The Israeli Supreme Court has ruled that anti-dilution protection contained in a shareholders agreement ("Agreement") to which the company ("Company") was not a party and had not adopted, and which provided for the maintenance of the percentage of shares held by a shareholder in the event of a future share issuance (as opposed to anti-dilution provisions with respect to future share issuances at a lower value than a fixed threshold), was unenforceable. .

The case before the Court involved a founders agreement that provided that a specific founder was not required to make additional investments in the Company. The Israeli District Court ("Lower Court") had held that the above arrangement implies that the shareholder would also maintain his present percentage ownership in the Company without any dilution and the Lower Court found that the Agreement was enforceable. The Israeli Supreme Court ("Court") overruled the Lower Court decision.

In its ruling, the Court noted that there are four types of documents in which shareholder anti-dilution protection can appear: Articles of Association, agreements to which a company is a party, agreements approved by a company post facto, and agreements to which a company is neither a party nor has approved.

Articles of Association are treated as agreements between a company and its shareholders and between the shareholders amongst themselves. Anti-dilution provisions included in Articles of Association are enforceable against the company.

Companies can also be bound by anti-dilution provisions included in an agreement to which the company is party, even where the company's Articles of Association do not contain parallel protections.

Anti-dilution provisions can also be enforceable against a company when included in a founders agreement entered into prior to the company's incorporation, provided that the company subsequently approves the agreement following its incorporation.

Provisions relating to anti-dilution protection are sometimes also included in agreements to which a company is not a party, such as founders agreements preceding incorporation, or agreements providing anti-dilution protection to investors that are concluded after incorporation. As a general rule, contractual anti-dilution protection will not bind a company to the extent that the company is not a party to the respective agreement and has not approved it post facto.

The Court ruled that in any event, the right to anti-dilution protection is limited and cannot be used to undermine principles contained in corporate law, such as the obligation of shareholders to act in good faith, and with respect to the controlling shareholder, also fairly, towards the company. The Court indicated that the greater the power of a shareholder to influence a company, the greater the shareholder's responsibility to use its power to advance the company's interests.

The Court observed that anti-dilution protection not enforceable against a company may still be enforceable against other shareholders who are party to a shareholders agreement. However, it is not reasonable that such obligations will be for an indefinite period.

On account of the foregoing, the Court held that the Company in the present case was not obligated to honor the anti-dilution protections that were contained in a founders agreement which the Company had not approved, and that the other founders were also not bound by such agreement because the Court found their obligations to have expired with the passage of time.

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