Quick Answer: Under Sections 268–283 of the Companies Law 5759-1999, any transaction between an Israeli company and a director, officer, or controlling shareholder must pass through a three-tier approval process: the audit committee, the board of directors, and — for transactions with a controlling shareholder or certain types of compensation — a general meeting of shareholders. A director who has a personal interest in a transaction must disclose it before the discussion and, in most cases, leave the room before the vote. Transactions approved without following this process are voidable, and directors who participate in a vote when conflicted can be personally liable.

Every company doing business with its own insiders runs the same basic risk: the insider gets better terms than an arm's-length counterparty would. Israeli law addresses this directly and in considerable detail. The Companies Law 5759-1999 (Hok HaChevrot) treats related-party transactions not as a matter of discretion but as a procedural obligation — one that applies automatically, whether or not anyone objects, and whether or not the terms are fair.

For foreign investors sitting on Israeli company boards, for US or European parent companies with Israeli subsidiaries, and for founders who are simultaneously shareholders, directors, and executives, this framework creates real exposure. The rules apply to private companies just as much as to publicly listed ones, though the shareholder approval requirements can be waived in certain private company situations. Miss a step, and the transaction is voidable. Participate in a vote you should have sat out, and you face personal liability under the fiduciary duty provisions of Section 252.

The Companies Law does not use the phrase "related party" as a defined term. Instead, it builds the framework around two core concepts: personal interest (inyan ishi) and controlling shareholder (baal shlitta).

"Personal interest" is defined in Section 1 of the Companies Law to mean a personal benefit (or avoidance of personal loss) that a person obtains, directly or indirectly, as a result of a corporate act — including a benefit obtained by a relative or by a company controlled by that person or their relatives. Relatives include a spouse, sibling, parent, grandparent, child, grandchild, and the spouse of any of them. This is deliberately broad: if a director's spouse would benefit from a transaction between the company and the spouse's employer, that director has a personal interest in the transaction even though the director receives nothing directly.

"Controlling shareholder" is defined in Section 268 as someone who holds more than 50% of the company's voting rights, or who has the ability to direct the company's management or its activities even without a majority — for example, through a shareholders' agreement, weighted voting shares, or board appointment rights. A founder who holds only 40% of the shares but who has the contractual right to appoint a majority of the board is likely a controlling shareholder under this definition.

The distinction matters because transactions with a controlling shareholder require the most onerous approval path — including mandatory shareholder approval — while transactions with non-controlling directors follow a somewhat lighter track that can, in private companies, be handled by the board alone in some circumstances.

2. The Three-Tier Approval System

For most related-party transactions, Section 270 of the Companies Law sets out a sequential three-tier process:

Tier 1 — Audit committee (va'adat bikoret). The audit committee must review the transaction and confirm that it is not detrimental to the company. In public companies, the audit committee must include at least one external director and must have a majority of independent directors. In private companies, many of the audit committee's functions can be performed by the board itself if the company has no audit committee — though this only works if the board members who vote are all disinterested.

Tier 2 — Board of directors. After the audit committee approves, the full board must approve the transaction. Directors with a personal interest must declare it before the meeting and, under Section 278, may not participate in the discussion or the vote. A quorum for the transaction approval requires a majority of disinterested directors.

Tier 3 — General meeting of shareholders (asefa klalit). For transactions with a controlling shareholder, or for certain types of director compensation, the shareholders must also approve. The vote at the general meeting follows the "double majority" requirement described in Section 4 below.

In Practice: The Audit Committee Quorum Problem

Many Israeli private companies and early-stage startups have boards of three or four people, all of whom are also shareholders. When the company needs audit committee approval for a founder-related transaction, and the only directors who are disinterested are the same two people who form the audit committee quorum, the process still works — but every step must be documented in writing. The Registrar of Companies (Rasham HaChevrot) does not review individual board approvals, but the company's Israeli legal counsel will need contemporaneous minutes signed by the disinterested directors. If those minutes are missing and the transaction is later challenged — by a minority shareholder, a liquidator, or the Israel Securities Authority (Reshut Niirut) in a public company context — a reconstructed record will carry far less weight than one prepared at the time of approval. Keep a written checklist: audit committee approval with dated minutes, board approval with dated minutes, shareholder approval if required.

3. What Counts as an Extraordinary Transaction?

Not every dealing with a director triggers the full three-tier process. The Companies Law distinguishes between transactions "in the ordinary course of business" and extraordinary transactions (iska yotzet dofen). Ordinary-course transactions with directors still require disclosure of the director's personal interest, but they do not necessarily require audit committee and board approval every time.

