To resolve US tax investigations, in December 2014, after negotiations persisted for more than three years, Israel's Bank Leumi and the US Authorities reached a settlement in the total amount of $400 million ("Settlement"). The Settlement arose out of allegations that the Leumi Group (a subsidiary of Bank Leumi le-Israel, B.M.) assisted approximately 1,500 US account holders to evade taxes during the years 2002-2010. It relates to the responsibility of the Leumi Group in accordance with US law and does not, however, bind or, grant any exemption to, officers or employees of the Leumi Group.
Already prior to the Settlement, in Israel, an application to approve a derivative action, Beeri Lenuel v. Galia Maor et al, was filed at the Tel Aviv District Court for Economic Affairs in the name of Bank Leumi le Israel, B.M ("Bank") against its senior office holders and auditors. It is claimed that the Bank is entitled to pecuniary damages in an amount exceeding hundreds of millions of Israeli shekels as a result of the said office holders and auditors involvement in assisting US account holders to evade taxes ("the Proceedings").
Within the framework of the Proceedings and after reaching the Settlement, in a recent interlocutory decision, the Bank successfully petitioned the court seeking an order for a stay of Proceedings for a period of four months and approval of the establishment of an independent claims committee of the Bank, notwithstanding that the Proceedings were already in a relatively advanced stage.
As explained by the court, from a normative perspective, the purpose of establishing an independent claims committee with respect to derivative actions made by shareholders on behalf of a corporation is to examine and make recommendations to the corporation's board of directors regarding the most appropriate steps to be taken by the corporation in the circumstances. It gives the corporation an opportunity to exercise its own independent discretion and 'to reclaim' the taking of a decision regarding the management of the derivative action. The committee's independence is usually ensured by being comprised of the corporation's directors who do not have any connection to the issues subject of the matter or who became directors after such issues arose as well as one or more experts in the legal or finance fields.
The committee’s recommendations, though, are not binding on the corporation's board of directors. Moreover, they are not binding on a court and neither is a board of director's resolution adopted in light of these recommendations. If necessary, in reviewing the committee's recommendations, the court is required to examine them in two stages. At the first stage, it reviews issues such as the independence and good faith of the committee, its expertise and the manner in which it reviewed the matter. At the second stage, it reviews the decision itself as to whether it was reasonable and whether it would benefit the corporation.
The crux of this interlocutory proceeding concerned the question of timing. Generally, under Israeli law, a corporation need not seek approval from the Court to establish an independent claims committee whether or not an application to approve a derivative action has been filed. Nonetheless, the timing for establishing such committee will affect the decision as to whether proceedings should be stayed until receipt of the recommendations of the committee and what weight, if any, will be given by the court to its recommendations.
In the event that a company adopts a resolution to establish an independent claims committee only after an application to approve a derivative action has been filed, and the court is requested (as in this interlocutory proceeding) to stay the proceedings until receipt of the committee’s recommendations, the court may rule in a number of ways:
- If the derivative plaintiff consents to stay the proceedings until completion of the committee’s work (as in the present case), the court will tend to approve such consent (unless the court believes that a stay for a lengthy period is unreasonable or for other reasons a stay of proceedings will not benefit the corporation);
- If the derivate plaintiff does not consent to stay the proceedings, the court may decide that, despite the fact that the decision to establish an independent claims committee was made after the filing of the application to approve a derivative action, there is room to stay the proceedings until receipt of a resolution by the board of directors of the corporation following receipt of the recommendations of the independent claims committee.
In such event, approving the establishment of such committee within the framework of the legal proceedings, will be the exception rather than the rule, and the court will accede to the application in exceptional cases, by weighing various considerations, including: why was the committee established only at this stage and not at an earlier stage (i.e. promptly after receiving the preliminary application from the derivative plaintiff prior to the commencement of legal proceedings); what powers are to be conferred on the committee; the composition of the committee; the assurance for independence of the committee; the ability of the committee to receive any document and to summons and examine any office holder or other entity in the company or connected to the company; the duration of time that is allotted for the committee’s work; whilst also taking into account, inter alia, the complexity of the claim and other relevant considerations in the circumstances of the case which may benefit the company.
In the present case, the Court ruled that the parties had agreed to stay the Proceedings until the committee completed its work and thus it will tend to approve such a decision, even though the Proceedings are in a relatively advanced state.
In any event, the Court stated that, despite the consent of the parties, the circumstances in this case merit the establishment of an independent claims committee, even at this relatively late point in time. As explained by the Bank, among other reasons, the preliminary application of the derivative plaintiff was rejected by the Bank because at the time the Bank was involved in negotiations with US authorities and was unsure as to the terms and conditions of any future settlement. Now that the Settlement was reached, the committee is in a better position to make its recommendations. In addition, such preliminary application was made prior to the original application to approve the derivative action and since then a significant amended application was filed. In these circumstances and in light of the fact, among others, that a decision to establish an independent claims committee does not require the approval of the court and that an independent and thorough examination will be performed by authorised and experienced members of such committee, a stay of Proceedings for four months is a reasonable and prudent option.
Since the handing down of the decision regarding the above interlocutory proceedings, earlier this month, the court granted the independent claims committee, headed by retired President of the Tel Aviv District Court, Ori Goren, an extension until mid-October 2015, to submit its recommendations to the Bank's board of directors. The committee began its work in March and has since then held more than 10 meetings and heard from both Israeli and US entities within and outside the Bank. In granting the extension, the court stated that, thus far, the committee's conduct has been fitting and in line with the court's expectations that the committee will act diligently and efficiently.
It will be interesting to see how this matter progresses.