Last week, International Flavors & Fragrances Inc. (IFF) (NYSE: IFF; TASE: IFF) announced that it was examining suspicions that Frutarom executives, including former CEO Ori Yehudai and former CFO Alon Granot, were involved in paying bribes in Russia and Ukraine.
The report by IFF, which acquired Israeli company Frutarom a year ago for $6.5 billion, had the same effect that suspicions that a company's directors and officeholders neglected their duty to the company and its shareholders, or at least showed inadequate alertness, usually do.
It happened in the past when Teva was involved in bribery, for which it paid the US Department of Justice a record $500 million. It happened when it was learned that Bank Hapoalim executives granted Nochi Dankner credit without supervision. A similar case happened in Frutarom itself, after the board of directors approved a $20 million bonus for Yehudai, despite opposition by the shareholders. Immediately after IFF's report made the headlines, a petition for approval of a class action against the company was filed for the purpose of making the company's officeholders pay a price for their actions.
The petition filed yesterday against IFF, Frutarom, Yehudai, Granot, and other past and present Frutarom officeholders in the economic court alleges that the company's officeholders put misleading information in their reports to the Tel Aviv Stock Exchange, and that this information constitutes a breach of Securities Law. The petition further alleges that the officeholders did not fulfill their duty of caution under the Companies Law. It is still unknown which judge will hear the case.
This request for approval of a class action is no surprise. It is possible that a petition for approval of a derivative action against IFF, on the grounds that it should demand that Frutarom officeholders who took part in "improper payments," as IFF stated, bear responsibility for damage caused to the company, will also be filed. Since IFF is a foreign company, however, such a petition is likely to encounter difficulties.
What will happen now? Past experience shows that that class actions, which are usually filed in the economic court in Tel Aviv, mostly fail to result in sanctions against the public companies that caused damage to the public.
Cases conclude with no substantial penalties
The route for derivative and class actions against Frutarom officeholders is unlikely to differ from previous such actions. What usually happens is that the companies and office holders hire Israel's leading lawyers, who begin total war against the public shareholder who demanded that justice be done. They waste years in preliminary proceedings leading nowhere. The courts encourage the parties to reach a compromise, and in many cases, the company establishes an "independent" claims committee to examine the allegations raised by the derivative plaintiff and make his claim unnecessary.
The parties then reach a settlement in which the cases are closed in a way that ensures that the lawyers who hurried to file an elucidated petition, supported by an expert opinion, will be awarded handsome lawyers' fees, while the officeholders pay a small fraction of the original amount of the claim. This is the reason that derivative and class actions in which public companies and officeholders are sued for billions end up with no substantial penalties and no judicial ruling.
To this should be added the fact that in almost all of the cases that recently reached the economic court and ended without a ruling, the officeholders' insurance companies paid for the settlement, not the officeholders themselves. In other words, not only are the courts not making rulings on the substance of the claims made in derivative and class actions, but the officeholders are not paying any of their own money. The impression is that this state of affairs is convenient for everyone, except for the public, which pays the price. The officeholders have no real motivation for learning any lessons.
Published by Globes, Israel business news - en.globes.co.il - on August 12, 2019
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