Newsletter 62- May 15, 2017

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THE LEGAL NEWSLETTER

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 the standard for liability when a public company fails to file mandatory immediate reports and the enforceability of contractual agreements regarding jurisdiction for derivative claims.

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 feel free to approach your contact person at our office or contact Yoram Shiv at 972-3-607-4777 or at yoram@sask.co.il, or Alex Berman at 972-3-607-4777 or at 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

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Supreme Court / Standard of Liability for Failure to File an Immediate Report

The Israeli Supreme Court (“Supreme Court”) held that the test for liability for a public company’s failure to file mandatory immediate reports is actual knowledge or willful disregard of the information required to be disclosed.

This case concerned a request for approval of a class action suit against a public company (“Company”) and its officers in connection with a breach of the Company’s obligation to file an immediate report. The applicants alleged that notwithstanding that the Company’s directors and CEO had been aware of the Company’s breach of a material agreement, they had not filed an immediate report disclosing such breach. The lower court had denied the applicants’ request for a class action suit, and the present case was their appeal of that decision.

In its ruling, the Supreme Court held that the officers of a public company could be found liable for a breach of the company’s statutory responsibility to file an immediate report when there was a finding of the officers’ actual knowledge or willful disregard of the matter requiring disclosure. The Supreme Court noted that were the standard of willful disregard excluded, the reliability of immediate reports would be eroded, for corporate officers could deliberately fail to clarify facts to avoid having to report on unfavorable matters. The Supreme Court explained that this standard is necessary due to the purpose of immediate reports, which is to protect investors, maintain the efficiency of the capital market and corporate governance, and help prevent manipulation by corporate officers.

The Supreme Court held that the standard for liability for failure to file an immediate report is different from the liability standard for failure to file a periodic report, where officers could also be found liable if they failed to report an event due to negligence regarding their awareness of a situation. The Supreme Court refused to impose this negligence standard for a failure to file an immediate report, noting that the applicable regulation’s language does not allow for such an interpretation and the short time frames involved. The Supreme Court further noted that applying a standard of negligence for the failure to file an immediate report would increase uncertainty and impair market efficiency, for a consequence of a negligence criterion for immediate reports would be companies flooding the market with worthless information.

The Supreme Court dismissed the appeal, holding that the applicant failed to meet its evidentiary burden of proving that the Company’s directors and CEO knew about the relevant information that should have been reported or had willfully disregarded such information.

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District Court of Tel Aviv, Economic Division / Contractual Determination of Forum for Filing a Derivative Claim

The District Court of Tel Aviv, Economic Division (“District Court”) held that even where a dispute jurisdiction clause in an agreement between a company and its shareholders specifies a non-Israeli forum and choice of law, such a clause will generally not apply to shareholder derivative actions in the name of the company against its office holders.

This case involved a request to file a derivative claim against an Israeli company’s (“Company”) officers in connection with an alleged breach of their duties. Relevant facts included provisions in both the Company’s Articles of Association (“Articles”) and the Share Purchase Agreement between the Company’s founders and the US-based venture capital fund investors in the Company that required that disputes between the parties be settled in the State of New York pursuant to the laws of New York. The office holder defendants argued that these provisions preempted derivative shareholder claims from being initiated under Israeli law and from being heard in Israel.

The District Court disagreed, holding that the current question of jurisdiction involved a derivative claim rather than shareholders’ dispute, and that as a matter of policy, jurisdiction for filing derivative claims cannot be fixed by an agreement between a company and its shareholders. In the event the parties had explicitly agreed that derivative claims were not to be filed in Israel, the onus of proving that such agreement prevails over the provisions of the Israel Companies Law (“Companies Law”) that specifically provide for the filing of derivative claims in Israel falls on the party attempting to enforce such agreement.

The District Court held that in the present case the Articles made frequent reference to the Companies Law, and as the Company’s officers were clearly aware of the applicability of the Companies Law to the Company, the officers should also have been cognizant that a breach of their duties would be governed by and enforceable under Israeli law.

The District Court concluded that based on the facts before it and notwithstanding that the US fund’s representatives were foreign residents, the proper forum for a derivative suit was Israel. The Company was an Israeli entity that manufactured its products in Israel, the Companies Law applied to its corporate officers, and disputes concerning breach of duties were to be adjudicated in Israel.

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