Summary

On April 17, 2016, the Israeli Minister of Jusĕce published an amendment to the Companies Law Regulaĕons (Relief for Companies Whose Securiĕes Are Listed for Trading on Foreign Stock Exchanges) (the "Amendment" and "Regulaĕons" respecĕvely) that exempts certain Israeli companies whose shares are traded on certain U.S. stock exchanges from the requirement under the Israeli Companies Law, 5759‐1999 (the "Companies Law") to appoint external directors. The Amendment, which was effecĕve immediately, also exempts the same category of companies from the related requirements under the Companies Law as to the composiĕon of the audit and compensaĕon commiĥees of the board of directors.

Applicability

The exempĕons provided by the Amendment apply to Israeli public companies whose shares are listed on any of the following U.S. stock exchanges: (1) New York Stock Exchange (NYSE); (2) NYSE MKT (formerly the American Stock Exchange); (3) NASDAQ Global Select Market, (4) NASDAQ Global Market and (5) NASDAQ Capital Market. The exempĕon applies regardless of whether a company's shares are listed solely on any such exchange, or listed dually on such exchange and on the Tel Aviv Stock Exchange. In order to qualify for the exempĕon, any such U.S.‐traded company must lack a controlling shareholder (as defined under the Companies Law).

Prospecĕve Condiĕons to be Met

Any company seeking to avail itself of the exempĕons provided by the Amendment must comply, on a going‐forward basis, with the board independence, and audit and compensaĕon commiĥee composiĕon requirements, of the U.S. exchange on which its shares are listed, as applicable to domesĕc U.S. companies. Those U.S. exchange requirements mandate that a majority of the members of the board and all members (at least three, in the case of the audit commiĥee, and at least two, in the case of the compensaĕon commiĥee) of the audit and compensaĕon commiĥees be determined by the board to be "independent directors" under the exchange lisĕng rules. The U.S. exchanges also require that members of the audit and compensaĕon commiĥees qualify as independent under Rules 10A‐3 and 10C‐1, respecĕvely, of the Securiĕes Exchange Act of 1934, as amended (the "Exchange Act"). Those laĥer rules disqualify "affiliates" (as defined under U.S. securiĕes regulaĕons) of the company or its subsidiaries from being independent for audit commiĥee purposes, and require that the source of compensaĕon, and "affiliate" status (if any), of any board member be considered in determining independence for compensaĕon commiĥee purposes.

While mandaĕng compliance with the above U.S. rules, the exempĕons under the Amendment nevertheless preserve the requirement under the Companies Law (which generally applies to external directors) that if, at the ĕme of elecĕon of a director, all exisĕng members of the board are of the same gender, a company must elect a board member of the opposite gender.

Elecĕon to be Governed by the Exempĕons

Any company seeking to avail itself of the exempĕons under the Amendment can do so by having its board of directors affirmaĕvely elect for the company to be governed by the exempĕons. Shareholder approval is not required for such an elecĕon. Such an elecĕon is furthermore not irrevocable under the Amendment, such that a company's board may later determine to subject the company to the Companies Law requirements related to external directors and the composiĕon of the audit and compensaĕon commiĥees.

Transiĕon Provisions

Exisĕng external directors of a company that elects to be governed by the exempĕons can, at the discreĕon of the board of directors, be transiĕoned immediately into a term of service that matches that of all non‐external directors. Typically, that will result in the former external director serving unĕl the next annual general meeĕng of shareholders, or, in the case of a company with a classified ("staggered") board of directors under its arĕcles of associaĕon, unĕl the annual meeĕng of the class into which the director is placed. In the alternaĕve, the Amendment permits a company to allow the former external director to conĕnue to serve unĕl the earlier of (i) the end of his pre‐exisĕng term as an external director, or (ii) the second annual shareholder meeĕng following the company's elecĕon to be governed by the exempĕon.

Any external director serving at the ĕme of a company's elecĕon to be governed by the Amendment may conĕnue to serve as an ordinary director (and be re‐elected for mulĕple terms), despite the usual two‐year "cooling off" period during which former external directors are prohibited from serving in any capacity for the company following external director service.

Implicaĕons of the Amendment

The Amendment is aimed to provide relief from excessive layers of corporate governance requirements that have burdened Israeli public companies that are traded in the U.S. It is part of a move by the current Israeli Jusĕce Ministry and Israeli Securiĕes Authority to ease regulaĕon on Israeli public companies generally and pave the way for smoother access for them to the capital markets, whether in Israel or in major markets abroad, such as the U.S. The Amendment in parĕcular will enable Israeli companies traded in the U.S. to have more of the "look and feel" of their domesĕc U.S. counterparts. While Israeli companies that elect to be governed by the exempĕons will be bound by the U.S. stock exchange rules for key governance maĥers such as board independence and audit and compensaĕon commiĥee independence, this will not sĕfle their flexibility enĕrely. Israeli companies will sĕll be able to elect to "opt out" from other stock exchange requirements applicable to domesĕc U.S. companies, such as quorum requirements, and shareholder approval requirements for certain transacĕons involving share issuances and equity compensaĕon plan amendments and the like. For that reason, the Amendment seems like a win‐win opportunity for U.S. traded Israeli companies. The one potenĕal downside to keep in mind for a company that lacks a "staggered" board of directors is that the eliminaĕon of external directors will eliminate one quasi‐takeover defense mechanism— the three‐year term of external directors who, while technically independent, o├en bear certain loyalĕes to management and its allies on the board of directors in actuality. Therefore, a company that fears a hosĕle takeover may want to contemplate that factor before elecĕng to be governed by the new leniencies.

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