Bottom Shekel / Good Show, Eliahu

The Bank of Israel does not want Shlomo Eliahu to hold a controlling stake in Bank Leumi. The numbers show it clearly: For many weeks, the Bank of Israel's supervisor of banks and the Finance Ministry's accountant general have been discussing a change in the so-called Marani amendment. In other words, a change that would allow the government to sell its last shares in Bank Leumi without creating a new controlling core of shareholders. Such a move would make Bank Leumi the first Israeli bank whose shareholders are dispersed throughout the capital market.

This is a novel experiment regarding control of Israeli banks, in fact a novel experiment regarding control of Israeli companies in general. So the Bank of Israel and Finance Ministry have been discussing for months the details that would facilitate proper control over the bank. In other words, details that would ensure that the bank's directors are appointed by shareholders at a general meeting and that there will not be a situation in which, for example, shareholders don't bother to make nominations for the board of directors.

This is why the law provides for a double mechanism: A special committee will nominate candidates for the board and present them to a general meeting for a vote. Also, shareholders will be allowed to nominate their own candidates, including relatively small shareholders.

The Bank of Israel recommends that every shareholder with a stake of at least 4% may nominate a director. The Finance Ministry, after consulting securities authority chief Zohar Goshen, goes beyond that. It favors allowing every shareholder with a stake of more than 2% to nominate a director. In any case, shareholders can nominate only one candidate to the board.

Here's the rub. The proposed amendment provides that a shareholder may nominate only one candidate. This means, for example, that holders of 2% or 10% of Leumi's shares would have the same controlling power: Just one director, that's it.

In Bank Leumi's case, there can be no doubt about what this means: Eliahu, with his 10% stake, will not be able to control the board.

A clear attempt to deny him control

The amendment is a clear attempt to deny Eliahu control of the bank. The Bank of Israel does not want him, period. On the other hand, Eliahu need not be insulted. The move isn't against him personally. It seems that the Bank of Israel simply does not want any controlling shareholder at the bank, whoever it might be.

During the past year the Bank of Israel quarreled with a controlling owner who claimed to communicate with heavenly powers; in another case, it argued with controlling shareholders who in a crisis refused to inject more capital into a bank. If those are the controlling owners, who needs them, the Bank of Israel asks itself. That's why it decided to examine, for the first time in Israel, a model of a bank that lacks a controlling core, a bank that the capital market controls.

This is a brave experiment. Some say it is far-reaching and dangerous because Israel's capital market lacks experience in such a role. Others would say this is clearly a move whereby the Bank of Israel assumes control. Without an effective controlling core, the supervisor of banks will have the final say about developments at the bank.

In any case, Eliahu plans to test the amendment sooner than the Bank of Israel expected. Even before the change in the Marani amendment passes, Eliahu will put the original amendment to the test by nominating his own candidate for the board and expecting the bank's general meeting to vote. Moreover, Eliahu has presented a particularly suitable candidate, one whom even the Bank of Israel would find hard to reject: the Bank of Israel's former governor, David Klein.

What will happen when the shareholders convene to discuss Klein's election to Bank Leumi's board? In that meeting, Eliahu will have the power emanating from his 10% stake in the bank. Facing him will be the state with 11%. That's nearly a tie. Since the state is about to replace some of the bank's directors in May, it's quite likely that it will nominate new members for the board at the same meeting, against Klein.

And so, earlier than the Bank of Israel expected, the Marani amendment is actually being put into action: For the first time a general meeting in Israel will have to choose between competing candidates for a company's board of directors amid a near tie between the two major shareholders. Hallelujah.

The outcome of this competition - between Eliahu's candidate and the state's candidates for the board - is difficult to predict. It's not clear at all if, for example, the state will vote against Klein. (And why should it oppose him; the man is beyond doubt fit for the bank's board.) In any event, Eliahu's challenge to the Bank of Israel and the state will lead to a democratization of Israel's capital market, even if it happens at a time and under conditions that are not convenient to state. Good show, Eliahu.