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Published online by Cambridge University Press: 17 February 2009
Professor Mestmäcker opened his seminal work on Verwaltung, Konzerngewalt und Recht der Aktionäre with the following citation: “The directors of such [i.e., public] companies … being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own … Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it”.
1 Mestmäcker, E.-J., Verwaltung, Konzerngewalt und Recht der Aktionäre (Karlsruhe: Müller 1958) p. 3.Google Scholar
2 Adam, Smith, Wealth of Nations (New York: Random House 1937) p. 700.Google Scholar
3 Kant, , On History (Beck, L.W. [ed.]) (Indianapolis: Bobbs-Merrill 1985) p. 112 (Perpetual Peace).Google Scholar
4 Companies Law, 5759-1999, sefer ha-chuqqim (official publication of Israeli legislation) 1711, 189; the Companies Law was translated into English by Aryeh, Greenfield (Haifa: A.G. Publications 1999).Google Scholar
5 Securities Law, 5728-1968, sefer ha-chuqqim 541, 234, and all amendments published since.
6 The Barak Committee Report, embodied in the draft Bill, mentions the legal systems it had studied: England, the US, Canada, New-Zealand, France, Germany, the EC, and others [sic]. It emphasizes that it has not given priority to any legal system. However, since English law formed the basis for Israeli commercial law and legal education is based on English Common Law, the Committee, for the sake of harmonizing the new law with the old, was inclined to adopt English law whenever appropriate. Cf. Draft Bill, 5756-1996, explanatory notes: introduction, basic principles, section 2.
7 Cf. Licht, A., “The Mother of All Path Dependencies Toward a Cross-Cultural Theory of Corporate Governance Systems”, 26 Del. J. Corp. L. (2001) 147.Google Scholar
8 Barak, A., “The Tradition and Culture of the Israeli Legal System”, in: Rabello, A.M. (ed.), European Legal Traditions and Israel (Jerusalem: Sacher Institute 1994) 473, 483 et seq.Google Scholar; Zweigert, /Köotz, , An Introduction to Comparative Law, 3rd ed. (Oxford: Clarendon 1998) 235 et seq.Google Scholar
9 Friedmann, D., “The Effect of Foreign Law on the Law of Israel”, 10 Israel L.Rev. (1975) 192.Google Scholar
10 Cf. Romano, R., The Genius of American Corporate Law (Washington D.C.: AEI 1993)Google Scholar, suggesting that the US states have engaged in an inter-jurisdictional competition for corporate charters, which yielded a race more to the top than the bottom. State competition has benefited rather than harmed shareholders. Cf., however, the nuanced view provided by J. Coffee, in a symposium on the occasion of 100th Anniversary of the Delaware General Corporation Law of 1899: “The Direction of Corporate Law: The Scholars' Perspective”, 25 Del.J.Corp.L. (2000) 79, 88 et seq., 95 et seq.Google Scholar
11 Categorical rules are fairly precise and specific and apply uniformly to a broad category of situations. They do not allow much leeway for exceptions and defenses. Selective rules, in contrast, allow for differentiation in the treatment of cases within a general category of situations, due to the varying facts and circumstances of each case. Cf. Clark, R.C., Corporate Law (Boston: Little, Brown and Co. 1986) 234 et seq.Google Scholar
12 Cf. Kaplow, L., “Rules versus Standards: An Economic Analysis”, 42 Duke L.J. (1992) 557.CrossRefGoogle Scholar
13 Cf. The Tel-Aviv Stock Exchange Annual Review 2000, p. 15Google Scholar. The concentrated structure of Israeli public companies has been highlighted by Agmon, /Lachman-Messer, , “The Theory of Enforcement in the Draft Company Law”, 26 Mishpatim (1995) 543Google Scholar, at pp. 547(16), 561 (in Hebrew). Regarding the development of the Stock Exchange during 1981-1990, see Saul, Bronfeld, Foreign Investment in Israel via the Tel-Aviv Stock Exchange (The Israeli International Institute for Applied Economic Review, Discussion Paper No. 2-11-90, November 1990)Google Scholar; cf. also Gross, Y., The New Companies Law (Tel-Aviv 2000)Google Scholar (in Hebrew) 22 (15). Gross bases the conclusions regarding takeovers on an unpublished study by R. Harel/J. Abramovitch (January 1998), according to which almost all tender offers made in 1995-1997 were friendly rather than hostile.
