How a Toronto Shareholder Recovered NIS 270,000 From an Israeli Lease

Result: Defective related party lease unwound, NIS 270,000 repaid to the company and the monthly rent reset from NIS 25,000 to NIS 18,500 · Timeline: 11 months from instruction to a consent judgment · Challenge: Interested director approved his own lease to the company · Authority: Economic Department of the Tel Aviv District Court · Financial Impact: NIS 270,000 recovered plus NIS 78,000 a year saved going forward

Background

Our client is an engineer in Toronto who put CAD 400,000 into an Israeli industrial coatings distributor in 2018 and took 34% of the shares. He is not a director. His co-owner holds 66%, runs the company day to day from Petah Tikva, and for six years the arrangement worked well enough. Dividends were modest but real, the annual financial statements arrived in Hebrew with an English summary, and our client, who does not read Hebrew, read the summary.

In February 2026 he was looking at a company bank statement for an unrelated reason and saw a standing order for NIS 25,000 a month going to a name he half recognised. It was a company. When he searched it at the Registrar of Companies he found his co-owner listed as its sole shareholder and director. The company's warehouse had been moved into a building his business partner personally controlled, and the rent had been running since April 2023.

The Challenge

Israeli law has an answer to this, and it is not a general principle of good faith. Chapter Five of the Companies Law 5759-1999 sets out a specific approval track for transactions in which an office holder has a personal interest, and it applies to a two shareholder company in Petah Tikva exactly as it applies to a listed one.

Section 270(1) is the gateway. It catches a transaction of the company with an office holder, and a transaction of the company with another person in which an office holder has a personal interest. A lease of a building owned by a company the director controls sits squarely inside it. What happens next turns on whether the transaction is extraordinary, which the Law defines as one outside the ordinary course of business, or not on market terms, or likely to have a material effect on the company's profitability, assets or liabilities. A market rate arm's length lease goes to the board under Section 271. An extraordinary one falls under Section 272(a), which layers audit committee approval ahead of the board, though a private company that is not a bond company is not required to maintain an audit committee, so in practice the approval lands on a properly constituted board.

The provision that decided this case is Section 278. A director with a personal interest in the approval may not be present during the deliberations and may not take part in the vote. And Section 280 provides that a transaction with an office holder which was not approved under Chapter Five, or where a substantial defect occurred in the approval process, has no effect as against the company or the office holder. Section 193 sits alongside, requiring a controlling shareholder to act with fairness towards the company.

The obstacle was never the law. It was information. Israeli private companies file almost nothing useful with the Registrar of Companies, and a shareholder in Ontario cannot walk into the office in Petah Tikva and ask for the minute book. Everything had to be obtained in writing, in Hebrew, across a seven hour time difference, from a co-owner who had every reason to be slow.

In Practice: Section 270(1) of the Companies Law 5759-1999 catches a transaction in which an office holder has a personal interest, Section 271 sends a non extraordinary one to the board of directors, Section 272(a) adds an audit committee stage where one exists, and Section 278 excludes the interested director from both the discussion and the vote. Section 280 denies effect to a transaction approved defectively. On a related party lease at NIS 25,000 a month, three years of overpayment at a 30% premium is roughly NIS 270,000 taken out of the company. Proceedings go to the Economic Department of the Tel Aviv District Court, where court fees are 2.5% ad valorem with half payable on filing, and an application for leave to bring a derivative claim under Section 198 typically takes 6 to 12 months to decide.

What We Did

We began with a written demand, not a claim. A shareholder is entitled to inspect the board protocols and the underlying agreement, and asking for them costs nothing and reveals a great deal. Our letter asked for four items: the signed lease, every board protocol approving or ratifying it, the minute recording who was present at the deliberation, and any valuation the board had relied on in setting the rent.

What came back six weeks later was almost helpful. There was a lease. There was a single board protocol dated 19 March 2023 approving it. The protocol recorded two directors present, our client's co-owner among them, and it recorded the resolution as unanimous. There was no valuation of any kind. In other words the interested director had sat in the room and voted on his own lease, and there was nothing on the file to suggest the rent had ever been tested against the market. Section 278 was breached on the face of the document the company itself produced.

We then did the work the board had not. An Israeli licensed valuer (shamai mekarke'in) assessed comparable industrial space in the same area at NIS 18,000 to NIS 19,000 a month for the floor area actually occupied. That put the lease at roughly a 30% premium and turned a governance complaint into a quantified one: about NIS 270,000 removed from the company over three years, of which our client's economic share was around NIS 92,000.

