Quick Answer: A shareholders' agreement (*heskem baalei manim*) is a private contract between the shareholders of an Israeli company that governs transfer restrictions, governance rights, exit mechanisms, and investor protections beyond what the Companies Law 5759-1999 provides by default. It binds only the signatories, not the company or future shareholders, unless its key provisions are also mirrored in the company's articles of association (*takanonim*), which are publicly registered at the Companies Registrar. For foreign investors entering an Israeli company, a well-drafted SHA is the document that determines whether minority rights are enforceable in practice or theoretical in name only.

Every Israeli company starts the same way: a handful of founders, a Companies Registrar certificate, and a set of articles of association that say roughly the same thing across thousands of startups. The problem with relying on standard articles alone is that they say almost nothing about what happens when co-founders fall out, when a new investor wants in, or when the majority decides to sell the company and the minority does not want to be left behind.

A shareholders' agreement fills those gaps. For US, UK, and European investors putting money into Israeli companies (from early-stage startups to mature private businesses), the SHA is typically more important than the term sheet that preceded it. Economic rights get defined here with precision. The board seat is guaranteed contractually. The exit waterfall determines whether an investor actually recovers their capital.

This guide explains how shareholders' agreements work under Israeli law, what provisions matter most, and where the specific features of Israeli corporate law create traps that a generic Delaware-style SHA will not anticipate.

1. SHA vs. Articles of Association: Getting the Architecture Right

Before drafting a single clause, every party to an Israeli SHA needs to understand the two-document structure that governs Israeli private companies.

The articles of association

The *takanonim* (articles of association) are the company's constitutional document. They are filed with the Companies Registrar (*Rasham HaChavarot*) when the company is incorporated, publicly available on the Registrar's database, and binding on the company, all current shareholders, and any person who later acquires shares (by virtue of Section 17 of the Companies Law 5759-1999). The articles automatically bind future shareholders: someone who buys shares from a founder takes subject to the articles without needing to sign anything.

The shareholders' agreement

The SHA is a private contract. It is not filed anywhere. It is not publicly available. It binds only those who sign it. Under Israeli contract law (the Contracts (General Part) Law 5733-1973), a party who breaches an SHA is liable to the other signatories for damages and potentially for specific performance, but the company itself is not bound unless it is also a party and the relevant obligation is owed to the company rather than between shareholders.

Why you need both, and why they must work together

The result is clear enough: provisions you want enforced against everyone (present and future shareholders, and the company itself) must appear in the articles. Transfer restrictions, drag-along obligations, and tag-along rights that exist only in the SHA will not bind a third party who buys shares from a departing shareholder without signing the SHA. That third party takes their shares free of those restrictions.

For a standard structure, the articles carry the transfer restriction framework (right of first refusal, drag-along, tag-along), while the SHA handles investor-specific economic terms (anti-dilution formula, information rights, veto matters, and exit preferences) that parties prefer to keep confidential.

In Practice — Amending the Articles Requires a Shareholder Resolution Under Section 20

Adding or amending transfer restrictions in the articles requires a shareholders' resolution under Section 20 of the Companies Law. In most Israeli private companies that is a special majority — 75% of voting shares, unless the articles themselves specify a different threshold. If a founder holds 30% and refuses to approve the amendment, no transfer restriction that requires article-level protection can be added without their vote. The lesson: negotiate the article provisions before the investment closes, not after. Once capital has been deployed and the cap table is set, getting a reluctant minority founder to approve a new drag-along provision is genuinely difficult. Any investor who agrees to fund an Israeli company before the articles are updated to include standard protective provisions is taking a structural risk that no amount of SHA drafting can fully repair.

2. Core Provisions Every SHA Should Cover

A complete shareholders' agreement for an Israeli company typically addresses six categories of concern. Which ones get the most attention depends on the transaction type (seed round, Series A, management buyout), but the structure stays the same.

