The Right of the General Meeting to Exercise the Powers of the Board

Dear clients and friends,

On January 28, 2014, the Supreme Court (the Hon. Deputy Chief Justice Naor, the Hon. Joubran, and the Hon. Sohlberg) handed down its ruling in Civil Appeal 6496/11 Jacob Sesbon v. Ephraim (Ofer) Solomon.  One of the questions presented to the Supreme Court was, when is a company’s board of directors deemed incapable of discharging its powers, thereby enabling the general meeting of shareholders of such company to exercise the board’s powers in its stead.

The company at hand was a closely held company with two groups of shareholders: the controlling group held 70% of the shares, while the minority group held 30% of the shares.  Each group had the right to nominate one member to the company’s board of directors.  Historically, the company was in effect run by its shareholders and the groups cooperated with one another in managing the company’s business.  When disputes arose between the two groups, so did the question of which corporate organ was authorized and had the power to direct the company’s affairs.

The minority group argued that the company’s management decisions should be made by its board of directors (in which each group had equal power), while the majority group contended that management decisions should be made by the company’s shareholders, in accordance with past practice and as permitted under Section 52(a) of the Companies Law, 1999.

Section 52(a) of the Companies Law allows the general meeting of a company to exercise one or more of the powers of the board of directors, if the board of directors is incapable of discharging its powers.  The issue before the Supreme Court in this respect was, therefore, does the term “incapable” in Section 52(a) apply to a deadlocked board.

The Supreme Court ruled that although “incapability” may be physical, such as in circumstances of death of a member of the board of directors, it may also be normative, such as when a board of directors reaches deadlock.

In Sesbon, the board of directors was divided into two adverse but equal groups who could not reach agreement on the management of the company, and this – ruled the Supreme Court – was sufficient to deem the board of directors “incapable” of discharging its powers.

In addition to the board of directors being “incapable” of discharging its powers, the Supreme Court noted two additional conditions that must both be met in order for the general meeting to be able to exercise the board’s powers in its stead.  The first additional condition is that the power that the board of directors cannot discharge is essential for the proper management of the company (the Supreme Court mentioned that such a determination is more likely to occur in private companies); and the second additional condition is that the general meeting must affirmatively resolve that the power that is incapable of being discharged by the board of directors is essential and that the board of directors is in fact incapable of discharging it.

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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