At the end of arduous negotiations with the regulator and years in the Courts, the company's financial penaly was set, but a moment after payment a derivative lawsuit is filed demanding that the directors be obligated to indemnify the shareholders for the violation, even if they were not involved therein. Can the directors be saved from the impending derivative lawsuit?
As an officer, a director has a fiduciary duty and a duty of care towards the company. The duty of care has developed as a kind of branch of torts law, based on an objective standard of conduct that requires the officer, in essence, not to be negligent in the performance of his or her duties. Against this background, the breaches of the duty can be classified into three levels: 1) Breaches committed deliberately by the director (whether for the benefit of the company or for his personal benefit); 2) Breaches committed inadvertently due to a misunderstanding of the law; and 3) Breaches by a third party (for example, a junior employee) attributed to the officer, due to a breach of the officer's duty to supervise. However, does the application of the business judgment rule protect officers or are they obligated to be proactive in order to enjoy the defense?
In a case brought before the Delaware Court in 1996 in the Caremark case, a pharmaceutical company which employees, via making illegal payments, increased sales without the knowledge of the directors. In the filed derivative lawsuit it was determined that as part of the duty to supervise the board of directors must adopt proactive behavioral norms to ensure that information about recurring problems reaches them in a timely manner and not wait for a report before taking action to prevent the breach. Meaning, the Court negated the possibility of acting with a blind eye and indifference, in an attempt to hide behind the business judgment rule. In 2020, the Tel Aviv District Court noted in the framework of a plea bargain proceeding in the Africa-Israel/Negev Ceramics case that the Israeli State Attorney's directive of 2019, which sometimes allows for leniencies for corporations when there is an effective internal enforcement plan, in practice establishes a standard of conduct that requires a board of directors to adopt an appropriate enforcement plan. In July, 2025, in a judgment of the Haifa Economic Court, it was noted that the Delaware Court decision of 2019 in the case of Marchand v. Barnhill expanded the Caremark rule to include an increased obligation to supervise matters critical to the company's operations, and clarified that the trend in the United State is to encourage the documentation of supervision and to observe substantive and active supervision, rather than a superficial one.
In summary, although as at mid-2025 the Courts in Israel have not yet officially adopted the rulings of the American Courts, it seems that this is not a question of if but of when and how. Thus, every director must ensure the existence and implementation of supervision mechanisms, as an insufficient enforcement plan that remains in the drawer will not be helpful, and it is necessary to consult with an attorney who is knowledgeable in the field both for the purpose of formulating a compliance plan and for updating, implementing and documenting it on an ongoing basis. This is of great importance not only to prevent lawsuits for breach of the duty of care, in which letters of indemnity and insurance can help, but also not always, but also to prevent criminal liability in certain cases, including when legal advice was not received or the advice was ignored or if the lawyer was not at a sufficient level.