Representations and warranties about the company

The SHA or an accompanying investment agreement should include representations from the founders and the company about the company's current state: cap table accuracy, absence of undisclosed liabilities, valid title to IP, absence of litigation, employment compliance, and tax filing status. These representations create a contractual basis for claims if the investor was misled, separate from any fraud claim.

Israeli courts apply the misrepresentation provisions of the Contracts Law rigorously. A party who signs an SHA containing accurate representations does not thereby waive a fraud claim if the other party knowingly gave false information before signing. But representations that are given and relied on create a cleaner path to damages under Section 12 (pre-contractual good faith) and Section 15 (misrepresentation) without needing to prove the higher standard of intent required for fraud.

Share classes and economic rights

Many Israeli startups have two or more share classes: ordinary shares held by founders and employees, and preferred shares held by investors. The Companies Law 5759-1999 permits multiple share classes with differentiated economic and voting rights, but the law does not define what those differences must be. The SHA (and the articles) must specify:

  • The liquidation preference — whether preferred shareholders receive their invested capital before ordinary shareholders participate in proceeds, and whether the preference is participating or non-participating;
  • The conversion ratio from preferred to ordinary shares, and the circumstances that trigger automatic conversion (typically an IPO meeting a defined market cap threshold);
  • Dividend priority, if any preferred dividends are contemplated;
  • Voting rights per share — most Israeli SHA structures give preferred shareholders one vote per ordinary share equivalent, but some give enhanced voting to the largest investor.

Information and inspection rights

Under Section 185 of the Companies Law, a shareholder holding at least 5% of the company's shares has a statutory right to inspect the company's financial statements and certain books. The SHA typically extends these rights to investors below the 5% threshold and adds requirements for monthly management accounts, annual audited financials within 90 days of year-end, and immediate notice of material events such as litigation or a term sheet for an acquisition.

Confidentiality and non-compete obligations

The SHA commonly includes confidentiality obligations binding all signatories to keep the company's trade secrets, financial information, and client lists confidential. Non-compete clauses in Israeli law require careful calibration: under the Commercial Torts Law 5759-1999 and Labor Court jurisprudence on departing employees, unreasonably broad non-competes are struck down. For founders and key employees who are also shareholders, the legitimate scope (geographic area, business type, and duration) must be defined with specificity. A clause that says "you cannot compete with the company anywhere in the world for five years" will not survive an Israeli court challenge.

3. Transfer Restrictions: ROFR, Drag-Along, and Tag-Along

Transfer restrictions are the mechanical heart of a shareholders' agreement. They determine who can sell shares, to whom, and on what terms.

Right of first refusal

A right of first refusal (*zekhut kidima*) requires a shareholder who wants to sell their shares to offer them first to the other shareholders, typically pro rata to their existing holdings, before approaching any third party. The selling shareholder must give notice of the proposed sale price and terms, and the other shareholders have a defined window (typically 30 days) to exercise their right to buy at those terms.

If the existing shareholders decline to buy all the offered shares, the selling shareholder can proceed to sell to the third party, but only on the same terms disclosed in the ROFR notice and within a defined completion window (typically 60 to 90 days). A sale to a third party at a lower price or on materially different terms requires a new ROFR notice cycle from the beginning.

Drag-along rights

A drag-along clause allows a majority shareholder (or coalition of shareholders) above a defined threshold, commonly 50% plus one share or 67% for investor-led transactions, to require all other shareholders to sell their shares to a third-party buyer at the same price and on the same terms. The majority can effectively force a full exit over the minority's objection.

From the buyer's perspective, drag-along rights are critical: no serious acquirer wants to buy 80% of an Israeli company only to find that three minority founders holding 20% refuse to sell. From the minority's perspective, drag-along is acceptable only with adequate price protections: a floor price set as a multiple of invested capital, and a requirement that the minority receive the same per-share consideration as the majority.

