Ilan Blumenfeld

In Israel, cooperative society law (unlike corporate law) does not address the tension between the various organs in a cooperative society. Therefore, it is sometimes difficult to understand the corporate governance in a cooperative society and the separation of powers in it. However, the principles created and developed in corporate law may be applied to cooperative society law by way of inference.

According to corporate law, the separation between the organs in a corporation, and their duties, is necessary to grant the corporation’s officers independence. Such corporate officers must be capable of exercising their independent professional discretion in order to guide the corporation solely according to the corporation’s best interests and not necessarily according to the best interests of the shareholders.

The segregation of duties between corporate organs (in private and public entities) derives from the principle of separation of powers. As opposed to the Cooperative Societies Ordinance, the Companies Law specifies the hierarchy of powers in a company and how each organ supervises the organ under it. According to the Companies Law, the general meeting and the board of directors have completely different powers. For example, section 57 of the Companies Law specifies the powers of the general meeting, while section 92 of the Companies Law specifies the powers of the board of directors.

Furthermore, according to the law and the principle of separation of powers, each of the organs in a company is an independent organ, which is not subject to the authority of the other organs, and one organ has no power to instruct another organ on how it should exercise its power and authorities. Moreover, a board of directors that delegates its independent discretion to others (to the shareholders, for example) is committing a breach of its obligations to the company and may face sanctions under the law.

Differences between Corporate Law and Cooperative Society Law

Several cases arose recently that raised the question of whether a general meeting in a cooperative society can overturn the decisions of its executive board.

In some of the cases, the court took the idea of the “business judgement rule” from corporate law and applied it to cooperative societies. Thus, an executive board (a cooperative society’s equivalent to a company’s board of directors) that made a decision involving no conflicts of interest benefits from the “presumption of propriety” and the court will not usurp the executive board’s authority and certainly not delegate it to the general meeting. Furthermore, one significant court ruling explicitly stated that not only is a cooperative society’s general meeting not allowed to overturn a decision of the executive board, but also that the executive board itself cannot retract its own duly passed decisions, if there are third parties relying on those decisions.

Therefore, it appears that if a cooperative society’s articles of association contain no explicit provision imposing an obligation on or conferring any right to the society’s general meeting to intervene in a resolution passed by the executive board, the society’s general meeting cannot intervene in a resolution of the executive board that was duly resolved, provided the resolution was not passed with mala fides or unreasonably.

***

We are at your service if you have any questions pertaining to the laws governing cooperative societies.

Adv. Ilan Blumenfeld is a partner in Barnea Jaffa Lande’s Corporate Department.