Translation Notice — This is an English translation of a Hebrew law and may contain inaccuracies. In any dispute or legal matter, the original Hebrew text as published in Reshumot (ספר החוקים) is the sole authoritative and legally binding version.

Law

Companies Law, 5759-1999

חוק החברות

Chapter III: Derivative Action

Section A: Derivative Claim and Derivative Defense

Preconditions for Filing a Claim

194.

[Amendment: 2011-3]

(a)Any shareholder and any director of a company (in this Chapter – a plaintiff) may file a derivative claim if the provisions of this Section have been fulfilled.

(b)A person wishing to file a derivative claim shall address the company in writing and demand that it exhaust its rights by way of filing a suit (in this Chapter – a demand).

(c)A demand shall be addressed to the chairperson of the company's board of directors, and shall set out in detail the facts giving rise to the cause of action and the reasons for filing it.

(d)Notwithstanding the provisions of subsection (b), a person wishing to file a derivative claim is not required to address a demand to the company pursuant to the provisions of that subsection, if one of the following applies:

(1)the competent organ of the company authorized to decide on the filing of the claim has a personal interest in the decision, and if that organ is composed of several individuals – one half or more of the members of that organ have a personal interest in the decision;

(2)there is a reasonable concern that addressing a demand to the company will prejudice the possibility of obtaining the relief sought.

Company's Response

195.

A company that has received a demand may act in one of the following ways:

(1)take an action or adopt a resolution as a result of which the cause of action is extinguished;

(2)reject the plaintiff's demand with reasons to be detailed in its decision;

(3)resolve to file a claim.

Company's Reply to the Plaintiff

196.

The company shall notify the plaintiff of the course of action it has taken as referred to in Section 195 within forty-five days from the date of receipt of the demand, providing details of the action taken and the body that decided upon it, including the names of those who participated in making the decision; if a participant or an office holder in the company had a personal interest in the decision, this shall be noted in the decision and in the notice to the plaintiff.

Right to File a Derivative Claim

197.

[Amendment: 2011-3]

A plaintiff may file a derivative claim with the approval of the court pursuant to the provisions of Section 198, if one of the following applies:

(1)the action taken or the decision adopted pursuant to Section 195(1) did not, in the plaintiff's opinion, extinguish the cause of action;

(2)the company rejected the plaintiff's demand as referred to in Section 195(2);

(3)the company notified the plaintiff that it resolved to file a claim, as referred to in Section 195(3), but the claim was not filed within seventy-five days from the date of the notice;

(4)the company did not reply to the demand in accordance with the provisions of Section 196;

(5)the plaintiff is exempt from submitting a demand to the company pursuant to the provisions of Section 194(d).

Approval of a Derivative Claim

198.

[Amendment: 2010-3]

(a)A derivative claim requires the approval of the court, which shall grant approval if it is satisfied that the claim and its conduct are prima facie in the best interests of the company and that the plaintiff is not acting in bad faith.

(b)The court may approve the filing of a derivative claim submitted before the time periods prescribed in Sections 196 or 197 have elapsed, if it finds that failure to file the claim at that time would cause it to become time-barred, and it may make the approval conditional upon fulfillment of the conditions set out in this Section for filing a derivative claim.

Application for Disclosure of Documents

198a.

[Amendment: 2011-3]

(a)A person entitled to file a derivative claim pursuant to Section 197 may apply to the court, before or after filing the application for approval of the claim, to order the company to disclose documents relating to the proceedings for approval of the derivative claim.

(b)The court may approve an application as referred to in subsection (a) if it is satisfied that the applicant has established a prima facie evidentiary basis regarding the existence of the conditions for approval of the derivative claim set out in Section 198(a).

Court Fee and Costs

199.

[Amendment: 2005]

(a)Upon filing a derivative claim, the plaintiff shall pay only a portion of the court fee at the rate prescribed by the Minister.

(b)If the court approves a derivative claim, the company shall reimburse the plaintiff for the court fee paid by him and shall pay the balance of the court fee in respect of the derivative claim in the manner and at the rate prescribed by the Minister, and notwithstanding anything provided in any law, non-payment of the balance of the court fee shall not delay the hearing of the claim; the court may –

(2)order the company to pay the plaintiff such amounts as it shall determine to cover his costs, or to deposit security for their payment;

(3)impose on the company an obligation to deposit security to cover the defendant's costs.

Costs

200.

[Amendment: 2005]

If the court gives judgment in the derivative claim and awards costs in favor of the defendant, the company shall pay the costs so awarded, unless the court determines, for special reasons to be recorded, that the costs shall be paid by the plaintiff; the court may impose on the company the payment of the plaintiff's costs, and may also impose on the plaintiff the payment of costs incurred by the company, in whole or in part, having regard to the judgment and to the other circumstances of the matter.