Tag-along rights

Tag-along rights run in the opposite direction. When a majority shareholder proposes to sell their shares to a third party, minority shareholders have the right to join the sale at the same price per share. The minority cannot be left holding shares in a company where a new, unknown majority owner has taken control without having had the opportunity to exit alongside the departing majority.

Tag-along and drag-along are typically structured as mirror obligations in the same article provision: the majority can drag, but the minority can always tag if the majority is selling voluntarily.

In Practice — The Transfer Notice Timing Gap and Economic Affairs Court Practice

The Economic Affairs Court in Tel Aviv has dealt repeatedly with cases where a ROFR notice was technically given but the proposed terms were so poorly defined that the other shareholders could not make a meaningful decision in the notice window. A ROFR notice that says only "I have received an offer to sell my shares for NIS 5 million" (without attaching the actual term sheet, identifying the buyer, or disclosing deferred payment conditions) has been held insufficient to start the 30-day clock in several unreported Economic Affairs Court decisions. The practical standard: the ROFR notice must be specific enough that a rational shareholder reading it can decide whether to match the offer without needing to ask additional questions. Boilerplate ROFR clauses that do not address deferred consideration, earnouts, or buyer-assumption of indemnification obligations routinely generate disputes. Draft the notice format into the SHA itself, not just the obligation to give one.

4. Board Governance and Minority Rights

For a foreign investor putting meaningful capital into an Israeli private company, the board seat is the governance mechanism that matters most. Without it, information rights and veto rights are difficult to monitor and even more difficult to enforce.

Board appointment rights

The Companies Law 5759-1999 grants shareholders the right to elect and remove directors under Section 59. In a company where the founders hold a combined majority, they can elect the entire board without any investor consent. The SHA overrides this default by granting specific investors (individually or as a class) the right to appoint a designated director, independent of the majority's voting block.

A typical structure for a Series A Israeli startup: founders elect two directors, the lead investor appoints one director (sometimes two), and the board agrees by consensus on one independent director. The SHA specifies that the investor's director appointment right survives as long as the investor holds at least a defined minimum percentage (commonly 5% or 10% of outstanding shares on a fully diluted basis).

Board observer rights

Investors below the threshold for a full director appointment right commonly receive board observer status instead. An observer attends board meetings and receives all board materials but cannot vote. Observer rights must be explicitly granted in the SHA because the Companies Law does not recognize the observer role as a statutory entitlement. The SHA should also specify whether the observer receives notice of every meeting (including emergency meetings), whether they can be excluded from discussions involving conflicts of interest, and whether their confidentiality obligation matches that of full directors.

Veto rights (protective provisions)

A minority investor with 20% of the shares can be outvoted on every board and shareholder resolution if the majority holds 80%. Veto rights, sometimes called protective provisions, address this by requiring the investor's affirmative approval for a defined list of material actions, regardless of the majority's wishes. Common veto items in Israeli SHAs include:

  • Issuance of new shares or options that would dilute the investor's percentage below a floor;
  • Amendment of the articles of association in any way that adversely affects the investor's share class;
  • Any acquisition, merger, or change of control transaction;
  • Sale or exclusive licensing of material intellectual property;
  • Borrowing above a defined NIS threshold (commonly NIS 2 million to NIS 5 million for early-stage companies);
  • Related-party transactions between the company and any founder or their affiliates above a defined amount;
  • Annual budget approval and any material deviation from an approved budget;
  • Changing the company's line of business.
In Practice — Fiduciary Duty Conflict Between SHA Veto Rights and Director Obligations Under Section 254

A scenario that arises regularly in Israeli venture-backed companies: the investor-appointed director is instructed by the investor (under the SHA) to veto a transaction, but the transaction is clearly in the company's best interest. Under Section 254 of the Companies Law, every director, including one appointed by an investor, owes a fiduciary duty to the company, not to the appointing shareholder. A director who votes against a transaction because the investor instructed them to, when that transaction plainly serves the company, is in breach of their Section 254 duty. The Economic Affairs Court has held in several decisions that SHA provisions that purport to require a director to follow shareholder instructions on how to vote are unenforceable to the extent they conflict with the director's independent statutory duty. The practical implication: investor protective provisions should be structured as shareholder-level veto rights (requiring shareholder approval for the listed actions in addition to board approval) rather than as instructions given to the board through the investor-appointed director. The two mechanisms create different legal obligations and different enforcement paths.

