During the process of drafting and legislating the Companies Law 5759-1999, great emphasis was placed on the issues that arise in public companies with a controlling shareholder. In the 1990s, the vast majority of public companies were controlled companies, and thus the rules governing Israeli corporations primarily addressed such companies.
However, in recent years, we have witnessed a major increase in the number of public companies traded on the Tel Aviv Stock Exchange that are run without a controlling shareholder. As of December 2018, the number of public companies without a controlling shareholder was at about 12% of all companies traded on the Tel Aviv Stock Exchange (with the exclusion of dually listed companies) and their market cap was 28% of the total.
Therefore, in September 2019, the Israel Securities Authority (ISA) and the Ministry of Justice published a call to the public to adjust the corporate regime, as part of addressing problems that may arise as a result of the transition of public companies to a decentralized ownership structure.
The main concern is that the Companies Law, as currently written, is not equipped to provide tools to handling the principal-agent problem in companies without a controlling shareholder. In other words, the concern is that senior officers, who control the ongoing activities of a company that has no controlling shareholder, may take advantage of information gaps and work to advance their personal benefit at the expense of the company or its shareholders. On the other hand, shareholders, because of their decentralization, may lack incentive or the ability to effectively oversee the activity of the officers or to appoint directors who would do so on their behalf.
In the call, the Ministry of Justice and the ISA sought the public’s position on, inter alia, the following points:
- The quantitative test for the definition of “control.”
- The composition of the board of directors and the issue of whether it is necessary to codify a minimum rate of independent directors in companies without a controlling shareholder.
- The procedures for appointing and nominating candidates for directors (dependent and independent) in companies without a controlling shareholder, including the power to nominate candidates for directors, the ability of shareholders and officers to participate in the process of electing directors, and the manner in which an appointment is confirmed, including the need to establish a nominating committee.
- The board committees required in companies without a controlling shareholder and their composition, including eligibility requirements for members of the board committees.
- The service term of directors (dependent and independent) and the power to remove directors from their position in companies without a controlling shareholder.
- The difference in roles of the chairperson of a board of directors and the CEO in companies without a controlling shareholder.
- The ways in which transactions by the company with dominant shareholders may be approved, including identifying shareholders with whom transactions require special approval in companies without a controlling shareholder.
- The ways in which transactions with directors and other officers are to be approved and the ways in which their compensation is to be approved in companies without a controlling shareholder.
- The ability to adopt defense mechanisms to prevent hostile takeovers.