Attorney's Fees in a Derivative Claim

200a.

[Amendment: 2005]

(a)The court shall determine the fees of the attorney who represented the plaintiff in the derivative claim; the attorney shall not receive fees in an amount exceeding the amount determined by the court.

(b)The fees shall be paid by the company, unless the court determines, for special reasons to be recorded, that the plaintiff shall pay the fees.

Remuneration

201.

[Amendment: 2005]

If the court rules in favor of the company, it may order the payment of remuneration to the plaintiff who took the effort of filing and proving the derivative claim.

Arrangement or Settlement

202.

[Amendment: 2011-3]

(a)A plaintiff shall not withdraw from a derivative claim, nor enter into an arrangement or settlement with a defendant, except with the approval of the court; an application for approval shall set out all the details of the arrangement or settlement, including any consideration proposed to the plaintiff.

(b)If the court is requested to approve a settlement or arrangement as referred to in subsection (a), it shall order the publication of a notice of the details of the arrangement or settlement; a shareholder, a director, and also a creditor in respect of a derivative claim pursuant to Section 204, may file an objection to the approval of the arrangement or settlement within a time period to be determined by the court.

Derivative Defense

203.

(a)If a suit has been filed against a company, the court may, upon the application of a shareholder or director (in this Chapter – a defendant), permit him to defend in the name of the company (hereinafter – a derivative defense), provided that it is satisfied that the conduct of the derivative defense is in the best interests of the company and that the defendant is not acting in bad faith.

(b)The provisions of this Section regarding a derivative claim shall apply, to the extent that no provisions have been prescribed by the Minister, to a derivative defense, with the necessary modifications.

Prohibited Distribution and Transaction with a Controlling Shareholder

204.

[Amendment: 2011-4]

A creditor of a company may file a derivative claim on behalf of the company in respect of a prohibited distribution carried out in the company; a creditor who is a bondholder in a bond company may also file a derivative claim on behalf of the company in respect of non-compliance with the provisions of Sections 275(c) and (d), and the provisions of this Section shall apply, with the necessary modifications.

Company in Liquidation or Insolvency Proceedings

205.

[Amendment: 2018]

A derivative claim or derivative defense shall not be filed on behalf of a company for which a trustee has been appointed pursuant to Chapter B of Part Eight A or pursuant to the Insolvency and Economic Rehabilitation Law.

Authority Funding

205a.

[Amendment: 2011-3, 2011-4]

(a)A person seeking to file a derivative claim on behalf of a company that is a reporting corporation, or a plaintiff in such a claim, may apply to the Israel Securities Authority to participate in his costs.

(b)If the Israel Securities Authority is satisfied that the claim is of public interest and that there is a reasonable prospect that the court will approve it as a derivative claim, it may participate in the plaintiff's costs, in an amount and subject to conditions that it shall determine; decisions of the Authority pursuant to this Section shall not serve as evidence and may not be submitted to the court.

(c)If the court rules in favor of the company, it may order in its judgment that the Israel Securities Authority be indemnified for its costs.

Regulations

206.

[Amendment: 2005]

The Minister may prescribe provisions regarding derivative claims and derivative defenses, including regarding the proceedings for their approval, the rate of the court fee and the times and methods of its collection.

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Section B: Class Action

207.

[Amendment: 2006]

208.

[Amendment: 2006]

209.

[Amendment: 2005, 2006, 2010-2]

210.

[Amendment: 2006]

211.

[Amendment: 2006]

212.

[Amendment: 2006]

213.

[Amendment: 2006]

214.

[Amendment: 2006]

215.

[Amendment: 2006]

216.

[Amendment: 2006]

217.

[Amendment: 2006]

218.

[Amendment: 2006]

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Part 6: Office Holders in a Company

Chapter I: Appointment and Tenure of Directors

Section A: Tenure of Director and Termination of Tenure

Number of Directors

219.

[Amendment: 2005, 2008-2, 2011-3, 2011-4]

(a)A company may determine in its articles of association the number of directors and the maximum and minimum number thereof.

(b)In a private company that is not a debenture company, at least one director shall serve.

(c)In a public company and in a private company that is a debenture company, at least two external directors as referred to in Section 239 shall serve, of whom at least one is a director with accounting and financial expertise and the remainder possess professional qualifications as defined under Section 240 (in this Law – directors with professional qualifications).

(d)In a public company and in a private company that is a debenture company, in addition to the external director with accounting and financial expertise, directors with accounting and financial expertise shall serve in such number as the board of directors has determined.

First Directors

220.

The first directors of a company are the directors appointed by the founders who have given a declaration as referred to in Section 8; the tenure of the first directors shall end upon the conclusion of the first annual general meeting, unless otherwise provided in the articles of association.

Commencement of Tenure

221.

The tenure of a director shall commence on the date of his appointment or on a later date, if the articles of association include a provision permitting an appointment to take effect at a future date.

