1 (1983) D.M.I. 764. Section 89 provides: “Any provision in the articles or in a contract of the company or in any other document, which may exempt an office holder of responsibility he may bear under law for negligence, default, breach of duty or breach of trust towards the company, or which requires his indemnification for a said breach, is void”.

See Yoran, , “Duties of Directors: Enforcement and Insurance Against It” (1979) 9 Mishpatim453, at 464–7Google Scholar. For an opposing view recently expressed regarding a parallel section in England, see Pennington, R.R., Directors' Personal Liability (Collins, 1987) 97Google Scholar. According to Pennington, when the company pays the premium, “The company does not thereby agree to indemnify the director against his liability to it, but merely to meet the expense of procuring an undertaking from a third party, the insurer, to do so”. Pennington's reasoning is unconvincing, in my opinion, as far as the positive statutory situation is concerned. In my view, the ideal situation would allow for insurance against a breach of the duty of care if the breach were unintentional, if the director acted in good faith, and did not gain any personal profit as a result of the breach. The reason for this is that it would spread the risk between the different companies, whilst a company damaged as a result of a breach of the duty of care would be able to gain compensation. Also, good candidates to serve as directors will not be deterred. The “moral hazard” claim, that is, that insured civil wrongs will not be prevented is, in my opinion, a valid one regarding breaches of fiduciary duties and duties of care which fall under the exception to the validity of the insurance which I have indicated, but not to the duties of care in other cases. In other words, the limits on the validity of insurance that I have noted constitute a point of equilibrium between the different considerations for and against insurance.

2 When the company pays the premium, whilst income should be imputed to the director, so too should an expense. One would thus cancel out the other.

3 Among these: the company insures itself against damages and losses and rules out subrogation in the policy; a holding company, rather than the company itself, insures the directors. An alternative to this last possibility would be for the holding company to decide to indemnify the directors in the subsidiary company, and to insure itself against the cost of this indemnity. Pennington is of the opinion, supra n. 1, that there is no doubt as to the validity of the first of these possibilities. However, note should be taken of the argument that the different possibilities are in reality a circumvention of section 89, and that in actual fact the company bears the cost of insuring the directors against breaches of their obligations to it. This is the situation when the company insures itself, but at the same time stipulates that the insurance company will not have a right of subrogation against the directors. This is also the case if the holding company insures by means of the subsidiary company's resources. As regards insurance by the holding company, there is also the question of whether the insurance constitutes a breach of the fiduciary duty of those insured, since they are receiving payment (the saving gained from not having to pay the premium) from the shareholders. The problem arises when the holding company is not the sole shareholder in the subsidiary company. All the same, the accepted view today is that the insurance of directors at the expense of the company is invalid, although the possibilities for circumventing the prohibition are valid.

4 First, a private bill was introduced by MK A. Weinstein. Later, in August 1988, the Ministry of Justice prepared a memorandum for the Companies Ordinance (Liability of Company Office Holders) Amendment 1988, a result of the work of the Barak Committee, based on the proposal that Procaccia prepared at the initiative of the Ministry of Justice. According to this proposal, a company will be permitted to insure office holders against breaches of their duty of care, as long as the company's articles of association permit liability insurance. Insurance against breaches of the duty of care will be invalid if the breach is intentional or caused by indifference to the circumstances of the breach and its results, if the act is performed in bad faith, if there is intent to gain unlawful personal profit, or if the breach constitutes a criminal offence. A revised version was presented as a draft law on 13 March 1990 (H.H. no. 1981, p. 138) but has not as yet been enacted.

5 Another example is the difference between the intrinsic value of a share, and its market price. During the period of the bank shares regulation, a major difference existed in favour of the stock exchange price. In contrast to this, it is possible to find at different periods on the stock exchange a price level for some shares that is significantly lower than their intrinsic value. This being the case, one wonders about the efficiency of the market in determining share values.

