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 II: Appointment, Tenure and Dismissal of Other Office Holders

Appointment and Dismissal of General Manager

250.

The general manager shall be appointed and dismissed by the board of directors, unless otherwise provided in the articles of association.

Appointment and Dismissal of Office Holders

251.

[Amendment: 2011-4]

Office holders in a company, other than directors and a general manager, shall be appointed and dismissed — in a public company and in a private company that is a bond company, by the general manager, and in a private company that is not a bond company, by the board of directors; all of the foregoing unless otherwise provided in the articles of association.

Application of Sections Regarding Restrictions on Appointments and Expiry of Office

251a.

Sections 225 to 226a, 231 to 232a, 233(2) and 234 shall apply, with the necessary modifications, with respect to an office holder who is not a director, in a public company and in a private company that is a bond company.

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Chapter III: Duties of Office Holders

Section A: Duty of Care

Duty of Care

252.

(a)An officer owes the Company a duty of care as set out in Sections 35 and 36 of the Torts Ordinance [New Version].

(b)Nothing in the provision of subsection (a) shall preclude the existence of a duty of care owed by an officer to another person.

Precautions and Standard of Skill

253.

An officer shall act at the level of skill at which a reasonable officer in the same position and under the same circumstances would have acted, and shall, among other things, taking into account the circumstances of the matter, take reasonable measures to obtain information relevant to the business viability of an action brought before him for approval or of an action performed by him in the exercise of his position, and to obtain any other information of importance in relation to such actions.

Duty of Care of a Director with Expertise or Qualification

253a.

[Amendment: 2005]

The appointment of a director who possesses accounting and financial expertise or who holds professional qualification pursuant to Sections 219(d) or 240(a1) shall not alter the liability imposed upon him or upon the other directors of the Company under any law.

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Section B: Duty of Loyalty

Duty of Loyalty

254.

(a)An office holder owes a duty of loyalty to the Company, shall act in good faith and in the best interests of the Company, and shall, among other things —

(1)refrain from any act involving a conflict of interest between the fulfillment of his role in the Company and the fulfillment of any other role of his or his personal affairs;

(2)refrain from any act that constitutes competition with the Company's business;

(3)refrain from exploiting a business opportunity of the Company for the purpose of obtaining a personal benefit for himself or for another;

(4)disclose to the Company any information and deliver to it any document relating to the Company's affairs that came into his possession by virtue of his position in the Company.

(b)Nothing in the provisions of subsection (a) shall preclude the existence of a duty of loyalty of an office holder toward another person.

Approval of Actions

255.

(a)A Company may approve an action from among the actions enumerated in Section 254(a), provided that all of the following conditions are met:

(1)the office holder acts in good faith and the action or its approval does not harm the interests of the Company;

(2)the office holder disclosed to the Company, within a reasonable time prior to the date set for deliberation on the approval, the nature of his personal interest in the action, including all material facts and documents.

(b)The Company's approval of actions that are not material actions shall be given in accordance with the provisions of the Fifth Chapter regarding the approval of transactions, and the Company's approval of material actions shall be given in accordance with the provisions of the Fifth Chapter regarding the approval of extraordinary transactions; the provisions of the Fifth Chapter regarding the validity of transactions shall apply, mutatis mutandis, to the validity of actions.

Remedies

256.

(a)The laws applicable to a breach of Contract shall apply, mutatis mutandis, to a breach of the duty of loyalty by an office holder toward the Company.

(b)Without derogating from the generality of the foregoing in subsection (a), an office holder who has breached the duty of loyalty toward the Company shall be regarded as having breached his undertaking with the Company.

(c)A Company may rescind an action taken by an office holder on behalf of the Company in relation to another person, or claim from that person the damages owed to it by the office holder, even without rescinding the action, if that person knew of the office holder's breach of the duty of loyalty and knew or ought to have known of the absence of approval for the action.

(d)A person shall be presumed not to have been required to know of the absence of approval for an action as required under this Chapter if he received confirmation from the board of directors that all approvals required for the action had been obtained.

Disclosure of Irregularity

257.

If a director becomes aware of a matter of the Company in which there appears to have occurred a breach of law or an infringement of proper business conduct, he shall act without delay to convene a meeting of the board of directors as referred to in Section 98(b)(2).

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Section C: Exemption, Indemnification and Insurance

Company's Authority to Grant Exemption, Indemnification and Insurance

258.

(a)A company may not exempt an office holder from liability for a breach of the duty of loyalty toward it.

