Oct.03, 2012 | 5:04 AM–Sweetheart deals have made headlines over the past few years, prompting legislation to deal with the phenomenon.
One example is the sale of Israir by Nochi Dankner’s privately-held Ganden Holdings. The cash-guzzling airline went to the public IDB group under Dankner’s control, sparking a lawsuit.
But there are other ways for tycoons to rake in profits at the expense of public shareholders, if they hold privately-owned companies in the same business as the public companies under their control.
A hypothetical example is Delek Real Estate, a public company controlled by Yitzhak Tshuva, who also owns Elad Group, another real estate investing company.
How would Tshuva decide where to channel property deals he came across?
Corporate law requires controlling owners to disclose business opportunities to their public companies, but only when the owner is listed as a corporate officer. So the law doesn’t necessarily apply to Dankner, Tshuva and Lev Leviev, who don’t always play an official role in the companies they control.
“A controlling owner who isn’t a corporate officer could be required to avoid exploiting a company’s business opportunities if his involvement and influence over the board’s actions is enough for him to be considered a shadow director,” says attorney Ziv Preis, a founding partner of the P&B law firm.
How can you tell if a certain transaction falls within the purview of the public company?
Preis: “One of the tests in the U.S. is the expectations test, whereby the business opportunity is considered the company’s opportunity when it is expected to operate in the field in question. Or there is a test of its normal business activity under which any accepted business opportunity leading to competition or cutting into its profits can be considered exploiting its business opportunity. In Israel the lines defining a company’s business opportunities haven’t yet been clearly set.”…Read More>>