In this first edition of “In a Nutshell”, we will examine how the legislators in Delaware and Israel deal with the two following topics:
1. The Vote of an “Interested Party” Director: Can an “interested director” vote when it comes to the underlying transaction?
The answer in a nutshell – YES, if it is under DE law, but NO, if it is under Israeli law.
Pursuant to Section 144 of the Delaware General Corporation Law (DGCL), an “interested” director’s or officer’s transactions can be approved, if:
1. The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
2. The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or
3. The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders.
4. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.
The Israeli Law:
Recently amended (under Amendment No. 16), Section 278 of the Israeli Corporation Law sets forth the procedure relating to interested directors’ or officers’ transactions. According to this Section, an Interested Director shall not participate in, or vote on, the underlying transaction in the pertinent board meeting, unless his participation is required for purposes of presenting the underlying transaction in front of the Board; provided however, that the presence of the Interested Director needs to be pre – approved by the Chairman of the board or the Chairman of the Company’s audit committee.
In case that a majority of the directors are “interested”, a majority of the shareholders of the Company must approve the transaction as well.
2. Pre-Emptive Rights –
Considered to be a “hot” topic almost in every investment transaction, it is interesting to see the difference between the two legislators handling the matter when it comes to the basic question – how fundamental the right is?
If nothing is mentioned in the Company’s certificate of incorporation, will a stockholder be entitled to pre-emptive in connection with future issuance of stock by the Company?
The answer in a nutshell – NO, if it is under DE law, and YES, to a certain degree, under Israeli law.
DGCL Section 102(b)(3) provides that no stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation.
The law in DE is very clear then – if the certificate of incorporation is silent about this issue, no preemptive right is granted.
Pursuant to ICL Section 290(a), in a privately held company that its capital stock is comprised of one series of stock, each stockholder shall be offered participation in future offerings of stock so that its pro-rata share of the outstanding stock of the company could be maintained.
So, according to Israeli law – in a privately held company with only one class of stock, every stockholder is granted pre-emptive rights in connection with future issuance of shares.