Newsletter 55 – August 15 2015

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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 jurisdiction and choice of law clauses in online user agreements, the validity of non-compete provisions in Articles of Association, and public company reporting requirements.

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, 972-3-607-4777, yoram@sask.co.il, or Alex Berman, 972-3-607-4777, alex@sask.co.il.

Sharir, Shiv & Co., Law Offices

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District Court / Jurisdiction and Choice of Law for International Companies Marketing Products or Services in Israel

Israeli customers of PayPal filed a request for approval of a class action suit in connection with certain fees charged to them that were not set forth in the PayPal User Agreement (“User Agreement”). A preliminary issue involved jurisdiction and choice of law; although the User Agreement exclusively provided for the courts and laws of Singapore, plaintiffs argued that under the specific circumstances the Israeli courts should have jurisdiction and Israeli law should be applied.

The District Court (“Court”) noted that PayPal provided services through the internet to hundreds of thousands of customers in Israel, and had established a Hebrew-language website and support services for the purpose of better serving its customers.

The Court held that taking under consideration the number of Israeli customers and the services specifically provided to Israelis, the requirement set forth in the User Agreement that Israeli customers file suit in courts in Singapore according to the laws of Singapore (while PayPal reserved the right to file suit in Israel) was clearly aimed at preventing PayPal’s Israeli customers from exercising their right to sue, and was void. International companies that market their goods or services to customers in Israel must expect that these customers be able to sue them in Israel. The fact that a company’s activities are provided primarily through the internet does not grant immunity from litigation in the Israeli courts or from Israeli law.

District Court of Haifa / Validity of Non-Compete Provisions in Articles of Association

A company’s Articles of Association contained a non-compete provision prohibiting shareholders from conducting business with the company’s customers in the company’s field of business. The company filed for an injunction against a shareholder for breach of this provision and sued for pecuniary damages. The defendant’s primary defense was that the non-compete clause amounted to a prohibited restriction on trade and breached the shareholder’s basic freedom of occupation.

The Court rejected both arguments. The Court stated that Israel’s antitrust laws are not aimed at prohibiting this type of provision, for there is rational to partners agreeing to not compete with one another. As a general rule, non-compete provisions contained in a company’s Articles of Association prohibiting shareholders from competing in the company’s field of business are valid.

District Court of Tel Aviv – Yaffo / Reporting Requirements regarding Possible Future Events

The applicants filed a request for approval of a class action suit against a company traded on the Tel Aviv Stock Exchange (“Company”) due to an alleged failure to timely file an Immediate Report (a current report filed with the Tel Aviv Stock Exchange and the Israel Securities Authority setting forth material information about the company) in connection with five real estate projects. Substantial losses were expected in connection with these projects, and when the Company ultimately filed an Immediate Report the value of the Company’s shares significantly dropped.

The District Court (“Court”) held that in certain situations a company must file an Immediate Report with respect to a possible future event, notwithstanding that there is uncertainty as to whether the event will actually occur. In order to determine whether an Immediate Report is required, the Bright-Line Rule or the Probability/Magnitude Approach is to be applied.

In many cases it is sufficient to apply only the Bright-Line Rule. The Bright-Line Rule measures whether the “point of no-return” has been reached, where it is more probable than not that a specific event will occur and information is transformed into material information. However, if a company reasonably believes that under the specific circumstances the Bright Line Rule is either inapplicable or would likely lead to material information failing to reach investors, it should apply the Probability/Magnitude Approach, which compares the possible future event’s significance with the probability of it occurring. The Probability/Magnitude Approach may require filing of an Immediate Report even where it is less likely than it not that a future event will occur, in cases where the potential impact of it occurring would be very significant. The Court noted that discretion with respect to whether to file an Immediate Report should take into consideration the significance of the possible future event on investors, rather than on company management.

The Court held that information may be considered material and the subject of an Immediate Report even if quantitative data is not yet available, provided that financial implications from existing information can be extrapolated.

In this specific case, as of the time that the applicants alleged that an Immediate Report should have been filed, not only was quantitative data regarding the five projects not yet available to the Company, but financial conclusions were also not able to be drawn from existing information. Therefore, the Court did not approve the application to file a class action suit.

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.