The Haifa District Court recently held, in a precedential decision, that an employee who received shares in a company held by a trustee in accordance with section 102 of the Income Tax Ordinance has no shareholder rights.

At the core of the court ruling, the court considered the issue of the rights of an employee who entrusts shares with a trustee under section 102 of the Ordinance (“a 102 trustee”), as well as the rights and duties of a 102 trustee in terms of the tax authorities, the employee, and the employer.

An employee of Sol Chip was allocated 102 options that were entrusted with a 102 trustee in accordance with the provisions of the Income Tax Ordinance. Over time, the employee converted these options to shares and the shares continued to “sit” in trust with the 102 trustee.

The employee applied to the court, seeking to affirm he is the owner of the shares and thus is entitled to review the company’s minutes, articles of association, financial reports, and more. In other words, the employee sought affirmation that he is a regular shareholder and entitled to all the rights a company shareholder is entitled to under the Companies Law.

The court ruled that once the shares were entrusted with a 102 trustee, the trustee shall act as such for any purpose and not only for purposes under the Income Tax Ordinance, and thus is subject to the provisions of the Trust Law. Accordingly, the 102 trustee holds the rights in the shares until the date the shares are conveyed to the employee.

As a result, the court did not find in favor of the approach whereby a 102 trust merely deprives an employee of the ability to trade the shares and the rest of the rights effectively remain with the employee. As long as, the court explained, the trustee does not convey the shares to the employee, the employee has no rights in the shares and only has rights vis-à-vis the trustee under the trust agreement.