Recent Developments in Case Law

Derivative Claim 43335-11-12 Ilan Verdnikov v. Shaul Elovitch
The Financial Division of the District Court of Tel-Aviv-Jaffa (Hon. Chaled Kabub)
rejected a motion to file a derivative claim against directors and officers of a company
in connection with the approval of a restructuring that was led by its controlling
shareholder, who previously purchased the controlling stake in a leveraged buyout
(LBO). The applicants argued that by approving the restructuring, which served the
controlling shareholder’s interests, directors and officers of the company breached
their fiduciary duties.
In its analysis of the case, the Court introduced the “Enhanced Business Judgment
Rule” (Enhanced BJR), which is based on the principles of good faith, the company’s
best interest, due care, minority shareholder support and consideration of the
company’s financial condition.
The Court ruled that in order to invoke the court’s scrutiny under the Enhanced BJR,
an applicant must first show that the controlling shareholder had significant influence
over the company’s decision-making processes, coupled with a strong need for the
restructuring as a consequence of the LBO. If this threshold is met, it is then up to the
respondent directors and officer to prove that the decision was based on reasonable
business-sense, was in the best interest of the company or all of its shareholders and
that they acted with due transparency and disclosed all relevant information. Where
necessary, the court will also consider minority shareholder involvement and the
company’s financial condition. Where the circumstances are such that the controlling
shareholder had pressing liquidity needs that amount to a “personal interest” in the
decision, the court will review the respondent’s position with enhanced scrutiny.
Generally, however, the court will not interfere with the decision if it was made in
good faith, with due mindfulness and under no conflict of interests.
Although the Court’s ruling in this case is limited to the circumstances of a
restructuring following an LBO, the rationale of the ruling may be applicable to other
similar circumstances.
We note that the above decision may be subject to additional review and appeal, and
is therefore not necessarily the final word on this matter.

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