When two form a company, there are procedures they perform, normally through a lawyer, which are part of the process of establishing the corporation, such as the payment of a government fee, execution of documents and other procedures required for this purpose. After that they have a company and they are fully aware of that. However, what happens when two or more enter a joint venture without any such procedures?
The Israeli Partnerships Ordinance is an archaic British mandate relic that still applies to any situation in which two or more people are managing together a business for profit (excluding a few examples that appear in section 2 of the Ordinance and are marked as “Non Partnership “) provided that the relationship between them are not regulated through another corporation (e.g., a company). A partnership that was established in order to manage a business is required under the Ordinance to be registered within one month and non-registration exposes each of the partners to an astronomical fine of 15 Liras (a currency cancelled over 30 years ago) For every day the offense continues (slightly more than ILS 0.5 per annum) – this provision is, naturally, not being enforced for decades.
The above means that in the absence of an agreement between the parties that determines otherwise, the Partnership Ordinance provisions apply to the parties many of which are not only unknown to many but are also of catastrophic significance. For example, in the absence of an agreement which states otherwise, each of the partners may obligate the other partner (for actions in the ordinary course of business of the partnership, unless such partner was unauthorized and the counterparty was aware of such non-authorization, or did not know, or did not believe, that such partner is acting as part of a partnership) and all the partners are jointly and severally liable. For example, if a partner signs an agreement to sell an asset of the partnership, such agreement may obligate all partners. Moreover, unlike in the case of a company, unless otherwise provided by agreement, a new partner is not liable or any obligations created before entering the partnership, and on the other hand, a departing partner continues to be responsible for the obligations created before the departing.
Some of the provisions of the Partnership Ordinance deal with the relationship between the partners. For example, each partner is committed to conduct the business of the partnership for the benefit of the partnership and be honest and true to the other partners and provide them with full data on any matter relating to the partnership and with respect to any competing business which such partner owns. Any benefit derived by a partner without the approval of the other partners from any transaction relating to the partnership, any use of asset of the partnership, the name or business contacts of the partnership and any business competing with the partnership will belong to the partnership.
Partnership agreement between the partners is vital in order to do away with the general provisions of the Partnership Ordinance and to regulate the relationship between the partners. Such an agreement is required to properly and fully handle the relationship between the parties and should be tailored-made to their business requirements. Only a properly drafted agreement will prevent future conflicts and it is important that such an agreement will not only be executed as soon as practical upon commencement of operation of the joint venture but also will be prepared by a business oriented attorney knowledgeable in corporate law and the law of partnerships.
2 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 Doron teaches Mergers and Acquisitions as part of the EMBA 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].
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