IsraelLawWhat is a preference share in an Israeli company and what rights can it carry?
Section 20 of the Companies Law 5759-1999 grants Israeli companies broad freedom to create multiple classes of shares, each carrying different bundles of rights. Preference shares are by far the most common instrument used in venture capital and private equity investments in Israeli companies. A typical Series A Preferred share issued to a venture investor will carry: a non-participating or participating liquidation preference (returning the investor's capital first on a sale or winding up before ordinary shareholders receive anything); a preferred dividend that accrues at an agreed rate before any ordinary dividends are declared; anti-dilution adjustment rights that trigger if the company later raises money at a lower valuation; and conversion rights allowing the holder to convert preferred shares into ordinary shares at a fixed ratio, usually on a 1:1 basis at first, adjustable by anti-dilution mechanics. The shareholder agreement typically supplements the articles and sets out the voting thresholds needed for major decisions.
For foreign investors entering an Israeli company, the key practical concern is ensuring that the preference rights are properly documented in both the articles of association and the shareholders' agreement, and that both documents are consistent. Discrepancies between the two can lead to disputes over which document controls a particular right. Israeli courts apply general contract law principles under the Contracts (General Part) Law 5733-1973 to resolve such disputes. A preference share that entitles the holder to veto certain company decisions — such as a sale, new funding round, or change of business — must be clearly defined in the articles, as Israeli courts will not imply a veto right from ambiguous language. Preference shares are typically converted automatically into ordinary shares immediately before an initial public offering so that the company can list a single class of shares on the stock exchange.
- Governing law: Section 20, Companies Law 5759-1999 (share classes); Section 11 (articles of association); Contracts (General Part) Law 5733-1973 (shareholder agreement interpretation)
- Competent authority: Registrar of Companies (Rasham HaChevrot) for articles amendments; Economic Division of District Court for corporate disputes
- Creation process: Preference shares require a board resolution to allot, an amended articles of association filed with the Registrar, and a shareholders' agreement signed by all participating investors — filing fee approximately NIS 1,800 (2026)
- Common investor protections: 1x non-participating liquidation preference; broad-based weighted average anti-dilution; protective provisions requiring preferred shareholder majority consent for dilutive issuances, asset sales, and charter amendments
- IPO conversion: Preferred shares typically convert automatically into ordinary shares on completion of a qualifying IPO — the trigger thresholds must be defined in the articles
From the full guide: Shareholder Agreements in Israel: What Foreign Investors Need to Include
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