It is embarrassing to admit how many years it had been since I last met Lior, but it was more or less since we finished high school, so I was surprised when, about a year ago, right after the start of the war, he arranged a meeting to discuss real estate matters abroad. Beyond our friendship on Facebook, I knew that Lior had studied law and accounting and served as a senior CFO at a real estate company. When he set up the meeting he gave no details, only saying that he had a matter with a partner and property purchased abroad, and that he wanted to come for a consultation.
“My father became a partner, a few years ago, with an old acquaintance / friend in a company that purchased land,” he opened the conversation, after pleasantries and a mutual update on what each of us had done during the many years since we last met. “For the past two years I've been asking the partner for financial statements in order to learn about the company's condition, and every time he promises to do it and nothing happens. When Dad became his partner, I drew up an agreement between them,” he said, and handed me a copy of the agreement to read.
After reviewing the agreement, I explained to him that what was written looked fine, although I wasn't sure it was enforceable.
“The climax was yesterday,” he added, “when Dad received a letter at home summoning him to a shareholders' meeting of the company, to be held in a week, with the sale of the plots owned by the company on the agenda. I checked flight prices, and it is simply not reasonable or possible to fly at such short notice at a sky-high price.”
“I suggest that as a first step we send a letter requesting to postpone the meeting to a date more convenient for us, also because the notice was given in a way that does not allow for organizing. At the same time, we request the company's financial statements,” I said.
The local office prepared a demand letter asking to postpone the general meeting and coordinate a new date, and at the same time to receive the company's financial statements.
We managed to postpone the shareholders' meeting, and when we finally got to the meeting, it blew up after about half an hour because of disagreements between the two partners and shareholders. At the general meeting too we failed to obtain the financial statements, which reached us only about a month ago, after countless correspondences, phone calls and futile meetings with the partner's lawyers (he changed 3 lawyers in the past year, each time requiring them to be re-briefed on the sources of the dispute between the partners and the company's status) and the company's accountant, who was unwilling to volunteer too much information.
This week I held a meeting with Lior to discuss the situation with him.
It turns out that the funds paid by Lior's father to the partner were not recorded as a shareholder loan to the company. On closer inquiry, Lior told me that the money was transferred to the partner's private account abroad. The share transfer agreement between Lior's father and the partner, who it turns out was already a shareholder in the company earlier, states explicitly that the shares were given without consideration. We also discovered that the plots owned by the company were purchased about a year before Lior's father received the shares in the company, and at a paltry price compared with Lior's father's investment.
Lior's father's case is not the first I have come across of investors who settle for an agreement drawn up for them by an Israeli lawyer, who does not know the laws of the country in which the investment is made, and think that this agreement will protect their interests and rights. Well, it won't!!!
When you approach an investment abroad, it is important to rely on a lawyer who works in international real estate and knows the laws and regulations of the target country. The lawyer can check the validity of the documents, advise you and accompany you at every stage of the investment.
Had Lior and his father received legal guidance before making the investment, it would have been possible to make sure the agreement between the parties allowed Lior's father to control the company's affairs or at least take part in decisions, because the funds would have been transferred against a shareholder loan to the company and directly to the company's bank account, not to anyone's private bank account. A review of the company's financial statements would have been carried out before making the investment, and it would have been possible to discover even then that the plots it owned were purchased at a paltry price. The partnership agreement would have been drafted clearly and comprehensively, defining the parties' rights and obligations, the way the investment is managed, profit sharing, dispute resolution mechanisms and exit options from the investment, and would have included a requirement for full transparency on the part of the partners or developers, including access to financial information and ongoing reports on the company's condition.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית