not only save a major headache for foreign entities interested in conducting activities in Israel (whether as a branch or a subsidiary), but are sometimes not just a convenience but a necessity of reality. In the global era, many companies manage branches in Israel by “remote control” – they appoint a local CEO, grant him powers, and are content with periodic reports. However, business and legal reality shows that this model – which does not comply with proper corporate governance rules – carries significant risks, which may even cause the company’s loss, if not just create large losses. The need for “Boots on the Ground” – an independent entity that is loyal to the owners or management of the company outside of Israel, but is physically located in Israel – is not only a managerial necessity, but is essential for minimizing risks.
The Agency Problem is a fundamental concept in economics, management, and law, describing the inherent conflict of interest that arises when one party (the “sender” or “Principal”) hires the services of another (the “agent”) to manage on its behalf. Naturally, the agent has his own interests, which sometimes do not coincide (and may even conflict) with the interests of the sender, because he is “on the ground” and manages matters, there are information asymmetries between him and the sender, and it is difficult to fully supervise him. When the representative is in Israel and the sender is outside Israel (the company’s management is outside Israel or the shareholders are outside Israel), and especially when the sender does not speak Hebrew (and often a translation alone does not translate the things between the lines or local practices), there is great importance for the entity in Israel who represents the entity abroad and constitutes its eyes and feet on the ground (boots on the ground). Generally, the mere existence of such an entity causes the representative to act transparently even without the need for further actions.
Israeli corporate law does impose a duty of care and loyalty to the company on officers , but the ability to retrospectively sue directors and officers for damages caused is an expensive and ineffective solution, to say the least , when it is possible to act and prevent the damage in the first place by having eyes and feet on the ground. Equally important, when management outside of Israel blindly relies on local management without an independent control mechanism, it itself risks violating its duty of care towards the corporation and may not benefit from the protections of business judgment.
So how do you increase oversight? “Soft landing” services certainly include the appointment of an Israeli director (who is not part of the local management) on behalf of the management outside Israel and certainly include an official address of the company with the service provider (to prevent official correspondence from “disappearing” on its way to the management outside Israel due to negligence or deliberate concealment by a local employee). However, it is also highly recommended to change the signing rights in the company to ensure that anything that is not in the normal course of business also requires the signature of the designated representative.
In conclusion, and since the authors of this article provide “soft landing services in Israel” to a large number of foreign companies or foreign managements, appointing “eyes and feet on the ground” is not an expression of distrust in local managers, but rather a necessary corporate governance tool, and therefore it is also important to use not only a serious representative, but also someone who is part of a firm with experience in the field. Such a factor will not only reduce risks but also enjoy many other benefits, such as ease of conduct in Israel and even major financial savings.
