Fordham Journal of Corporate & Financial Law Volume 11 Issue 2 Article 2 2006 The Political Dynamics of Corporate Legislation: Lessons From Israel Yael T. Ben-Zion Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Banking and Finance Law Commons, and the Business Organizations Law Commons Recommended Citation Yael T. Ben-Zion, The Political Dynamics of Corporate Legislation: Lessons From Israel, 11 Fordham J. Corp. & Fin. L. 185 (2006). Available at: https://ir.lawnet.fordham.edu/jcfl/vol11/iss2/2 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. ARTICLES THE POLITICAL DYNAMICS OF CORPORATE LEGISLATION: LESSONS FROM ISRAEL Yael T Ben-Zion * TABLE OF CONTENTS INTRODUCTION ..................................................................................................... 187 I. THE POLITICAL THEORY OF LEGISLATION: OVERVIEW AND APPLICATION ......... 191 A . Interest G roup Theory ........................................................................... 192 B. Applications to Corporate Law ............................................................. 196 II. BACKGROUND ON THE NEW ISRAELI CORPORATE LAW: ECONOMY, POLITICAL HISTORY, AND RELEVANT INTEREST GROUPS ................................. 206 A. Background on Israel's Economy ......................................................... 208 A. 1. The Israeli CapitalMarket......................................................... 211 A.2. The Stock Exchange ................................................................... 214 B. The Political History of the New Corporate Law ................................. 224 B. 1. ProfessorProcaccia's Proposal ................................................ 226 B.2. The Barak Comm ittee ................................................................. 227 B.3. The ParliamentaryProcess ........................................................ 236 B.4. Epilogue ..................................................................................... 24 1 C. Relevant Interest Groups ....................................................................... 242 C.J. R egulators.................................................................................. 242 C.2. Business Service Providers........................................................ 244 C.3. Shareholders,Managers, and Control Holders......................... 245 C.4. Creditors .................................................................................... 247 C.5. Non-ParticipatingGroups ......................................................... 248 C.6. Other Considerations................................................................. 249 D . Sum m ary ...............................................................................................250 185 186 FORDHAM JOURNAL OF CORPORATE & [Vol. XI FINANCIAL LA W III. THE POLITICAL ECONOMY OF CORPORATE LAW LEGISLATION ........................ 250 A. The New Corporate Law - General Characteristics and Specific C ontents ............................................................................................. 25 1 A. 1. General Characteristics............................................................. 251 A.2. The Companies Law's Content .................................................. 254 A.3. MajorModifications Occurring in the Course of Legislation.... 256 B. Interest Groups' Impact on the Israeli Corporate Law and Im plications ....................................................................................... 283 B. 1. The Shift from Rules to Standards.............................................. 283 B.2. The Conversion of EnablingProvisions to Mandatory P rovisions.................................................................................... 289 B.3. Mitigating Provisions ................................................................. 295 B. 4. Delegation to the Minister of Justice ......................................... 310 C. Political Theory Framework of the Israeli Corporate Law ................... 312 IV . C ONCLUSION ....................................................................................................314 A. The Identity and Impact of the Interest Groups Involved in the Legislative Process ............................................................................ 316 B. The Role Played by the Media .............................................................. 322 C . Legislators' Ideology ............................................................................ 324 D. Normative Implications for Corporate Law .......................................... 