The Duty of Conduct Applied to Officers and Controlling Shareholders

Duty of care – in order to perform as a company officer, one must have reasonable skills to fulfill that position. The breach of the Duty of Care that applies  on an officer implies only a “procedural duty” that concerns decision-making based on material information that is likely to be received in the circumstances of the case and will be imposed on an officer only in severe cases of gross negligence. The duty of care has evolved as a category of tort liability.

Fiduciary Duty- Along with the duty of care, the fiduciary duty  is primarily intended to prohibit self-dealing and compliance on both sides of the transaction, prohibition of conflict of interest, prohibition of competition with the company’s business, and prohibition of exploiting the company’s business opportunity. The fiduciary duty is based primarily on wealth-making laws that focus on the violator’s self-enrichment and his subjective motivion of making a personal profit.
Duties of a Controlling Shareholder – the Duty of Fairness and the Duty of Good faith – unlike its “friends”, the duty of care and the duty of fidelity, the Duty of Fairness does not apply to an officer of the company but does apply on a controlling shareholder (i.e. the Duty of Good faith applies on any shareholder). The duty of a shareholder to act in good faith and an acceptable manner and to refrain from abusing his power is directed towards both the company and the other shareholders, while the duty of fairness imposed on the controlling shareholder is directed towards the company only.
The common perception is that the Duty of Fairness imposed on a controlling shareholder is weaker than the power of duty imposed on directors and managers because unlike officers in charge of the property of others and their duty to consider only the interests of the company, the shareholders is in charge on their own property and therefore it may consider their own interests as well.
At the same time, the fact that a controlling shareholder may consider his own good does not mean that he may ignore the intrest of the company. For example, in the circumstances of a sale of the controlling shareholder shares, while considering the sale of its share the obligation of the controlling shareholder is not similar to the obligation of an ordinary shareholder who wishes to do so, since the consequences arising from the sale of control are immeasurably wider. Hence the increased duty of the controlling shareholder to take into account the good of the company deals with this consern.
In other words, the difference between the power of the Duty of Good Faith and the Duty of Fairness lies in the balance that is struck by their power between the personal good of the controlling shareholder/shareholder versus the good of the company. From a shareholder we expect behavior in good faith in which there is no abuse, from the controlling shareholder we expect a higher standard of conduct, within which greater weight is given to the consideration that concerns the good of the company.
The Duty of Fairness is a general duty that is examined according to the facts of each case when in general it can be said that where the controlling shareholder exercises his power as controlling shareholder, in a way that does not take into account the good of the company and acts contrary to its favor, this violates the Duty of Fairness.

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.

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