14 Gross, ibid., p. 110.
15 I agree with Gross that it would have been better to formulate the board's duty as requiring supervision of the executive management. Cf. Gross, supra n. 13, p. 30.
16 According to Procaccia, the new Companies Law was initially planned to require that every large public company would have to be directed by a board comprised of a majority of outside directors: Procaccia, U., A New Corporate Law for Israel (1989) (in Hebrew) 342Google Scholar. The Israeli final requirement of two outside directors may be compared with the English Cadbury Committee Code of Best Practice, recommending that the board of a listed company should include non-executive (defined similarly to outside directors), independent directors of sufficient caliber and number for their views to carry significant weight on the board's decisions (s. 1.3): SirCadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance (1992)Google Scholar. The Hampel Committee recommends that non-executive directors comprise at least one third of the membership of the board: SirHampel, Ronald, Committee on Corporate Governance – Final Report (1998)Google Scholar. The ALI Corporate Governance Project proposes a rule requiring a majority of outside directors on the boards of public companies. Although criticized, in general, for its assumption that “one size fits all”, which has resulted with the American states paying it no heed, many public companies in the US have paid heed to this rule. For the criticism see Easterbrook, F.H./Fischel, D., The Economic Structure of Corporate Law (Cambridge, Mass.: Harvard University Press 1991) 14 (2)Google Scholar. Regarding the composition of boards in US public firms see Bhagat, S./Black, B., “The Relationship Between Board Composition and Firm Performance”, in: Hopt, /Kanda, /Roe, /Wymeersch, /Prigge, (eds.), Comparative Corporate Governance – The State of the Art and Emerging Research (Oxford: Clarendon 1998) 281.Google Scholar
17 Under s. 1 of the Companies Law: “‘Officer’ – Director, General Manager, Chief Business Manager, Deputy General Manager, Vice General Manager, any person who holds a said position in the company, even if he has a different title, and also any other manager who is directly subject to the General Manager.”
18 Barak, A., Judicial Discretion (Tel-Aviv: Papirus 1987) (in Hebrew) p. 495 § 546Google Scholar. This reference, like many others to Israeli law, its analysis and interpretation, have been omitted from the English translation bearing the same title (translated by Yadin Kaufmann, New Haven: Yale 1989).
19 Ibid., pp. 492-493, § 524.
20 Cf. Clark, supra n. 11,147 et seq. A nuance of this paradigm is provided (ibid., 149) by the case where the insider has no particular interest in the welfare of the third person, yet he has some interest in a side effect of the transaction. For example, if the company repurchases the shares of an insurgent, resulting in the influential insider retaining control and reaping its rewards.
21 Tocatly v. “Shimshon”, Civil appeal 267/55, 11 P.D. (Law Reports of the Israel Supreme Court) 1569.
22 Aberdeen Railway v. Blaikie Bros. (1854) 1 Macq. HL 461 (H.L.). Cf. also Marsh, H., “Are Directors Fiduciaries?”, 22 The Business Lawyer (1966) 35, 36Google Scholar et seq. In the US, too, transactions between a director and his corporation were prohibited and, as such, voidable at the instance of the corporation or its shareholders.
