District Court / Application Of Anti-Dilution Protection Provision

Author:Mr Yoram Shiv and Alex Berman
Profession:Sharir, Shiv & Co. Law Offices

In this ruling, the District Court rejected a demand to apply an anti-dilution price protection mechanism. The Court held that the anti-dilution provision was intended to prevent dilution of the investors' holdings as a result of capital raising activity as opposed to dilution as a result of option grants to employees or service providers.

The plaintiffs purchased shares of Wave Guard Technologies Ltd. (the "Company") pursuant to an investment agreement, which included a price protection anti-dilution provision. The provisions provided that if the Company were to offer shares and/or other securities, including convertible securities or options, during a set period after the execution of the investment agreement, at a price lower than the price paid by the plaintiffs, then the Company would issue additional shares to the plaintiffs in a quantity that would reflect such reduced price.

Three weeks after the execution of the investment agreement, the Company granted a director options to purchase shares at an exercise price that the plaintiffs alleged was lower than the price they paid for their shares. Thus, the plaintiffs demanded that the Company apply the anti-dilution protection mechanism.

The Court examined the wording of the anti-dilution section in the investment agreement. Despite the broad language in the agreement, which included...

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