An extraordinary transaction is defined in Section 1 of the Companies Law as any transaction that is not in the ordinary course of the company's business, that is not on market terms, or that is likely to have a material effect on the company's profitability, assets, or liabilities. Courts have interpreted this broadly. A service agreement between the company and a director's consulting firm is almost always extraordinary, even if the company regularly uses outside consultants, because the identity of the counterparty (a director) takes it outside the ordinary course. A loan to a director or controlling shareholder is always extraordinary regardless of size.

Specific transaction types that Section 270 explicitly covers include:

  • Loans to directors, officers, or controlling shareholders — always extraordinary
  • Guarantees by the company of a director's or controlling shareholder's obligations
  • Service agreements between the company and entities controlled by directors or controlling shareholders
  • Asset transfers — sale, lease, or license — between the company and an interested party at non-market terms
  • Employment or consulting arrangements with family members of directors

The test is substance, not form. A company that books a payment to a director's spouse as an "office services expense" when the spouse performs no real services has not avoided the approval requirements — it has simply failed to follow them while also potentially mischaracterizing the payment for tax purposes.

4. The Minority Shareholder Double Majority

For transactions with a controlling shareholder — and for certain categories of director compensation — Section 275 of the Companies Law requires that the general meeting approve the transaction by a "double majority." This is one of the most distinctive features of Israeli corporate governance and one that foreign investors regularly misunderstand.

The double majority works as follows:

  • Standard condition: More than 50% of all votes cast by shareholders who have no personal interest in the transaction must be in favor. The controlling shareholder's votes are excluded entirely — they count neither for nor against.
  • Alternative condition: If fewer than 2% of the total voting rights of the company are cast against the transaction, the standard condition is deemed satisfied regardless of the distribution of votes among disinterested shareholders.

In practice the double majority requirement means that a controlling shareholder cannot approve a self-dealing transaction by voting their own shares. A founder who holds 60% of the company and wants to enter a five-year consulting agreement between the company and their own holding company must get a majority of the remaining 40% to vote yes. If those minority shareholders abstain or fail to attend the meeting, the approval fails.

In Practice: Calling the Shareholder Meeting in Time

Under Section 69 of the Companies Law, shareholders must receive at least 21 days' notice of a general meeting (35 days for public companies). For a related-party transaction requiring shareholder approval, that 21-day clock starts the day the notice goes out, not the day the board first discusses the deal. If an Israeli company's founders want to complete a controlling-shareholder transaction — say, a building lease between the company and a property owned by the founding family — and they need the deal signed within the month, they must send the shareholder notice on day one, hold the shareholder meeting on day 22 at the earliest, and sign the lease only after the meeting approves it. Signing before the shareholder meeting voids the approval. For urgent transactions, consider whether the counterparty can give the company a 30-day exclusivity period while the approval process runs. The Israel Securities Authority (Reshut Niirut) regularly fines public companies for holding general meetings with insufficient notice; in private companies the failure is less visible but equally legally consequential.

5. Director and Officer Compensation

Compensation — salary, bonuses, options, severance — is its own category under the Companies Law and has its own approval path under Sections 270–272.

For directors who are not controlling shareholders, compensation must be approved by the audit committee and the board. Shareholder approval is required in public companies but not in private ones. However, if the director's compensation is part of an employment or service agreement that also covers matters outside compensation — for instance, a combined consulting and services agreement — the whole transaction follows the more onerous related-party path.

For officers (CEO, CFO, VP, and anyone directly accountable to the CEO), Section 272 requires audit committee and board approval for the terms of employment. In public companies, the shareholders must also approve. In private companies, officer compensation does not require shareholder approval — but it does require the personal-interest disclosure and recusal from voting if the officer is also a director.

For the CEO who is also a controlling shareholder — a common situation in founder-led companies — the full three-tier process applies: audit committee, board (with all interested directors recused), and shareholder approval under the Section 275 double majority. A founder-CEO who draws an above-market salary without following this process is at risk of having that salary treated as an unauthorized distribution in any subsequent insolvency or minority shareholder litigation.

Severance above statutory minimums also requires approval as a related-party transaction if the departing officer is a director or controlling shareholder. The Severance Pay Law 5723-1963 sets a minimum of one month's salary per year of employment; anything above that floor paid to an interested party requires audit committee and board sign-off, and shareholder approval if the officer is a controlling shareholder.