Term of Tenure

222.

The tenure of directors appointed by a general meeting shall end upon the conclusion of the annual general meeting first held after the date of appointment, unless otherwise provided in the articles of association.

Reporting of Changes

223.

[Amendment: 2011-4]

A company that is not a reporting corporation shall report to the Registrar of Companies on the appointment of a director and on the termination of tenure of a director, within fourteen days from the date on which the director was appointed or from the date on which his tenure ended.

Register of Directors

224.

A company shall maintain at its registered office a register of members of the board of directors and of their alternates, if alternates have been designated for them pursuant to the provisions of Section 237, which shall be open for inspection by any person.

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Section B: Restrictions on Appointments and Expiry of Office

Eligibility for Appointment

224a.

[Amendment: 2008-2, 2011-4]

A person who does not possess the requisite qualifications and the ability to devote appropriate time to the performance of the role of director in a company, having regard, inter alia, to the special needs of the company and its size, shall not be appointed as a director in a public company or in a private company that is a bond company, and shall not serve as a director in such a company.

Declaration of Candidate to Serve as Director

224b.

[Amendment: 2008-2, 2011-3, 2011-4]

(a)In a public company and in a private company that is a bond company, a general meeting shall not be convened with the appointment of a director on its agenda, and a director shall not be appointed, unless the candidate has declared that he possesses the requisite qualifications and the ability to devote appropriate time to the performance of his role, and has set out the said qualifications in detail, and that the restrictions prescribed in Sections 226 and 227 do not apply to him, and — with respect to an independent director — that he also meets the requirements set forth in paragraphs (1) and (2) of the definition of "independent director" in Section 1 (in this Section — declaration).

(b)The declaration shall be brought before the appointing authority and the provisions of Section 241(b) and (c) shall apply to it.

Duty of Disclosure

225.

[Amendment: 2011, 2011-4]

(a)A person who is a candidate to serve as a director shall disclose to the appointing authority:

(1)whether he has been convicted by judgment of an offense as referred to in Section 226(a), and the period during which he is prohibited from serving as a director pursuant to Section 226 has not yet elapsed;

(2)whether he has been convicted by judgment of an offense as referred to in Section 226(a1), and the period determined by the court pursuant to that subsection has not yet elapsed;

(3)whether the Administrative Enforcement Committee has imposed on him an enforcement measure prohibiting him from serving as a director in any public company or in any private company that is a bond company, and the period determined by the Administrative Enforcement Committee in its said decision has not yet elapsed.

(b)In this Section —

"enforcement measure" — an enforcement measure as referred to in Section 52nv of the Securities Law, imposed pursuant to Chapter VIII4 of the Securities Law, pursuant to Chapter VII2 of the Regulation of Investment Advice and Investment Portfolio Management Law, 5755–1995, or pursuant to Chapter X1 of the Joint Investments in Trust Law, 5754–1994, as the case may be;

"Administrative Enforcement Committee" — the committee appointed pursuant to Section 52lb(a) of the Securities Law;

"judgment" — a judgment of a court of first instance.

Restriction on Appointment Due to Conviction

226.

[Amendment: 2011, 2011-4]

(a)A person who has been convicted by judgment of any of the offenses listed below shall not be appointed to the office of director in a public company or in a private company that is a bond company, unless five years have elapsed from the date on which the judgment of conviction was rendered:

(1)offenses under Sections 290 to 297, 392, 415, 418 to 420, and 422 to 428 of the Penal Law, 5737–1977, and under Sections 52c, 52d, 53(a) and 54 of the Securities Law;

(2)conviction by a court outside Israel of offenses of bribery, fraud, managerial offenses in a corporation, or offenses of insider trading.

(a1)A person who has been convicted by judgment of an offense not listed in subsection (a) shall not be appointed to the office of director in a public company or in a private company that is a bond company, if the court has determined that, by reason of the nature, gravity, or circumstances of the offense, he is not fit to serve as a director in a public company or in a private company that is a bond company, for the period determined by the court, which shall not exceed five years from the date on which the judgment was rendered.

(b)A court may determine, at the time of conviction or thereafter, upon the application of a person seeking to be appointed as a director, that notwithstanding his conviction of offenses as referred to in subsection (a), and having regard, inter alia, to the circumstances in which the offense was committed, he is not precluded from serving as a director in a public company or in a private company that is a bond company, or that the period during which he is precluded from serving as a director in a public company or in a private company that is a bond company shall be shorter than five years.

(c)The Minister may prescribe additional offenses to those prescribed in subsection (a)(1).

(d)A court, and if an appeal has been filed — an appellate court, may order a stay of execution of the appointment restrictions or of the expiry of office pursuant to this Section until a date to be determined and on such conditions as it deems fit.

