In its August 27, 2014 decision on a motion in Intercolony Investments Ltd. vs. Shkedi, the Israeli Supreme Court recognized – in the first case in Israeli law – a party's right to file a multiple derivative action, namely an action brought by a shareholder of a company not on behalf of the company itself but on behalf of that company's subsidiary (or second-tier subsidiary).

The Israeli Companies Law, 1999 ("the Law") includes a specific mechanism permitting derivative actions, providing that "any shareholder and any director of a company" is entitled to file a derivative action. However, this mechanism does not address the possibility of filing a multiple derivative action, and the question of a shareholder's right to file a claim based on a cause of action available to a company's subsidiary had not previously been addressed by the Israeli courts. [1] 

In its decision, the court presented two methods for establishing the right to file a multiple derivative action. The first method would be by way of an exception to the doctrine prohibiting the piercing of the corporate veil. The court stated that a multiple derivative action would constitute an exception to the principle of the company as a separate legal entity to its shareholders which underpins such doctrine. It based such statement on section 6(b) of the Law, according to which, under appropriate circumstances, Israeli courts are entitled to attribute a company's rights or obligations to its shareholders, and by doing so partially to pierce the corporate veil, holding that the section could be used to confer a company’s right to claim upon a shareholder. In the court's view, the existence of this statutory provision together with the aforementioned right to file a derivative action creates a normative framework which would enable a shareholder to file a multiple derivative action.

The second method suggested by the court was based on viewing subsidiaries (even when not wholly-owned) as an asset of their parent company, on the basis of which the court concluded that a parent company itself has a direct cause of action in a case where its subsidiary has a cause of action. Given that the Law entitles a shareholder, as noted, to file a motion to approve a derivative action on behalf of the company, this would therefore cover a parent company's cause of action deriving from its subsidiary's cause of action.

The court stipulated that the right to file a multiple derivative action was not dependent upon the length of the chain of holdings (meaning that such action could be filed on behalf of a company's subsidiary, second-tier subsidiary, third-tier subsidiary, etc.). In the absence of such a finding, the concern would be that an entity would put in place a chain of subsidiaries in order to avoid exposure to such multiple derivative actions.

Having established the existence of the right, the court went on to discuss the circumstances in which an approval to file a multiple derivative action should be granted. It held that in general, a shareholder of a parent company would be entitled to file a multiple derivative action on behalf of one of the parent company’s subsidiaries only when the parent company were to hold control in the relevant subsidiary, whether internally or externally (meaning where a person holds shares in all three companies and his holdings grant him control).

The Court found that the test for the definition of control is an objective test, namely the ability to direct the activities of the company. In this regard, there would be a presumption of control in cases

where a parent controlled fifty per cent or more of a subsidiary's shares, though such presumption would be refutable. The court however left undecided the question of whether a multiple derivative action could be filed in a case of partial or lack of control.

In the Intercolony Investments case, the parent company held 80% of the shares in its subsidiary, which held, in turn, 50% of the second-tier subsidiary. In addition, a “joint control agreement” had been signed between the subsidiary and the other shareholder of the second-tier subsidiary, whereby, inter alia, all the decisions in the second-tier subsidiary would require unanimity. There was therefore no dispute that the parent company controlled the subsidiary. However, it was claimed that the parent company did not control the second-tier subsidiary, since it effectively held only 40% of its shares (80% of 50). The court rejected this claim, stating that an "essence of control" existed through the chain of the companies, and accordingly that the parent company's shareholders were entitled to file a multiple derivative action in respect of a cause of action available to the second-tier subsidiary.