Can an Israeli company lend money to its director or controlling shareholder?

The Companies Law regulates transactions where an office holder or controlling shareholder has a personal interest, precisely to stop value leaking out of the company. A director must disclose the interest under Section 269 and generally abstain. An ordinary transaction with an office holder is approved under Section 270(1), while an extraordinary transaction with a controlling shareholder, which a loan or guarantee usually is, follows the stricter Section 275 chain of audit committee, board, and a general meeting where a majority of the votes of disinterested shareholders support it. An unapproved interested transaction can be void or voidable.

Founders of Israeli subsidiaries often want the company to lend to a shareholder or to guarantee a parent company's debt. Doing so without the approval chain risks the deal being unwound and the directors being sued for breaching their duty of care and loyalty under Sections 252 to 254. A single-shareholder company still follows the rules, though the approvals are simpler in practice. Watch the tax side too, because a shareholder loan can trigger deemed interest or be recharacterized as a dividend under the Income Tax Ordinance. Our guide to directors and corporate governance sets out the duties in full.

From the full guide: Directors & Corporate Governance in Israel: Duties, Liabilities & Best Practices

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