“How did the board approve this?” Headlines like this pop up each time it is announced the Israel Securities Authority is investigating a public company’s transactions with its controlling shareholder, such as the latest allegations of deals between Bezeq and its controlling shareholder. But the real question that should be asked is, “Was the board given the right tools to perform its work?”
A Board’s Authorities
The Companies Law elaborates extensively on the authorities of a board of directors. These authorities may be divided into supervisory authorities and business development authorities.
Supervisory authorities empower the board to oversee the general manager and his actions. Some examples are the examination of the company’s financial position and the preparation of financial statements, the approval of the distribution of dividends, and the approval of transactions with related parties.
Business development authorities are delegated to the board of directors in order for it to forge a strategy for the company and to guide its policies. Such authorities include defining action plans for the company, appointing and dismissing the general manager, formulating a remuneration policy, and issuing bonds and allotting securities.
A Board’s Work
In addition to a board of director’s authorities, the Companies Law prescribes procedural rules governing the work of a board of directors, which include, inter alia, provisions regarding the chairman of the board, the convening and conducting of board meetings, voting by the board, and the procedure for approving material transactions.
As stated, the Companies Law provides the board with technical operating rules, but it does not provide the board with high-quality, fundamental rules to guide it in the exercise of its power. This omission becomes even more glaring when at issue are complex matters, such as controlling shareholder transactions and the distribution of dividends.
Over the years, this void has been filled by court rulings and guidelines, as well as via position statements issued by the Israel Securities Authority. Both constitute normative sources of guidance to boards of directors on fundamental issues pertaining to how the board’s work should be performed. While the instructions from the courts and the ISA are many and diverse, one material rule, which recently received official recognition by the Supreme Court, and which encompasses a number of material rules for exercising authority, overshadows the rest—the Business Judgment Rule.
The Business Judgment Rule
The Business Judgment Rule prescribes when the court is not to intervene in business decisions made by a board of directors. Namely, the court is not to intervene in board resolutions passed with bona fides, without any conflicts of interest, and in an informed way. According to the principles of this rule, when the board exercises its powers, it must examine and consider, inter alia, these issues:
- Conflicts of interest – Does the approval of a particular transaction affect, or is highly likely to affect, the board or any of its members? The board must ascertain whether the transaction promotes solely the company’s best interests or if it benefits other interested parties in the company.
- In-depth deliberation – The board must hold a fundamental and practical deliberation of the proposed resolution on the agenda. It must perform a thorough examination of the transaction, ask questions, act as devil’s advocate, propose revisions to the terms of the transaction or a competitive proceeding, and examine other alternatives.
- Sufficient background material – In order to hold an in-depth deliberation, the board must make sure it has been provided with the full factual foundation as well as with all the relevant background documents and data it needs, such as valuations and economic forecasts.
- Documentation – Minutes of board meetings must be recorded. The objective of the minutes is not to constitute a full transcript of what was said during the board meeting, but rather to document the key statements made and to show readers that an in-depth deliberation indeed took place.
In summary, the work of a board of directors entails risks. The Companies Law prescribes procedural rules for the work of a board of directors, but only by integrating the material rules prescribed outside the Companies Law does the board possess the complete set of rules it needs to cope with the risks posed by its work.