- Sharir, Shiv & Co. Law Offices - https://www.sask.co.il -

Newsletter 60 – November 15, 2016


We are pleased to present another edition of our periodic newsletter. In this edition we provide a brief synopsis of recent developments in Israeli corporate law affecting both private and public companies, including fund manager liability for changes to the investment model presented to investors, public company shareholder disclosure obligations, and new legislation relating to the supervision of financial services.

Our newsletter is intended to create awareness of important practical developments in Israeli corporate and commercial law, and the principles of law upon which these issues are based. We hope that you will find our newsletter informative and helpful, and your comments or suggestions are appreciated.

If you would like further information or have any questions concerning the issues discussed in this newsletter, please contact either Yoram Shiv at 972-3-607-4777 or yoram@sask.co.il, or Alex Berman at 972-3-607-4777 or alex@sask.co.il.

You can view previous editions of our newsletter on our website at www.sask.co.il.

Sharir, Shiv & Co., Law Offices


Supreme Court / Fund Manager Liability for Changes in Investment Model

The Supreme Court (“Court”) has ruled that an investment fund’s (“Fund”) articles rather than its investor marketing presentation or fact-sheet (together, “Marketing Materials”) delineate management’s authority regarding Fund investment strategies.

The case evolved around the claim of certain Fund partners that the Fund improperly deviated from the investment model (“Investment Model”) presented in the Marketing Materials provided to them before they joined the Fund. Notwithstanding the strategy presented in the Marketing Materials, after witnessing US stock market volatility, the Fund’s manager decided on his own initiative and without advising the partners to change the Fund’s investment strategy to a higher-risk model. Following this decision, the Fund suffered heavy losses.

The Court noted that the Marketing Materials specifically stated that they contained partial information only and were qualified by the Fund’s articles, which was to be the only binding legal document governing the Fund’s obligations to its partners. The Court also observed that the objective of the Marketing Materials was to highlight Fund manager experience with a particular Investment Model, rather than to commit the Fund to a particular strategy, The Court noted that although the Investment Model was intended to be the Fund’s central investment strategy, the Fund was not obligated to maintain this model and indeed had broad discretion with respect to the nature of its investments.

The Court held that neither the Fund nor its management breached their obligations to the partners on account of investments that varied from the Investment Model. In addition, the Court held that the Fund was not negligent for selecting higher-risk investments.

District Court of Tel Aviv (Economic Division) / Public Company Shareholder Disclosure Obligations

During a hearing in which the applicants requested permission to file a class action suit against the directors and officers of a public company (“Company”), the District Court of Tel Aviv (Economic Division) (“Court”) discussed public company reporting obligations in the context of a proposed sale of the company.

In the present case, the Company had been negotiating with a potential buyer (“Potential Buyer”) of 75% of the Company’s shares from an existing controlling shareholder for a transaction price of approximately $125 million. During the negotiations, which ultimately failed, the Company disclosed certain information to the potential buyer that was not disclosed to the general public in the Company’s obligatory public reporting, including information concerning possible tax exposure. The applicants maintained that this information should also have been disclosed to shareholders.

The Court held that information required to be released to shareholders in the framework of a public company’s reporting obligations is not necessarily identical to the information disclosed during negotiations in connection with a specific transaction involving the company. Reporting requirements are set forth in the Israeli Securities Law, in the Reporting Regulations, and in the rules and case law of the Securities Authority. Disclosure rules for negotiations arise from agreements between the parties as well as general rules regarding the management of negotiations, such as the obligation to negotiate in good faith.

The Court explained that differences between public disclosure and transactional disclosure arise from the relevant parties’ ability to digest, process and understand information, as well as from the monetary interest at stake.

For instance, a potential buyer of a controlling interest in a public company would presumably investigate all corporate data available. Due diligence on this scale is costly but reasonable, considering the nature of the intended transaction. Specifically, in the case at hand, the potential buyer was sophisticated and capable of not only analyzing all of the information provided to it by the Company, but also of understanding the relative quality and significance of each piece of data.

In contrast, the reference point with respect to the typical public shareholder is that of the “reasonable” investor, rather than a “sophisticated” investor. The Court indicated that as typically a reasonable investor does not have the ability or resources to analyze large quantities of data, flooding such a shareholder with enormous amounts of information might reasonably lead to confusion and run counter to the purpose of public company disclosure obligations. Therefore, public companies have an obligation to filter information provided to public investors so that material information, rather than all information, is provided to them.

In light of the above, the Court held that the mere fact that the Company provided certain information during negotiations to the Potential Buyer was insufficient to establish that such same information should also have been generally provided to all shareholders.


New Legislation / Supervision of Financial Services

On July 18, 2016 the Knesset approved a new law, the Supervision of Financial Services (Financial Services Regulation), 2016 (“Law”). The Law will require (with certain limited exceptions) the acquisition of a license in order to provide financial assets services or credit services. The Law defines a “financial asset” very broadly, including, inter alia, cash, checks, securities, and virtual currency in the definition. “Granting credit” is similarly widely defined, and seems to also apply to venture capital loans. The Law sets forth different requirements for basic licenses and broad licenses in each of the two areas, depending on the scope of activities of the provider. For example, a broad license for providing credit would be required for the provision of credit in excess of approximately 25 million shekels, and would be restricted to corporations incorporated and registered Israel.

The Law also grants a regulator authority to monitor organizations in these fields, with the objective of developing financial services alternatives to the banking system and to avert abuse by criminal factions for illegal purposes.

The Law will come into effect in June 2017 with regard to the provision of credit services


This newsletter provides general information and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.