Newsletter 45 – February 15 2013

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THE LEGAL NEWSLETTER

We are pleased to present another English-language edition of our firm newsletter.  In this edition we provide a brief synopsis of recent court decisions concerning approval of compensation of office holders/controlling parties in public companies and the validity of notices of liens filed with the Registrar of Pledges, and recent amendments to the Companies Law relating to compensation of office holders.

The newsletter, which our firm publishes periodically, addresses important practical developments in the field of Israeli corporate and commercial law.  The objective of the newsletter is to create awareness of these developments and of the underlying principles of the issues discussed.  We hope that you will find the newsletter informative and helpful.  Any comments or suggestions are appreciated.  If you need further information or have any questions concerning the issues discussed in this newsletter, please contact either Yoram Shiv, 972-3-607-4777, yoram@sask.co.il, or Alex Berman, 972-3-607-4777, alex@sask.co.il.

You can view previous editions of our newsletter on our website: www.sask.co.il.

Sharir, Shiv & Co., Law Offices

Corporate Law / Payment of Salary to CEO of Public Company in Advance of Shareholder Approval / Supreme Court

The Companies Law requires shareholder approval of compensation arrangements between a company and a controlling party who serves as its CEO.  In the matter before the Supreme Court, a restraining order had been issued preventing the convening of a scheduled shareholders meeting called to approve the CEO’s compensation.  Consequently, the CEO was providing services without receiving payment. The CEO petitioned the Court to lift the restraining order.  The Court refused to lift the restraining order but approved, as a temporary measure until the shareholders decided in the matter, payment of compensation on a retroactive basis for the period during which compensation had been withheld, equal in amount to the compensation that had been properly approved for the CEO’s prior periods of service.  However, the Court also ordered that the CEO provide security to ensure repayment to the company in the event that the approval of the compensation was not eventually obtained.

Corporate Law / Contract with Controlling Party Void unless Approved by Shareholders / District Court, Economic Division

The District Court, Economic Division, approved a derivative suit on behalf of a public company against its controlling party concerning an employment arrangement between the controlling party and the company that had not been approved by the company’s shareholders.

The shareholders had properly approved an employment agreement with the controlling party with respect to his service as Chair and CEO of the company.  Some period after such approval, the controlling party resigned from the position of Chair but continued to serve as a director and as CEO of the company receiving the same compensation that had been previously approved.

The Court found that as the agreement related to service as both Chair and CEO, once the controlling shareholder ceased to serve as Chair, the agreement should have been resubmitted to shareholders for approval.  The Court noted that it did not have authority to ratify the agreement, even if the failing failure to obtain proper approval was in good faith, and that the employment terms had to be resubmitted to the company’s shareholders for approval as required by the Companies Law.

The Court referenced the Companies Law requirements for shareholder approval (including approval of a majority of the disinterested shareholders) of transactions with interested parties.  The Companies Law provides that any transaction that does not receive such approval is void and unenforceable.

As the contract was void, the controlling party was required to return to the company any amounts that he had improperly received.  Interestingly, the Court noted that if it had been established that the compensation in question was reasonable in light of the nature of the services provided, then it would not be necessary to require return of the amounts paid to the controlling party, as a company is required to pay reasonable compensation for services rendered to it even in the absence of an agreement.

 

Pledges / Validity of a Pledge in the Absence of Details Concerning the Underlying Loan / Supreme Court

A couple received a bank loan which was secured by registering a pledge on their rights to real property in the pledge registry at the Registrar of Pledges. When the couple fell behind in their loan payments, the bank initiated proceedings with the execution office to recover its debt. The couple was subsequently declared bankrupt and the bank’s recovery proceedings against the couple were stayed. The bank then filed an application with the court, requesting the resumption of its proceedings at the execution office on the basis that it was a secured creditor.

The bankruptcy trustee opposed the bank’s application, alleging that the pledge was invalid with respect to third parties, including the trustee, because the original notice of pledge lacked sufficient detail regarding the nature of the secured debt. The trustee claimed an additional defect with the pledge, as the bank did not provide the Registrar of Pledges with any notice of the actual provision of the loan.

The Court held that a notice of pledge does not need to include specific details concerning the type or amount of debt secured by the pledge in order to establish the pledge’s validity, or priority with regard to other creditors, including a bankruptcy trustee.  Moreover, a holder of a pledge relating to a future event (i.e., provision of funds pursuant to a loan agreement) is not obligated to update, as a condition to the pledge’s validity, the notice of pledge regarding the status of the debt secured by the pledge. Any question regarding whether a pledge secures a specific loan will be decided according the rules governing the interpretation of contracts, by examining the contract between the debtor and the pledge-holder relating to the pledge and the loan in question.

We emphasize that this decision applies only to the pledge registry at the Registrar of Pledges.

Corporate Law / Amendment 20 to the Companies Law, 1999 / Effective December 12, 2012

Amendment 20 is intended to strengthen corporate governance in connection with compensation awarded to senior executives in public companies by strengthening the correlation between performance and salary and by including minority shareholders in the process of development of compensation policies and the approval of senior executive salaries. Highlights of the amendment are described below.[1]

Amendment 20 requires public companies to constitute a Compensation Committee to establish the company’s compensation policy. All of the company’s external directors are to serve on, and form a majority of, the Compensation Committee, with one of them acting as Chair. The Compensation Committee’s remaining members are to be comprised of non-affiliated directors that receive the same pay as the external directors.

The Compensation Committee will consider the following issues when it develops the Company’s compensation policy:

  • Promotion of corporate goals, work plans, and long-term policies.
  • Creation of incentives, inter alia, taking into consideration corporate risk management policies.
  • Company size and the nature of operations.
  • Officer education, qualifications, expertise, professional experience and accomplishments, as well as position, areas of responsibility and previous signed agreements regarding salary conditions.
  • Relationship between an officer’s terms of compensation and those of the company’s other employees and contractors, paying special attention to average and median levels of salary and the impact of differences in levels of compensation on corporate labor relations.
  • Bonuses and options: the compensation policy must provide for “claw back” provisions – the return to the Company of amounts paid in the event that payment was made on the basis of mistaken facts that are restated in the Company’s financial statements.
  • Establishment of minimum holding and vesting periods for variable equity components, taking into consideration appropriate long-term incentives.
  • Severance pay must take into account the term of an officer’s employment or service, conditions of employment and service, corporate performance during this period, the officer’s contribution towards reaching company goals and increasing profits, and reasons for retirement.
  • Ceilings on retirement grants.

The Compensation Committee forwards its recommendations to the Board of Directors, and the Board of Directors establishes the company’s compensation policy after considering the Compensation Committee’s recommendations. The compensation policy must then be approved by a special majority of the shareholders (approval by the majority of votes of shareholders that are not controlling shareholders or interested parties).

Notwithstanding the foregoing, the Board of Directors may establish a compensation policy even where the shareholders oppose it, provided that first the Compensation Committee and then the Board of Directors decide, on the basis of detailed reasons and after a renewed discussion of the compensation policy, that notwithstanding the General Meeting’s opposition, the approval of the compensation policy is in the best interests of the company.

Amendment 20 requires that the terms of employment and service for the CEO of a public company are approved by the same process as is prescribed for the approval of the compensation policy.

This newsletter provides general information and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.


[1] Please note that this brief summary does not address all aspects of Amendment 20.