5. Anti-Dilution Protection and Pre-Emptive Rights

The two mechanisms that protect an investor's economic position against future capital raises are anti-dilution adjustments and pre-emptive subscription rights. They are related but distinct, and many founders do not fully understand what they are agreeing to until they face a down round.

Pre-emptive rights

A pre-emptive right gives the existing investor the right to participate in any future share issuance, pro rata to their current holding, before new shares are sold to anyone else. If the company raises a new round by issuing 10% more shares, the investor holding 20% has the right to buy 20% of those new shares — maintaining their percentage on the cap table without dilution.

Under Section 112 of the Companies Law, shareholders have a statutory pre-emptive right to participate in new issuances unless the articles waive it. In practice, nearly all Israeli startup articles waive the statutory right in favor of a contractual pre-emptive right defined in the SHA, because the statutory version is less flexible. The SHA version specifies the notice period (typically 15 to 30 days), the price, the maximum subscription amount, and what happens to unexercised rights (typically offered to participating investors on a pro-rata over-subscription basis).

Anti-dilution adjustment

Pre-emptive rights protect against dilution if the investor exercises them. Anti-dilution adjustment protects the investor's economic position even when they cannot or choose not to exercise. It adjusts the conversion ratio of the investor's preferred shares downward (so that preferred shares convert into more ordinary shares than originally agreed) when the company raises new capital at a price below what the investor paid.

The two standard formulas used in Israeli SHAs mirror those used globally:

  • Full ratchet: The conversion price drops to the new, lower price per share, regardless of how many shares are issued at that price. This gives the investor maximum protection but is punishing for founders and other shareholders in a modest down round. Full ratchet provisions are rare in early-stage Israeli startups but appear in distressed financings.
  • Broad-based weighted average: The conversion price is adjusted by a formula that accounts for both the new lower price and the number of new shares issued. A small down round that issues few shares produces a modest adjustment; a large down round produces a larger one. This is the market-standard formula for Israeli venture transactions and the structure that most founders will accept.
In Practice — IIA Grant Restrictions on New Share Issuances

Israeli companies that have received research and development grants from the Israel Innovation Authority (IIA, formerly the Office of the Chief Scientist) face a complication that purely commercial SHAs often overlook. Under the Encouragement of Research, Development and Technological Innovation in Industry Law 5744-1984, a company that has received IIA funding cannot transfer know-how developed with grant funding outside Israel without IIA approval, and certain corporate transactions (including change of control events and IP assignments) require advance consent from the IIA Innovation Committee. The approval process takes approximately 45 to 90 days and can involve a payment to the IIA of 100% to 600% of the accumulated grant amount depending on the type of transaction and the destination country. For investors acquiring a controlling stake in an IIA-funded Israeli company, any SHA that does not reference the IIA restrictions and build in a closing condition for IIA approval (where required) is structurally incomplete. US and UK corporate law have no equivalent mechanism, which is what makes this distinctly Israeli.

6. Exit and Deadlock Mechanisms

Two scenarios end most shareholder relationships in Israeli private companies: a consensual exit (sale, IPO, or dissolution) and a shareholder deadlock. The SHA should address both in advance, because neither resolves cleanly by default under the Companies Law.

