Free Consultation
Corporate Law

What is a derivative action under Israeli company law?

A derivative action (*ta'bula nishgat*) under Sections 194–196 of the Companies Law 5759-1999 allows a shareholder to sue in the company's name when a director, officer, or controlling shareholder has wronged the company and the board refuses to act. The shareholder sues on behalf of the company, not for personal loss, so any damages recovered go to the company. The court must grant leave before the action proceeds, and the shareholder must first demand that the company pursue the claim itself.

The derivative action solves a structural problem in company law: the people best positioned to enforce the company's rights against wrongdoing directors are often the directors themselves or a board under their influence. Sections 194 to 196 of the Companies Law 5759-1999 address this by giving any shareholder — including a minority shareholder holding a single share — standing to litigate in the company's name. Before filing, the shareholder must send a written demand to the board requiring the company to pursue the claim. If the board declines, fails to respond within 45 days, or is tainted by a conflict of interest that makes its refusal suspect, the shareholder may apply to the Economic Division of the Tel Aviv District Court for leave to bring the derivative action. The court evaluates whether the claim appears prima facie meritorious and whether bringing it serves the company's genuine interests — not just the applicant's private agenda.

For foreign investors in Israeli companies, the derivative action is particularly relevant in closely held start-ups and joint ventures where a dominant founder or local partner may divert corporate opportunities or strip assets. A derivative action can run alongside the separate oppression petition (*bakshat dachak*) under Section 191, which is a personal remedy for unfair treatment of a shareholder, but the two claims serve different purposes. Israeli courts have confirmed that a foreign national shareholder has the same standing to file a derivative action as an Israeli shareholder. Directors' duties in Israel — including the duty of loyalty under Section 254 and the duty of care under Section 252 — are the most common substantive bases for derivative claims. Legal costs can be awarded to a successful applicant under Section 196(b), making derivative litigation a viable enforcement tool even for minority shareholders with modest holdings.

⚖ In Practice
  • Governing law: Sections 194–196, Companies Law 5759-1999; directors' duties under Sections 252–254
  • Competent authority: Economic Division, Tel Aviv District Court (HaMachlacha HaKalkalit, Beit Mishpat Mechozi Tel Aviv)
  • Pre-condition: written demand to the board must precede any court filing; board has 45 days to respond before the shareholder may proceed
  • Standing: any shareholder, regardless of the size of their holding; foreign shareholders have equal standing
  • Costs: Section 196(b) allows the court to award legal costs to a successful derivative claimant from the company or from the defendant

From the full guide: Directors and Corporate Governance in Israel: What Foreign Investors Must Know

Related Questions

Related Guides

Need legal help with this topic?
Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

← Browse all Q&A