In Practice: The Retrospective Approval Trap

Section 280 of the Companies Law allows a transaction that lacked the required approval to be ratified retrospectively — but only if, had it been disclosed at the time, a properly constituted approval body would likely have approved it. Courts interpret this narrowly. In practice, an Israeli company that paid an above-market salary to its founder-CEO for three years without following the required approval process cannot simply hold a retrospective shareholder meeting, pass a resolution approving past payments, and move on. The Tel Aviv District Court (Beit Mishpat Mehozi Tel Aviv) and the Economic Department (HaMachala HaKalkalit) have repeatedly held that retrospective ratification of materially unfair transactions is ineffective. The practical lesson: get approvals before the transaction is consummated, not after. If a related-party transaction was entered without proper approval, get Israeli legal advice on whether and how retrospective ratification is available before the next financing round or exit, when the structure will come under due diligence scrutiny.

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6. Consequences of Non-Compliance

The consequences of failing to follow the related-party approval requirements fall into three categories: voidability, director liability, and criminal exposure.

Voidable transactions. Under Section 280, a transaction approved without following the required process is voidable at the company's option. A minority shareholder or a liquidator can apply to the court to rescind the transaction. The court has discretion to decline rescission if third parties have relied on the transaction in good faith or if rescission would cause injustice disproportionate to the harm, but in straightforward cases of a self-dealing director or controlling shareholder, Israeli courts have not been reluctant to void the arrangement and order repayment of any amounts paid out.

Director liability. Section 252 of the Companies Law imposes a duty of loyalty on directors, requiring them to act in the company's interest and to avoid conflicts of interest. A director who participates in the discussion or vote on a transaction in which they have an undisclosed personal interest breaches Section 252. The liability is to the company, not to any individual shareholder, but a minority shareholder can bring a derivative action on the company's behalf under Section 194. In exceptional cases where a director's actions cause direct harm to a specific shareholder's interests, the court may also allow a direct personal action under Section 191.

Criminal liability. Section 254 of the Companies Law makes it a criminal offence for a director or officer to breach their fiduciary duty with the intent to obtain an improper benefit for themselves or for another. The penalty is up to three years' imprisonment. In practice, criminal prosecutions under Section 254 are rare for ordinary governance failures, but they do occur in cases of systematic self-dealing — for example, a controlling shareholder who causes the company to pay personal expenses through a web of related-party transactions while presenting them as legitimate business costs.

7. What Foreign Directors Must Do

A foreign national sitting on an Israeli company's board has exactly the same obligations as an Israeli director. The Companies Law does not distinguish by nationality. That said, foreign directors often discover the personal-interest disclosure requirements for the first time mid-transaction, when Israeli counsel points out that a vote they already participated in was invalid.

The key obligations for foreign directors:

  • Initial disclosure on appointment: Under Section 269, every director must disclose any personal interest in an existing transaction at the time of their appointment. If you join an Israeli company board while your family trust already has a service agreement with the company, that relationship must be disclosed to the board in writing within seven days of your appointment.
  • Ongoing disclosure before each vote: Under Section 268, if a director becomes aware that they have a personal interest in a transaction that is about to come before the board, they must notify the chairperson in writing as soon as practicable and certainly before the meeting at which the transaction will be discussed. Disclosure at the meeting itself is permissible but creates ambiguity about the timing — pre-meeting written notice is cleaner.
  • Recusal from discussion and vote: Under Section 278, a director with a personal interest in a transaction may not participate in the discussion and may not vote. Remaining in the room during the discussion — even silently — can be challenged if the director's presence influenced the outcome.
  • No approval by waiver: A director cannot waive their conflict by simply declaring it and then voting. The recusal requirement is mandatory, not curable by disclosure alone.

For foreign parent companies with Israeli subsidiaries, an additional practical issue arises: the parent may instruct its nominated directors on how to vote on related-party transactions, not realizing that the instructions themselves may create a conflict. A director who votes on an intercompany service agreement between the Israeli subsidiary and the parent, at the instruction of the parent, has a personal interest in the transaction regardless of whether they personally benefit. The solution is for the parent to nominate at least one wholly independent director who genuinely has no affiliation with the parent and can vote on related-party matters without recusal.

Israeli companies that expect to have a series of related-party transactions — intercompany service agreements, management fees, IP licenses between affiliated entities — should adopt a standing related-party transaction policy as part of their articles of association or a board resolution. The policy can pre-authorize categories of ordinary-course transactions up to specified annual amounts (for instance, intercompany IT services up to NIS 500,000 per year), reviewed by the audit committee annually, which reduces the need for a full approval process every time a new invoice is issued.