6 In 1988 the Ministry of Finance introduced the Equating of Voting Rights in Banking Corporations Bill. This law is intended to equate the voting rights of the bank shares proportionally to the shares' nominal value, so that the shares that the State will receive under this arrangement, will have voting rights. Naturally, this proposal raises the question of the appropriation of existing rights without compensation.

5 Yoran, supra n. 1, at 464.

8 Ibid., at 456-460.

9 Companies Ordinance (Amendment No. 2) Law, 1987 (S.H. no. 1211, p. 72).

10 See infra n. 12.

11 Subject to the Securities Authority's power to apply to the court for an injunction.

12 Securities (Amendment No. 9) Law, 1988 (S.H. no. 1261, p. 188).

13 22 L.S.I. 266.

14 See supra n. 4.

15 One of the major precedents in this area is Smith v. Barlow 13 N.J. 145, 98 A. 2d 581, 39 A.L.R. 2d 1179 (1953), appeal dismissed, 346 U.S. 861 (1953), which ruled that a donation by an industrial factory to Princeton University was not invalid as an act not undertaken for the good of the company, for three alternative reasons: first, that it fulfilled the criterion of profit maximalization; second, that it was allowed in a law with retroactive force; third, that the good of the company is not only the good of the shareholders. Rather, modern conditions require that corporations acknowledge, and discharge, social responsibilities as members of the communities within which they operate.

16 In England sec. 309(1) of the 1985 Companies Law now requires that the good of the employees be considered.

17 It should be noted here that in the professional literature frequent mention is made of the liabilities of directors despite the fact that the principal powers lie, in reality, in the hands of the officers responsible for the daily management of the business.

18 Pnidar Investment, Development and Construction Co. Ltd. v. Castro (1983) 37(iv) P.D. 673, at 695.

19 Kossoy v. Feuchtwanger Bank Ltd. (1984) 38(iii) P.D. 253, at 279; 7 S.J. 183 at 208.

20 This conclusion is not a new one. It first arose in the course of an exchange of articles in the U.S.A. during the 1930s, known as the Berle-Dodd Exchange. This illustrated that no one had yet succeeded in formulating an efficient test for the liability of directors that differed from the test of the economic benefit of the company, i.e., its shareholders, which could nonetheless impose real supervision on managerial acts and authority. See Yoran, A., “Validity of Companies' Donations” (1972/1973) 28 HaPrnklit 555, at n. 4Google Scholar.

21 Galant v. State of Israel (1981) 35(iii) P.D. 746.

22 British Canadian Builders Ltd. v. Oren (1981) 35(iv) P.D. 253.

23 See Pnidar, supra n. 18.

24 A characteristic example of such a rule is sec. 224A of the Income Tax Ordinance (New Version) (1 L.S.I. [N.V.] 145, at 214) that provides:

“Where a body of persons has committed an offence under sections 215 to 220, every person who at the time the offence was committed was an active director or a partner, accountant, responsible official, trustee or attorney of that body shall also be regarded as guilty thereof unless he proves-

(1) that the offence was committed without his knowledge; or

(2) that he adopted all reasonable measures to ensure the prevention of the offence”.

25 27 L.S.I. 117.

26 2 L.S.I. [N.V.] 5. See Cohen, Z., “Duty of Care of a Company Director” (1980) 1 Mehkarei Mishpat 134Google Scholar, obiter dictum of Barak J. in the Kossoy case, supra n. 19, at 278, and the proposal dealing with this in the new draft law, supra n. 4. Procaccia's statement, that the Kossoy case ruled that a controlling shareholder who sells his shares to a purchaser whom he should have known would loot the company, is in breach of his duty of care to the company, should be modified. In fact, Kossoy ruled that a controlling shareholder who sold his shares with the knowledge that the purchaser would loot the company was in breach of his fiduciary duty. The question of whether lack of knowledge is sufficient, when a reasonable shareholder should have known, was left undecided.