Bottom Shekel / The Way Out of Catch-22

Legally and ethically, the state is in an uncomfortable position on the attempt to oust Discount Bank chairman Shlomo Zohar.

The state's 25% stake in the bank is almost identical to that of its controlling shareholder, the Bronfman-Schron group, which owns 26% of the bank's shares.

Should the ouster demanded by the Bronfman-Schron group not be approved by the bank's board, which appears to be a distinct possibility, the controlling shareholder has the right to bypass the board and turn to a vote of the General Assembly.

In such a case, the state will have a decisive say in the matter. The question is, what will it chose to say?

Firstly, this is a legal question. When it sold control of the bank, the state signed an agreement with its new controlling shareholder in which the state undertook to support the controlling shareholder in General Assembly votes. In doing so, the state promised Bronfman-Schron de facto control in the General Assembly, even though the group owns only 26% of the bank's shares.

The voting agreement obligates the state to support the choice of board member candidates proposed by Bronfman-Schron, but does not address the question of ousting board members. It may be assumed that when the agreement was drawn up, no one imagined that such approval would be necessary.

It can be argued that if the agreement aims to ensure that the General Assembly vote remains in the hands of the Bronfman-Schron group unimpeded by the state, this should also include a vote on the ousting of a board member. But since the agreement was not specifically worded as such, legally speaking, the state is not obliged.

Moreover, Discount Bank's controlling shareholder relinquished the option of securing its control of the bank. The group has not exercised its option to acquire the rest of the bank's shares from the state, and in effect chose to keep the state as a partner. It may be argued that this choice carries a price: The state cannot be expected to remain a passive partner to the throne of a controlling shareholder forever, especially in the face of an issue that raises serious questions about the soundness of the controlling core's management.

Legality aside, there is also another fundamental question here: Should the state express it's opinion on the identity of the bank's chairman at all? Obviously, any vote by the state for or against Zohar's ouster will be construed as expressing an opinion on Zohar's qualifications and those of the controlling shareholder. It's not likely that the state wants to do any such thing, after selling the controlling stake to a private group.

Nevertheless, it's no secret that the state is uncomfortable with the controlling shareholder's conduct. There is capriciousness in acting as master of the house on the issue of ousting of the bank's chairman, but refusing to shoulder the master's responsibility when asked by the supervisor of banks to provide a capital injection.

So the state is very uncomfortable with the situation that has developed. One solution could be to for the state to abstain from casting any vote at all. That would seemingly release it from the burden of opining on the abilities of one party or the other, and at the same time would send a message of dissatisfaction about the handling of the matter.

Another possible solution is for the state to leave the decision to the supervisor of banks, relaying the message that this is not about the abilities of either of the parties, but about the appropriateness of the process itself, which is a question for the banks' regulator. If the regulator believes the process is in keeping with principals of sound corporate management, then the state should not intervene.

A third possible option would be not to reach that point in the first place. And that's the policy the state has opted for at the moment. The state is signaling, through the press, that it's support of the Bronfman-Schron group should not taken for granted.

This subtle threat, along with pressure from the supervisor of banks and fear of humiliation by the bank's board (whose support of the controlling shareholder is not assured) could lead to a rethinking on the ouster of Zohar, who anyway completes his appointed term in a year. The state is hoping that the Bronfman-Schron group will get the hint and chose to pull the chestnuts out of the fire itself.