Israeli Company Law: An Overview

Corporate and company law in Israel regulates the system of relations between a company and its various components and between the company or corporation and the state. This relationship, especially that between the company and the various components comprising it, can be very complex, and therefore the law attempts to define the duties, rights, and definitions of various officeholders. Naturally, this is a complicated job.

Israeli law has common law origins thanks to the heritage of the British Mandate in Palestine that was in force until 1948. Applicable law thus consists of an amalgam of statutory provisions and case law, and adheres to the stare decisis principle. Israeli company law relies on a backbone of fiduciary law that draws its main principles and many rules from English law. In recent years, it has become more fashionable to turn to Delaware law for comparative analysis.

The law regulating companies and corporate laws in the State of Israel is the Companies Law, 5759-1999, which went into effect in 2000 and is therefore relatively new. Israel’s company law is based primarily on the Companies Law, 1999, statute which provides a modern framework for business entities, both private (closely-held) and public (listed). As of this writing, the Companies Law has been amended more than twenty-five times, in some cases quite substantially and with regard to basic issues, thus making the statutory basis somewhat unstable. Against this backdrop, attention should be paid to the more general legal infrastructure within which the Law is embedded.

As foregoing, the Companies Law is a relatively new piece of legislation, and although many lawyers in both Israel and abroad consider the law to be groundbreaking in the corporate field, it includes a saving of statutes clause. The saving of statutes clause, Section 345DD(a) of the Companies Law, allows a company incorporated prior to the law’s legislation (prior to 2000, as foregoing) to continue operating pursuant to the British Mandate-period Companies Ordinance, which was in effect (excluding some changes introduced over the years) prior to the establishment of Israel.

The Companies Ordinance, in contrast to the law, is an outdated and archaic ordinance, lacking in wording and leaving much for interpretation.

One of the goals of the Companies Law is to establish oversight over the system of relations between the state and a corporation. The need for oversight increases when dealing with a public, rather than a private, company (public company - a company listed for trade on the stock exchange, whose shares the public can buy and sell). While some sections of the Companies Law deal with supervision over public companies, Amendment 16 to the Companies Law, also known as the Corporate Governance Rules, presents a list of sections that increase the restrictions on public companies.

Despite many discussions and attempts at introducing Amendment 16 as binding legislation, it was finally agreed that the corporation may choose whether or not to adopt the amendment. If the corporation chooses not to adopt the amendment, it is obligated to inform the public that it is not adopting it.

The section determines, on the one hand, that the company’s purpose is to produce profits; on the other hand, the legislator decides not to end the section there, but further adds that it is possible to take into account the interests of other entities, such as creditors, employees and the public. The law’s wording makes it impossible to ascertain the legislator’s intention and creates many problems of interpretation. The problematic wording did not go unnoticed by judges, and thus in the ruling in Panidar v. Castro (Further Hearing 7/81), the judges determined that the trends in corporate and companies laws in Israel are modern, i.e. it is impossible for the company’s purpose to start and end with making profits for the shareholders, but rather it is necessary to think of the other entities in the company and even of the public.

As is often the case, the development of Israeli company law has been influenced by the socio-economic environment, namely, by the corporate governance infrastructure in place. Thus, during the first decades of the State of Israel, when the economy was struggling and did not have a capital market to speak of, Israeli company law stagnated as well. The heritage of that period consists primarily of seminal Supreme Court decisions that solidified core principles of fiduciary and company law.

By contrast, the 1999 Companies Law was enacted after Israel had developed a vibrant, open economy that is interconnected with global markets. Nearly invariably, Israeli public companies have a dominant shareholder, making the protection of minority shareholders a salient issue that indeed receives substantial attention by the law.

The establishment in 2010 of an economic division in the Tel Aviv District Court with special jurisdiction on company and securities law cases has increased the judicial output. This court has been attentive to public shareholders’ protection, yet its jurisprudence is not uncontroversial.

The above-referenced chapter begins with a description of the law’s approach to corporate legal personality and foundational documents, and, next, to corporate institutional organs, and directors and officers. The main part analyzes the legal duties imposed on directors and officers, control persons, and regular shareholders. In addition to the familiar duties of loyalty and care, which roughly follow the standard common law pattern, Israeli law has some unique features with regard to those duties, as well as certain obligations owed by shareholders. Next, the chapter deals with the regulation of related party transactions. It closes with a review of corporate litigation, focusing on veil-piercing and shareholder derivative suits and class actions.

In summary, corporate and company law in Israel is considered by many lawyers in Israel and throughout the world to be groundbreaking in the corporate area, but we cannot overlook the law’s shortcomings.

Key Aspects of Israeli Company Law:

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