Israel's Business Structures & Forms
A foreign person or enterprise can operate in Israel through several types of business entities. Of primary importance are corporations and partnerships.
Furthermore, except in unique circumstances, no limitation is placed on the nationality of the shareholders or officers of an Israeli corporation. In fact, all the shareholders, officers and directors may be foreign residents or citizens.
Corporations are governed by the Companies Ordinance (New Version) of 1983, which was modeled on British legislation and are the most common form of business entity in Israel. They may be private or public, limited by shares or guarantees, unlimited or foreign.
The procedure for incorporation includes the filing of a memorandum of association and articles, in accordance with the provisions of the Companies Ordinance, with the Registrar of Companies. Those documents may be submitted in English.
It should be noted that a new Companies Law has been proposed and is now being debated in the Knesset, the Israeli parliament. If enacted, as is anticipated by many legal scholars, it will bring Israeli legislation even more closely in line with modern, western corporate law, especially that prevailing American law.
Israeli private companies are either limited by shares or by guarantee and may have between two to fifty shareholders. They may not offer their shares or debentures to the public, and any transfer of their shares is subject to a board approval. In addition, a private company is not obliged to publish a prospectus in order to issue securities, nor is it required to submit audited financial statements to the Registrar of Companies.
Israeli public companies must have a minimum of seven shareholders. Unlike private companies, they may offer shares and debentures to the public on the stock exchange by issuing a prospectus approved by the Securities Authority or through private placements if the offer is to 35 investors or less. They must file financial statements with the Companies Registrar, and if their shares are listed on the stock exchange, they must also abide by the rules of the exchange and the laws relating to securities and the regulations promulgated by the Securities Authority. In addition, a public company must hold a general meeting of its shareholders at least once a year, at which its management report and audited financial statements must be presented. In those meetings, the shareholders can, inter alia, approve dividends, elect directors and appoint auditors. A publicly traded company must include two independent, non-executive directors on the board, who serve as representatives of the public.
Companies Limited by Shares
Among corporations, this is the most common corporate form. The Companies Ordinance provides the general protections afforded to shareholders in limited liability companies throughout western countries, including the shareholders' limited liability towards the liabilities of the company, which is regarded as a separate legal entity. This protection is not absolute, and may be withdrawn by the courts, by "lifting the corporate veil". This may occur in circumstances where shareholders abuse the corporate form in order to commit criminal acts or to wrongfully depreciate the corporation's assets.
A foreign company may operate in Israel through a branch or through a subsidiary formed under Israeli law.
A foreign company wishing to set up a branch in Israel must register as a foreign company with the Registrar of Companies. According to the requirements of the Israeli Companies Ordinance, a list of its directors and a power of attorney authorizing an individual residing in Israel to receive legal process served on the company must be filed with the Registrar of Companies.
Directors' Duties and Liabilities
Recent legislation has confirmed the case-law based duty of care and fiduciary duty owed by company directors to their company and imposed greater responsibility upon directors. Directors must act competently, in good faith and in the interest of the company. They must not put themselves in a position that may create a conflict of interest between themselves and the company or that may place them in competition with the company. Furthermore, company directors may not take advantage of any business opportunity arising as a result of their position in the company and must disclose any personal interest they may have in a transaction to which the company is a party. Provided full disclosure is made, a company director may enter into a transaction with the company. Transactions with interested parties require board approval, approval of the audit committee, and transactions not in the ordinary course of business require shareholder approval. The interested party may not participate in the board meeting review of the transaction, and at least one-third of the non-interested shareholders participating in the shareholder meeting must vote for the resolution approving the transaction.
The issuance of securities to the public is governed by the Securities Law of 1968 and the rules and regulations of the Tel-Aviv Stock Exchange and of the Ministry of Finance. The main subjects covered by the Securities Law include, inter alia, the establishment, composition and powers of the Securities Authority; the rules relating to prospectuses and the permit for their publication; the manner and form in which the subscription to securities issued by prospectus takes place; the possible liability for a misleading prospectus; and rules concerning insider trading and class actions.
The basic requirement of the Securities Law of 1968 is that securities will be offered to the public only under a prospectus whose publication was authorized by the Securities Authority. The prospectus is then scrutinized by the Securities Authority and is made public within a few days. The prospectus requirement reflects the principle of disclosure as a primary instrument for investor protection. The liability of the signatories to the prospectus for misrepresentation or inaccuracy is strictly enforced.
