Since the enactment of the Companies Act in 1999, corporate governance principles have developed throughout the world. In the same year the Organisation for Economic Cooperation and Development published its principles of proper corporate governance, which have since been adopted and embedded in legislation by numerous countries. Recent amendments to the Companies Act are the result of the implementation of principles of corporate governance in Israeli legislation. The process commenced in December 2006 with the establishment of the Goshen Committee, which was charged with examining the issue and publishing its recommendations.
On March 7 2011 the Israeli parliament enacted Amendment 16 to the Companies Act. Most provisions entered into effect 60 days after publication in the Official Gazette (ie, on May 15 2011); certain other provisions will enter into effect six months from such date.
Among other things, the amendment introduces a change in the majority required for the approval of extraordinary interested parties' transactions by a general meeting of shareholders of a public company. The amendment calls for approval by a majority of disinterested shareholders (previously one-third of shareholders could approve such transactions), or alternatively that no more than 2% of the total voting rights in such a company opposes the approval (previously 1%). In addition, extraordinary transactions of publicly traded companies must be re-approved every three years, except for transactions other than remuneration of services where the audit committee agrees that the term of such a transaction may exceed three years.
This controversial amendment led to heightened public discussion. The change resulted from an attempt to increase the powers of minority shareholders in approving transactions between companies and their controlling shareholders or transactions with a third party in which controlling shareholders may have an interest that differs from the interest of other shareholders in the company. It has ultimately led to an increase in the powers of institutional investors in approving interested parties' transactions.
In addition, the amendment provides that the remuneration of all office holders (excluding directors) in a company requires the approval of the audit committee and board of directors. Such approval was previously required only if such a transaction was regarded as 'extraordinary'. This change tightens the transparency and control of the audit committee - composed of mainly independent directors - over senior management remuneration.
The act has also been amended to include a provision that allows companies to amend their articles of association to include recommended corporate governance principles, relating, among other things, to:
- the composition of the board of directors to increase the presence of independent directors;
- a prohibition on office holders serving as directors;
- holding meetings of the board without the presence of office holders (ie, the chief executive officer and his or her subordinates); and
- permitting shareholders to vote via the Internet in order to influence increased public participation in general meetings.
Additional amendments target an increase in the powers of the audit committee and its independence. Accordingly, it has been determined that the audit committee must include a majority of independent directors, and that the decision of the audit committee will in future require the support of both a majority of the committee members and a majority of the independent members. In addition, the roles and duties of the audit committee have been expanded, granting it additional functions as a supervisory board. These include decisions on whether transactions are considered 'extraordinary' and 'material' in order to determine the mechanism of their approval - namely:
- by the board alone;
- by the audit committee followed by the board; or
- a three-step approval (by the audit committee, the board and finally the general meeting of the shareholders).
The amendments to the act are praiseworthy and contribute to the implementation of customary corporate governance principles in line with the rest of the world. It remains to be seen how the increased power granted to the public and to institutional investors will be utilised in order to address the best interests of companies.
For further information on this topic please contact Dana Livneh-Zemer at Yoram L Cohen Ashlagi Eshel Law Offices by telephone (+972 3 693 1900), fax (+972 3 693 1919) or email ([email protected]).