(b)A company may exempt an office holder from liability for a breach of the duty of care toward it, in accordance with the provisions of this Chapter only.

(c)A company may insure the liability of an office holder therein or indemnify such office holder, in accordance with the provisions of this Chapter only.

Authorization to Grant Exemption

259.

[Amendment: 2005]

(a)A company may exempt, in advance, an office holder therein from all or part of such office holder's liability for damage caused by a breach of the duty of care toward it, provided that a provision to that effect is set forth in the articles of association.

(b)Notwithstanding the provisions of subsection (a), a company may not exempt a director in advance from liability toward it arising from a breach of the duty of care in a distribution.

Authorization Regarding Indemnification

260.

[Amendment: 2005]

(a)A company may, if a provision from among the provisions set out in subsection (b) has been included in its articles of association, indemnify an office holder therein in respect of a liability or expense as specified in paragraphs (1), (1a) and (2), imposed upon or incurred by such office holder, arising from an act performed by the office holder by virtue of being an office holder therein:

(1)a monetary liability imposed upon the office holder in favor of another person pursuant to a judgment, including a judgment given by way of settlement or an arbitral award confirmed by a court;

(1a)reasonable litigation expenses, including attorney's fees, incurred by an office holder as a result of an investigation or proceeding conducted against the office holder by an authority competent to conduct such investigation or proceeding, which concluded without the filing of an indictment against the office holder and without the imposition of a monetary liability upon the office holder as an alternative to a criminal proceeding, or which concluded without the filing of an indictment against the office holder but with the imposition of a monetary liability as an alternative to a criminal proceeding in respect of an offense that does not require proof of criminal intent, or in connection with a financial sanction; in this paragraph —

Liability Insurance

261.

A company may, if a provision to that effect has been included in its articles of association, enter into a contract to insure the liability of an office holder therein in respect of a liability imposed upon such office holder arising from an act performed by the office holder by virtue of being an office holder therein, in any one of the following:

(1)a breach of the duty of care toward the company or toward another person;

(2)a breach of the duty of loyalty toward the company, provided that the office holder acted in good faith and had reasonable grounds to believe that the act would not prejudice the interests of the company;

(3)a monetary liability imposed upon the office holder in favor of another person.

Amendment of Articles of Association

262.

[Amendment: 2005]

(a)In a private company whose shares are divided into classes, a resolution to include in the articles of association a provision regarding exemption or indemnification shall require, in addition to the approval of the general meeting, also the approval of class meetings.

(b)In a public company in which an office holder is a controlling shareholder as defined in Section 268, a resolution of the general meeting to include in the articles of association a provision regarding exemption, indemnification or insurance shall require, in addition to the majority required for amending the articles of association, also the approval of shareholders who have no personal interest in the approval of the resolution, as required with respect to an extraordinary transaction, pursuant to the provisions of Section 275(a)(3).

Provisions of No Effect

263.

[Amendment: 2005, 2011]

No effect shall be given to a provision in the articles of association permitting a company to enter into a contract to insure the liability of an office holder therein, to a provision in the articles of association or to a board of directors resolution permitting the indemnification of an office holder, or to a provision in the articles of association exempting an office holder from liability toward the company, in respect of any of the following:

(1)a breach of the duty of loyalty, except with respect to indemnification and insurance for a breach of the duty of loyalty as referred to in Section 261(2);

(2)a breach of the duty of care committed intentionally or recklessly, except where committed by negligence only;

(3)an act performed with the intention of unlawfully deriving personal gain;

(4)a fine, civil penalty, financial sanction, or ransom payment imposed upon the office holder.

Non-Derogation

264.

[Amendment: 2005]

(a)No effect shall be given to a provision in the articles of association or in a contract, or to any provision given in any other manner, that derogates from the provisions of this Section, whether directly or indirectly.

(b)No effect shall be given to an undertaking to indemnify or to insurance of an office holder's liability arising from a breach of the duty of loyalty toward the company, except for a breach of the duty of loyalty as referred to in Section 261(2), and an office holder shall not receive, whether directly or indirectly, any such undertaking; receipt of such an undertaking constitutes a breach of the duty of loyalty.

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Chapter IV: Rights of a Director

Right to Receive Information

265.

(a)Every director has the right to inspect the Company's documents and records and to receive copies thereof, and to inspect the Company's assets, to the extent required for the performance of the director's duties.

(b)The Company may prevent a director from inspecting a document or asset of the Company if the Board of Directors is of the opinion that the director is acting in bad faith or that such inspection is likely to harm the interests of the Company.

