In 1970, a man transferred the shares in two companies to his children, but in practice he continued to manage the companies and withdraw the full dividends from them, which led to a divorce dispute that began in 2000 and ended after the demise of both spouses only by a Supreme Court of Israel ruling at the end of October, 2024, which stated that the shares actually belonged to the man and not to his children.
Israeli law defines asset holding in escrow as "a relation to an asset according to which an escrow agent must hold or act on it for the benefit of a beneficiary or for another purpose". The law does not require a specific procedure for the recording of asset holding in escrow and the only sanction in practice is that holding the asset in escrow does not obligate anyone who did not know or should not have known about it, as long as it was not recorded in a public registry (for example, registration in the land registry or with the Corporations Registrar, as an asset held in escrow). Moreover, an escrow agreement is not even required to be in writing and an escrow relationship can be interpreted later from the behavior of the parties.
When it comes to an escrow in real estate, the existence of the escrow relationship can sometimes be interpreted later based on the actual use of the land, but even then, in the absence of a written settlement or evidence of the parties' intent, things may get complicated over the years, as the starting point in the Israeli Real Estate Law is that recoding in the regulated real estate register faithfully reflects the rights of the parties and is conclusive evidence of its content.
When it comes to holding shares in escrow, in many cases it is more difficult to bring external evidence to prove the existence of the escrow in the absence of an express written agreement. Thus, for example, in 2006, attorney Yigal Arnon opened proceedings in the District Court in Tel-Aviv-Jaffa against Mr. Shlomo Piotrkovsky and Afshi Investments Ltd., in which he sought to declare that half of the shares of Cellcom Israel Ltd. held by Piotrkovsky and constituting 1 % of the Cellcom shares, with all the rights and dividends arising from them, belong to Arnon. The demand was based on a document which authenticity was at the center of the procedure and the reason for the escrow was that Arnon did not want the shares to be recorded in his name, because at the relevant time he was in the midst of a separation from his wife, and he preferred not to involve the shares. Thus, the shares were also treated as if they were not his. In spite of this, the Court determined that the shares were indeed held in escrow. This case reinforces the need for an orderly escrow agreement signed in a manner that cannot be later attacked, as an agreement signed before a notary.
In addition to the above, holding shares in escrow may also have tax implications. To the extent that it will not be possible to prove to the Tax Authority that the shares were held in trust in the first place, the tax authority may deed the transfer of the shares from the escrow agent back to the real shareholder as a sale transaction and tax it. Also for this reason it is important to have a dated and documented escrow agreement and the solution of a notarized signature may assist here too. It is important that the agreement is also drawn up by a notary with experience in the fields of corporations and trusts to avoid complex legal disputes later, as well as to receive proper advise later, including when opening a bank account, to avoid money laundering related issues with the bank. Additionally, it is important that the escrow agreement will regulate also issues of managing the shares, such as the manner of voting such, distribution of dividends, etc.