Two recent amendments to the Israeli Companies Law (1999) have an effect on D&O's liability, as well as on the basic requirements for their appointment as such.
1.1 Changes Relating to Independent Directors in Public Companies
In order to ensure the proper management of public companies and minimize the risk that the funds of public investors will be misused, a recent amendment to the Companies Act was legislated. The amendment is intended to balance the two contradicting requirements: on the one hand - the need for a director in a public company to be objective and professional, and on the other hand - the need for such a director to be familiar with the company's business and have a trustworthy and transparent relationship with the company's shareholders.
The new amendment added several demands relating to the board of directors of a public company, as detailed hereunder:
(a) A public company may include in its articles of association instructions regarding the appointment of independent directors in addition to outside directors. In case the company has no controlling shareholder, the majority of the directors shall be independent, and if it has a controlling shareholder, one-third of the directors shall be independent.
(b) A person is qualified to serve as an independent director only if he or she:
- has previous professional experience which is relevant to the director's position or has knowledge in financial accounting; and
- does not have any relation to the company's controlling shareholders or to the company itself - neither business relations nor professional relations, whether directly or indirectly; and
- has the necessary skills and the ability to invest sufficient time to perform his/her tasks as a director.
The potential director must declare that he/she has the capacity, the ability and the necessary time to dedicate to his/her job as a director.
(c) The public company is under no duty to include such instructions relating to the nomination of independent directors in its article of association, but nevertheless, it is possible to obligate it to disclose whether it included such instructions or not (under the Securities Act (1968)), i.e. the Israeli law adopted the "adopt or disclose" attitude common in other countries.
Hopefully, these amendments (in force since July 2008) will encourage companies to appoint independent directors who comply with the requirements set under the law, and consequently, public companies will have more independent professional boards of directors.
1.2 Changes Regarding Companies for the Benefit of the Public
Companies acting for the benefit of the public may act according to two possible legal paths:
One path is to establish a non-profit organization, governed by the Law of Associations (1980).
Another path, which was recently defined by a new set of clauses added to the Companies Law as of 12th June 2007, is to establish a company for the benefit of the public. As opposed to a non-profit organization, a company for the benefit of the public is subject to the Companies Law (1999).
Among the different clauses relating to the such companies for the benefit of the public is clause 345(13) which determines that such a company cannot exempt a director or officer or member of the control committee from liability resulting from a breach of their duty of care towards it or to reimburse its D&Os for loss they may suffer as a result of such breach.
Consequently, the only remedy for such D&Os in a company for the benefit of the public is a D&O liability insurance policy.
Home
