The Supreme Court – the General Assembly of Shareholders in a private company may take away Board’s powers and authorities in case of a “deadlock”

In CA 6946/11 Jacob Sesbon et al. v. Ephraim Solomon et al., published by “Nevo”  the Supreme Court ruled in an appeal on the Tel Aviv District Court, which rejected appellants’ motion to declare that their “management shares” are entitled to appoint board members, and accepted respondents’ position that the general assembly of its shareholders rightfully took away the  powers and authorities of the board due to its failure to adopt resolutions in light of a deadlock situation.

The appellants, the Sesbon family, and the respondents, the Solomon family, are all shareholders of a company named “Solomon $ Sesbon Packaging Industries 1989 Ltd.” (hereinafter “the company”). The respective shareholdings in the company are: 30% to Sesbon, and 70% to Solomon. Solomon family shares are divided among three brothers: Ofer (25%), Avni (25%) and Orly (20%). In addition to the ordinary shares held by the parties, there were 2 “management shares” issued: one to Sesbon and one to Solomon. The main question discussed in the appeal was the entitlement of the management share to appoint board members, 50% each.

Another questions brought to the decision of the Supreme Court was the ability of the general assembly of the shareholders to take away powers and authorities from the board: after several attempts to resolve the dispute between the parties, which failed, in 2008, the shareholders meeting (consisting of 70% Solomon and 30% Sesbon) resolved to take away the powers and authorities of the board of directors.

The District Court decided that there was nothing wrong with taking the authority by the general assembly. The appellants contended that there were no grounds to the application of Section  52(1) of the Companies Law,-1999, allowing the general assembly to take the powers of the board due to its “incapacity”. They contended that in order to take away the powers of the board, the board must be distributed into two equal parties of conflicting opinions and interests, who are unable to reach an agreement. In this context, the appellants argued that an internal conflict between the appellants themselves was the cause of the general assembly’s decision to take away the power of the board. Another argument raised by the appellants was that such resolution made by the general assembly was a “depriving act”. They claimed that, in a company managed as a partnership, there is a legitimate expectation of the parties for the joint management of the company, and the general assembly’s resolution terminated such joint management and may serve as a basis for a claim of a “depriving act”.

The Supreme Court ruled that in order to seize the powers of the board, Section 52 of the Companies Law requires that three conditions will be met:

  • Firstly, the existence of “incapacity” of the board. The “incapacity” may be physical, such as accidental death. But it can also be a normative incapacity, such as unsolvable disagreements.
  • Secondly, the general assembly’s authority to seize such powers of the board should be necessary “for the proper management of the company”.
  • Thirdly, that the general assembly must determine that the board is incapable of managing the company properly.

The main dispute in the appeal was the determination of the board’s “incapacity”. The Supreme Court ruled that, when the board is divided into two equal forces of opposite interests, incapable of agreeing on managerial decisions, the “incapacity” condition is met. therefore,, the general assembly rightfully seized its authorities.

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