Be Careful What You Wish for: How Progress Engendered Regression in Related Party Transaction Regulation in Israel

Abstract

The regulation of related party transactions (RPTs) is today the single most important yardstick for the quality of corporate governance systems. It is also one of the thorniest issues because RPTs are a well-documented cause of abuse by corporate insiders, yet they could be valuable and sometimes simply inevitable. This paper analyzes reform measures adopted in Israel with a view to improving corporate governance in general and RPT regulation in particular. Whereas one set of measures revolved around procedural safeguards based on disinterested informed approval (a property-like rule), another set purported to establish a Delaware-like business court that would implement an “entire fairness” review (a liability-like rule). The latter trend came to dominate the former notwithstanding applicable statutory and case law, thus engendering regression instead of progress in RPT regulation. This case suggests lessons for law makers, be they judges or legislators, who contemplate mimicking the “corporate capital of the world”.