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Administrative Enforcement and Disclosure Requirements in Transaction with a Public Company

February 18, 2015
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One of the vital elements of a merger and acquisition transaction is the confidentiality of the transaction and its details. However, when the transaction is with a public company such company will be subject to certain immediate reporting obligations. Until recently, a public company failing to report faced years long criminal proceedings, but a 2011 amendment to the law created an administrative enforcement route that changed the rules of play.

Amendment 45 of the Securities Law of 2011 optimizes the Israel Securities Authority (ISA) enforcement procedures by creating an administrative enforcement mechanism by a quasi-judicial tribunal appointed by the Chairman of the Authority after a decision to initiate administrative enforcement and may impose significant, quick and effective sanctions against a company or an officer of a company, all without requiring long and complicated criminal proceedings.

The enforcement committee of the ISA since imposed financial sanctions and approved enforcement arrangements.  However, only recently did a District Court decide on the first administrative appeal submitted against the decision of the enforcement committee regarding sanctions against Africa Israel Industries. In that matter, an Israeli company and a Canadian company entered into a large-scale export agreement. Before signing the agreement, the parent company of the Israeli company made a tender offer to purchase the remaining shares of the subsidiary from the public.  The tender offer failed to disclose the negotiations to enter into the export agreement and the enforcement committee determined, inter alia, that the parent company breached the prohibition on insider trading and imposed a monetary sanction of ILS 5 million and further monetary sanction against negligent officers in an amounts of ILS 625,000.

The Court upheld the committee’s decision and determined that information will be considered inside information if it is material to the investor’s investment decision. Regarding forward-looking information, the test will be a test of reasonableness / power based on the weighted probability of the future event to happen and the expected impact of such on the company and the value of its securities. The Court ordered that it will not easily intervene in administrative sanction imposed by the enforcement committee, unless the committee deviated from the practice in similar cases or in the case of an overt mistake.

It is important to note that in negotiations disclosure to the public might jeopardize the transaction and therefore the legal obligations of information disclosure ought to be carefully examined. It is important to be accompanied by a lawyer specializing in mergers and acquisitions and also knowledgeable in securities legislation to avoid personal liability of the company and its officers.