Partnerships are governed by the Partnerships Ordinance (New Version) of 1975. A partnership may not have less than two nor more than twenty members. The relationship between the partners is usually determined in accordance with the partnership agreement. In the absence of such an agreement, partners are entitled to their share of profits in proportion to their share in the partnership's capital. Unless stated otherwise in the partnership agreement, a partner may withdraw at any time from the partnership. Withdrawal of a partner will liquidate the partnership unless otherwise provided in the partnership agreement.
Partnerships must register with the Registrar of Partnerships, although the Partnerships Ordinance states that failure to register shall not be taken into account when considering whether or not the partnership exists. A limited partnership may not commence business until it has been registered.
A limited partnership must have at least one general partner and one limited partner. The general partner, as in a general partnership, has unlimited liability for the obligations of the partnership. The liability of a limited partner is limited to the sum invested in the partnership. The limited partner may not participate in the management of the partnership and does not have the power to bind the partnership. In addition, a limited partner may not, while the limited partnership is in existence, draw on or receive in return, either directly or indirectly, any part of his investment in the partnership. Violation of this principle may make him liable for the obligations of the limited partnership up to the amount so withdrawn.
In a general partnership, all partners jointly and severally share unlimited liability for the partnership's obligations; such liability may extend to the partners' personal assets. Each partner is permitted to participate in the management of the business and is held to be an agent of the partnership.
A foreign partnership may conduct business in Israel, but it may not establish a place of business in Israel unless it has first registered with the Registrar of Partnerships and received a permit from the Ministry of Justice.
Other Corporate Forms
Joint ventures are an effective method for conducting business between entities from different countries. A joint venture can be formed by a contract or be structured as a partnership or a company.
Agency arrangements may also be of interest to foreign investors. It should be noted that there is no specific legislation dealing with commercial agents and distributors in Israel (except with respect to limitation of commission payable for supplying goods or services to the government). Therefore, there are no statutory requirements regarding the form and content of an agency agreement. In addition, there is no limitation on the nationality or domicile of such agents.
This form of organization is found mainly in agriculture, transportation and in certain types of marketing operations associated with agricultural products. The liability of a member in a cooperative society is generally limited to the amount of shares owned by the member or to an amount specified in the society's articles.
A special law enables non-profit activities to be conducted through an organization. This is a simplified form of an incorporated body and is generally used by charitable organizations.
Israel's anti-trust law is governed by the Trade Restrictions Law of 1988 and is enforced by the Trade Restrictions Authority headed by a Commissioner. The Law and the Authority deal primarily with three issues: restrictive contractual arrangements, mergers and prohibition of monopolies. According to the Law, a contractual arrangement would be considered restrictive if at least one party to an agreement restricts itself in a manner that may reor prohibit competition in the business between the parties to the agreement or between one of the parties and a third party. An arrangement is deemed restrictive if the restriction concerns the price offered or paid, the profit which may be derived, the division of the market according to the location of the business or the people or type of people engaged with it, or the quantity, type or quality of the assets or services rendered.
The Authority also certifies ventures involving the consolidation of companies. A merger is defined as including the purchase of the majority of the assets of one company by another company, or the purchase of shares of one company by another company that provides the purchasing company with either more than 25 percent of the issued share capital, the voting power, the power to appoint more than 25 percent of the directors, or the power to participate in more than 25 percent of the purchased company's profits. The Law applies only if the joint annual turnover of the consolidated companies exceeds US$ 14.5 million or if the merger would either create a monopoly or lead to the vesting of a significant purchasing power in a particular industry in the hands of a single entity. The Authority has the power to prohibit such a merger and also to separate already merged companies if, as a result of their merger, competition was restricted.
The Law also prohibits monopolies. A monopoly is defined as the concentration of more than half of the total supply of assets or purchase of assets, or more than half of the total services rendered or purchased, in the hands of one individual. The Authority's role is to define business entities as a monopoly and to restrict them from abusing their position.
The Authority's involvement in Israel's Business Climate has increased significantly in the past several years. The Law is enforced rigorously, as its violation would constitute a criminal offense.
© 2000 Mena Report (www.menareport.com)