shareholder” as one holding more than 50% of the voting rights or otherwise able to exercise actual control over the company’s decisions. However, the definition extends further: for purposes of transactions with a controlling shareholder, the law (Sections 270-275 of the Israeli Companies Law) provides that even someone holding 25% or more of the voting rights, alone or together with others in a controlling group, may be deemed a controlling shareholder if they have the ability to significantly influence material corporate decisions. Minority shareholders, by contrast, are those who lack such decision-making power and often find themselves excluded from decisions or facing resolutions contrary to their interests.
When a controlling shareholder abuses this power for example, by blocking dividend distributions, awarding themselves excessive compensation, or advancing deals that harm the minority this may constitute oppression under Section 191 of the law. The courts have repeatedly emphasized that the purpose of this section is to protect minority shareholders from abuse of majority power.
In Prat Metal Industries Ltd. v. Dadon Haviv (CA 5025/13, Feb. 28, 2016), the court held that oppression may arise not only from exclusion of the minority from decisions but also from refusal to distribute profits despite significant profitability.
In addition, there is a unique framework governing transaction with controlling shareholders (Sections 270-275 of the Israeli Companies Law). Such transactions including special compensation arrangements, business dealings, or sale of assets require approval by the audit committee, the board of directors, and in certain cases, a special majority of the general meeting (“majority of the minority”). In Sharon Atzmon v. Osem Investments Ltd. (CA 8762/20, Dec. 9, 2021), the Supreme Court clarified the scope of judicial review over such transactions, particularly in cases where a controlling shareholder seeks to purchase the public’s shares and the company is delisted. The Court held that when a transaction is properly approved by an independent special committee, the board, and a majority of the minority shareholders, it enjoys a presumption of validity under the Business Judgment Rule (BJR). This means that courts will generally not interfere with the business rationale or the consideration paid unless there is proof of a fundamental flaw in the committee’s work or a breach of fiduciary duty. The ruling thus underscores that the “three-tier approval mechanism” requirement is not a mere formality but creates a meaningful presumption of fairness that limits judicial intervention in the substance of the deal.
The Business Perspective
Business paralysis Partner disputes can prevent execution of contracts, delay investments, or cause loss of business opportunities.
Reputational harm public litigation between shareholders deters investors and banks and may trigger reactions from creditors and even customers.
Direct financial loss Minority shareholders may find themselves “trapped” in the company with no return on their investment when dividends are not distributed and business growth stagnates.
Practical Examples
In a family-owned business, the controlling sibling appointed close relatives to senior management roles with high salaries and benefits. The minority siblings were excluded from decisions and saw company profits drained for personal interests. Such conduct may justify a minority oppression claim in court.
In a start-up founded by two equal partners, a deadlock arose when one wanted to accept a buyout offer while the other refused. With no exit mechanism in their founders’ agreement, the deal collapsed. A bring-along clause or buy-me-buy-you (BMBY) mechanism could have resolved the deadlock and preserved business continuity.
Legal and Business Tools for Resolution
Founders’ agreements to safeguard shareholder interests while allowing the company to maximize profits, it is advisable to include exit mechanisms, dividend policies, protection against oppression, and rules on related-party transactions (including those with controlling shareholders).
Ongoing updates Agreements signed at the company’s inception must be updated in line with its development, capital raises, and entry of new investors.
Arbitration and mediation Alternative dispute resolution (ADR) methods help avoid public exposure, save time and costs, and preserve business continuity.
Internal oversight Appointing external or independent directors, even in private companies, can provide important balance, especially where control is concentrated.
Minority protections Utilizing statutory rights under the Companies Law and contractual mechanisms, including veto rights on key matters, ensures minority shareholders can resist harmful transactions.
Conclusion
Shareholder disputes are nearly inevitable. The difference between a company that becomes paralyzed and one that continues to grow lies in early legal planning. A detailed founders’ agreement, clear exit mechanisms such as BMBY, and strict adherence to the Companies Law rules on related-party transactions provide both entrepreneurs and investors with effective and fair tools to navigate conflicts.
For further information please contact:
Hanan Efraim, Adv. Aviad Bergrin, Adv
Office: 03-691-6600 Office: 03-691-6600
Email: hanan@ekw.co.il E-mail: aviad@ekw.co.il