The duties of care and loyalty of office holders, the business judgment rule, and exposure to personal liability.
The two duties: care and loyalty
The Companies Law imposes two fundamental duties on directors and office holders: the duty of care (Sections 252-253): to act with the level of skill of a reasonable office holder, stay informed, read materials, and make informed decisions; and the duty of loyalty (Section 254): to act in good faith for the benefit of the company, avoid conflicts of interest, competition with the company, and exploitation of its business opportunities. Breach of these duties exposes the office holder to a personal lawsuit by the company, and under appropriate conditions, to a derivative action by a shareholder. A personal claim by a creditor or a derivative action on its behalf requires an appropriate legal basis, and does not arise automatically from a debt of the company.
The business judgment rule: the central protection
Case law has adopted the business judgment rule: the court will not examine, after the fact, the wisdom of the business decision if it was made in good faith, without a conflict of interest, and on an informed basis. The practical meaning for directors: documentation is the protection. Orderly minutes, materials sent in advance, professional opinions relied upon, and reservations that were recorded—these are the documents that will stand between you and personal liability.
Risk focal points in practice
Interested-party transactions that were not lawfully approved; unlawful dividend distributions; continuation of engagements during a period of difficulties (exposure to creditor claims and personal guarantees); personal regulatory liability under securities, antitrust, tax, and environmental laws; and criminal exposure in corporate offenses. Alongside these: directors and officers insurance, indemnity letters, and exemption, the validity and scope of which must be examined before assuming the role, not after the claim arrives.
Representation of office holders
Advocate Israel Arama, formerly of the Tel Aviv District Attorney's Office, represents directors and office holders in civil claims and in criminal and regulatory proceedings, as well as companies and shareholders suing office holders. Contact us for an initial consultation without obligation.
The two duties: care and loyalty — what is important to know?
The Companies Law imposes two fundamental duties on directors and office holders: the duty of care (Sections 252-253): to act with the level of skill of a reasonable office holder, stay informed, read materials, and make informed decisions; and the duty of loyalty (Section 254): to act in good faith for the benefit of the company, avoid conflicts of interest, competition with the company, and exploitation of its business opportunities. Breach of these duties exposes the office holder to a personal lawsuit by the company, and under appropriate conditions, to a derivative action by a shareholder. A personal claim by a creditor or a derivative action on its behalf requires an appropriate legal basis, and does not arise automatically from a debt of the company.
The business judgment rule: the central protection — what is important to know?
Case law has adopted the business judgment rule: the court will not examine, after the fact, the wisdom of the business decision if it was made in good faith, without a conflict of interest, and on an informed basis. The practical meaning for directors: documentation is the protection. Orderly minutes, materials sent in advance, professional opinions relied upon, and reservations that were recorded—these are the documents that will stand between you and personal liability.
Risk focal points in practice — what is important to know?
Interested-party transactions that were not lawfully approved; unlawful dividend distributions; continuation of engagements during a period of difficulties (exposure to creditor claims and personal guarantees); personal regulatory liability under securities, antitrust, tax, and environmental laws; and criminal exposure in corporate offenses. Alongside these: directors and officers insurance, indemnity letters, and exemption, the validity and scope of which must be examined before assuming the role, not after the claim arrives.
This information is for initial orientation about the service and contact process. It is not individual legal advice.
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