The New Israeli Companies' Law

In February 2000, a new Companies’ Law came into force in Israel. The aim of the new law is to harmonize legislation dealing with companies with the business and economic reality of the year 2000. The new law replaced the old Companies’ Ordinance that was modeled upon the English law version of 1929, and which did not relate to essential topics in the field of company law. As a result, extensive case law developed in Israel which included main binding legal precedents that were not expressed in the Ordinance itself. Some of these legal precedents are now legislatively anchored in the new Companies’ Law (The Companies’ Law, 5759-1999) (hereinafter: “the Law” or “the New Law”).

In this review we shall attempt to briefly describe a few of the main additions contained in the New Law.

1. The Law contains a clear distinction between a public company and a private company. A public company is a company whose shares are registered for trade on a stock exchange or which were offered to the public by way of a prospectus. All other companies are private companies. With respect to a private company, the Law grants a great deal of freedom in the relationship between the shareholders, based on the assumption that the shareholders have the ability to negotiate and to freely agree to the contents of the agreement between them. With respect to a public company, since the buyers, which purchases its shares during trade on the stock exchange, are actually joining on the basis of an “existing agreement” which deprives them of the ability to negotiate, the Law is therefore much more involved in protecting shareholders from amongst the public, as shall be shown hereinafter.

2. The New Law cancelled the memorandum of association and, requires that the foundation documents of a company include only one document - the articles of association. Articles of association must be submitted to the Registrar of Companies at the time the company is registered. With the exception of essential details which must be included in the articles (company name, its purposes, its share capital and the manner in which liability is limited), the Law gives freedom to the shareholders to prescribe the contents of the articles themselves. The articles constitute an agreement between the company and its shareholders, and between the shareholders themselves. The articles may be amended by an ordinary majority of the shareholders. It should be mentioned that every company can prescribe a general purposes section in the articles, according to which it is entitled to engage in any legal business.

3. A company’s organisms are the general meeting of the shareholders, the board of directors and the general manager. The role of the board of directors is to determine general policy and to supervise the management of the company headed by the general manager. A corporation may also be appointed to be a director. A public company must appoint “external directors” in addition to the regular directors. Each director, within the framework of his position, has a duty of care and a duty of faith to the company.

4. Under the Law, a company must convene an annual general meeting of the shareholders once a year. The Law permits a private company to prescribe a provision in the articles according to which it is not under any obligation to convene such a meeting. In addition to the annual general meeting, the board of directors of the company may convene an extraordinary general meeting. A resolution adopted at these meetings is done so by an ordinary majority, unless the articles of association of the company prescribe another majority which is required for the adoption of a particular resolution. The shareholders of a public company may vote at general meetings by way of proxy, with the aim of encouraging public shareholders to be involved in and influence a public company’s doings.

5. The Law imposes a duty on the shareholders to act reasonably and in good faith in respect of the company and in respect of the other shareholders of the company. The significance of this duty is to prevent discrimination of a minority of the shareholders of a company. In an event in which the company’s matters are managed in such a way that discriminates against part of its shareholders, the shareholders being discriminated against may plead to the courts the removal of such discrimination.

6. The Law regulates the types of derivative actions which, up until now, were only regulated by case law of the courts. Every shareholder and every director may submit a derivative action under the condition that prior to doing so he or she presented the company such demand which was not positively granted.

7. With the exception of a few regulations, the majority of the provisions of the Law regulates the operation of a company. The rules regarding the relationship between the shareholders may be waived, provided that the shareholders add specific conditions to them. The fundamental assumption is that it is not suitable to determine binding provisions except where a market failure formed or where discrimination of a certain minority is feared. On remaining topics the Law prescribes provisions which are proposed to the shareholders as default options. It is important to mention that the New Law does not restrict a private company from creating various types of shares. A company may have shares, debentures or other securities, with each one bearing different rights.

8. One of these prominent aforementioned regulations regards preservation of capital and its distribution. The aim of the restrictions on the distribution is protection of the capital, i.e. preserving the interests of the creditors and the shareholders. Distribution of the capital is permitted upon 2 (two) accumulative conditions: Firstly, the profit criteria, according to which capital may be distributed as profits accumulated by the company during the company’s life or in the last 2 (two) years, whichever is the highest. Secondly, the solvency criteria, according to which capital may only be distributed if there is no reasonable fear that the distribution will prevent the company from keeping its existing and expected obligations. This criteria requires the company’s board of directors to exercise discretion. In the event the company does not agree to the profit criteria, it is entitled to plead to the court which may approve the distribution of capital after giving the creditors’ contentions an opportunity to be heard. In addition, a new arrangement was determined under the New Law which enables a company to purchase its shares from within the capital that the company is able to distribute as a dividend. For so long as the purchased shares are in the hands of the company, they become “deferred shares” (shares without any rights). In addition, a subsidiary company may purchase the shares of the parent company upon certain conditions.

9. A topic that is extensively covered in the New Law is company mergers. Under the Law, two companies may decide to merge in such a way that the legal personality of one company will disappear without the need to take any steps to wind it up. All of the rights and obligations of the merging company (“designated company”) are incorporated into the absorbing company. In order to make a merger, the following procedures, inter alia, should be followed: The board of directors of the two merging companies should approve the merger whilst examining the financial status of the companies and the existence of the fear that after the merger, the absorbing company shall not be able to fulfil the company’s obligations to its creditors. If such a fear exists, the board of directors shall not approve the merger. After approval of the merger by the board of directors, a general meeting of the shareholders shall be conducted in order to approve the merger.

In this study, we attempted to briefly review the main aspects of the new Companies Law. As aforementioned, the New Law brought with it many changes, the most important of which is perhaps the minor number of regulative provisions in the Law, and the freedom granted to the shareholders to design a framework for the company’s legal and economic operation according to their conveniences.