http://www.afiklaw.com/files/articles/a170.pdf
People who act on behalf of a corporation generally understand that they can be personally liable for
their actions and act accordingly. However, not everyone understands that as an officer of a
corporation may also have passive liability – liability that arises when the officer does not take any
action. This is perhaps also the reason why in many, too many, mergers and acquisitions transactions
the company utilizes its ordinary lawyer instead of hiring and expert in the field, and sometimes even
waive due diligence procedures by experts in the field.
A company has its own separate legal entity and therefore, an officer of the company should
ordinarily not be personally liable for offences of the company because it is merely acting as an organ
of the company. However, when an officer is personally committing an offence or tort (for example,
misrepresentations) the officer will be personally responsible and the corporate veil will not provide
shelter. The liability of officers while acting actively is something most officers are aware of.
However, in many cases officers are burying their heads in the sand and tend to confirm company
transactions without ensuring that the transaction was carried out by an expert in the field and proper
due diligence review has been carried out.
There is a long list of Israeli legislation that create personal passive liability of officers. i.e. liability
of the officer even if such officer was not involved in the process. Such liability exists, inter alia, in
many labor law legislation, environmental legislation, zoning laws and antitrust issues. For example,
Israeli Antitrust Law requires the approval of the antitrust authority for certain actions, prohibits other
actions and requires reporting in certain cases. The law states that if an offense is committed by a
corporation any person who at the time of the offense was an active director or senior administrative
employee responsible for the field in which the offense was made will be personally liable unless
such person can prove that the offense was committed without his knowledge and that he took all
reasonable steps to ensure compliance with the law.
Similarly, our office represented directors of a corporation who were indicted under zoning laws after
the corporation purchased a business with a building that was built without a permit. The permit
issue was not checked before purchase. Once the business was acquired, the responsibility for the
offenses came to the doorstep of the directors, despite (or perhaps because) they did not know about
the offence.
How can one avoid passive liability during a merger or acquisition transaction? To act diligently to
ensure that the corporation does not make any offenses during the transaction. Ensure that the
corporation hires the services of a mergers and acquisitions specialist (and not utilize the lawyer who
by chance escorts the corporation but this is not his or her specialty), perform proper due diligence
coordinated by the M&A lawyer and in case the company is represented by a large office, ensure that
in such office an M&A expert is actually involved and the transaction is not carried out only by
inexperienced lawyers and if the office has several departments, all relevant departments are involved
in the transaction so that office politics do not cause the transaction not to be properly taken care of.
In the end it is not just the responsibility of the corporation and its shareholders but also personal
responsibility of the directors and officers under the list of laws that imposing a personal liability.
Doron Afik is the managing partner of Afik & Co., Attorneys and Notaries (www.afiklaw.com). He
is admitted to practice law both in Israel and in New York and is also a licensed Notary Public in
Israel. Doron is an adjunct professor at Hebrew University where he teaches Mergers and
Acquisitions as part of the Executive MBA program. Doron’s practice focuses primarily on
international transactions, including mergers and acquisitions, dispute resolution and issues of public
law. For additional details: +972-3-6093609 or at the e-mail: [email protected].