Foreign Private Issuer Exemptions: NASDAQ Rule 5615(a)(3) - Israel

This post represents the final post of a three part series focused on NASDAQ's exemption rule for foreign private issuers.

Israel has the second largest number of foreign issued securities listed on the NASDAQ.  The rules Israeli companies most commonly deviate from are:

• Rule 5605(b) and (e) – Nomination and Composition of Board of Directors
• Rule 5605-6 – Executive Compensation
• Rule 5620(c) – Quorum Requirements

Under Israeli law, public companies are not required to have the majority of their boards be independent nor are companies required to have a nominating committee.  Israeli law states that the board of directors must include at least two external directors, nominated and elected by the board, to serve a term of three years.  External directors and their family members cannot at any time preceding the two years prior to their appointment have had any affiliation with the issuing company.  Additionally, external directors’ current jobs cannot interfere with service on the board otherwise the external director may be terminated.  In comparison, an independent director or family member by NASDAQ standards, cannot have had any affiliation with the issuing company for the last three years prior to being appointed. 

Israeli law allows for a company to choose its own method of nominating its board of directors as opposed to a nominating committee comprised of independent directors established by NASDAQ.   ITRN, for example, has its shareholders owning 1% or more of common stock nominate members for the board of directors in the general meeting, as is custom in Israel.  A majority of shareholders must approve the nominations. 

The NASDAQ independent director rule and the Israeli external director rule are similar in many fashions.  Both rules operate to ensure there is no conflict of interest between the director and issuing company.  Where the rules differ is in the composition of the board.  While NASDAQ requires the majority of the board be independent, the Israeli law only provides that at least two directors be external.  While Israeli law does present a strict set of rules for their external directors, the two required external directors may not be enough to veto company initiatives that could be deemed unjust.

Nasdaq Rule 5605-6 requires independent directors to oversee executive compensation plans.  Under Israeli law, compensation packages for employees who are not directors must be approved by the board of directors.  Compensation packages for directors must be approved by the audit committee, board of directors and at least one third of shareholders.  Under NASDAQ rules, a compensation committee made up of independent directors reviews executive compensation plans.  Israeli law dictates a more stringent requirement having not only the board approve compensation plans but also the shareholders. 

In comparison to NASDAQ’s rule, Israeli law has additional checks in place to determine executive compensation.  This process could be more costly to Israeli companies in time and expenses to have shareholders approve compensation packages however allows for shareholders to have a check on compensation packages. 

Like Canada, Israel has also moved away from NASDAQ’s quorum rule requiring 33 1/3% of shareholders present to conduct a meeting.   Unlike Canada, however, Israel’s Companies Law requires a higher quorum requirement.  Israel’s Companies Law requires a minimum of two shareholders holding at least 25% of the outstanding stock present at a meeting. Most companies in the sample, such as ROSG and GILT, set their quorum requirements to the minimum required by law while EZCH set its quorum requirement to 50%, much higher than the NASDAQ requirement.  

NASDAQ’s Rule 5615(a)(3), by allowing foreign companies to follow home country corporate governance standards, has encouraged foreign issuers to list on a U.S. exchange.  While some home country practices may be more favorable to the foreign issuer, some standards have also increased the level of corporate governance as required by NASDAQ.