New Court Ruling: Terminating a CEO’s Employment After Controlling Shareholder Changes

Can a company dismiss its CEO after the controlling shareholder changes? This was the central question in a recent proceeding in which we represented an employer and its new controlling shareholder.

Indeed, Israel’s national labor court accepted our claim, and ruled, for the first time, that a company may dismiss its CEO after the controlling shareholder changes and wants to appoint a new CEO.  

Under such circumstances, a company does not have to justify the dismissal by indicating any personal or professional defect. The new controlling shareholder’s desire to appoint a CEO familiar with its organizational culture reflects the new controlling shareholder’s business interests and the managerial freedom vested it, particularly if the outgoing CEO identifies with the previous controlling shareholder’s interests.

The national labor court also allowed our argument that the company may negotiate an employment agreement with a potential new CEO even before completing a dismissal hearing for the outgoing CEO. The court ruled that, in the interim period between considering the CEO’s dismissal and the final decision, any reasonable company must prepare for the possibility the hearing will culminate in a decision to dismiss the CEO. Accordingly, it will need to swiftly appoint a new CEO. As long as there is no proof these preparations constituted a premeditated act, the court will not entertain allegations the company held the hearing solely for the sake of appearances. 

The national labor court also allowed our argument that there was no defect or conflicts of interest in the appointment of a new CEO from among board of director members, or in the fact the board member took part in the decision-making process to dismiss the outgoing CEO. As a private company, the court refused to entertain allegations about ulterior motives also in this case. The dismissal derived entirely from the desire to replace the outgoing CEO with a CEO on the new controlling shareholder’s behalf, without any considerations of the quality of the outgoing CEO’s work, integrity, etc. Under these circumstances, the company has the prerogative to decide whether to involve the new CEO candidate in the dismissal process, based on its internal considerations, and allegations of ulterior motives in the dismissal process are entirely irrelevant. 

The court also adjudicated the issue of the outgoing CEO’s entitlement to an annual bonus. It ruled that the fact the company paid the CEO some kind of bonus in the past does not automatically entitle him to one for the year in which his employment was terminated, especially not a discretionary bonus at the board of directors’ sole discretion. Therefore, the company’s board of directors may decide not to grant a bonus to the CEO terminated mid-year, especially for an annual bonus usually paid at the end of the year. Moreover, since the employer clearly demonstrated the CEO’s ineligibility for a bonus during the legal proceeding, this suffices to overcome the fact the board did not reach an orderly formal decision about the CEO’s entitlement to a bonus.

The court rejected the outgoing CEO’s appeal. Accordingly, it upheld the regional labor court’s ruling to reject the CEO’s claim for payment of ILS 1,329,879.  

This ruling constitutes a significant milestone in relation to employment terminations and executives’ tenures in organizations, and anchors the right of new controlling shareholders to restaff senior management to align with their business interests. At the same time, the ruling emphasizes the importance of conducting fair and respectful hearings for outgoing management members, and of adhering to the fundamental principles of transparency and fairness during the decision-making process.

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Our firm’s Adv. Netta Bromberg, Adv. Eli Beloshevsky, and Adv. Amit Hadad provided representation in this proceeding

Barnea Jaffa Lande’s Employment Department is at your service to provide professional advice and guidance during employee termination proceedings and in relation to any other labor law issues.