Shareholders
Who is a shareholder?
A shareholder is an individual or a corporate entity that holds shares in a company, thereby becoming one of its owners. Each share represents a portion of ownership in the company, no matter how small or insignificant it may be. As such, a shareholder has rights granted by law and agreements. Even in the absence of a Shareholders’ Agreement, the Articles of Association of the company serve, by definition, as a contract between the shareholders and the company.
The General Meeting
The General Meeting serves as the voting forum for all shareholders of the company. The law requires that it be convened at least once every certain period—generally, every 15 months. However, this requirement can be waived in the Articles of Association, except for once every three years, when the company must appoint its external auditors.
The General Meeting has several powers within the company. For example, it appoints the directors and also appoints the company’s auditors. The reason why the General Meeting appoints the external auditors instead of the Board of Directors is that the auditors are considered external examiners of the company, and their role is to oversee the Board’s actions—providing an additional layer of oversight.
Another authority of the General Meeting is approving or amending the Articles of Association, as well as increasing or decreasing the company’s authorized share capital.
Additionally, the General Meeting is responsible for approving a company merger or voluntary liquidation.
A company may also establish provisions in its Articles of Association that allow it to reassign powers typically held by another corporate organ (such as the Board of Directors or the CEO) for specific matters or for a limited period, provided that the timeframe does not exceed what is required under the circumstances.
The Board of Directors
What is a director and what is their role?
The law states that the Board of Directors shall determine the company's policy and oversee the performance of the CEO and company operations. Therefore, the Board's responsibilities can be divided into two main categories: supervision and policy formulation.
Among its specific responsibilities, the Board must set the company’s business plans, principles for financing, and priorities. It must also establish the organizational structure and compensation policy. It has the authority to declare the issuance of bonds, appoint and dismiss the CEO, allocate shares and securities within the limits of the authorized share capital, decide on dividend distributions, and more.
The Board of Directors also has residual authority—any power that is not explicitly granted to another corporate organ (such as the CEO) by law or the company’s Articles of Association is automatically vested in the Board.
Similarly, the General Meeting of shareholders also holds a residual power over the Board, meaning that if the Board is unable to perform its function, the General Meeting can step in and assume that authority.
To carry out its duties, the law allows the Board to establish specialized committees. These committees focus on specific areas, such as credit management, IT governance, and more.
In a public company, the Board is required to appoint an Audit Committee. In other words, every public company must have an Audit Committee.
However, the law prohibits delegating certain matters to committees. For example, approving financial statements and deciding on dividend distributions cannot be delegated and must be handled directly by the Board.
Duties of a Director
In Israeli law, directors are subject to two primary duties: Duty of Care and Duty of Loyalty. Extensive literature has been written on these subjects, so we will provide only a high-level overview.
The Duty of Care is a tort-based duty, requiring directors not to act negligently toward the company. Negligence is assessed based on the standard of a reasonable director, meaning that deviation from this standard may lead to liability for damages to the company.
This standard of care has been adopted from the United States (specifically from Delaware) and is known as the Business Judgment Rule. This rule evaluates the decision-making process that led to an alleged harm rather than the harm itself.
The Duty of Loyalty relates to whose interests directors must serve—should they act in favor of the shareholder who appointed them and has the power to remove them, or should they act in favor of the company itself?
According to the law, the Duty of Loyalty is a broad obligation that requires directors to act in good faith and in the best interests of the company. They must not promote their personal interests or those of the shareholders who appointed them.
In fact, a shareholder may not bind a director’s discretion, and a director may not allow their discretion to be influenced—they must always consider what is in the best interests of the company.
The Duty of Care is a tort-based duty that requires proof of negligence and demonstration of actual harm. In contrast, the Duty of Loyalty is a more general duty—a director must act in good faith and in the best interests of the company. If they fail to do so, they breach their duty of loyalty.
Unlike the Duty of Care, the Duty of Loyalty does not require proving a specific standard of conduct. The mere failure to act in the company's best interests constitutes a breach of this duty, even if no specific harm resulted.
