The Tel Aviv District Court – Economic Division ("Court") considered what circumstances warrant court interference in decisions of a company's board of directors. In the case at hand, a company's board of directors ("Board") resolved to distribute dividends and to incur certain loans. Several shareholders of the company claimed that this decision, made following a leveraged buyout of control, was designed to benefit the new controlling shareholder and was not in the company's best interests.
In its decision, the Court confirmed the business judgment rule, pursuant to which there exists a rebuttable presumption that office holders' decisions made in good faith, without conflicts of interest, and in an informed manner, are presumed correct and not subject to judicial review. Only in exceptional cases are such decisions subject to judicial review.
The Court set forth five general principles concerning judicial interference with board action:
- Good Faith. A company's board of directors is required to carry out its duties in good faith, especially in connection with significant decisions regarding the company's share capital.
- Best Interests. The action does not conflict with the company's best interests or those of the majority of its shareholders.
- Disclosure. In order to avoid judicial review, company officers must provide all relevant information to shareholders and company decision-makers prior to reaching a decision; this prevents decisions being made by a small and self- interested forum. In the present case involving a leveraged buyout, the controlling shareholder's liabilities and liquidity requirements would be important to disclose.
- Minority Shareholder Support. Although not a binding requirement, receiving support from minority shareholders will greatly decrease the concern of a conflict of interest.
- Financial Situation. There is a presumption that officers in near-insolvent companies have decreased authority to make dramatic changes to a company's capital structure.
In the present case, the Court held that the Board had disclosed relevant information, and that its decision was supported by a large majority of the company's shareholders, including minority shareholders. In addition, the Court noted that the presumptions of good faith, best interests and informed decision had not been rebutted. The Court therefore held that it would not interfere with the Board's discretion, and denied the shareholders' request to file a derivative action.
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