Working for the directors

The Danziger committee absolved the directors of Bank Hapoalim from personal responsibility and recommended that the bank exhaust the bank's negotiations with the insurance companies for the payment of $140 million from the bank's insurance policies. Attorney Sela explains why this is a worrying result for the investing public

Adv. Oded Sela

The ill-remembered Bank of North America case happened in the second half of the eighties of the last century. In 1993, a judgment was given in the District Court of Jerusalem, in a lawsuit filed by the official receiver at the time, against a series of officials at the Bank of North America, for their personal responsibility for the collapse of the bank and for the damages caused in the case, charging them with personal compensation for the damages caused due to their negligence in fulfilling the duty of care towards the bank and other factors. The receiver worked at various levels to cover the bank's losses, but his work at the beginning of the road was not really successful. Another ruling from 1994 obliged two of the bank's directors to pay personal compensation in the amount of NIS 500 million together and separately. In 2003, an appeal was rejected by those directors regarding their charge for the high compensation and the determination in the original judgment, that they were negligent and showed exhaustion in regards to fulfilling their duties of care towards the bank. The official receiver, through attorney Yossi Segev, sued the insurance companies that insured the bank with BBB insurance, which includes both coverage against embezzlement and coverage for the liability of the directors, but his claim for compensation for the corporation's damages was unsuccessful. On the other hand, the receiver's claim against the bank's board on the personal level was also successful and Judge Yaakov Bezek, in the Jerusalem District Court, required the board members to compensate the bank for the damages caused due to their negligence in supervising the bank's activities. For quite a few years, the collector worked to collect the compensation stipulated in the judgment and in retrospect, managed to collect some of the amounts as part of a number of compromise arrangements.

The background to the explosion of the Bank of North America affair was the embezzlement of bank managers, not the directors. The main argument against them was that they did not supervise and did not fulfill the minimum duties of care required of a director in a corporation, let alone a banking corporation. The Bank of North America case is a milestone and perhaps even a capstone in regards to the liability of directors and officers in Israel and their personal liability for damages caused due to their negligence, this case has been studied in every business school and every law faculty in Israel for over twenty years and countless articles and studies have been written about it.

And in a sharp transition to 2022 - what happened to the responsibilities of directors and officers in banks from then until today? Since the nineties of the last century, quite a few reforms have been implemented, the banking corporations have entered into countless new activities, using various tools, and at the same time countless new regulations have been imposed on them by the supervision of the banks.

On the face of it, it could be assumed that during the three decades that have passed since the Bank of North America affair, the exposure of the board members in the banking system to their personal liability in cases of negligence will only increase. In the same breath, it could be expected that in cases where it is determined that the negligence of the directors of the banking corporation caused the damage, this will relatively quickly result in their being charged for the damages of the corporation, its customers and its shareholders. But then one case came and it seems that despite all the regulatory developments, the multiplicity of tasks and positions, many legal provisions dealing with proper corporate governance and more, the trend actually turned towards reducing the responsibilities of office bearers and directors.

Bank Hapoalim was involved in two corruption scandals. The first one dealt with helping American customers to avoid taxes. As a result, the bank reached a settlement with the legal authorities in the USA and was ordered to pay 875 million dollars. The second interpretation was known as the 'FIFA affair', in which a series of banks around the world, including Bank Hapoalim, were investigated on the suspicion that they had helped the executives of the World Football Association to launder bribes that had been paid to them and deposited in various banks in the US and mainly in Switzerland. Bank Hapoalim reached an agreement with the American authorities on this matter as well and was fined 30 million dollars. The two scandals would never have happened and we would not have heard about them, had it not been for the American tax authorities "brazenly" deciding to start a war of money laundering and the tax evasion of American citizens around the world. Both arrangements require Bank Hapoalim to pay close to a billion dollars, an amount that could collapse quite a few banks and in any case has the potential to affect the bank's equity, its profits and the value of its shares in the free market. To the extent that the reason for this lies in the negligence of directors, when fulfilling their duties of care as directors of the bank, then responsibility must be placed on those who allowed it, and also by turning a blind eye, then they must be held responsible. This responsibility should include personal charges for the damages caused to the bank and the public of its customers, due to their negligence and even worse the turning a blind eye they took, in the hope that these actions will never be discovered. And here, a surprise. The bank appointed an independent committee to review the events that led to the heavy sanctions and to provide recommendations on how to proceed regarding the significant rewards and bonuses paid to those involved in the relevant years. It is true that this is not a voluntary committee initiated by the bank, but rather a committee that was imposed on it due to the heavy sanctions imposed on the bank and following them a request for the approval of derivative claims and a number of class actions. The committee was chaired by retired Chief Justice Dr. Yoram Danziger, who is considered one of the leading experts in Israel in the field of corporate law in general and the liability of directors and officers in particular. The committee decided that the directors and senior officers of the bank did not act as required of them. The directors breached the duty of care in that the internal inspections they carried out were limited in their scope and depth, board meetings were not convened on the issue and discussions on the strategy amounted to "wait and see", using the well-known and trite "it will be fine" method. Despite all these conclusions, the committee recommended not to demand from the directors and officers on the relevant dates any compensation of any kind, nor to return to the bank the rewards they received in the relevant years, in the form of salary and bonuses or a part of them, sums that in aggregate reach many tens of millions of shekels.

These conclusions are puzzling, to say the least, especially when the Danziger Committee itself states that the directors "did not conduct themselves as expected of them in the situation that arose, especially after the UBS affair, and in the situation that the bank found itself in with the beginning of the American investigation against the Swiss workers, and later, against the bank itself." The committee also determined that if the officers had acted reasonably, at least part of the damage to Bank Hapoalim would have been spared. The question arises, in light of the gap between the serious determinations of the Danziger Committee and the exemption it gave to directors and officers, is the Danziger Committee actually sending a message to office holders that their exposure to personal lawsuits is in fact marginal to non-existent even in the case of negligence?

In my opinion, the answer is no. The Danziger Committee decided that the bank will be satisfied with receiving the insurance benefits from the bank's insurers in the amount of 140 million dollars, while the officers will not take a shekel out of their pockets. This decision causes discomfort and raises many questions. For example, is there a distinction between the personal responsibility of officers in banking corporations versus their personal responsibility in other public companies. Do the Bank of Israel, the Banking Supervision Authority and the Securities Authority believe that such a separation should be made? If you read the Bank of Israel's proper management circular from last April, you find that it sets a much higher standard for proper conduct than that of the Danziger Committee. It may be that in light of the widespread public criticism of the forgiving attitude towards Bank Poalim, it is still too early to eulogize the rules established in the Bank of North America case and the many rulings that followed it. Meanwhile, the sighs of relief in the meeting rooms of many boards across the country, echo more powerfully than the voice of the public.

*Attorney Oded Sela, a partner in the law firm Zilbreschats, Sela, Brands specializing in commercial law, regulation of the capital market and insurance, special risk management laws and law and technology