325 E. Policy Recom m endations ...................................................................... 331 APPENDIX A: MAIN AMENDMENTS IN THE ISRAELI CORPORATE LAW AND THE LEGISLATIVE PROCESS OF THE COMPANIES LAW OF 1999 .............. 335 APPENDIX B: LIST OF INTERVIEWS AND MEETINGS ............................................... 337 APPENDIX C: SUMMARY OF MAJOR MODIFICATIONS MADE DURING THE LEGISLATIVE PROCESS .................................................................... 339 APPENDIX D: THE PARLIAMENTARY SUBCOMMITTEE ON THE MATTER OF THE COMPANIES BILL, 1995 - LIST OF INVITEES .................................... 345 2006] THE POLITICAL DYNA MICS OF 187 CORPORA TE LEGISLATION INTRODUCTION Corporate law governs the operation of business organizations in a given state or country. Generally, it is conceived of as being a combination of permissive mechanisms designed to lower transaction costs for varied economic players and regulating mechanisms intended to smooth out embedded structural flaws. While the distinctions among the corporate laws of the various U.S. states have usually been explained on the basis of competition among the states,1 the distinctions among the corporate laws (and especially the corporate governance structures and corporate finance patterns) of different countries have been explained on the basis of the existence of myriad exogenous conditions, such as market mechanisms, ownership structures, historical legal origins, and quality of enforcement.2 Out of this latter sort of explanation, there has * Associate, Fried, Frank, Harris, Shriver & Jacobson LLP; J.S.D., Yale Law School, 2004; LL.M., Yale Law School, 2001; LL.B./MBA, Hebrew University of Jerusalem, 1998. This paper is largely based on a doctoral thesis entitled "Looking at Corporate Law through a Political Theory Lens - The New Israeli Corporate Law as a Case Study" (Feb. 2004) (unpublished manuscript, on file with the Yale Law School Library). I am deeply indebted to Roberta Romano for her enduring support and guidance as well as to Henry Hansmann and Alan Schwartz for their valuable advice. I would also like to thank Aviva Diamant for her insightful comments. Further, I wish to express my gratitude to Shuki Abramovich, Michal Agmon-Gonen, Aharon Barak, Amihud Ben-Porat, Sam Bronfeld, Joseph H. Gross, Reuven Y. Hazan, Meir Het, Menachem Hofnung, Davida Lahman-Messer, Dan Meridor, Arie Mientkavich, Michel Ohayon, Uriel Procaccia, Eran Rosman, Eliezer Sandberg, Amir Sharf, Zeev Sher, Ruth Shikler, Nathan Shilo, Gad Soen, Eyal Sulgenik, Shimon Wise and Omri Yadlin, who shared with me their experience and knowledge regarding the process that led to the enactment of the new Israeli Companies Law. Finally, I thank Kobi Abramov of the Tel Aviv Stock Exchange, Amir Bachar of Bank Israel, Rivka Marcus of the Knesset Archive, Yigal Mersel of the Supreme Court of Israel and Shelly Udvin-Aharoni of the Israel Securities Authority for granting me access to the formal records of the legislative process of the new Companies Law and current economic data. 1. For the different views regarding the efficiency of that competition, see William Cary, Federalism and CorporateLaw: Reflection upon Delaware,83 YALE L.J 663 (1974); Roberta Romano, The State Competition Debate in Corporate Law, 8 CARDOZO L. REv. 709 (1987). For cross-sectional empirical study of the effect of state law on firm value see Robert Daines, Does DelawareLaw Improve Firm Value?, 62 J. FIN. ECON. 525 (2001). 2. See Lucian A. Bebchuk & Mark J. Roe, A Theory of Path Dependence in 188 FORDHAMJOURNAL OF CORPORATE & [Vol. XI FINANCIAL LA W arisen a lively debate in recent years with respect to the possibility, or even the likelihood, of convergence of corporate codes toward a common standard.3 And yet, this rich scholarship has thus far paid little heed to the way in which political factors impact corporate law legislation. This paper attempts to fill this gap by providing its reader with a new and different outlook on the substance and structure of corporate law. It does so by examining the political history that accompanied the recent enactment of a new Israeli corporate law and placing this history in a firm framework of political theory. By tracing this law as its case study, the paper is able to trace the influence of interest groups on different stages of the legislative process and assess the implications of this particular instance for corporate law in general. As we explore the political history of the new law, we are also given some fascinating insights into the production process of corporate law and the complex relationship between theory and practice. Political