23 Clark, supra n. 11, p. 179.
24 Cf., Haviv-Segal, I., Corporate Law in Israel, vol. 1 (Tel-Aviv 1999) 435 et seq.Google Scholar
25 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del.Supr. 1983); Knepper, /Bailey, , Liability of Corporate Officers and Directors, 5th ed. (Charlottesville, Virginia: Michie 1988, 1994 suppl.) 133 et seq.Google Scholar; cf. also The American Law Institute (ALI), Principles of Corporate Governance: Analysis and Recommendations (St. Paul, Minn.: ALI 1994) § 5.01 et seq.Google Scholar
27 Weinberger v. UOP, Inc., ibid.
28 N.W. 261 (Minn. 1879), and its discussion by Clark, supra n. 11, pp. 110-113.
29 Among many cases, see, for example, the careful assessment by the Delaware court of the board meetings' records in Weinberger v. OUP, supra n. 25; Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985); Kahn v. Lynch Communication Systems, Del. Supr., 638 A.2d 1110(1994).
30 Guinness pic v. Sounders, [1988] 2 All ER 940 (CA); affirmed by the House of Lords: [1990] 2 AC 663 (HL).
31 Cf., in contrast, with Delaware where, although the Delaware Statute does not on its face mandate disinterested shareholder approval, the Delaware Supreme Court has held that shareholder approval of interested director transactions must come from a majority of disinterested, independent, fully informed stockholders: Fliegler v. Lawrence, 361 A.2d 218, 221 (Del. 1976): “The purported ratification by shareholders would not affect the burden of proof in this case because the majority of shares voted in favor of exercising the option were cast by the interested directors in their capacity as shareholders. Only about one third of the ‘disinterested’ shareholders voted, and we cannot assume that such nonvoting shareholders either approved or disapproved”. See, however, the fine distinctions drawn in William v. Geier, 671 A. 2d 1368 (Del. 1996).
32 Block, /Barton, /Radon, , The Business Judgment Rule: Fiduciary Duties of Corporate Directors, 5th ed. (New York: Aspen 1998) 33Google Scholar, with further references to case law.
33 Kosoi v. Bank Feuchtwanger, Civil appeal 817/79, 38(1) PD 253.
34 Knepper/Bailey, supra n. 25, 132; Block/Barton/Radon, supra n. 32, 29 et seq. with references therein.
35 Van de Walk v. Unimation, Inc., 1991 Del. Ch. LEXIS 27; Fed. Sec. L. Rep. (CCH) P95, 834.
36 Weinberger v. UOP, Inc., supra n. 25, 710.
37 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); Williams v. Geier, 671 A.2d 1368, 1377 n. 19 (Del. 1996)
38 Cf. also American case law: Block/Barton/Radon, supra n. 32,80 et seq., and cases referred to therein.
39 Interestingly, an Israeli scholar has suggested that the good faith requirement has been inserted “due to the suspicion that the authorization procedures will not assure that beneficial transactions are approved … this is essentially an additional mechanism for overseeing the quality of transactions”: Goshen, Z., “Controlling Corporate Agency Costs: A United States – Israeli Comparative View”, 6 Cardozo J. Int'l & Comp. L. (1998) 99, 106.Google Scholar
40 Knepper/Bailey, supra n. 25, 132.
41 Clark, supra n. 11, pp. 164-165.
42 Friedmann, D., The Law of Unjust Enrichment, vol. 1, 2nd ed. (Aviram 1998) (in Hebrew) pp. 537Google Scholar et seq.. Cf. also Lord, Hoffmann, “Duties of Company Directors”, in: Andenas, /Sugarman, (eds.), Developments in European Company Law. Vol. 3: Directors' Conflicts of Interests (London: Kluwer Law International 2000) 1, 6Google Scholar; Knepper/Bailey, supra n. 25, 178 et seq.; Block/ Barton/Radon, supra n. 32, 33; Cinerama, Inc. v. Technicolor, Inc., 17 Del. J. Corp. L. 551, 569 (Del. Ch. 1991), affirmed in part and revised in part in Cede & Co. v. Technicolor, Inc. (Technicolor II), 634 A.2d 345 (Del. 1993).
43 Cf. Block/Barton/Radon, supra n. 32, 530 et seq. with further references: “[i]n Delaware existing law and policy have evolved into a virtual per se rule of damages for breach of the fiduciary duty of disclosure”.
