Allow Public to Sue State-Owned Company Directors

Idan David, who was dismissed as chairman of Netivei Ayalon amid suspicions of falsifying his resume for the Government Companies Authority appointments committee, is under police investigation for fraud, forgery, and submitting a false affidavit. Concurrently, the Government Companies Authority is preparing to file a civil lawsuit against David. If filed, this would be a significant and unprecedented move, as the state has never before sued an individual director of a state-owned company for alleged misconduct.

The case of David's appointment, suspected of fraud and forgery, highlights a deeper systemic issue. Public policy cannot rely solely on the decisions of specific officials. In private and public companies, shareholders can file derivative lawsuits on behalf of the company when a corporate officer harms it and directors or controlling shareholders fail to act. This mechanism exists precisely for situations where those responsible for enforcing duties are in a conflict of interest or unwilling to act. Examples include cases where directors were forced to pay tens of millions of shekels to companies due to problematic deals, improper dividend distributions, or significant fines paid to authorities.

However, this mechanism is absent in state-owned companies, where the state is the sole shareholder. The decision to sue a director rests with the system that appointed them, and when an appointment might be considered 'political,' the system may be reluctant to act against its own appointee. This creates a situation where directors of state-owned companies have fiduciary duties but are practically immune from lawsuits, as only the state can enforce these duties, and it may be the least interested party. Often, such lapses end with the director simply resigning, a practice that the article suggests should be eradicated.

Drawing a lesson from the David case, the author proposes a new approach: state-owned companies belong to the public, not the government, which holds them in trust via the Government Companies Authority. Therefore, every Israeli citizen should have legal standing to file a derivative lawsuit on behalf of a state-owned company against a director who breached their duties, especially when the state refrains from doing so. This would encourage directors to be more diligent, knowing that even if the authority doesn't sue them, a citizen might. This is not intended as a political tool but as a means to improve corporate governance, potentially positioning Israel as an international leader in this field.

The article argues that this change does not require new legislation, citing the historical precedent of derivative lawsuits in private and public companies originating from a court ruling before being codified into law. Existing legal filters, such as the requirement to first demand the company act and court approval for the lawsuit, can protect state-owned companies from frivolous claims, ensuring only well-founded cases proceed.