Restriction on Appointment Due to Decision of the Administrative Enforcement Committee

226a.

[Amendment: 2011, 2011-4]

Where the Administrative Enforcement Committee has imposed on a person an enforcement measure prohibiting him from serving as a director in a public company or in a private company that is a bond company, that person shall not be appointed as a director in a company in which he is prohibited from serving as a director pursuant to that decision.

Restriction on Appointment

227.

[Amendment: 2005, 2018]

(a)A minor, a person declared legally incompetent, an individual in respect of whom an order to commence proceedings has been issued as long as he has not been discharged, and a corporation that has resolved on its voluntary winding up or in respect of which a winding-up order or an order to commence proceedings has been issued, shall not be appointed as a director.

(b)A candidate for the office of director in whom any of the circumstances referred to in subsection (a) apply shall disclose this to the appointing authority.

Duty of Notification

227a.

[Amendment: 2008-2]

A director who no longer satisfies a condition required under this Law for his tenure as a director, or in respect of whom a ground for expiry of his tenure as a director has arisen, shall notify the company thereof immediately, and his tenure shall expire upon the giving of such notice.

Expiry of Office

228.

[Amendment: 2008-2, 2011, 2018]

(a)Without prejudice to the provisions of any law, a director's tenure shall expire prior to the end of the period for which he was appointed in any of the following:

(1)he resigned or was dismissed as provided in Sections 229 to 231;

(2)upon the giving of notice of conviction as referred to in Section 232;

(2a)upon the giving of notice of the imposition of an enforcement measure as referred to in Section 232a;

(3)pursuant to a court decision, as referred to in Section 233;

(4)an order to commence proceedings has been issued in respect of him, and if he is a corporation — also if it has resolved on its voluntary winding up or a winding-up order has been issued in respect of it;

(5)upon the giving of notice pursuant to Section 227a or 245a.

(b)A company is not permitted to derogate in its articles from the provisions of this Section, but it may add thereto other grounds for the expiry of a director's tenure.

Resignation of Director

229.

(a)A director may resign by delivering notice to the board of directors, to the chairperson of the board of directors, or to the company, and the resignation shall take effect at the time the notice is delivered, unless a later date is specified in the notice.

(b)A director shall state the reasons for his resignation.

(c)Upon receipt of a notice of resignation of a director, the resignation and the reasons given therefor shall be brought before the board of directors and recorded in the minutes of the first meeting to be convened following the resignation.

Dismissal of Director

230.

(a)The general meeting may at any time dismiss a director, unless otherwise provided in the articles, provided that the director is given a reasonable opportunity to present his position before the general meeting.

(b)Where a provision is prescribed in the articles under which a director is to be appointed to his office other than by the general meeting, he may not be removed from office except by the person entitled to appoint him and in the manner prescribed therefor in the articles, unless otherwise provided in the articles.

Obligation to Terminate Tenure

231.

[Amendment: 2011]

Where a company becomes aware that a director was appointed in contravention of the provisions of Sections 226, 226a or 227(a), or that a director has breached the provisions of Sections 225, 227(b) or 232, the board of directors shall decide, at the first board meeting to be convened after it becomes aware thereof, on the termination of the tenure of that director, if it finds that the said conditions have been met, and the tenure shall expire as of the date of the decision.

Expiry of Office Due to Offense

232.

[Amendment: 2011, 2011-4]

Where a director has been convicted by judgment of an offense as referred to in Section 226(a)(1) or (a1), he shall notify the company thereof and his tenure shall expire upon the giving of such notice, and in a public company and in a private company that is a bond company, he may not be reappointed to the office of director unless the period during which he is prohibited from serving as a director pursuant to Section 226 has elapsed.

Expiry of Office Due to Decision of the Administrative Enforcement Committee

232a.

[Amendment: 2011, 2011-4]

Where the Administrative Enforcement Committee has decided to impose on a person an enforcement measure prohibiting him from serving as a director in any public company, in any private company that is a bond company, or in a company in which he serves, he shall notify the company thereof and his tenure shall expire upon the giving of such notice, and in a company to which the said prohibition applies he may not be reappointed to the office of director unless the period of the said prohibition has elapsed.

Disqualification by Court Decision

233.

[Amendment: 2011-4]

The court may, upon the application of the company, a director, a shareholder, or a creditor, order the expiry of a director's tenure if it finds that any of the following has occurred:

(1)the director has been permanently prevented from fulfilling his role;

(2)with respect to a director serving in a public company or in a private company that is a bond company — during the course of his tenure he has been convicted by a court outside Israel of offenses as detailed in Section 226(a)(2).

Duty of Loyalty

234.

[Amendment: 2008-2, 2011]

A director who has breached the duty of disclosure under Sections 225, 227a, 227(b), 232, 232a or 245a shall be deemed to have breached the duty of loyalty to the company.

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