Exit provisions

Investors commonly negotiate a minimum exit timeline and a minimum return threshold into the SHA. A typical clause might read: "If the company has not completed an Exit Event (defined as an IPO or a sale of substantially all shares or assets at a pre-money valuation of at least USD 30 million) within five years of the Series A closing date, any Preferred Shareholder holding more than 5% of outstanding shares may give notice requiring the board to retain an investment bank to run a formal sale process."

This gives the investor a defined path to liquidity without requiring unanimous agreement. The clause should specify what happens if the founders refuse to cooperate with the sale process, and whether refusal triggers the drag-along mechanism as a backstop.

IPO ratchet

If the company goes public, the preferred shares typically convert to ordinary shares, eliminating the liquidation preference. An IPO ratchet gives the investor additional ordinary shares at conversion if the IPO price is below a defined floor. This protects the investor's nominal return even in a modest IPO while not penalizing the founders in a strong public offering.

Deadlock mechanisms

A 50/50 company (two equal founders, or two investors each holding half) has no natural resolution mechanism when the parties cannot agree. The Companies Law does not provide one. Several mechanisms appear in Israeli SHAs:

  • Casting vote: The chair of the board has a second vote to break a tie. Simple, but it effectively transfers control to whoever holds the chair position.
  • Escalation: A deadlocked board decision is escalated to the shareholders' meeting; a deadlocked shareholder vote is referred to a defined mediator or senior executive at each shareholder organization for a cooling-off negotiation period, typically 30 to 60 days.
  • Buy-sell (Russian roulette): Either shareholder can trigger a mechanism by naming a price per share. The other shareholder must then either buy the triggering party's shares at that price or sell their own shares to the triggering party at that price. The mechanism creates strong incentives to name a fair price because the triggering party does not know which role they will end up in.
  • Shoot-out (Texas shoot-out): Both shareholders simultaneously submit sealed bids. The higher bidder buys the lower bidder's shares at the higher-bid price. Less exploitable by information asymmetry than Russian roulette when both parties have equivalent financial capacity.
In Practice — Minority Oppression Petition Under Section 191 as a Parallel Remedy

When a shareholder deadlock escalates to the point where the majority is actively running the company in a manner that damages the minority's interests, the minority shareholder has a statutory remedy independent of the SHA: a petition to the Economic Affairs Court under Section 191 of the Companies Law for relief from oppressive or unfairly prejudicial conduct. The court has broad remedial powers under Section 191, including ordering a compulsory purchase of the minority's shares at a fair value determined by an appointed valuator, unwinding specific transactions, removing a director, or ordering the company wound up. Economic Affairs Court proceedings under Section 191 typically take 12 to 24 months at the District Court level. Filing fees are NIS 1% of the claimed amount, with a minimum of NIS 1,680 and a maximum of NIS 28,400. The Section 191 remedy supplements whatever remedies the SHA provides; it does not replace them. A minority shareholder can simultaneously pursue breach of SHA damages and a Section 191 petition, but must be careful not to make factual claims in one proceeding that contradict the other.

7. Breach and Enforcement

An SHA that cannot be enforced on a reasonable timeline is an expensive exercise in false security. Understanding how Israeli courts handle SHA enforcement is as important as the drafting itself.

Injunctive relief

When a shareholder threatens to transfer shares in violation of ROFR or tag-along obligations, the injured party typically needs an interim injunction to stop the transfer before it closes. Israeli courts grant interim injunctions under the Courts Law (Consolidated Version) 5744-1984 when the applicant shows a serious question to be tried, a balance of convenience favoring the injunction, and critically, a risk of irreparable harm if the transfer is not stopped.

The irreparable harm requirement is satisfied in a share transfer context because damages after the fact are difficult to quantify: the injury is not just the economic value lost but the change in governance balance that results from shares landing in the wrong hands. Israeli courts in the Economic Affairs Court have consistently granted interim injunctions to preserve the status quo in SHA breach cases when the application is made promptly.

Speed matters. An interim injunction application filed within days of learning of the threatened breach is taken far more seriously than one filed weeks later, when a court may conclude the applicant acquiesced to the situation.

