ISRAEL Law and Practice Contributed by: Benjamin (Benny) Sheffer and Lance Blumenthal, S. Horowitz & Co.
under the Companies Law and the Class Actions Law, 2006, especially where directors are alleged to have breached their duties of loyalty or care. To that end, buyers should be aware of the following when acquir- ing a company that may be exposed to shareholder, derivative or class action litigation. • Scope of directors’ and officers’ (D&O) liability: (a) under Israeli law, directors and officers can be personally liable for breaches of the duty of loyalty or duty of care under the Companies Law, 1999; and (b) buyers should review the target’s D&O insur- ance policy and any indemnification or exemp- tion provisions in the articles of association to assess coverage limits and exclusions, especially for acts involving bad faith or gross negligence. • Due diligence on pending or threatened litigation: (a) conduct thorough legal due diligence to identify any existing derivative or class action proceedings or claims filed with the Economic Department of the Tel Aviv District Court, which specialises in corporate and securities matters; and (b) examine board minutes, ISA filings and audit committee reports for any references to poten- tial disputes, settlements or internal investiga- tions. • Disclosure obligations and market sensitivity: (a) for public companies, any material litigation or claim likely to affect the company’s financial position or control must be disclosed under the Securities Regulations (Periodic and Immediate Reports), 1970; and (b) buyers should ensure that all such disclosures have been made and that there is no risk of omission or misleading disclosure, which could trigger ISA enforcement or shareholder suits post-closing. • Transaction structuring and indemnities: (a) consider allocating risk through representa- tions and warranties or indemnities to protect against undisclosed litigation or post-closing liabilities; and (b) in cross-border acquisitions, ensure that Israeli choice-of-law and jurisdiction provisions are in- cluded to enable effective enforcement against
Israeli parties. • Governance and post-closing integration: (a) if the target has a history of governance dis- putes or shareholder activism, the buyer should review the composition of the board, the func- tioning of independent directors and corporate governance procedures; and (b) implementing compliance and documentation processes post-closing can serve to mitigate future exposure. • Minority shareholder rights and approval require- ments: (a) under Sections 270–275 of the Companies Law, certain transactions require approval by the audit committee, board, and the majority of disinterested shareholders; and (b) buyers should verify that all prior approvals were duly obtained to avoid claims alleging procedural irregularities or breach of fiduciary duty. 9.4 Independent Outside Advice Israeli boards regularly seek independent external advice when considering significant corporate actions such as mergers, acquisitions, or related-party trans- actions. Common types of advice include: • financial advice and valuation opinions (including “fairness opinions”) especially where the transac- tion involves a controlling shareholder or merger between affiliates; • legal and regulatory advice – concerning corporate approvals, antitrust clearance (Competition Author- ity), and securities disclosure obligations; • accounting and tax advice – particularly where share-for-share transactions or complex considera- tion structures are involved; and • technical and environmental advice – in the energy and infrastructure sectors, from engineers or consultants assessing project risks or regulatory compliance. While the Israeli Companies Law does not require a fairness opinion in all cases, the Israel Securities Authority and the Tel Aviv Stock Exchange generally expect public company boards to rely on a compe- tent, independent evaluation when approving material transactions affecting shareholder value.
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