(c)The court may, upon the application of an external director, determine that the right referred to in subsection (a) shall also apply with respect to documents and records of any related company, if it is satisfied that the information sought is material to the performance of the external director's role.

Right to Engage Advisors

266.

(a)For the purpose of performing the director's role, a director is entitled, in special cases, to obtain professional advice at the Company's expense, provided that the coverage of such expense has been approved by the Company's Board of Directors or by the court.

(b)When the court comes to decide on an application as referred to in subsection (a), it shall consider, inter alia, whether the Company's own experts are not providing the director with the assistance required for the performance of the director's role, and the reasonableness of the amount requested having regard to the grounds for seeking the advice and the financial position of the Company.

Right of Action

267.

(a)Where a director has reasonable grounds to believe that an act by an office holder is about to be carried out that is likely to constitute a breach of an office holder's duty, the director may, after having acted as provided in Section 257 where circumstances so permit, apply to the court for an order enforcing the duty or restraining the act; the court may issue an order restraining the act or any other relief that appears to it appropriate in the circumstances of the matter.

(b)Unless the court determines otherwise, the Company shall bear all expenses incurred by a director who applied to the court pursuant to the provisions of this Section, including court fees and attorneys' fees, at such time as the court shall determine.

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Chapter IVa: Compensation Policy for Office Holders

Determination of Compensation Policy for Office Holders

267a.

[Amendment: 2013]

(a)The board of directors of a public company or of a private company that is a bond company shall determine a policy with respect to the terms of office and employment of office holders in the company (in this Law – the compensation policy), after having considered the recommendations of the compensation committee submitted to it pursuant to Section 118b(1); the compensation policy requires approval by the general meeting.

(b)In the approval of the general meeting of a public company pursuant to subsection (a), one of the following shall be satisfied:

(1)The majority vote count at the general meeting shall include a majority of all votes of shareholders who are neither controlling shareholders of the company nor have a personal interest in the approval of the compensation policy, participating in the vote; abstentions shall not be counted among the total votes of the said shareholders; the provisions of Section 276 shall apply, mutatis mutandis, to any person who has a personal interest;

(2)The total votes against among the shareholders referred to in paragraph (1) did not exceed two percent of all voting rights in the company; the Minister may prescribe rates different from the rate stated in this paragraph.

(c)Notwithstanding the provisions of subsections (a) and (b), the board of directors of the company, except in a public grandchild company, may determine the compensation policy even if the general meeting opposed its approval, provided that the compensation committee and thereafter the board of directors resolved, on the basis of detailed reasons and after reconsidering the compensation policy, that approval of the compensation policy notwithstanding the opposition of the general meeting is in the best interest of the company; for this purpose, "public grandchild company" means a public company controlled by a public company or by a private company that is a bond company, which is itself controlled by a public company or by another private company that is a bond company, controlled by a controlling shareholder.

(d)A compensation policy for a period exceeding three years requires approval once every three years; approval pursuant to this subsection shall be given in the same manner in which the compensation policy is determined pursuant to subsections (a) through (c).

(e)Without derogating from the provisions of subsection (d), the board of directors shall examine, from time to time, the compensation policy as well as the need to adapt it to the provisions of Section 267b if a material change has occurred in the circumstances that existed at the time of its determination or for other reasons.

Considerations in Determining the Compensation Policy

267b.

[Amendment: 2013]

(a)The compensation policy shall be determined, inter alia, according to the following considerations:

(1)Promotion of the company's objectives, its work plan and its policy from a long-term perspective;

(2)Creation of appropriate incentives for office holders in the company, taking into account, inter alia, the company's risk management policy;

(3)The size of the company and the nature of its activities;

(4)With respect to terms of office and employment that include variable components – the contribution of the office holder to the achievement of the company's targets and to the maximization of its profits, all from a long-term perspective and in accordance with the office holder's role.

(b)The compensation policy shall include, inter alia, reference to the matters set out in Part A of the First Schedule A, and provisions shall be determined therein, inter alia, as detailed in Part B of the said Schedule.

(c)The Minister, after consulting with the Israel Securities Authority and with the approval of the Constitution, Law and Justice Committee of the Knesset, may, by Order, amend the First Schedule A.

Regulations Regarding the Matter

267c.

The Minister, after consulting with the Israel Securities Authority, may prescribe that the provisions of this Chapter shall not apply to classes of public companies or bond companies, as the Minister shall determine.

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