Teva's officeholders legally liable for their blunders

Teva  photo: PR

In the past, executives and directors had ethical obligations in management decisions but recent rulings suggest they may be legally liable too, argues Dr. Eli Bukspan.

The crisis at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), one of the most important Israeli companies, both locally and worldwide, can be recorded in Israel business history as a watershed in relations between a company and society and the legal and public responsibility of a company's board of directors and officeholders - one of the hottest questions in corporate law in recent years.

The case of Teva gives rise to two questions. One is the social and legal responsibility of Teva's management in managing the current crisis (emergency medicine). The second involves the responsibility of Teva's management for the decisions that led to the current crisis (preventative medicine). Although these are seemingly different questions, there is a strong connecting thread between them concerning the company's legal and public responsibility to its shareholders, employees, consumers, debt-holders, and in effect the entire public, whose health depends on its activities in both good and bad times.

In the current acute crisis, the workers are being obliged to give their share in the attempt to streamline and save Teva, but the turbulent discourse concerning the place of the workers in the company is only the tip of the iceberg where the standing of the various interested parties involved in the company's operations is concerned.

It is true that the conventional attitude that prevailed in corporate law in the distant past was focused narrowly on the expected profit of the company and the shareholders. Today, however, this approach is anachronistic, and certainly where socioeconomically important corporations like Teva are concerned, even though business, public, ethical, and legal aspects of the process have not yet been assimilated into law.

The key question concerning the current crisis, both for the purpose of assessing the responsibility of those involved and in order to prevent similar situations in the future, is examining the considerations in real time before decisions were taken about deals, some of which were particularly daring, and whether these considerations took into account the benefits and risks of all the interested parties: the stakeholders, not only the shareholders.

In considering this question, the revolution that has taken place in business law in recent years cannot be ignored. Both legal rulings and current legislation in Israel increasingly recognize the obligation of companies' officeholders to the workers, creditors, and other parties at interest. A strong expression of this was given in a ruling rendered in 2009 by Supreme Court Justice (ret.) Ayala Procaccia, who imposed obligations on shareholders in a company who took many loans that gave the company high leverage and jeopardized its creditors.

A ruling made shortly after the sub-prime crisis in the US states that managing a business in this manner constitutes "business ineptitude" through which legal liability is incurred, because, "In recent times, a business corporation features duality. One aspect is business considerations guided by cost and benefit considerations, while the other is duties of fairness and goodwill in relations with various groups with which the corporation comes into contact with in the course of its business activity."

This approach dovetails with the trail blazed by Supreme Court President (ret.) Meir Shamgar in a ruling given 30 years earlier, and is also consistent with the growing trend in rulings by the National Labor Tribunal and the Supreme Court that emphasizes the standing of the workers as the company's main contracting party, which enjoys a quasi-possessory status.

A similar approach is heard in English law and also in US corporate law. Most countries have "communities law," in which directors considering takeover proposals (Teva has been involved in many such deals in recent years) are obliged to take into account the interests of all parties connected to the company, including its workers and customers. These laws apply mostly to the directors of the acquired company, not the acquiring company, but it appears that there is reason to apply them symmetrically to the consideration of the directors in the acquiring companies.

It therefore appears that what was in the past regarded as an ethical obligation of the directors and officeholders in business companies is today also rooted in the legal framework, and insofar as these questions are heard by a court, it is likely that the case of Teva can make a significant contribution to clarifying the proper message about Teva of current corporate law in Israel.

The author lectures at the Interdisciplinary Center (IDC), Herzliya.

Published by Globes [online], Israel Business News - www.globes-online.com - on December 31, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Teva  photo: PR
Teva photo: PR
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