Judge voids share waiver by co-founder of $220m startup

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Legal tips for startups

Tel Aviv District Court judge Magen Altuvia found that Moshe Ben-Abu's partners deprived him of most of his stake in cybersecurity company Cyvera, which was sold to Palo Alto for $220 million.

Five years after the $220 million exit, Moshe Ben-Abu, one of the founders of cybersecurity company Cyvera, will receive tens of millions of shekels from his two partners on account of the sale of the company to US network security company Palo Alto in 2014.

Last week, Judge Magen Altuvia decided in the Tel Aviv District Court that Ben-Abu's partners had exploited him and exercised illegitimate manipulation resulting in him foregoing most of his rights in the company whose main product he had invented and developed.

Rarest of cases

Cyvera's three founders, Ben-Abu, Netanel Davidi and Uri Alter, joined together in 2011 to set up a data security venture, and agreed to divide the shares in the company between them equally. Three years later, following sustained pressure from his partners, Ben-Abu signed waiver documents whereby he returned 95% of his shares to the company.

A few months later, the $220 million sale of Cyvera to Palo Alto was completed. While Ben-Abu's two partners pocketed $28.5 million each from the sale, Ben-Abu, who had thought up the company's product even before it was founded, received just $1.5 million.

Ben-Abu did not give up, and about a year after the deal was completed he filed a NIS 60 million lawsuit against Davidi, Alter, and Palo Alto. Ben-Abu was represented by Adv. Danny Kabir, Adv. Eran Presenti, and Adv. Naor Vaknin, of M. Firon & Co.

Last week, Judge Altuvia upheld Ben-Abu's claim against his two former partners, and found that the waiver documents he had signed were null and void, since they were signed in an act of exploitation by his partners. Altuvia ordered Alter and Davidi to transfer to Ben-Abu the excess consideration they received in the sale to Palo Alto arising from the addition to their holdings in Cyvera following Ben-Abu's signature on the waiver documents.

The precise amount that Alter and Davidi will have to pay Ben-Abu is still not known. In order to calculate it, the changes in the share price of Palo Alto since the sale deal will have to be taken into account, and the parties will probably fight a fierce legal battle over that as well.

The voiding by judicial decision of waiver documents, which represent a contract in every respect, is the rarest of rare cases. Courts generally tend to decide against voiding waivers, especially in cases where it seems that the claim against their validity arises from the wisdom of hindsight, when the claimant realizes that as a result of signing a waiver he or she has lost a great deal of money.

What then made Altuvia find that in the case before him there were exceptional circumstances justifying the voiding of the waiver and the restoration of tens of millions of dollars to Ben-Abu?

"They exploited Ben-Abu's distress for their benefit"

Ben-Abu claimed that he signed the waiver "thanks to huge effort by Davidi and Alter, who exerted pressure on him and in the process deliberately made presentations to him that were untrue, and hid facts from him."

According to Ben-Abu, he "fell victim to a coordinated, pre-arranged, organized move planned down to the finest details by two experienced and sophisticated friends, while he trusted them and honestly and truly believed that they sought his benefit."

Davidi and Alter naturally denied these severe accusations. They raised claims, which were backed by e-mail messages sent at the time, that Ben-Abu's signature on the waiver documents came about against a background of "problems in Ben-Abu's professional and personal conduct," and that his behavior and lifestyle "had started to cause damage and embarrassment."

Against this background, according to Davidi and Alter, the three of them reached agreement on reducing Ben-Abu's professional responsibility, and accordingly it was agreed that the structure of the company's ownership would be changed in such as a way as to reflect Ben-Abu's newly defined contribution to the company as a staff member rather than as vice president of technology.

Altuvia adopted the argument of Ben-Abu and his counsel, based mainly on documents that Davidi and Alter had been forced to hand over in a document discovery procedure in the case, almost in its entirety. In his decision, the judge found that "It appears that a few months after the company was founded, when external investment began to be received, Alter and Davidi acted against Ben-Abu and not together with him, as far as his status and future in the company were concerned. There is no disputing that Alter and Davidi coordinated their actions and decisions in relation to Ben-Abu in advance."

The judge also found that "it appears that in persuading Ben-Abu to sign the waiver documents, Davidi and Alter exploited his inexperience and/or his naivety and/or his distress."

The judge found that even if it was a question of furthering the interests of the company, the main beneficiaries of the signature on the waiver whereby Ben-Abu transferred 25% of the issued share capital to the company were Davidi and Alter: their stakes in the company rose in parallel to the transfer of Ben-Abu's shares without them having to pay anything for it.

From this it was but a short step for Altuvia to find that Davidi and Alter's actions laid the basis for the existence of all three principles of an action for exploitation, which gives the person exploited the right to cancel a contract: there was Ben-Abu's distress; it was exploited by Davidi and Alter; and this led to a contract the terms of which were unreasonably bad.

"Even if I assume that there is substance to Davidi and Alter's claims concerning Ben-Abu's work and his behavior at the company before the signing of the waiver documents and afterwards, and even if I accept that terminating his employment at the company was unavoidable, that does not justify depriving him of most of his holdings in the company without consideration, when the shares in the company were allocated to him for the product or technology on which the company was based, at least in the initial stages," the judge said.

"The cause of exploitation, which gives the person exploited the right to cancel a contract the terms of which are unreasonably worse than is the norm, is designed to ensure the existence of a moral and fair society whose members engage in personal and commercial contracts while maintaining fairness even when one party to the contract is in an inferior position," Altuvia said in summing up the case and giving the signal for an accounting between the parties that is due to start shortly and that will itself prove very difficult.

Published by Globes, Israel business news - en.globes.co.il - on August 11, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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