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Corporate Law

Can an Israeli company buy back its own shares?

Yes. The Companies Law 5759-1999 allows an Israeli company to acquire its own shares, but the law treats the buyback as a distribution and applies the same controls that govern dividends. The company must satisfy the profit test, meaning it has distributable surplus, and the solvency test, meaning the board reasonably believes the company can still meet its existing and foreseeable obligations. Shares bought back become dormant shares that carry no voting rights and no dividend entitlement while the company holds them. If the profit test cannot be met, court approval is required.

Israeli company law does not forbid a company from purchasing its own shares, but it channels the transaction through the distribution rules because a buyback returns value to the exiting shareholder in much the same way a dividend does. A lawful distribution requires two things at once. The profit test asks whether the company has retained earnings or surplus available to fund the purchase. The solvency test asks whether, after paying for the shares, the board can reasonably conclude the company will still be able to pay its debts as they fall due. Directors who approve a distribution that fails these tests can face personal exposure, so the board must document its reasoning. Where the company lacks distributable profits but still wishes to proceed, it can apply to the court for approval of a distribution that does not meet the profit test.

For a foreign investor, the buyback is a practical tool for buying out a departing founder, settling a deadlock, or adjusting the cap table, and it interacts directly with any share transfer mechanics in the company's documents. The shares the company reacquires do not vanish; they are held as dormant shares with no rights, which changes the effective ownership percentages of the remaining holders. Common pitfalls include ignoring pre-emption rights or consent provisions in the shareholders' agreement, failing to record the board's solvency assessment, and overlooking the tax treatment, which can differ between a buyback and a straightforward third-party sale. Structuring the buyback with both corporate and tax advice avoids an unwelcome surprise for the company and the selling shareholder.

⚖ In Practice
  • Governing law: distribution rules of the Companies Law 5759-1999, including the profit test and solvency test
  • Approving body: the board of directors, which must document the solvency assessment; the court approves distributions that fail the profit test
  • Effect on shares: repurchased shares become dormant shares with no voting rights and no dividend entitlement while held by the company
  • Check first: pre-emption rights, consent clauses, and transfer restrictions in the articles and shareholders' agreement
  • Tax note: a buyback can be taxed differently from a sale to a third party, so confirm treatment with the Israel Tax Authority position before closing

From the full guide: Share Transfer in an Israeli Private Company

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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