The shareholders of public companies must elect, by a special majority, at least two (2) members of the board of directors who qualify as “external directors” under the Israeli Companies Law. At least one (1) of the external directors must have “accounting and financial expertise” and the rest of the external directors must have either “professional competence” or “accounting and financial expertise”. The conditions and criteria for a director qualifying as having accounting and financial expertise or professional competence are set out in regulations adopted under the Israeli Companies Law. The board of directors is charged with determining whether a director possesses accounting and financial expertise or professional qualifications. A director is deemed to have professional competence if he or she has any of (i) an academic degree in one (1) of the following: economics, business management, accounting, law or public administration, (ii) an academic degree or has completed another form of higher education in the primary field of business of the company or in a field which is relevant to his or her position in the company, or (iii) at least five (5) years of experience serving in one (1) of the following capacities, or at least five (5) years of cumulative experience serving in two (2) or more of the following capacities: (a) a senior business management position in a company with a significant volume of business; (b) a senior position in the company’s primary field of business; or (c) a senior position in public administration or service.
External directors must meet certain standards of independence at the time of their appointment and during the two-year period prior to their appointment. The Israeli Companies Law provides that a person is not qualified to be appointed as an external director if (i) the person is a relative of the controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation with the company, with the controlling shareholder of the company or a relative of such person, or with any entity controlled by or under common control with the company or with the controlling shareholder of the company; or (b) in the case of a company with no controlling shareholder or no shareholder holding a controlling block (i.e., 25% or more of the voting rights in a general meeting of shareholders), had at the date of appointment as an external director, any affiliation with a person then serving as chairman of the board of directors or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer. For this purpose, the Israeli Companies Law defines the term “affiliation” as employment relationships, business or professional relationships maintained on a regular basis, control relationships and service as an office holder (excluding service as a director appointed to serve as an external director in a company which is about to offer its shares to the public for the first time). An “office holder” is defined in the Israeli Companies Law as: (i) a director; (ii) general manager (chief executive officer); (iii) a chief business manager; (iv) a vice general manager; (v) a deputy general manager; (vi) any other person who holds a similar position regardless of that person’s title; and (vii) any other manager directly subordinate to the general manager (chief executive officer). The term “relative” is defined as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons. A person may not be appointed as an external director if his or her other activities or position create, or are likely to create, a conflict of interest with his or her service as a director or interfere with his or her ability to serve as a director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time. Under the Israeli Companies Law, an external director must be appointed at a general meeting of shareholders of the company within three months following the admission of the company’s shares for trading on a stock exchange. We intend to propose two (2) external directors (namely, Elka Nir and Hang Chang Chieh) from amongst our independent directors, namely, Elka Nir, Stephen Philip Haslett and Hang Chang Chieh to be appointed as our external directors in accordance with the Israeli Companies Law. Our Board of Directors has reviewed and determined that Elka Nir has “accounting and financial expertise” and Hang Chang Chieh has professional competence.
Without derogating from the aforementioned, a person will not serve as an external director if such person, his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has business or professional relationships with any person or entity with which an affiliation is forbidden in accordance with the above mentioned provisions regarding qualification to be appointed as an external director, even if such relationship is not maintained on a regular basis, other than negligible relationships, as well as a person who received remuneration not in accordance with the provisions of the Israeli Companies Law.
The resolution to appoint external directors must be adopted by a simple majority of the votes cast at the general meeting, provided that either (i) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and who do not have a personal interest in such election (other than a personal interest which is not derived from a relationship with a controlling shareholder), present and voting at such meeting (and without including any abstaining votes), to which we refer as a disinterested majority; or (ii) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such election (other than a personal interest which is not derived from a relationship with a controlling shareholder) voting against the election of an external director does not exceed 2% of the aggregate voting rights in the company. A “controlling shareholder” is defined in the Israeli Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being a director or holding any other position with the company. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the “means of control” in the company. The term “means of control” is defined under the Israeli Securities Law as voting rights in a company’s general meeting or the right to appoint the directors of the company or its general manager. With respect to certain matters, a controlling shareholder is deemed to include a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in the company.
Each of the external directors must be eligible to be appointed as a director. A company whose shares have been offered outside of Israel or whose shares are listed on a foreign stock exchange is entitled to appoint an external director who is a non-Israeli resident. If, at the time of appointment of an external director, all of the members of the board of directors who are not controlling shareholders or their relatives are of one gender, the external director appointed must be of the other gender.
Each external director is appointed for a term of three (3) years, which may be extended for two (2) additional terms of three (3) years each, provided that either: (i) his or her service for each such additional term is recommended by one (1) or more shareholders holding at least 1% of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such re-election exceeds 2% of the aggregate voting rights in the company; (ii) his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same majority required for the initial election of an external director (as described above), or (iii) the external director proposed his candidacy for an additional term, and such candidacy was approved in accordance with the requirements described in (i) above, provided however, that if the re-election is sought pursuant to the options noted in paragraphs (i) and (iii) above, the external director appointed under this paragraph for an additional period is not, at the time of the appointment, an affiliated or competing shareholder or a relative of such a shareholder, and has no affiliation with such affiliated or competing shareholder at the time of the appointment or during the two-year period preceding the appointment. An “affiliated or competing shareholder” is defined under the Israeli Companies Law as the shareholder who proposed the appointment or a holder of 5% or more of the issued share capital or voting rights in the company, all if at the appointment date such shareholder, the controlling shareholder of such shareholder or an entity under control of any of them has a business relationship with the company or if such shareholder, the controlling shareholder of such shareholder or an entity under control of any of them is a competitor of the company.
External directors may be removed from office only by a special general meeting of shareholders convened by the board of directors, which approves such removal by the same percentage of shareholders as required for his or her election, or by a court ruling, and then only if the external director ceases to meet the statutory qualifications for his or her appointment or if he or she violates his or her duty of loyalty towards the company.
In the event of a vacancy of an external director’s office, the board of directors is required to convene a shareholders’ meeting to appoint a new external director, if there are not two (2) other external directors serving at that time on the board of directors. An external director is entitled to compensation solely as provided by regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with his or her service as an external director with the company (other than indemnification and insurance coverage as permitted under the Israeli Companies Law). Each committee of a company’s board of directors which is authorized to exercise the board of directors’ authorities is required to include at least one (1) external director, except for the audit committee and remuneration committee, which are each required to include all external directors.
Following the termination of an external director’s membership on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control, including serving as an office holder of the company or a company controlled by its controlling shareholder and cannot be employed by or provide professional services to the company for pay, either directly or indirectly, including through a corporation controlled by that former external director, for a period of two (2) years following said termination of his service as an external director, and for other relatives of such former external director, who are not his or her spouse or children, for a period of one (1) year following said termination of service.