What approval process does Israeli company law require before a company can enter a transaction with its controlling shareholder?

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, is not on market terms, or is likely to have a material effect on the company's profitability, assets, or liabilities. Common examples include the sale or acquisition of major assets between the company and its controlling shareholder, service or management fee arrangements, loans, and financing arrangements. A "controlling shareholder" is defined as a person holding 50% or more of the voting rights, or a person with the power to appoint a majority of the board of directors. Even below the 50% threshold, practical control over board appointments can trigger the statutory definition and the approval requirements that follow.

The minority shareholder approval requirement — the so-called "minority veto" element — is the most powerful protection in the regime. The one-third threshold means that any minority shareholder holding more than one-third of the non-controlling shares can effectively block the transaction. A transaction approved by the board but rejected by the required minority shareholder vote cannot proceed. Where the transaction proceeds without full compliance, the directors and the controlling shareholder may face personal liability for any resulting harm to the company. The Economic Division of the District Court has jurisdiction to set aside improperly approved transactions and order compensation. This regime applies to public companies in full; private companies without the required Audit Committee structure may use an alternative audit function substitute under Section 115 of the Companies Law.

From the full guide: Directors and Corporate Governance in Israel: Rights, Duties and Liabilities

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