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Arbitration

Is an arbitration clause in an Israeli company's articles of association binding on all shareholders?

Generally yes. Section 17 of the Companies Law 5759-1999 gives the articles of association (takanon) the status of a contract between the company and its shareholders and between the shareholders themselves. An arbitration clause inside the takanon therefore binds every shareholder, including someone who acquired shares later and never signed anything. The clause must still meet the Arbitration Law 5728-1968 requirement of a written arbitration agreement, which the filed articles satisfy. Its reach is limited to disputes arising from the shareholder relationship itself.

The takanon is not an ordinary contract that binds only its signatories. Because Section 17 makes it binding as a contract on each shareholder in that capacity, a person who buys shares takes them subject to the arbitration clause already in the document. An Israeli court asked to stay a lawsuit under Section 5 of the Arbitration Law will normally do so where the dispute falls inside the clause. Scope is where these cases are actually won and lost. A clause covering any dispute between shareholders concerning the company reaches share transfers, dividends and pre-emption rights, but it is unlikely to capture a claim a shareholder brings in a different capacity, such as an unpaid supplier invoice or an employment claim.

Two limits matter to a foreign investor. Not everything is arbitrable: a winding-up petition, and often a statutory oppression petition or a derivative action brought on the company's behalf, sit uneasily with a private clause, and Israeli courts have been cautious about pushing statutory minority remedies into arbitration where third-party interests are engaged. And a majority can amend the articles, so a clause a minority investor relies on can be changed by the same majority it was meant to constrain. Investors who want a stable mechanism usually repeat it in the shareholders agreement and specify the seat, language and number of arbitrators. See the guide on who is bound by an Israeli arbitration clause.

⚖ In Practice
  • Governing law: Section 17, Companies Law 5759-1999 (articles bind the company and its shareholders); Sections 1 and 5, Arbitration Law 5728-1968 (written agreement; stay of court proceedings)
  • Competent authority: District Court (Beit Mishpat Mechozi) for a stay application and for confirming or setting aside an award; the Companies Registrar (Rasham HaChavarot) holds the filed articles
  • Amendment: an ordinary majority at a shareholders' meeting can amend the articles unless the articles themselves require a higher majority
  • Commonly not arbitrated: winding-up petitions, and frequently statutory oppression relief under Section 191 of the Companies Law
  • Deadline: an application to stay court proceedings must be made before the applicant files a defense or takes any other step in the case
  • Drafting: name the appointing authority, the seat, the language and the number of arbitrators; a bare clause falls back on a sole arbitrator under the First Schedule to the Arbitration Law

From the full guide: Who Is Bound by an Israeli Arbitration Clause? Parent Companies, Guarantors and Successors

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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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