The ongoing crisis in the board of Israel Aerospace Industries (IAI) has led in recent days to an absurd and highly unusual spectacle: a government-owned company petitioning the High Court of Justice against the Government Companies Authority and against the ministers responsible for the company.
This extraordinary legal move reflects the desperation of the defense corporation and the few remaining directors on its paralyzed board, caught in the middle of a political power struggle between Defense Minister Israel Katz and the minister in charge of government companies, David Amsalem.
Since November, the ministers have failed to appoint a chairperson for IAI because they cannot agree on a candidate. In recent months, they have also refused to appoint external directors (public representatives) to replace Chava Shechter and Adi Barshadsky, whose terms ended.
The result is a complete paralysis of the board’s work, legal complications with the law and with the Securities Authority, and even a situation in which IAI failed to submit its Q2 financial reports. Major deals with the Defense Ministry are left unapproved.
“The ministers’ disregard of our appeals and their refusal to appoint external directors without any explanation or clear, reasoned decision goes far beyond the bounds of reasonableness,” the company argued in its High Court petition. “The board’s activity, in normal times and certainly in wartime, is of utmost importance. IAI is required to take critical actions to ensure full support for the defense establishment, to accelerate production and deliveries, while also continuing extensive business activity abroad and maintaining defense exports amid complex foreign relations.”
In an effort to resolve the crisis, a proposal was raised last week under which each minister would appoint one external director and the other minister would confirm the appointment with a “cross-signature” in the presence of their chiefs of staff.
Katz’s candidate is Alice Frenkel, former VP of Marketing at Haifa Port. Amsalem has yet to choose his candidate, “between two heavyweights he is considering,” as one close associate described. Katz’s chief of staff informed the board that “the appointment of external directors will be completed in the coming days.”
But hopes for a breakthrough were premature. Amsalem’s chief of staff quickly notified the board that “the Defense Minister’s chief of staff did not coordinate with me before sending the letter you received, and I refused to sign it because I do not trust that they will actually follow through.”
Directors refuse to 'fall on their swords' for the ministers
Meanwhile, the board crisis is spiraling out of control as sensitive details about major defense deals delayed between IAI and the Defense Ministry are leaking. One such deal involves the production of Arrow-3 interceptor missiles, vital for Israel’s defense against ballistic missiles from Yemen’s Houthis and from Iran.
“If the board had an audit committee, its chair would have had to involve MALMAB (the Defense Ministry’s Security Authority), put everyone on a polygraph, and find out how such information is leaking," according to a senior defense official. "This is already about Israel’s security during wartime — the holiest of holies.”
The Defense Ministry did not respond to Calcalist’s inquiry on the matter.
While the ministers delay the appointment of a chairperson, the refusal to appoint external directors has brought the board to a standstill. Two weeks ago, IAI failed to submit its Q2 financial statements and instead filed a “preliminary report” with only a summary of its business results.
“The absence of approved financial reports could have serious consequences for the company. It may raise questions about the continued trading of its securities on the stock exchange and about the grounds for the immediate repayment of its bonds,” the Securities Authority warned.
In other words, a suspension of trading could lead IAI’s bondholders, with holdings worth 160 million shekels, to demand immediate repayment.
IAI fears that, beyond forced bond repayment, it could face lawsuits from creditors, breaches of commitments to suppliers and customers, downgrades and more. In addition to the fine for failing to appoint a chair, the Securities Authority could impose another approximately 500,000 shekel fine for the lack of an audit committee chaired by an external director.
IAI, which issues bonds, is under Securities Authority oversight. Last May, the Authority already announced its intention to fine the company 1.5 million shekels for failing to appoint a chairperson.
The directors’ motivation to petition the High Court stems from their fear of sanctions from the Securities Authority. None of them is willing to “fall on the sword” for ministers fighting to expand their power inside Likud. The petition is meant to send a message to the Securities Authority that they did everything in their power to resolve the crisis.
Why isn’t the prime minister intervening?
The past few years of unprecedented global demand for weapons, both from Israel and abroad, have been highly profitable for IAI, leading to record financial performance. In addition to the Arrow-3 missiles, which became stars of the ongoing war, the company has been scoring success across multiple fronts.
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Test launch of an Arrow 3 interceptor missile
(Photo: Courtesy of Israel Aerospace Industries)
Earlier this month, IAI’s aviation division received regulatory approval from U.S. and Israeli civil aviation authorities to convert Boeing 777 passenger planes into cargo planes. These approvals make IAI the only company in the world authorized to perform such conversions, opening the door to multi-billion-dollar deals in the coming years.
A few weeks ago, IAI also launched the Ofek-19 spy satellite, designed to enhance Israel’s intelligence-gathering capabilities in distant theaters like Yemen and Iran. Just weeks before, it launched the Dror-1 communications satellite, built for the state.
“IAI has achieved impressive successes, both technological and financial, after years of dragging a problematic image as a company plagued by low productivity and political interference. In recent months, it has rebranded itself, trying to improve its standing in the red-hot global market. It is inconceivable that its owner, the State of Israel, is destroying it,” warned a senior defense official.
The key to solving the crisis lies with Prime Minister Netanyahu. He is aware of what is happening at IAI, fully updated on the ministers’ inaction, yet does nothing and refrains from intervening. All this while IAI continues to compete for mega-deals abroad, in a climate where negative sentiment toward Israel is steadily rising.
“How do we look in the eyes of Germany, which will soon receive the first Arrow-3 batteries from IAI? It’s one thing that they see Israel as a bully rampaging across the Middle East, bombing wherever it pleases. But what will they think when they see the chaos raging inside our own house? Especially now, when Israel’s international standing is so damaged, a government-owned company must project something else outward — certainly not chaos,” said a senior defense official.