It is not a mere paraphrase of the opening sentence in one of the most famous monologues of the play “Hamlet” by William Shakespeare, but a state of mind that accompanies the internal deliberations of many when examining the issue of appointment as a director in a legal entity of a limited liability company.
One cannot deny that the mere appointment as director of a company is viewed by some as holding aspects of status and respect, in addition to the fact that this is an officer in the company (note well, director), and in addition to awarding real ability and tools to supervise, to be involved in and control the on goings in the company.
However, as we know power or authority without responsibility is similar to anarchy, and sometimes concern rises that the potential for harm outweighs the benefits. To what does this refer?
Applicable law (and not just in Israel) has seen a development and significant increase in strictness in the standard of responsibility required of directors in particular and of officers in general.
Moreover, serious fraud scandals in recent years in the U.S. (e.g. the “Enron” affair), and in Israel (suffice it to mention the matter of “Peled Givoni”) also resulted in the aggravation of the fiduciary duties and duties of care of officers and directors of a company, which were reflected, inter alia, in legislative amendments (amendment to the U.S. Securities Act, which is the Sarbanes Oxley Act).
In Israel, it is important to note that the process already began with the North America Bank case, which shattered the “theory of honor”, constituting a real revolution in respect of the revision of the role of officers and directors and their responsibilities towards the company, which was later established into an organized doctrine in the “Koasoy” case, and became a statutory duty in 1991, when amendment no. 4 entered into effect and was later included in the new Companies Law.
Directors and officers, in addition to their fiduciary duty towards the company , which includes the duty not to be in a conflict of interests with the company, etc., are also subject to duties of care and skill towards the company, which include the obligation to study the nature of the company’s business, participate actively and critically in the company board of directors meetings and be involved in its business, learn the company’s internal control structure, read the company’s financial statements, when a discussion is not enough and there is an obligation to study carefully, especially before the discussion.
Thus, various types of “alibi claims”, such as “I did not attend, did not see, did not hear” raised by directors of companies, today, in the current legal climate, in light of the legislative amendments and “new” rulings, shall not be deemed as acceptable arguments of defense.
Naturally in private companies, where the control of the company is in the hands of one or two shareholders, a shareholder serving as a director is inevitable.
However, as specified above, one must not always agree under any circumstances to the offer to be appointed as director as in the short term such an appointment entails responsibility and honor, but in the long term it may expose the director to risks and claims made on a personal level, that may even amount to criminal liability.
It is therefore important to know that the appointment as a director in a company, let alone a public company, is an appointment of great significance and responsibility, and in addition to the grounds set out in the Companies Law, one should know and understand that in terms of the various laws, such as (but not only) – tax laws (see for example section 119 of the Value Added Tax Law; section 224a of the Income Tax Ordinance), planning and building laws (see section 253 to the Planning and Building Law), the labor laws (see section 26 of the Protection of Wages Law), etc. – your appointment as a director in a company has great significance, allowing the lifting of the corporate veil, exposing the manager in the company (director) in many aspects, not only in the financial aspect but also the criminal aspect (!!!).
In light of the foregoing, prior to consenting to the appointment as director of a company, it is best to better understand the risks that such appointment as a director in the company may entail, while emphasizing different parameters: from the capital structure in the company, the company’s field of occupation, whether the company is a new company, etc. In these matters it is definitely advisable to consult with an attorney specializing in the field, all to enable you to make your decisions when seeing the entire picture, and refrain from discovering things in retrospect…
Adv. Tal Rechnitz is a partner in the “Rechnitz, Kessler & Co. Law Office and Notary” operating in the field of commercial law, contracting and real estate. www.rk-law.co.il
This paper is for general and preliminary information only and in no event can it be construed as a substitute for legal counsel for any case and its circumstances. The above is true only as of the date it was written, and its veracity may change from time to time.
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