BlueMountain v. Taro - Voting at General Meetings of Shareholders

March 1st 2016

Dear clients and friends,

A recent decision handed down by the District Court for the Central District (the Hon. Prof. Ofer Grosskopf, J.), sheds light on a number of issues related to voting at general meetings of shareholders on resolutions in which the controlling shareholders has a personal interest; and particularly when the company involved is an Israeli company whose securities are traded on a non-Israeli stock exchange.1


Taro Pharmaceutical Industry Ltd. is an Israeli company whose shares are traded on the New York Stock Exchange. Taro’s board of directors approved a resolution, which, according to the Israeli Companies Law, 1999, required the approval of the company’s general meeting of shareholders by a majority of disinterested shareholders. The company held the general meeting and announced the resolution was approved. A group of minority shareholders motioned the court claiming that the approval process was flawed, both from a procedural point of view as well as from a substantive point of view. The minority shareholders contended that the approval of the general meeting should be declared void, for three reasons:

(i) Taro’s voting form required shareholders to state whether they were interested parties or not, but did not provide for identification of shareholders, denying the company of its ability to determine whether the voting shareholder should be regarded as interested or disinterested with respect to the resolution; moreover, the company claimed that the voting mechanism should have been in compliance with the Israeli law;

(ii) Taro’s voting form provided that a shareholder who did not indicate whether it was interested or disinterested was regarded as being disinterested by default. The minority shareholders argued that such default is biased in favour of the board’s resolution and is contradictory to the procedural requirements of the Companies Law, which requires each to notify whether it has a personal interest in the resolution, and that failure to do so renders its vote disqualified for purposes of determining a majority of disinterested shareholders; and

(iii) Taro’s voting form provided that a shareholder who did not indicate whether it was in favour of or opposed to the resolution was regarded as voting in favour of the resolution by default. The minority shareholders argued that this too was contradictory to the provisions of the Companies Law.

The District Court’s Decision

The district court’s decision focuses on the procedural aspects relating to identification of shareholders voting at general meetings and on the voting procedures.

With respect to the issue of identification of shareholders, the District Court ruled neither that Israeli law nor US law requires shareholders to identify themselves in order to vote at general meetings, unless a shareholder is an “interested party”, as defined in the Companies Law (generally, an executive officer or director of the company, or a person that holds 5% or more of the company’s shares). Furthermore, the Court commented that requiring a shareholder to identify itself may be contradictory to US law, which provides shareholders with the right to privacy and to remain anonymous. In addition, the Court reiterated that it was not the company’s duty to enforce a shareholder’s duty to correctly represent its interest.

Regarding the rule of default relating to a shareholder’s indication of being interested or disinterested, the District Court decided in favour of the minority shareholders and ruled that a shareholder must positively indicate whether or not it has an interest in the resolution, and that failure to do so triggers a default rule whereby such shareholder should be considered as being interested and therefore his vote cannot be counted towards a majority of disinterested shareholders. Since US law does not require shareholders to state their interest in a resolution, the Court ruled that Taro’s attempt to base its practice on US custom was irrelevant.

Regarding the rule of default relating to a shareholder’s vote in favour or against a resolution, the District Court rejected the minority shareholder’s argument, stating that such a practice is commonplace in the US and that based certain extenuations provided by Israeli law to companies whose securities are listed on a stock exchanges outside of Israel, there is no place for an Israeli court to intervene in the determination of such rule of default.

1 Motion 36222-11-16 BlueMountain Capital Management LLC v Taro Pharmaceutical Industry Ltd.

This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances.

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