Companies without a Control Core – Draft Bills Calls for Changes

The Ministerial Committee for Legislation has recently re-approved the draft amendment to the Israeli Companies Law in order to better address the representation problem commonly faced by companies with no controlling shareholder.  

The proposed amendments mainly engage in the definition of “control,” the board of directors composition, in replacing the obligation to appoint outside directors with the obligation to maintain an independent majority on the board of directors, and in improving the processes for appointing directors and approving transactions with dominant shareholders.

As of now, the draft bill has not yet completed the requisite legislative process. Therefore, if ratified, the final version of the law may differ from the current draft bill.

Amendment Highlights

Public Companies with No Controlling Shareholder

Amending the definition of “control” in the Securities Law and the Companies Law as it pertains to public companies

The amendment proposes to add a rebuttable presumption that holding 25% or more of the means of control will be deemed control of the company if no other shareholder possesses more than 50% of the means of control.

Composition of the board of directors and board committees in a public companies without controlling shareholder

The amendment proposes replacing the obligation to appoint outside directors to the boards of directors of such companies with the obligation that the majority of the board members be independent directors. The amendment also proposes that all independent directors must possess either accounting expertise (at least one of them) or financial expertise, or professional qualifications, and that at least two of them must be residents of Israel.

The board of directors will be required to define the desired mix of board members, based on the company’s characteristics, needs, and challenges. The board will also have to define the qualifications it believes its members must have, as the basis for selecting candidates the board will nominate for office as directors for approval by the general meeting.

Formation of a nomination committee in a public companies without controlling shareholder

The board of directors plays a particularly important role in overseeing the company’s management, and heightened responsibility in a public company with no controlling shareholder. Therefore, the amendment proposes a revised board procedure for nominating candidates for office as directors for approval by the general meeting. This procedure will be performed by an independent nomination committee appointed by the board of directors, whose composition will be similar to that of the audit committee.

The nomination committee may select candidates for nomination solely from among candidates proposed by the company’s board of directors and not from among candidates nominated by shareholders (holding at least 1% of the voting rights and entitled to nominate a candidate for office as a director) for approval by the general meeting.

Audit committee members in a public companies without controlling shareholder

Considering the proposed amendment to the composition of the board of directors, the draft bill also proposes new obligations regarding the compositions of the audit committee and the remuneration committee. These include that the majority of members of these committees, including the nomination committee, should also be independent directors, that their chairpersons be independent directors, and that a majority of independent directors constitute the quorum for discussions and passing resolutions within these committees.

Gender diversity in a public companies without controlling shareholder

For a company whose independent directors are all of one gender, the amendment proposes that the next independent director appointed in that company be of the other gender (similar to the current requirement pertaining to the appointment of an outside directors).

Outside and independent directors of a public company with no controlling shareholder and in a public company in which control is being acquired

Any outside or independent director holding office in the company immediately prior to the date of the change in the control structure (from a public company with a controlling shareholder to a non-controlling company), or upon the entry into force of the proposed amendment (if the public company operates without a controlling shareholder), may continue holding office. This is provided the director has no affiliation to any of the parties the law prohibits a director from having affiliation to in a company with no controlling shareholder. Furthermore, as of the date the company becomes a company with no controlling shareholder, any outside director who held office up until that date shall no longer be subject to the provisions regarding term of office and dismissal. Instead, the director will continue holding office as an independent director until the end of the next general meeting whose agenda includes the appointment of independent directors.

The same applies vice versa. The amendment proposes that when independent director who holds is office until a public company with no controlling shareholder becomes a company with a controlling shareholder, may continue holding office (as long as the independent director complies with the relevant affiliation prohibitions), and may even be reappointed as an outside director. This is provided that the director fulfills the provisions and qualification criteria regarding outside directors or independent directors, as the case may be, as prescribed in the law. Furthermore, with respect to any person who held office as an independent director and was appointed as an outside director as a result of the change in the control structure, the years of service as an independent director will be taken into account for the purposes of the restriction on years of service as an outside director.

