Corporate Governance Code – Israel

I. Introduction:

Israel Securities Authority had decided to adopt the Goshen Committee recommendations on 17^th December, 2006. The Goshen committee recommendations focus on improvement of director independence, particularly regarding approval of related party transactions, improvement in the workings of auditing/balance committees, pertaining to approval of company’s financial statements, improvement of corporate disclosure and accountability and establishment of a Court for Securities and Corporate Offences for public companies.

The Committee believes that the best way to implement corporate governance principles is through the imposition of disclosure requirements on public companies. At the same time, the Committee does not believe that requiring companies to explain why they did not adopt certain principles or rules will be particularly effective.,

Companies can voluntarily elaborate its decision not to adopt a given corporate governance principle. The Committee believes that the corporate governance code sets an appropriate threshold which should be adopted by the market and the disclosure requirements highlight the conduct the corporations choose to undertake, with the expectation that the capital market will process and uses this information as part of the decision-making process regarding investments in various companies and securities pricing.

II. Key recommendations include:

1. Independence of the Board of DirectorsIt recommended that 30 days after the second general meeting of a company, after 1/1/2007, every public company shall have independent directors on its board, in addition to external directors (as defined under the Companies Law), so that an overall number of independent and external directors shall be as follows:
   1. In a company that doesn’t have a “group of controlling shareholders”, as defined under the Companies Law – at least half of all directors;
   2. In a company that does have a “group of controlling shareholders” – at least one third of all directors.“Independent Directors” shall be designated as such following the examination carried out by the auditing committee that examined connections between said directors and the company, its controlling shareholder and senior corporate officers, and had substantiated its decision, regarding independence of said directors, by referring to their connections with the company and other circumstances relevant to the issue. The aforesaid examination and adjudication of the auditing committee shall be carried at least once a year. An independent director has to inform the auditing committee regarding changes in his position, where it is relevant to his independence.
2. Composition and Role of the Internal Audit CommitteeA majority of members of the audit committee be independent directors (including external directors) and the chairman of the committee will also be an external director.

   The audit committee holds preliminary discussions on the company’s financial statements and that its recommendations be brought before the board of directors. The board of directors is obligated to discuss the Committee’s recommendations prior to approving the financial statements.

3. Approval of Transactions with Related PartiesUntil a specialized court for corporate and securities law is established, approval of corporate transactions with controlling shareholders in which conflicts of interest exist will require approval of majority of the quorum of shareholders bearing no interest in the transaction.

   The Committee believes that once the court is established, public companies will be able to approve related party transactions with a simple majority (without qualification of a majority of disinterested shareholders).

   However, in cases in which a shareholder disputes the fairness of the transaction in court, the burden of proof will fall on the company. The costs of a trial will be paid by the company.

4. Establishment of a Court Specializing in Corporate and Securities LawThe Goshen Committee recommends establishing a court specializing in corporate and securities law. The Committee believes that the existence of a dedicated court will prevent exploitation and discrimination of minority shareholders and will constitute a key factor in enhancing the quality of public company management, developing the capital market and improving the economy. Empirical research demonstrates a clear correlation between the quality of investor protection, financial development and economic growth. Moreover, in the absence of a court empowered to prevent minority shareholder discrimination, the development of a market characterized by diffused ownership will not come to pass. Controlling shareholders will simply not have an incentive to sell control in the market, as long as they are able to “appropriate” benefits from the company at the minority shareholders’ expense. Only when the ability for misappropriation is restrained by a court, controlling shareholders will reach the conclusion that the dispersion of risk favors diffuse ownership or that the proceeds received from selling shares to the public justify the relinquishment of control.