1 Background
The Israeli Companies Law, which was enacted in 1999, included various orders related to corporate governance. However, since the law was enacted, corporate governance principles have been developed throughout the world. In 1999 the Organization for Economic Co-operation and Development (the OECD) published its principles of proper corporate governance. Various countries have adopted the OECD principles by publishing codes on corporate governance and by legislation.
In December 2006 a committee which was established by the Israel SEC to examine the issue (the Goshen Committee) published its findings and recommendations.
Based on the above examination, and in order to improve the corporate governance principles set under the Israeli law, on 4th June 2008 the Ministry of Justice published its recommendations for amendments to the Companies Law (hereinafter: the Bill). The Ministry of Justice invited the public to give its remarks to the Bill and intends to start the legislation process in the near future.
One can assume that the version of the final law will be somewhat different than the Bill recently published. Nevertheless, the main principles included in the Bill are expected to be adopted. Furthermore, the Bill reflects the Israeli government's position concerning corporate governance and summarizes the conclusions reached after various examinations in this respect.
2 The Main Principles included in the Bill
2.1 Imposing liability on controlling shareholders ("shadow directors")
The Bill recommends to amend the legal definition of "director and officer" in order to include any person who a director or other organ of the company follows his or her orders. By doing so, the Bill intends to impose liability to parties which have a certain control over the activity of the company, although they themselves do not serve in any formal position.
2.2. Including Corporate Governance Principles in the Company's Article of Association
According to the Bill, the Minister of Justice will publish recommended corporate governance principles which the companies will be entitled to include in their article of association, or if they decide not to adopt such principles, to explain the reasons for their decision not to do so.
The said principles refer to the composition of the Board of Directors, training and update programs for board members, etc.
2.3 The Independence of the Board
The Bill recommends to prohibit family relationships between the Chairman of the Board of Directors and the CEO, and to prohibit the appointment of a person who is subject to the authority of the CEO as the Chairman of the Board.
In addition, it is recommended to determine that when voting, every board member has the duty to independently consider his or her decisions and not to act according to the orders of someone else.
2.4 The Audit Committee
It is recommended to determine that the Audit Committee will include a majority of independent directors and that the decision of the Audit Committee will require the support of a majority of the committee members and a majority of the independent members.
In addition, it is recommended to expand the Audit Committee's authority to enable its supervision over the company's internal auditor and its CFO and to impose on the Audit Committee the duty to deal with faults discovered in the company's activities, to protect the employees who revealed the said faults and to conduct a quarterly discussion concerning these faults.
2.5 Derivative Claims
The Bill recommends several procedural changes in order to encourage potential claimants to file derivative claims. One of the substantial changes will be the ability of the Security of Exchange Commission to finance the legal expenses incurred by the Plaintiff in a derivative action.
2.6 Independent Directors
The Bill recommends several amendments which are meant to enforce the position of the independent directors and their independence:
- The appointment of an independent director shall require the support of a majority of the shareholders which are not controlling shareholders.
- An independent director shall not have any business relationship with the company or its controlling shareholders.
- The company and its controlling shareholders will be not entitled to prevent the appointment of a serving independent director to an additional term.
2.7 Transactions with Interested Parties
The Bill recommends to make stricter the criteria for approval of transactions with parties connected to the company, for example:
- Every decision concerning the salary of the officers requires advance approval of both the Audit Committee as well as the Board of Directors.
- Certain transactions with the company's controlling shareholders will require the approval of the majority of the shareholders which do not have a personal interest in the transaction.
- Officers will not attend a meeting which will discuss a transaction in which the officers have a personal interest.
- Any transaction with an interested party which was not lawfully approved is invalid.
2.8 Enforcement by External Parties
Although the Companies law prefers the enforcement thereof by internal mechanisms, the Bill recommends strengthening the enforcement by two external parties as follows:
- To authorize the Securities Authority to impose fines on companies which fail to follow certain orders (such as to appoint a chairman to the Board or to appoint an audit committee).
- To authorize the Companies Registrar to impose sanctions to companies which do not pay fees as required by the law.
3 Summary
As can be seen from the above, the Israeli law correlates with the worldwide tendency to adopt corporate governance principles in order to direct the controlling management to act with objectivity, integrity and transparency. The new bill presented by the Ministry of Justice is a significant step in this direction.
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