Additional remuneration to an independent director who serves as chair of the board or as lead independent director

With the goal of encouraging independent directors to hold office as chairperson of the board or as a lead independent director, the amendment proposes to allow the payment of additional remuneration to independent directors holding office as chairperson or as lead independent director of public companies with no controlling shareholder. This is in addition to the remuneration to which they are entitled for their services as directors. However, the remuneration committee must ensure that the additional remuneration does not affect the chairperson’s independence. The additional remuneration must be determined in conformity with the company’s duly approved remuneration policy and must be approved in conformity with the provisions regulating the approval of transactions with directors regarding their terms of office and employment.

Transactions with material interested parties

For public companies with no controlling shareholder, the amendment proposes that the company’s audit committee and board of directors must approve any exceptional transaction with a material shareholder (shareholder who holds 10% or more of the means of control over the company) and any exceptional transaction with any other party in which a material shareholder has a personal interest.

Recommendation to appoint a lead independent director alongside the chair of the board in a public company without controlling shareholder

For public companies with no controlling shareholder in which the general meeting has approved that complete separation will not be maintained between the office of chair of the board and the office of CEO (i.e., the chair of the board also holds office as the CEO, or the chair of the board is a relative of the CEO), the amendment proposes to add a provision whereby one of the independent directors will be appointed to hold office alongside the chair as lead independent director. The amendment proposes to add this provision to the recommended corporate governance rules prescribed in the addendum to the Companies Law. The provision should then be enshrined in the company’s articles of association. Such lead independent director will receive powers to influence the board of directors’ work, thus contributing to optimal supervision of the company’s management by the board of directors. To this end, the amendment proposes that such companies’ articles of association should prescribe that the lead independent director:

• Will serve as the representative of the independent directors in managing the board of directors;
• May demand that the board of directors discuss a specific topic.
• Will approve the chairperson’s proposed board agenda.
• Will serve as acting chairperson if the chairperson is absent or is in a state of conflict of interest.
• Will convene a meeting attended solely by the independent directors at least once a year.

Reporting Corporations with or without a Controlling Shareholder

Transactions (which are not transactions regarding terms of office and employment) with directors or transactions in which directors have a personal interest

The amendment proposes to differentiate between transactions with an officer who is a director and transactions with an officer who is not a director.

The amendment proposes that the company’s board of directors and audit committee (and not just the board as the law currently prescribes) must approve any transaction which is not considered as an extraordinary transaction with a director or in which a director has a personal interest, unless the company’s articles of association prescribe a different approval procedure.

The amendment also proposes that the company’s board of directors, audit committee, and general meeting (and not just the board and audit committee as the law currently prescribes) must approve by simple majority any extraordinary transaction with a director or in which a director has a personal interest.

Approval of a remuneration policy and remuneration transactions in private companies that issue debentures

The amendment proposes reliefs to private companies that issue debentures by way of eliminating the need to obtain the general meeting’s approval for a remuneration policy, deviations from the remuneration policy, or remuneration transactions with the controlling shareholder and the CEO.

Composition of boards of directors of public companies whose articles of association prescribe that a director’s term of office does not necessarily have to end on the date of the annual general meeting

The law prescribes a default provision whereby a director’s term of office will be held until the next annual general meeting. However, the law allows companies to deviate this default in their articles of association. For example, a public company may prescribe a staggered board mechanism in its articles of association, i.e., longer terms of office for board members, with only some of the board members replaced each year, rather than the entire board being replaced at once.

However, the amendment proposes a restriction on staggered boards, whereby public companies may not appoint directors for a term exceeding three years, without obtaining the general meeting’s approval. The amendment also proposes that, at any given time, most of the directors’ terms of office must end within two years. Nevertheless, these provisions do not prevent companies from reappointing any of those directors for additional terms, provided that there is no other restriction. The purpose of these restrictions is to ensure that the provision enabling the creation of a staggered board is used to stagger the replacements of directors, and not just to extend their terms of office until their re-appointment.

The proposed provisions aim to enable an external party interested in acquiring control over a company to appoint most of the board members within a maximum of two years and to replace the entire board within three years of the date of the takeover.

According to the draft bill, the law will come into effect 12 months after its promulgation, in order to enable companies to prepare for the enacted amendments.