Tel Aviv, Israel – Recently, in a precedential case, the Supreme Court of Israel (the "Supreme Court") cited and based its groundbreaking decision on an article co-authored by Amichay Tessler, a litigation partner in Sullivan & Worcester's Tel Aviv office.

According to Israeli law, a shareholder or a director of a company (and a creditor, in certain circumstances) can file a motion to certify a claim as a derivative claim (“Derivative Claimant” and “Motion to Certify”, respectively).

Furthermore, Derivative Claimant can, before they file a Motion to Certify, file a motion for discovery and production of documents against the company, relating the cause of the future Motion to Certify (“Motion for Discovery”).

In order to obtain approval for a Motion for Discovery, certain legal requirements must be fulfilled, which include acting in good faith and demonstrating that the Motion for Discovery will serve the company's best interests.

Recently, a shareholder in a known retail company in Israel named Max Stock Ltd. (“Max Stock”) filed a Motion for Discovery before a Motion to Certify to the economic department in Tel Aviv district court. In his motion, the Derivative Claimant argued that, allegedly, some of the officers and directors in Max Stock breached their fiduciary duties and exploited business opportunities that allegedly belonged to Max Stock. A few months after Max Stock submitted its response to the Motion for Discovery, the Derivative Claimant sought an extension for submitting a class action against Max Stock, arguing that the documents he asked for in the Motion for Discovery will assist him in the class action as well.

The district court denied the Motion for Discovery, and the Derivative Claimant filed a motion to appeal to the Supreme Court (in Hebrew).

The Supreme Court denied the motion to appeal on March 31, 2024, citing and basing its ruling in this precedential case on an article co-authored (in Hebrew) by Amichay Tessler, published in the prestigious Law Review of Reichman University. According to Tessler’s article, a Derivative Claimant cannot submit a Motion for Discovery, which is designed to assist him in a derivative action and is meant to benefit the company, to assist him in a class action in which he opposes the company; and by doing so – he, or she, is acting in bad faith, and therefore the conditions to allow Motion for Discovery are not met.

This new ruling, which adopts Tessler’s research and conclusion as outlined in his article, deepens the gravity of good faith in derivative procedures, and will shape the future conduct and rulings in following Motions for Discovery.

All companies, public and private alike, which face a derivative procedure will be best served to address our litigation practice and be advised on the best and most recent relevant legal theories and tactics.