This issue was addressed in a recent decision of the Economic Court (Judge Ruth Ronen) in the case of Tsmicha Investments Ltd. In this case, an application was filed for approval of a derivative action against members of the Board of Directors and controlling shareholders in respect of several investment transactions entered into by the Company. It was alleged that the above-mentioned transactions were illegally approved due to the personal interest of the majority shareholders. To the extent that it was possible to permit such transactions as transactions in which the controlling shareholder had a personal interest, it was possible to consider the impact of the legal advice received by the directors on their liability. In many cases, the act or transaction that is the subject of the legal proceedings raises complex legal questions whose answer is ambiguous. As a result, directors seek legal advice as part of the consultation and approval process. Based on the case law, it is difficult to predict when the court will decide that relying on legal advice will exempt directors from liability, but the implementation of the above measures will certainly increase the likelihood that the court will recognize the aforementioned trust. The question is under what circumstances are the arguments of confidence accepted and in which are not, or in other words, « what guidance should be given to directors who are trying to clarify the legal position in relation to a particular transaction so that they can act in order to obtain professional advice, knowing that they have the right to rely on it even then: whether the conclusion it reaches does not coincide with the position. of the Court ». In this regard, the Court lists a number of guidelines (relating to the decision and classification of a transaction as a transaction with interested parties), which can be divided into five stages of work: It is clear from the Court`s decision that recourse to legal advice could generally be a defence for directors when a claim is filed by the corporation. In that regard, the General Court referred to two conflicting interests. On the one hand, there are cases, for example the case considered in the above-mentioned decision, which involve complex legal issues.
In such circumstances, the court stated, « it is legitimate and even desirable to turn to a professional who has expertise in the field. Therefore, anyone who acts in this way should be allowed to rely on the responses they receive. On the other hand, in the words of the Court, « the opening of a portal too wide to rely on an opinion could be problematic … « , including a portal to « shop » for an opinion. Moreover, in cases where the reviewer has no liability to those who may be harmed by the content of the notice, the possible and undesirable result is that the aggrieved persons are « clueless in both directions » (in the words of the court). The question arises as to whether reliance on legal advice as mentioned above could, in appropriate circumstances, negate directors` liability and, if so, what steps can directors take to overcome the risk that the court at the end of the world will confirm that they are relying on the legal opinion and conclude that they have no liability? The expert opinion requirement was not met because the opinion was issued « in bad faith ». « Overall, the conduct of outside counsel went too far to give legal advice in good faith, » the court wrote. The statement « did not reflect [the law firm`s] good faith efforts to see the facts and apply professional judgment. » On the contrary, « [t]he opinion was an artificial attempt to achieve the result that [the controller] wanted. » According to the Court: In summary, directors face many challenges in carrying out their duties, including resolving complex legal issues. It is not for directors to comment on such legal issues. To this end, directors must consult with « credible, experienced and impartial legal counsel. » And if the advice of such an advisor is accepted, directors have the right (and perhaps even the obligation) to rely on it. It should be noted that conflicting opinions expressed to a company in themselves do not necessarily negate the argument of confidence, but the existence of a contradictory opinion could weigh heavily on the eventual waiver (among other things, because of the fear of « shopping » for an opinion). However, the Court emphasised that, where there are two contradictory opinions, an approach aimed at obtaining a third opinion cannot be excluded and that such an approach is even legitimate.
The court held that the controlling shareholder had no personal interest in the transactions and therefore the transactions did not require « triple approval » under corporate law provisions. Although, in the light of the foregoing, the need to examine the implication of the legal opinion has become superfluous, the Court has referred to a number of aspects arising from this question. While the decision serves primarily as an introduction to best practices in legal advice, it also recalls that, notwithstanding exculpatory provisions, a controller may be held liable if the court considers that he acted in bad faith against the interests of the minority. The general partner was not protected from liability by the articles. The court found that there was no exoneration because the general partner`s actions together constituted « wilful misconduct. » These acts included the knowingly participation of the general partner in efforts to develop the « invented » opinion; rely on the sole member of the general partner (whose board of directors was composed exclusively of insiders of the controller) and not on the general partner`s board of directors (which included external directors) to determine the acceptance of the opinion; and the exercise of the right of appeal at a time when there is « maximum uncertainty » for the partnership. The presumption of good faith when relying on legal advice does not apply, the court concluded, because the general partner (and its controller) « provided the driving force that led the outside counsel to reach the [expert`s] conclusions that [the controller] wanted. » In 2018, FERC announced proposed policy changes (the « FERC Actions ») that could potentially have an EAW for the partnership. All parties acknowledged that it was impossible to know whether FERC`s actions had a negative, neutral or positive impact on the partnership. During this period of uncertainty (with the decrease in the company`s unit price), the general partner obtained the notice and exercised the right to purchase. The acquisition was completed the day before FERC announced the full and final package of policy changes, on the basis of which it was clear that FERC`s actions would have no impact on the partnership. Some former sponsors have taken legal action against privatization. Vice Chancellor J. Travis Laster, Jr.
ruled in favor of the plaintiffs. The controller has publicly stated that he intends to appeal. As is well known, directors are vulnerable to many civil lawsuits, including derivative claims. These claims include allegations of breach of the duty of trust, the required failure to approve transactions by interested parties, and more. The condition of acceptance was not met because the general partner had misinterpreted the ambiguity of the wording in its own interest and not in the interest of the limited partners. Originally, the general partner wanted the sole shareholder to rule on the admissibility of the opinion. She changed her mind based on the advice of another outside lawyer that the best view was that the board should make the decision (since the condition was likely to protect the sponsors). When the external managers raised questions about the opinion, the general partner relied instead on the sole shareholder. The court held that the ambiguities in the MLP agreement had to be resolved in favour of the interests of the limited partners and not in favour of the interests of the general partner, since the general partner was the party who imposed and drafted the condition. The court calculated the damages on the basis of the flow of distributions withheld from the limited partners as a result of the abusive exercise of the right of appeal. The court therefore valued damages as the difference between the present value of these future distributions (which it set at $17.60 per unit) and the price of the Take Private transaction ($12.06 per unit), totalling $689.83 million.
The claimants` expert had estimated the present value of future distributions at between $720 million and $901.6 million. The court called his $689.83 million damages « conservative » given the much higher amount he « could have awarded under the authorship rule » (eliminating uncertainty about the extent of damages against the offending party). Background. In 2005, Boardwalk was founded as a limited partnership.