44 The characterization of these transactions is further discussed by Clark, supra n. 11,pp. 148 et seq.
45 SirGreenbury, Richard, Directors' Remuneration – Report of a Study Group (1995)Google Scholar requires that, to avoid potential conflicts of interest, boards of directors should set up remuneration committees of non-executive directors to determine, within agreed terms of reference, the company's policy on executive remuneration, and specific remuneration packages for each of the executive directors (art. Al). The board should determine the remuneration of the non-executive directors, including the members of the remuneration committee.
46 See the discussion in section 4.1.1 above.
47 Del Ch. Lexis 121, 1997 WL 419633 (Del. Ch. July 16, 1997).
48 Cf. the decision of the Delaware court in Fliegler v. Lawrence, supra n. 31.
49 Clark, supra n. 11,195; cf. also Orlinsky, E.G., “Corporate Opportunity Doctrine and Interested Director Transactions: A Framework for Analysis in an Attempt to Restore Predictability”, 24 Delaware Journal Of Corporate Law (1999) 451, 522 et seq. with further references.Google Scholar
50 Rogers v. Hill, 289 US 582, 591-592 (1933); cf. also Clark, supra n. 11,198.
51 The Greenbury Report, supra n. 45.
52 SirHampel, Ronald, Committee on Corporate Governance – Final Report (1998)Google Scholar. Cf. Villiers, C., “Disclosure and Corporate Governance”, in: UK Law for the Millenium (London: UK National Committee of Comparative Law 1998) 148, 164Google Scholar et seq. with further references; Cheffins, B., Company Law: Theory, Structure and Operation (Oxford: Clarendon 1997) 655Google Scholar et seq. provides a sharp analysis anticipating these results.
53 For further studies of this matter cf. Levmore, S., “Symposium Norms and Corporate Law: Puzzling Stock Options and Compensation Norms”, 149 U. Pa. L. Rev. (2001) 1901CrossRefGoogle Scholar, with further references; Wulff, J., Aktionen für das Management (Köln: Heymann 2000)Google Scholar, comparing the legal systems of Germany, England, France and Austria; Monks, /Minow, , Corporate Governance (Maiden, Mass: Blackwell 1995) 242 et seq.Google Scholar
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56 Wulff, supra n. 53, 8-9.
57 Wulff, ibid., 9.
58 Cheffins, supra n. 52,657 et seq. with further references.
59 Wulff, supra n. 53, 8-9.
60 Clark, supra n. 11, 149; Orlinsky, supra n. 49, 457.
61 See the discussion of the procedure of approval in section 4.1.1 supra.
62 Cf. Clark, supra n. 11, pp. 243-247; see however the rules proposed by ALI, supra n. 25, § 5.05.
63 Ibid., 248-251.
64 Ibid., 252. On information belonging to the company see also Easterbrook/Fischel, supra n. 16, 254etseq.
65 See Friedmann, supra n. 42, 559 et seq.; “It is an act of disloyalty for a fiduciary to profit personally from the use of information secured in a confidential relationship, even if such profit or advantage is not gained at the expense of the fiduciary. The result is nonetheless one of unjust enrichment which will not be countenanced by a Court of Equity.” (In re Tri-Star pictures, 634 A.2d 319, 334 (Del. 1992)); cf. Nolan, R.C., “Conflicts of Interest, Unjust Enrichment, and Wrongdoing”, in: Restitution: Past, Present and Future: Essays in Honour ofGareth Jones (Cornish, et al. [eds.]) (Oxford: Hart 1998) 87Google Scholar; Solomon, /Schwartz, /Baumann, /Weiss, , Corporations: Law and Policy (St. Paul, Minn.: West 1994) 812.Google Scholar
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67 Hopt, K., “Legal Elements and Policy Decisions in Regulating Groups of Companies”Google Scholar, in: Schmitthoff, /Woolridge, , Groups of Companies (London: Sweet & Maxwell 1991) 81, 100.Google Scholar
