We are pleased to present another edition of our periodic newsletter. In this edition we provide a brief synopsis of a recent development in Israeli corporate law affecting both private and public companies, regarding the Business Judgement Rule.
Our newsletter is intended to create awareness of important practical developments in Israeli corporate and commercial law, and the principles of law upon which these issues are based. We hope that you will find our newsletter informative and helpful, and your comments or suggestions are appreciated.
District Court / Business Judgement Rule
The liquidators of the Better Place venture ("Better Place") filed a claim on behalf of Better Place against Better Place's former office holders, claiming that the office holders were negligent in the performance of their roles. The office holders filed a motion to summarily dismiss the claim arguing, inter alia, that the office holders' actions were protected under the Business Judgment Rule, which establishes a "presumption of propriety" in relation to business decisions made by office holders.
The Business Judgment Rule, developed under US law, has recently been adopted by the Israeli Supreme Court, though not entirely in its US form. The Israeli Business Judgment Rule confers on the office holder an "immunity" from judicial review of business decisions under the following conditions: the decision did not involve a conflict of interest, the decision was made in good faith and the decision was an informed one. The Court established that an office holder making a business decision while meeting these three conditions will benefit from a "presumption of propriety".
As part of the judgment, the Court held:
- Business Judgment Rule only applies to internal officers of the company but not to outside consultants, such as outside counsel and accountants, whose obligations to the company are anchored in other legal arrangements.
- Business Judgment Rule will not apply to matters intended to benefit third parties, such as public reporting obligations.
- Business Judgment Rule will not apply to situations in which the Board of Directors fails to act and does not make a decision at all. However, in contrast to the failure to act, a decision not to act (for example, a decision not to enter into a transaction) is an active decision that entitles the office holders to the protections of the Business Judgment Rule.
- In order to determine whether the board of directors meet the requirement of an informed decision, the Court will examine the information upon which the decision was made, whether the necessary information was available for the decision, and also if the information that any reasonable officer would have requested prior to the decision was available. The Court will review various indicators, such as the scope of the background material presented to the decision makers, the length of time required for making the decision, the number of topics discussed, the scope and depth of the discussion, the range of options examined, the number of professionals involved in the decision, etc.
- An "informed decision" requires not only a sufficient factual basis, but also that the office holder utilize such basis and make a decision with professional judgement. Failure to exercise independent discretion may, under appropriate circumstances, void the application of the Business Judgment Rule.
- The Court accepted that there is a difference between decisions made by office holders of a parent company and decisions made at a wholly owned subsidiary level by office holders who usually receive instructions from the parent company, and that decision making in this manner cannot be seen as a breach of the office holders' obligations towards the subsidiaries. When a decision has been made by an entity at the top of the corporate hierarchy, there is no expectation of independent discretion by office holders who act to implement the decision in accordance with the instructions given to them.
In the case at hand, the Court examined whether the facts contradicted the presumption of propriety enjoyed by the office holders via the Business Judgement Rule. The Court concluded that the office holders are entitled to the protection of the Business Judgement Rule and accepted the motion to summarily dismiss the claim.
The Court further noted that the success of a start-up company, such as Better Place, is inherently risky, and that adding the risk of legal claims to the set of existing risks involved in start-ups may harm the attractiveness of the Israeli start-up market. In the opinion of the Court, rejection of the claims at an early stage of legal proceedings achieves a desirable result and sends an appropriate message about the Israeli legal environment.
We note that the ruling of the District Court has been appealed to the Israeli Supreme Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.