A director of the Israeli company I part-own wants to lease his own building to it. What approval does Israeli law require?

Related-party leases are the most common way value leaves a small Israeli company, and Israeli law does not leave them to the goodwill of the people signing. Chapter Five of the Companies Law 5759-1999 sets out an approval track that applies to a two-shareholder company in Petah Tikva exactly as it applies to a listed one. The lease your co-owner is proposing needs to travel that track. If it does not, Section 280 says the company can walk away from it.

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Detailed Answer

Section 270(1) is the gateway. It catches a transaction of the company with an office holder of the company, 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 the director, or by a company he controls, sits squarely inside it. What happens next depends on whether the transaction is extraordinary, a term 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, its assets or its liabilities. An ordinary, arm's length lease is approved by the board under Section 271, unless the articles provide some other method. An extraordinary one falls under Section 272(a), which layers audit committee approval ahead of the board. A private company that is not a bond company is not required to maintain an audit committee, so in practice that approval lands on the board sitting properly, which is where the real protection sits: Section 278 provides that a director with a personal interest in the approval may not be present during the deliberations and may not take part in the vote. That is not a formality you can paper over afterwards. Section 280 provides that a transaction with an office holder that 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 it and requires a controlling shareholder, or a shareholder whose vote decides a matter, to act with fairness towards the company.

For a shareholder in New York the practical problem is not the rule, it is finding out. Israeli private companies file almost nothing useful with the Registrar of Companies, so a related-party lease usually surfaces months later in a line of the annual financial statements or in a bank statement showing a standing order to a name you half recognise. Two steps are worth taking before anything else. Ask in writing for the board protocols and the signed lease, which a shareholder is entitled to inspect, and check whether the interested director was recorded as absent from the vote. Time zones make the second step easier than it sounds, because the request goes by email and the answer is a document, not a meeting. Where the approval is missing or the interested director voted, the remedy is not a demand letter from abroad but an application to the Economic Department of the Tel Aviv District Court, which can be run entirely by an Israeli lawyer under a notarised and apostilled power of attorney. Our answer on what minority shareholders in an Israeli company can actually do sets out the oppression and derivative routes and how leave to sue is obtained.

In Practice: Section 270(1) of the Companies Law 5759-1999 catches the transaction, 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 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 even a 30% premium is roughly NIS 270,000 out of the company. Proceedings go to the Economic Department of the Tel Aviv District Court, 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.

When to Consult a Lawyer

• The board protocol exists but records the interested director as present. Section 278 makes his presence during the deliberations a defect in its own right, separate from how he voted, and that is the point on which these applications are usually won or lost.
• The lease has been running for years and the company has been paying without complaint. Acquiescence is the standard defence, and the longer you wait after learning of it the harder the Section 280 argument becomes.
• You hold shares through a US LLC or a trust rather than in your own name. Standing to bring an oppression or derivative application is tested against the register of shareholders, and a nominee arrangement has to be unpicked before anything is filed.

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Speak With an Israeli Attorney

We obtain the board protocols and the underlying agreement, establish whether the Chapter Five approval track was followed, and where it was not, bring the application in the Economic Department without you leaving the United States.

Contact us for a confidential initial consultation.