68 Immenga, supra n. 67,46 et seq.
69 F.2d 173 (2d cir.), cert, denied, 349 US 952 (1955).
70 Cf. Clark, supra n. 11, p. 254 with further references.
71 Weinberger v. UOP, Inc., supra n. 25, 710; cf. also Levien v. Sinclair Oil Corp., 261 A.2d 427,431 (Del.Ch. 1969).
72 Weinberger, ibid.; cf. also Warshaw v. Calhoun, 221 A.2d 487, 492 (Del.Supr. 1966).
73 Block/Barton/Radon, supra n. 32, 270; referring also to Management Techs., Inc. v. Morris, 961 F. Supp. 640,645 (SDNY 1997) noting conflicting duties owed by director of parent corporation and two wholly-owned subsidiaries (1) to the parent corporation, and (2) to creditors of the subsidiaries in light of the perilous financial circumstances of those companies; cf. also Monks/Minow, supra n. 53, 198.
74 Forum Europaeum Corporate Group Law, “Corporate Group Law for Europe”, 1 EBOR (2000) 165–285, 172 et seq.Google Scholar; cf. also the articles of Windbichler, C., “‘Corporate Group Law for Europe’: Comments on the Forum Europaeum's Principles and Proposals for a European Corporate Group Law”, 1 EBOR (2000) 265–285Google Scholar; and Kluver, J., “European and Australian Proposals for Corporate Group Law: A Comparative Analysis”, 1 EBOR (2000) 289–315.Google Scholar
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77 For a checklist of the necessary information see Monks/Minow, supra n. 53, 185 et seq.
78 Cf. Cheffins, supra n. 53, 105-107; Clark, supra n. 11, 183 et seq.
79 The Law Commissions' Report on Directors' Conflicts of Interest calls for further research on the role of non-executive directors in overseeing service contracts: Joint Consultation Paper by the English and Scottish Law Commissions, Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (London: The Stationary Office 1998)Google Scholar marginal number 3.70. Empirical studies in the UK have not been promising: Villiers, supra n. 52, 164-165 with further references.
80 Clark Supra n. 11, 110.
81 Easterbrook/Fischel, supra n. 16, 81-88.
82 Black, B.S., “Agents Watching Agents: The Promise of Institutional Investor Voice”, 39 UCLA L. Rev. (1992) 811Google Scholar; Rock, E.B., “Foxes and Hen Houses? Personal Trading by Mutual Fund Managers”, 73 Wash.U.LQ. (1995) 1601Google Scholar; Chandler, supra n. 76.
83 Easterbrook/Fischel, supra n. 16, 88 et seq.
84 Cf. Law Commissions' Report on Directors' Conflicts of Interest, supra n. 80, part 3: economic considerations, § 3.64.
85 Brandeis, Louis D., Other People's Money (New York: Stokes 1932) 92.Google Scholar
86 Cf. Procaccia, U., “Crafting a Corporate Code from Scratch”, 17 Cardozo L Rev. (1996) 629, 641 et seq.Google Scholar; Agmon/Lachman-Messer, supra n. 13, 574 et seq.
87 Cf. Clark, supra n. 11,663.
88 Ibid.
89 Grossfeld, B., in: International Encyclopedia of Comparative Law, vol. XUIGoogle Scholar: Business and Private Organizations, Chapter 4: Management and Control of Marketable Share Companies, 121.
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91 Louis, Loss, Fundamentals of Securities Regulation, 2nd ed. (1988) 33Google Scholar (cited by Lowenstein, ibid., 1344).
92 Easterbrook/Fischel, supra n. 16,31
93 Burnet v. Coronado Oil & Gas Co., 285 US 393, 406 (1932) (Brandeis J, dissenting).
94 Orlinsky, supra n. 49, 452.
95 Romano, supra n. 10, 39-40; cf. Fisch, J.E., “The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters”, 68 U. Cin. L. Rev. (2000) 1061.Google Scholar