Directors‘ Liability in Israel

Under Israeli law, directors have various sources of responsibility that may lead to liability.

The various sources can be caricaturised in general by three main categories:

• the duty of loyalty and good faith to the company and shareholders as a whole;
• the duty of care and diligence, and;
• the recently further elaborated duty to know and act accordingly.

More particularly, the sources of law are various and vary from the Israeli corporate laws (sections 252-256 of The Companies Law 5759-1999"), Securities laws, tort laws, environment laws and regulations, fundamental Principles of law such as Good Faith and more.

Moreover, throughout the years, case law has been applying the principle of the Business Judgment Rule in order to determine whether the conduct of the director, was reasonable in line with the director's duties to the company and shareholders as a whole and in an adequate manner as expected from directors.

The Companies law provides that any breach of the directors obligations and duties may provide cause for a lawsuit similar to a breach of contract, in addition to any other sources of law.

Actions against directors for civil liability can be brought by, The Company itself; by Shareholders; by a Director of the company; and possibly also by a third party that can prove the personal involvement or breach of duty of a director in the concerned matter that affected the third party and/or personal responsibility of the director.

Under Israeli law, Criminal liability may arise for directors for breach of obligations or offenses under the Penal (criminal) Code for matters such as fraudulent registry in corporate documents, knowingly harming the company's ability to stand by its commitments, fraud and breach of loyalty to the company.

In addition, under the Israeli securities law, criminal liability may arise for matters such as insider trading, misleading investors or the Securities authority, intervening with administrative actions, etc.

Moreover, criminal liability may arise under many additional sources of law, such as antitrust and competition law, consumer laws, employment law, taxation, environmental law, health, and safety laws and regulations.

Criminal proceedings may be initiated solely by the state authorities, namely by the state's Attorney's Office, although the initial stage and investigation might origin from other regulatory institutions such as the Israeli securities authority or environmental authorities and the like.

In General, the civil statute of limitations is 7 years from the point of time the possible claim has arisen or from the point of time it was discovered by the potential claimant (the later).

For criminal cases, in light of a rather recent amendments (in October 2019) to the Israeli Act of Criminal Code 1982, the statute of limitations regime is quite complex and varies significantly depending on the severeness of the matter and offense and its category – the more severe the crime (reflected by the category classification and the possible punishment) the longer the statute of limitations.

For instance: A misdemeanor offense the incurs a maximum of 3 yeas imprisonment, has a statute of limitations of 5 years, whereas an offense categorized as a crime (that may incur more than 3 years imprisonment – such as fraudulent registry of a corporate document) the statute of limitations is of 10 years, and on the other side of the spectrum, for a Sin (that may incur not more than 3 months imprisonment) the statute of limitations is of 1 year.

Statute of limitations in criminal law may be extended by the law enforcement authorities for various reasons such as extended need of time for investigations etc.

Sections 258-263 of The Israeli Companies Law 5759-1999 provide the framework defining how and what kind of insurance a company may provide for its directors, such as it has to be allowed in the company bylaws, no insurance for breach of the duty of loyalty no insurance for intentional or reckless breach of the duty of caution etc.

There are commonly various insurance coverages for directors' liability for negligence, misstatements, errors, omissions and similar – and it is possible for directors and the company to contract an insurance policy to cover the risk liabilities and reasonable pertained costs subject to the limitations by law.

Nevertheless, as mentioned, there are certain matters that may not be insured and the corporation may not exempt the directors from liability of such as the breach of the duty of loyalty or criminal responsibility and more.

The liability of directors might vary considerably, depending on the scope of involvement of the director and the type of connection between the director and the shareholders or key shareholders, holders of controlling interest.

The more the director was involved in a certain conduct or misconduct the more possible liability, and similarly the more the director is involved or connected to a key controlling shareholder greater liability may be expected as opposed to an independent or external director.

However the evolving case law regarding the duty to know, to monitor and be involved is on the rise and accordingly expanding possible liability also to the more "remote" directors, that are expected to be more aware and inquire what is being done within any by the corporation.

Accordingly, while the regime of personal liability of each director depending on his/her involvement is still in place, the court may also refer to the board of directors as a whole in order to determine collective responsibility.

In general, liability of shareholders is limited to the value of their contribution and holdings in the company, in principle this is also the case for a holding company controlling the appointment of directors in a subsidiary and similarly the holding company and the director are separate legal entities for any reference.

However, in light of the limitations and careful review of the actions of a controlling shareholder, enhanced liability may be applied to a director appointed on behalf of the controlling shareholder (the holding company of the subsidiary) this might be the case especially when examining the breach of a legal obligations of the director or questionable actions of the company in favour of the holding company, and even more so when reviewing the duty of Loyalty to the company that must always overcome any interest of the shareholder controlling holding company.