There are three main types of common shareholders’ litigation:
- A derivative action, which is filed on behalf of the company;
- A class action, which is filed on behalf of a certain class, such as a class of shareholders; and
- An appraisal claim, which is filed following a full tender offer that includes a compulsory acquisition.
A derivative action can be filed by a shareholder or a director or a debtor pursuant to the conditions detailed in the Companies Law, including initial application having been made to the company (except, among other situations, under particular circumstances where the board is affected by a personal interest) requesting the company to file such claim. Insofar as the company rejects to file such claim, then plaintiff is allowed to submit a derivative action application on behalf of the company. The court will tend to certify the derivative action application if it determines mainly that there is prima facie evidence that there are merits to such claim and that the claim is to the benefit of the company and that the plaintiff is not acting in bad faith.
A derivative action may be filed in respect of any matter or issue, including a claim for compensation or disgorgement against directors and officers, third parties, other shareholders who has harmed the company, including the controlling shareholders and so on.
The Companies Law allows the Israeli Securities Authority to fund a derivative action, if requested by the plaintiff. If the Israeli Securities Authority is satisfied that the derivative action has a public interest and that there is a reasonable chance that the court will certify it as a derivative action, it may bear the costs of the plaintiff.
Whoever is authorised to file a derivative action is entitled to request the court, prior to or following submission of the application for approval of the claim, to instruct the company to disclose documents relating to certain issues of the company where there is a suspicion of wrongdoing by others that resulted in a loss to the company. This legal procedure is for the purpose of examining the merits of a potential derivative action. The court is authorised to approve this motion for disclosure if it is convinced that the applicant has provided an initial prima facie evidence for this preliminary stage and that the applicant is acting bona fide with respect to the motion.
Another litigious course of action is a class action. An application for approval to file a class action may be submitted in accordance with the Class Action Law, 2006. The Class Action Law specifies in its endorsement on what cause of action and against whom a class action can be filed.
According to the endorsement, a class action can be filed by a party having ‘an interest in certain security’, that is, allegations relating to securities must be involved. There are four preconditions, which the court must examine in order to certify a claim as a class action:
- the claim gives rise to substantial questions of fact or law common to the entire class and they are reasonably likely to be settled in favour of the class;
- the class action is the most efficient and equitable way of resolving the dispute other than by means of a regular claim;
- the court is persuaded that all members of the class are adequately represented; and
- the court is persuaded that the affairs of the members of the class will be managed in good faith.
Courts will tend to certify a class action where a wrongdoing has been demonstrated prima facie.
The Securities Law allows the Israeli Securities Authority to fund a class action, if requested by the plaintiff. If the Israeli Securities Authority is satisfied that the class action has a public interest and that there is a reasonable chance that the court will certify it as a class action, it may bear the costs of the plaintiff.
A person wishing to acquire shares of a public Israeli company and who would as a result of such acquisition hold over 90 per cent of the target company’s voting rights or the target company’s issued and outstanding share capital (or of a class thereof) is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company (or the applicable class). If:
- the shareholders who do not accept the offer hold less than 5 per cent of the issued and outstanding share capital of the company (or the applicable class) and a majority of the offerees that do not have a personal interest in the acceptance of the tender offer accepted the tender offer; or
- the shareholders who did not accept the tender offer hold less than 2 per cent of the issued and outstanding share capital of the company (or of the applicable class), all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law.
A shareholder who had his or her shares so transferred may petition the court within six months from the date of acceptance of the full tender offer, regardless of whether such shareholder agreed to the offer, to determine whether the tender offer was for less than fair value and whether the fair value should be paid as determined by the court. A petition of this sort may also be filed as a class action. However, an offeror may provide in the offer that a shareholder who accepted the offer will not be entitled to appraisal rights as described in the preceding sentence, as long as the offeror and the company disclosed the information required by law in connection with the tender offer. If the full tender offer was not accepted in accordance with any of the above alternatives, the acquirer may not acquire shares of the company that will increase its holdings to more than 90 per cent of the company’s issued and outstanding share capital (or of the applicable class) from shareholders who accepted the tender offer.
The Supreme Court ruled in the case of Atzmon v Bank Hapoalim Ltd that the value of the target company in an appraisal claim followed by a full tender offer will be determined in accordance with the discounted cash-flow method.
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