Corporate Distributions to Shareholders in Delaware and in Israel

140 Pages·2014·0.98 MB·English

by  Anat Urman

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LLM Theses and Essays Student Works and Organizations
12-1-2001
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Anat Urman
University of Georgia School of Law
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Essays. 52.
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ANAT URMAN
Corporate Distributions To Shareholders In Delaware And In Israel: Cash Dividends And
Share Repurchases.
(Under the Direction of Professor CHARLES R.T. O’KELLEY)
This thesis considers the corporate legal systems of Israel and Delaware as they
address the subject of corporate distributions to shareholders. The thesis reviews the
significance of cash dividends and the acquisition by corporations of their own stock, in
the management and survival of corporations, the effect they have on the disposition of
creditors, and the extent to which they are restricted by operation of law.
The thesis demonstrates how dividends and share repurchases may translate into a
transfer of value from creditors to shareholders. It considers the effectiveness of the legal
capital in securing creditors’ interest, and concludes that the legal capital scheme presents
no real obstacle to distributions.
It is further concluded that despite the recent corporate law reform in Israel,
Delaware’s corporate law system continues to surpass Israel in flexibility and broad
approach to distributions. Nevertheless it is expected that Israeli courts will consider
Delaware’s methodology on the matter.
INDEX WORDS: Debt, Distribution, Dividend, Equity, Equity cushion, Fiduciary,
Greenmail, Insolvency, Legal capital, Leverage, Nimble dividend,
Par value, Recapitalization, Redemption, Restrictive covenant,
Repurchase, Surplus, Takeover.
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CORPORATE DISTRIBUTIONS TO SHAREHOLDERS IN DELAWARE AND
IN ISRAEL: CASH DIVIDENDS AND SHARE REPURCHASES
by
ANAT URMAN
LL.B. The University of Manchester, Israel, 1998
A Thesis Submitted to the Graduate Faculty of The University of Georgia in Partial
Fulfillment of the Requirements for the Degree
MASTER OF LAWS
ATHENS, GEORGIA
2001
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© 2001
Anat Urman
All Rights Reserved
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CORPORATE DISTRIBUTIONS TO SHAREHOLDERS IN DELAWARE AND
IN ISRAEL: CASH DIVIDENDS AND SHARE REPURCHASES
by
ANAT URMAN
Approved:
Major Professor: Charles R.T. O’Kelley
Committee: Fredrick W. Huszagh
Charles R.T. O’Kelley
Electronic Version Approved:
Gordhan L. Patel
Dean of the Graduate School
The University of Georgia
December 2001
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DEDICATION
To my parents Malka and Menachem Urman, and to Ron Kalfus.
Thank you for your support.
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TABLE OF CONTENTS
Page
CHAPTER
1 INTRODUCTION…………………………………………………………..1
I. Thesis Background…………………………………………………..1
II. The Significance Of Distributions To Corporate
Constituencies……………………………………………………….4
III. Israel’s Corporate Law System……………………………………...6
IV. Thesis Structure……………………………………………………...7
2 THE CONFLICT OF INTEREST BETWEEN THE
SHAREHOLDERS AND THE CREDITORS……………………………...9
I. Introduction……………………………………………….…………9
II. The Conflict Between Debt and Equity……………………….…...10
III. Eliminating Investment Risks And The Function Of The
Equity Cushion……………………………………………………..15
3 LEGAL CAPITAL RULES AND THE EQUITY CUSHION……………18
I. Introduction To The Legal Capital System……………….………..18
II. Distributions And Their Effect On Creditors………………………26
III. Legal Limitations On Distributions………………….……….……29
4 CRITICISM OVER TRADITIONAL LEGAL CAPITAL
DOCTRINES……………………………………………………….……...45
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5 MOTIVES FOR ENGAGING IN CASH DISTRIBUTIONS
AND SHARE REPURCHASES……………………………………….….48
I. Introduction……………………………………………….…….….48
II. Leveraged Recapitalizations………………………………….……52
III. The Excess Cash Theory………………………………….………..56
IV. The Signaling Explanation…………………………………………56
V. The Bird-In-The-Hand Theory……………………………………..62
VI. The Takeover Defense Theory……………………………………..63
VII. Greenmail…………………………………………………………..65
VIII. Stock Manipulations And The Creditor Expropriation
Theory…………………………………………………….………..67
IX. Stock Redemptions……………………………………….………...69
6 RESTRICTIONS ON DIVIDEND DISTRIBUTIONS AND
SHARE REPURCHASES…………………………………………….…...74
I. Restrictive Covenants…………………………………….………...74
II. Statutory Limitations………………………………………….……76
III. Limitations Imposed By Case Law..……………………………….80
7 LIABILITY FOR IMPROPER DISTRIBUTIONS……………………...113
8 CONCLUSION…………………………………………………………..118
BIBLIOGRAPHY………………………………………………………..125
CHAPTER 1
INTRODUCTION
I. Thesis Background
Israel is small country with very few natural resources, facing difficult political
scenarios. Despite these adverse conditions, Israel has reportedly sprouted into the
world’s second most important high-tech cluster after Silicon Valley.1 In a country of
only six million people, there are nearly as many Israeli companies listed on the
NASDAQ (National Association of Securities Dealers Automated Quotation System) as
there are European companies.
The government of Israel has taken an active role in promoting the county’s
technological capabilities.2 The high-tech sector has become a central element in Israel’s
economy, so much so, that its continued success is central to Israel’s economy.
However, it has become increasingly difficult to attract foreign investors to
participate in ventures within Israel. If fact, Israel’s high-tech industry is reportedly
losing its business to foreign countries.3 In the past several years, over ninety percent of

