Background
Nano Dimensioning Ltd. is an Israeli public company without a controlling shareholder, traded in the United States through American Depositary Shares (ADS). To defend against hostile takeovers, the company adopted a “poison pill” plan. Under this plan, if any shareholder or group of shareholders acquires more than 9.99% of company shares without board approval, a dilution mechanism is triggered allowing all other shareholders to purchase company shares at $0.01 per share, thereby severely diluting the acquirer’s stake.
The poison pill included a carve-out: shareholders could request a special shareholders’ meeting under Section 63 of the Israeli Companies Law (1999) without triggering the poison pill, but only through two “permitted mechanisms”—either obtaining board approval or conducting a “public solicitation” by publishing notice on the US Securities and Exchange Commission website of their intention to reach agreements and inviting other shareholders to join. Two hedge funds (respondents) holding 7.4% of shares sought to cooperate with other shareholders to reach the 10% threshold needed to call a special meeting. They challenged whether these permitted mechanisms adequately preserved their cognate (inalienable) shareholder rights.
The hedge funds sought a temporary injunction preventing the poison pill from being activated if they and other shareholders jointly requested a special meeting. The district court granted the injunction. The company appealed to the Supreme Court, arguing that the temporary relief was actually the final remedy sought and thus should be scrutinized more carefully, and that the balance of convenience favored the company given the risk of hostile takeover by activist hedge funds.
The Court’s Holding
Justice Ruth Ronen affirmed the temporary injunction. The court held that poison pill defense mechanisms, while valid, cannot eliminate shareholders’ cognate rights to call special shareholders’ meetings. Although the permitted mechanisms regulate how shareholders exercise this right—requiring either board approval or public solicitation—they do not extinguish the underlying right itself. The court found that requiring shareholders to navigate these procedural mechanisms as a condition of exercising their core governance right constitutes an impermissible restriction, particularly when the right is cognate under Israeli law.
Critically, the court distinguished between the temporary injunction and the ultimate relief sought. The temporary injunction is narrower because it applies only during the pendency of the litigation and only to the specific act of calling a shareholders’ meeting—not to all shareholder agreements. If other shareholder agreements emerge suggesting a genuine hostile takeover threat, the company remains free to apply the poison pill. The court held that the temporary relief is a prohibitory injunction (preventing the company from acting) rather than a mandatory one (requiring affirmative action), and therefore does not fundamentally alter the existing situation in the way that would justify applying heightened scrutiny.
On the merits of the balance of convenience, Justice Ronen found that the hedge funds would suffer irreversible harm from share dilution if the poison pill were activated, whereas the company had presented only theoretical and speculative risks of hostile takeover. The hedge funds’ stated intention is merely to exercise voting rights at a shareholder meeting—a fundamental corporate right that cannot be prevented through defensive mechanisms. Without concrete evidence of a hostile takeover threat, the court found the speculative risks insufficient to outweigh the shareholders’ immediate and tangible interest in exercising their cognate rights.
Key Takeaways
- Poison pill defenses cannot entirely eliminate shareholders’ cognate rights to call special shareholders’ meetings; they may only regulate how such rights are exercised
- Procedural mechanisms (such as public solicitation requirements) cannot serve as substitutes for substantive shareholder rights under Israeli law
- In balancing temporary relief, courts will weigh irreversible harm to shareholders (share dilution) against speculative corporate risks
- Dual-listed Israeli companies must reconcile Israeli cognate shareholder rights with US securities law requirements; US law does not override Israeli law on fundamental shareholder governance rights
- Temporary injunctions preventing activation of contractual remedies are appropriate where one party faces irreversible harm and the other faces only speculative damage
Why It Matters
This decision clarifies the boundaries of poison pill defenses in Israeli corporate law, particularly for companies with dual listings in Israel and the United States. While Israeli courts recognize poison pills as valid takeover defenses, they do so within the constraint that cognate shareholder rights cannot be bargained away. The ruling rejects the company’s argument that requiring shareholders to follow specific regulatory procedures sufficiently preserves their rights. Instead, the court held that shareholders cannot be forced into burdensome procedural mechanisms as a condition precedent to exercising fundamental governance rights—that would constitute an impermissible restriction on the right itself.
The decision has significant implications for activist shareholders and hedge funds engaging with Israeli-listed companies. It confirms that while activists must comply with required regulatory procedures, companies cannot use these procedures as a substitute for—or barrier to—the underlying right to call meetings. For other Israeli companies with US listings seeking to implement poison pill defenses, the ruling establishes that compliance with US securities law requirements does not justify eliminating or severely restricting Israeli cognate shareholder rights. The court’s approach preserves shareholder protections under Israeli law while respecting the company’s legitimate interests in preventing sham transactions conducted under the cover of shareholder meetings.