The next step was procedural and it is where non residents usually stall. A shareholder cannot simply sue in the company's name. Leave is required under Section 198 to bring a derivative claim, and the application goes to the Economic Department of the Tel Aviv District Court. Court fees are 2.5% ad valorem with half payable on filing. We prepared the application, the valuer's report and our client's affidavit, and we prepared them to be signed in Ontario. Since Canada acceded to the Apostille Convention on 11 January 2024, an Ontario document carries a single apostille from Official Documents Services in Toronto rather than consular legalisation, so the affidavit and the power of attorney were sworn before an Ontario notary, apostilled provincially, couriered, and translated into Hebrew under a notarial translation certificate in Tel Aviv. Our client attended nothing. The general framework for these applications is set out in our guide to interested party transactions in a private Israeli company, and the oppression and derivative routes in our answer on what minority shareholders in an Israeli company can actually do.

We filed, and then we did not press for a hearing. A Section 280 argument that appears on the face of the company's own protocol is worth more in negotiation than in judgment, because the other side's lawyer can read it as easily as we can.

In Practice: Section 278 of the Companies Law 5759-1999 makes the interested director's mere presence during the deliberation a defect in its own right, independent of how he voted, and the board protocol is therefore the single most valuable document to demand. Where the defect is established, Section 280 leaves the transaction with no effect as against the company, which is why a NIS 25,000 monthly lease with no valuation on file settles rather than proceeds. Leave under Section 198 is decided by the Economic Department of the Tel Aviv District Court in 6 to 12 months, and the Prescription Law 5718-1958 gives a general limitation period of seven years, so a lease running since 2023 was comfortably in time.

The Outcome

The case settled nine weeks after filing and was recorded as a consent judgment. The director repaid NIS 270,000 to the company. The lease was terminated and replaced with a fresh one at NIS 18,500 a month, which is NIS 78,000 a year less than the company had been paying, and this time it went to the board under Section 271 with the interested director recorded as absent from the room and abstaining from the vote, exactly as Section 278 requires. Our client's costs were paid in part.

Two further things went into the settlement, and they matter more over ten years than the cash did. The articles were amended to require prior shareholder approval for any contract between the company and a party connected with an office holder where the annual value exceeds NIS 100,000. And the company undertook to circulate every board protocol to all shareholders within 14 days of the meeting, in Hebrew with an English translation. A shareholder in Toronto who receives the protocols does not need a derivative application to find out what happened.

On the Canadian side the effect was quieter but real. Our client holds a foreign affiliate and files a T1134 information return for it each year, and those filings had been prepared from company financial statements that carried an inflated rent expense and therefore understated income. Once the repayment and the reset rent were booked, his Canadian accountant revisited the affected years rather than leaving a set of returns built on figures the company itself had abandoned. Shares of a foreign affiliate belong on the T1134 rather than on the T1135 Foreign Income Verification Statement, and this was a useful moment to confirm that his filings had that right.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. Ask for the board protocol before you ask for anything else. Section 278 of the Companies Law 5759-1999 makes the interested director's presence during the deliberation a defect on its own, so a protocol recording him as present and voting often decides the case without a witness ever being cross examined.
2. Quantify before you complain. A governance objection is arguable; a licensed valuer's report showing a 30% premium and NIS 270,000 removed from the company is not, and it is what converts a letter into a settlement.
3. A minority shareholder cannot sue in the company's name without leave under Section 198, and that application goes to the Economic Department of the Tel Aviv District Court with fees at 2.5% ad valorem, half on filing. Budget for it before you start.
4. Fix the information flow, not only the transaction. An undertaking to circulate board protocols within 14 days with an English translation is worth more to an overseas shareholder than the cash recovered, because it removes the three year blind spot that allowed this to run.
5. Since 11 January 2024 a Canadian affidavit or power of attorney for Israeli proceedings needs one provincial apostille and a Hebrew notarial translation, nothing more. The entire application can be sworn in Ontario and run in Tel Aviv without the shareholder travelling.

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Facing a Similar Situation?

If money is leaving an Israeli company you part own through a contract with somebody connected to management, the answer is usually in a single board protocol, and you are entitled to ask for it today.

Contact us for a confidential consultation about your Israeli legal matter.