The law also lists the cases in respect of which a company is permitted to purchase a D&O liability policy for its directors and officers.
These provisions are cognitive and cannot be stipulated against.
On 7th March 2005 the law was amended and various changes relating, inter alia, to insurance and indemnification of D&O’s came into force. Another provision was amended in respect of piercing the corporate veil against a D&O of a company.
Indemnification During Investigation Proceedings
In respect of indemnification of legal expenses by the company, Clause 260 to the Law provides that a company may indemnify its D&O with regard to reasonable expenses, including lawyers’ fees which the D&O incurred or with which he was charged by the Court in a criminal prosecution in which he was acquitted or convicted of an offence which does not require proof of criminal intent.
The current amendment to the Law adds a new provision to the Law which provides that a company is permitted to indemnify its D&O for legal expenses incurred by him during an investigation or proceedings conducted against the D&O by an authority which was concluded without filing a criminal indictment and without imposing monetary liability (i.e. fine or penalty) on the D&O, as an alternative to criminal proceedings.
If a fine or penalty is imposed on the D&O regarding a felony which does not require criminal intent, then indemnification will be allowed in respect of the D&O for his legal expenses.
In this respect it should be noted that all investigations initiated by authorities in Israel (except for disciplinary proceedings) are considered criminal.
This new amendment was required in order to avoid the unreasonable interpretation of the law, according to which the law did not permit indemnification of legal expenses incurred during a criminal investigation which did not lead to an indictment.
It should be noted that the Law does not relate in any way to the purchase of a D&O policy in respect of coverage for legal expenses of the D&O in criminal or other investigation proceedings. However, one can deduce that where indemnification is allowed, insurance is also allowed.
Insurance and Indemnification in Respect of a Wrongful Act perpetrated with Recklessness
The Law (clause 263) provides that a company will not be permitted to purchase a D&O insurance policy or to indemnify the D&O for breach of duty perpetrated with intent or with recklessness.
The new amendment clarifies that a reckless wrongful act which was perpetrated with negligence, can be subject to coverage under a D&O insurance policy as well as to indemnification by the company.
The Law does not define “recklessness”, however the Israeli Courts have interpreted this term as an “element” which requires more than pure negligence, but less than intent. (See for example: C.A.56/77 La National Insurance Co. Ltd. v. Starplast Industries (1967) Ltd., PDI 33 (1) 337).
Exemption from Liability
Under clause 259 to the Law, a company may, in advance, exempt its D&O’s from all or some of their liability for damage due to breach of duty towards the company. The new amendment clarifies that, in case of a breach of trust by the D&O, even if perpetrated in good faith, the company may not exempt the D&O from liability.
Moreover, in case of breach of duty by the D&O with regard to wrongful allocation of shares, the new amendment provides that the company may not exempt the D&O from liability.
Piercing the Corporate Veil
Under clause 54(b) the Law provided that the Court has authority to pierce the corporate veil, and to relate the rights and obligations of the company to the D&O under specific conditions as detailed by the Law. This provision has been deleted in the new amendment to the Law, i.e. the Court will only have authority to pierce the corporate veil as far as a shareholder of the company is concerned, while the Court will not have such authority in respect of the D&O.
Nevertheless, the Court has authority, under the Law, to impose personal liability in tort on the D&O. This issue was discussed in several Court precedents in Israel, the leading one being C.A.407/89 Zukor v. Car Security Ltd. and Others PDI 48 (5) 661.
In the said judgement, the Supreme Court ruled that the principle of personal liability according to which an individual must be responsible for his wrongdoing, is the basis of the Israeli jurisprudence. Personal liability is substantially different from piercing the corporate veil, in that personal liability preserves the separate legal entity of the company. The Supreme Court determined that an injured party does not need to be disadvantaged by the fact that the wrongdoing was perpetrated by a company. The Court ruled that such damage may not be sufficient to pierce the company’s veil, but justifies imposition of personal liability in tort on the D&O.
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