1 Roger Abravanel, The Promised Economy, THE MCKINSEY QUARTERLY, 2001 Number 4

(hereinafter The McKinsey Quarterly). Also available at,
http://www.mckinseyquarterly.com/article_abstract.asp?tk=:1108:7&ar=1108&L2=7&L3=10.
According to The McKinsey Quarterly, during the year 2000, Israeli high-tech start-ups attracted
more investment per head than any other country in the world. Israeli high-tech start-ups attracted $3.2
billion in capital investment, most of which foreign. This amounts to a 30-fold increase in investments in a
period of only three years.
2 Subsidizing and setting up labs, incubators and seed-money venture capital funds.
3 Many companies transfer their business centers and management teams out of Israel. Even when
the research is performed in Israel, the development products are transferred to related companies overseas.
1
2
the new start-up companies that were formed in Israel, incorporated as foreign
companies,4 many of those in the U.S., a majority of which in Delaware.
Why is it then that Israel, an incubator for world-class technological innovation,
is struggling to prevent companies from immigrating to Delaware?
One known turnoff for choosing Israel as a jurisdiction, is its unique system of
corporate law. A major source of funding flowing into the venture capital industry in
Israel originates from U.S. investors who do not believe in the Israeli system. Much
pressure is, therefore, placed on Israeli entrepreneurs to set up their companies in the
U.S. rather than Israel. Clearly, investors are likely to choose a jurisdiction whose laws
are simple and most advantageous. Indeed, we see that among worldwide systems,
those that dominate are systems that have the easiest, clearest, simplest, and most
worthwhile laws governing economics, securities, income tax, and companies. Such
systems compete in the global market because they are compatible with worldwide
leading codes.
The new 1999 Israeli Companies Law, on which work commenced fifteen years
ago, was intended to serve this purpose precisely. However, by introducing an
innovative and revolutionary code, legislators have, in effect, set back Israel’s
competitive position. The new Companies Law is widely criticized as being less clear,
less simple, less predictable, and less user-friendly than its foreign counterparts.
Delaware, which has become a corporate haven for many Israeli corporations,
has been offering an attractive legal landscape for incorporation for over two decades.

4 Ron Tira, Bye-Bye-Tech, GLOBES ISRAEL’S BUSINESS ARENA, June 7, 2000.