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DISTRICT COURT: DISTRIBUTION OF DIVIDENDS IS NOT A “TRANSACTION” UNDER THE COMPANIES LAW

The Commercial Division of the Israeli District Court has held that a dividend distribution to shareholders, including to the controlling shareholder (even if such distribution involves a reduction of capital approved by the Court) does not constitute a “transaction” for the purposes of the Israeli Companies Law, and therefore, is not subject to the procedures prescribed under the law.

In this case, a controlling shareholder acquired control in a public company by obtaining credit lines. Following the acquisition, the acquired company’s audit committee and board of directors approved a dividend distribution. The acquired company also obtained the approval of the Court for the distribution because it involved a reduction of capital. Thereafter, the company distributed dividends in the amount of NIS 1.4 billion to its shareholders.

The controlling shareholder used part of its share of the dividend to repay outstanding debts. The plaintiff, a minority shareholder, filed a suit against the controlling shareholder, who was then chairperson of the board, as well as against the other directors of the company. The plaintiff claimed that the dividend distribution was in fact an extraordinary transaction with the controlling shareholder, in which the controlling shareholder had a personal interest. Accordingly, the plaintiff argued that approval at a general meeting of the company’s shareholders had been required under the Companies Law to effect such a dividend distribution and that the approval had not been obtained.

The Court held that a dividend allocation is not a “transaction” within the meaning of the Companies Law, but the exercise of rights gained by the shareholders along with the acquisition of their shares.

The Court further held that in general, the distribution of cash dividends will not qualify as an interested party transaction, since the majority shareholder’s interest in such distribution is similar to the interest of all other shareholders and derives from the shares. This conclusion will not change even if the motive for the distribution is to provide liquidity to the controlling shareholder and it may be to the company’s economic and financial benefit to avoid such distribution and use the available funds for its ongoing operations.

Where there are no special circumstances that entail a particular and separate interest relating to the distribution of dividends, a shareholder may not argue against such a distribution for the sole reason that the controlling shareholder intends to use its portion of the dividends to repay loans extended for the purpose of acquiring the company.

The Court found that the plaintiff had failed to prove that the controlling shareholder had a personal interest in the transaction or had placed its personal interests above those of the company and it rejected the plaintiff’s claim.

This Newsletter has been prepared by Y. Ben-Dror Law Offices for informational purposes only and does not constitute legal advice. This Newsletter is not intended to create and the receipt of it does not constitute an attorney-client relationship. Readers should not act upon this Newsletter without seeking professional counsel.

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