Specific performance

Under Section 3 of the Contracts Remedies Law 5731-1970, the default remedy for contract breach in Israel is specific performance, not damages. A court will order the breaching party to perform their SHA obligation — whether that means exercising a drag-along, completing a buy-out, or providing information — unless specific performance is impossible or unjust in the circumstances. This is a meaningful difference from common law systems where damages are the primary remedy and specific performance is the exception. For SHA enforcement in Israel, a claimant asking for the other party to be ordered to actually sell or buy shares has a strong legal basis under Israeli statutory contract law.

Arbitration as an alternative forum

Most sophisticated Israeli SHAs include an arbitration clause directing disputes to private arbitration under the Arbitration Law 5728-1968 or the International Commercial Arbitration Law 5784-2024. The advantages for shareholders are real: confidentiality (no public court record), the ability to appoint an arbitrator with corporate law expertise, faster proceedings than the Economic Affairs Court, and finality of the award without an automatic right of appeal on the merits.

The disadvantage is that an arbitrator does not have the full range of remedies available to the Economic Affairs Court. Notably, a Section 191 minority oppression petition is a statutory remedy that only the court can grant — an arbitrator cannot order a compulsory share purchase or remove a director under Section 191. Many Israeli SHAs include a hybrid clause: contractual disputes (breach of ROFR, anti-dilution calculation disputes) go to arbitration, while Companies Law statutory remedies (Section 191 petitions) are reserved for the Economic Affairs Court.

Frequently Asked Questions

Yes. A shareholders' agreement in Israel is a binding commercial contract under the Contracts (General Part) Law 5733-1973. Courts enforce it against the signatories through injunctions, specific performance orders, and damages. However, SHA terms do not automatically bind the company itself or future shareholders who have not signed. To bind the company and third-party acquirers, key protective provisions (such as transfer restrictions and pre-emption rights) should be mirrored in the company's articles of association, which are registered at the Companies Registrar and bind everyone.
The articles of association (takanonim) are the Israeli company's constitutional document, filed with the Companies Registrar and publicly available. They bind the company, all current shareholders, and any person who acquires shares. A shareholders' agreement (heskem baalei manim) is a private contract between specific shareholders — confidential, not filed publicly, and binding only on those who sign it. For full protection, the two documents should be aligned: provisions you want to bind all future shareholders and the company belong in the articles; commercially sensitive arrangements between existing investors can remain in a private SHA.
Only within the limits the Companies Law 5759-1999 sets. Many Companies Law provisions are default rules that shareholders can modify by agreement — quorum requirements, voting thresholds, and distribution policies. Other provisions are mandatory and cannot be contracted away, including the director's fiduciary duties under Sections 254 and 255 and the minority protection provisions under Section 191. A shareholders' agreement that purports to require a director to vote in breach of their fiduciary duty will not be enforced by an Israeli court.
Yes, if properly drafted. A drag-along clause requires minority shareholders to sell their shares to a third-party buyer at the same price and terms as the majority when the majority decides to sell. The Israeli Companies Law does not regulate drag-along rights specifically, so they derive their force entirely from contract law. For maximum enforceability, the drag-along should appear both in the SHA and in the company's articles, define the triggering threshold clearly (typically 50%+1 or 67% of voting shares), and include price and terms protections for the dragged minority.
Disputes about shareholders' agreements in Israeli private companies are heard by the Economic Affairs Court (Beit HaMishpat Hachalkalot), which operates as a division of the Tel Aviv District Court. The Economic Affairs Court has exclusive jurisdiction over Companies Law matters, including minority oppression petitions under Section 191 and claims arising from a company's internal governance. The SHA itself can include an arbitration clause directing disputes to private arbitration instead of public court proceedings — most sophisticated SHAs do exactly that for contractual claims, while reserving statutory Section 191 remedies for the court.