Polygon Real Estate Seeks Court Intervention to Resolve Board Deadlock

Polygon, a real estate company controlled by Kobi Maimon, has petitioned the Central District Court to appoint external directors (dachatzim) after more than a year without any public representatives on its board. During this period, the company published three financial reports without the required approval from an audit committee, which normally includes these external directors. Polygon proposed candidates for the external director positions in four separate shareholder votes, but minority shareholders opposed these nominees, while the controlling shareholder rejected candidates proposed by the minority, resulting in a stalemate.

This deadlock has left the publicly traded company operating without proper oversight, violating legal requirements for financial report approvals. The Israel Securities Authority could have imposed fines for the absence of external directors beyond 90 days, but the repeated shareholder meetings to appoint directors prevented such penalties, as the law exempts companies when the required majority is not achieved. Although the authority could have invalidated the unapproved reports and sanctioned the company, such measures are unprecedented.

A potential resolution may come from the court, which in 2022 resolved a similar deadlock by appointing court representatives as external directors, later approved by shareholders. However, those court-appointed directors' terms ended in July 2023, and Polygon has since lacked external directors. Earlier this month, Polygon itself requested the court to propose two candidates and order a shareholder meeting to vote on them. The presiding judge, Sharon Geller, has required minority shareholders to be included in the proceedings.

The deadlock stems from a dual majority voting requirement for first-time external director appointments, granting veto power to both the controlling shareholder, who owns 52% of shares, and minority shareholders holding about 4.5%, with only 13% turnout in recent votes. This system effectively allows both sides to block the other's nominees.

Corporate governance expert Erez Barak suggested a legislative amendment to allow first-time external director appointments by a simple majority excluding the controlling shareholder's vote, as is done for subsequent terms. This change would reduce controlling shareholders' influence over nominations, encourage institutional investors to propose candidates, and provide shareholders with genuine choices. Barak also noted existing safeguards against minority shareholder abuses, including fiduciary duties and independent directors' oversight.