Editor’s note: This is general educational information about how Israeli company law counts shareholder votes on conflicted transactions, based on the filings and regulations listed at the end. It is not investment advice and is not a view on any company or transaction.
Analysis: what the count changes, and what it does not
The Special Majority converts a governance question into an arithmetic one, and that is its strength. A controlling holder cannot supply the approving votes for its own transaction, so approval has to come from institutions and public holders who gain nothing from the deal. The 2 percent alternative is what keeps the rule from becoming a veto held by a handful of shares: a transaction that draws almost no active opposition from disinterested holders passes even without an affirmative disinterested majority, which matters when turnout among public holders is low, as it usually is.
The rule’s weaknesses follow from the same design. Everything depends on the classification of a transaction as extraordinary or as involving a personal interest, and that classification is made by the company’s own committees before any shareholder sees a ballot. Relief regulations for related party transactions carve out categories entirely. Approval is also not a fairness finding: a vote that clears the Special Majority establishes that disinterested holders who voted did not object in sufficient numbers, and nothing more about price.
For a reader working through an Israeli disclosure, the useful checks are mechanical. Whether the company identifies a controlling shareholder at all, since the 25 percent limb of the definition catches holders who would not describe themselves that way. Which approval route the company says it used, since a transaction cleared by the audit committee under a relief regulation never reaches a disinterested vote. And whether the disinterested vote was carried on an affirmative majority or on the 2 percent limb, because those are different facts about how the minority actually responded, and only the first means anyone voted for the deal.
What the documents say
In an ordinary shareholder vote, the largest holder decides. Israeli company law removes that arithmetic for a defined set of transactions. Where a controlling shareholder sits on the other side of a deal, the statute requires a simple majority of all votes cast and, on top of that, either a simple majority of the votes cast by shareholders with no personal interest in the matter, excluding abstentions, or that the votes cast against by those same disinterested shareholders do not exceed 2 percent of the total voting rights in the company. Israeli filings call the combination the Special Majority. It is one of the few places in company law where a controlling holder’s own shares are simply not counted.
Which transactions the rule catches
The trigger is a defined status plus a defined kind of transaction. A controlling shareholder, for these purposes, is any shareholder able to direct the company’s actions, and the definition sweeps in any holder of 25 percent or more of the voting rights when no other shareholder owns more than 50 percent. Two or more shareholders with a personal interest in approving the same transaction are treated as one shareholder, which closes the obvious route of splitting a block.
The transactions covered are extraordinary transactions with a controlling shareholder, or in which a controlling shareholder has a personal interest, plus the terms of employment or engagement of a controlling shareholder or a relative, even where those terms are not extraordinary, plus specified compensation matters. An extraordinary transaction is itself defined: one outside the ordinary course of business, not on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities.
The shareholder vote is the last of three approvals rather than the only one. Such a transaction requires the audit committee, or the compensation committee where the subject is employment terms, then the board, then the shareholders. The Companies Law also bars a director with a personal interest from being present at the discussion and from voting on the matter in the audit committee or the board, unless a majority of that body’s members are themselves personally interested, in which case they may participate, and where a majority of the board is interested the transaction requires shareholder approval as well.
What it looks like in a real file
ICL Group, which reports a controlling shareholder in Israel Corporation, records an application of the rule in its annual report. Its gas purchase agreement with Energean was negotiated jointly with two other Israeli companies then affiliated with Israel Corporation, and because of that joint negotiation the agreement was approved by ICL shareholders on February 22, 2018 as an extraordinary transaction in which the controlling shareholder had a personal interest, by the Special Majority. The company also states the consequence in governance terms: Israel Corporation does not exercise control over ICL’s compensation policy or over extraordinary transactions in which a controlling shareholder has a personal interest, including a private placement of that kind, because those matters require the Special Majority.
That is the mechanism working as designed and it is also its practical limit. The controlling shareholder still selects most directors, still controls the ordinary business of the general meeting, and loses its votes only inside the narrow category the statute defines.
The same problem answered a different way in the United States
The comparison that makes the Israeli rule legible is Rule 13e-3, the United States going private rule. It applies where an issuer or an affiliate takes a registered class of equity out of public hands, and its machinery is disclosure rather than counting. The issuer or affiliate must file a Schedule 13E-3 with the Commission, amend it promptly for material changes, and file a final amendment reporting the results. It must give holders a summary term sheet, prominently disclose the items covering the transaction’s purpose, fairness and reports in a Special Factors section at the front of the document, disclose appraisal rights information, and carry a legend on the cover stating that neither the Commission nor any state securities commission has approved the transaction or passed upon its merits or fairness. The rule also makes it a fraudulent, deceptive or manipulative practice to engage in such a transaction while omitting a material fact necessary to make the statements made not misleading.
Two systems, two theories. One tells the conflicted party to disclose completely and leaves approval to the ordinary vote and to litigation. The other lets the conflicted party say what it likes and then removes its votes from the count.
