The Corporate Law applies in the state of Delaware has developed three different standards of judicial review of business decisions made in the company. On one end of the spectrum stands the BJR – business judgment rule, which confers a kind of “immunity” to decision-makers against imposing liability for breach of Duty of Care. On the other end of the spectrum we will find the ‘fairness rule’, which is a strict auditing standard, the fairness of the relevant transaction or action. Between these two rules, is the third intermediate standard called “enhanced scrutiny”. the following two standards have been recognized in one way or another in Israeli court, as follows:
Rule of Business Discretion – The rule of business discretion essentially creates for the defendant a contradictory presumption of “correctness” that the defendant made his decision after considering the favor of the company. The plaintiff must prove that the decision was made out of a desire to harm the company or out of the decision-makers indifference to his Duty to Care for the company, that the decision-maker has a conflicting personal interest in the relevant context of the decision and that there is a concern or breach of Fiduciary Duty. The power of the Business Discretion Rule, lies in the fact that it gives officers protection from material criticism of the reasonableness of their business decisions, as long as the procedure for making them was proper.
The Increased Examination – ithis standard is intended to deal with circumstances in which the context of decision-making may undermine the pure discretion of the officers, even if they are independent and without personal interest. This rule applies in situations where a “failure” may arise as a result of applying the Rule of Business Discretion that may “miss” a breach of fiduciary duties on the part of officers, given the existence of a potential conflict of interest arising from the dynamics of decision making or the controlling owner. It allows the court to take a stricter critique than that exercised under the rule of business discretion, and if necessary allows the court to deepen an investigation into the weaknesses that arise in the relevant context.
Note that even the ‘Fairness Rule’ in which the procedural fairness of a transaction approval procedure is examined and the substantive fairness involved in examining economic and financial considerations received recognition in some form in Israeli law but in very certain cases and limits (for example, in a case involving discrimination against minority shareholders). This is because the procedural approval mechanism in Israel is set by law as a precondition for approving the transaction, while in Delaware, USA, the ‘Fairness Rule’ is exercised only in retrospect after someone has decided to confront the company’s decision in court.
On the contrary, In Israel, not whenever a claim is made regarding a transaction that met the conditions of approval required by law is contrary to the company’s favor, the court will be required to examine the transaction to the point of interfering with the decision makers’ decision in the company. In addition, the court in Israel proceeds from the premise that it should not interfere in transactions approved under the mechanism established by law, from an approach that a transaction that was approved by the ‘approval mechanisms’ outlined in the Companies Law it will prassume that the harmful potential of conflict of interest is neutralized.
The foregoing does not constitute legal advice, legal opinion, or a replacement for legal advice, and for this purpose, you are welcome to contact counsel Sagie Royzer to receive further advice regarding your case.
