ASX, OMX, SGX and Mrs. Cohen from Singapore …

ASX, OMX, SGX and Mrs. Cohen from Singapore …

Doron Afik, Esq.
October 24, 2020

One of the questions that arises in any IPO of an Israeli company on a foreign stock exchange (for example on the Australian Securities Exchange - the ASX, in Singapore - SMX, or NASDAQ Nordic - OMX) is whether to IPO the Israeli company or IPO a special purpose vehicle/company (SPV or SPC) incorporated for that purpose and to become the parent of the Israeli company on listing. This has tax implications (which with proper advice can usually be completely neutralized), legal implications, and especially implications as to investor support for IPO and for the aftermarket. No less important, one should always remember Mrs. Cohen !

As an office specializing in IPOs outside of Israel, the structure we usually recommend is a structure that is in Australia called "Top-Hat", a structure under which (in the case of an ASX IPO) a new Australian company is established, which at the time of the IPO conducts a reverse merger with the Israeli company (so that the shareholders of the Israeli company "Climb up" to the Australian company). This procedure requires a pre-ruling from the Israeli Tax Authority, but when done correctly, the shareholders should not be liable to tax on the share exchange to complete the reverse merger. The main disadvantage of this procedure is the cost. In addition to the costs of establishing the Australian company, from that date of incorporation an accounting mechanism must be maintained in both Israel and Australia. If the company is planning on operating in the country in which it will list it doesn’t matter, but if the company is not planning to do so, these additional resources can be saved by directly listing the Israeli company. On the other hand, even if the stock market allows an IPO by a foreign company, the investor public is not always comfortable with investingin a non-local company (especially institutional investors, without whom it is usually not possible to reach the desired share price highs and are usually more conservative in their investment choices). Of course, this is a generalization, but especially when it comes to public offerings by relatively small companies, this issue may be significant, especially in the first months after listing.

And what about Mrs. Cohen? On February 28, 1996, Mrs. Cohen from Hadera (a small city in the north-center of Israel) was “born” in the Supreme Court of Israel (or in her full name: "(about) the same Mrs. Cohen from Hadera or (about) the same teacher from Raánana"). In the holding that dealt with the criminal liability of banks and their managers for the collapse of the Tel Aviv Stock Exchange (TASE) on October 6, 1983, due to what would later be called the "Bank Stock Crisis", the Court coined the nickname "Mrs. Cohen of Hadera" as an example of an anonymous public investor – the same person that the Securities and Exchange Commission and the Australian Securities and Investments Commission are designed to protect in the United States and Australia respectively. And what does Mrs. Cohen have to do with the above question?

Well, when an Israeli company issues in Singapore, for example, Israeli law and Singaporean law (or Australian law, in an ASX IPO, or any other relevant law) apply at the same time. Thus, for example, Israeli corporate law provides that the Israeli District Court has exclusive jurisdiction regarding any corporate law issue concerning an Israeli company. However, one can not expect Mrs. Cohen from Singapore (or probably Mrs. Tan, Lim, Lee or Ong, slightly more common surnames in Singapore) or Australia (or Mrs. Smith, Jones, Williams or Brown) who bought shares for $ 100, to fly to Israel and file the lawsuit in the Tel Aviv District Court. When the lawsuit is filed in a Court in Singapore or Australia, a fascinating legal question will arise as to which Court has the exclusive jurisdiction on the matter ...

In 2013 in the bankruptcy proceedings of the founder of an Israeli startup company which IPOed in England, an English Court held the Israeli receiver of the founder, Adv. Eitan Erez, personally liable for hundreds of thousands of pounds in expenses due to Adv. Erez's conduct in the same proceedings in England. Judge Alsheikh of the Tel Aviv District Court held that the Court in England had no jurisdiction (although it was the receiver who initiated proceedings in England). We do not know of any developments beyond that ruling in this fascinating case... In another case of an Israeli company which IPOed in Australia (ASX:ESE), a shareholders dispute reached legal proceedings in a court in Israel in 2019. Proceedings were opened in both Israel and Australia and it seems that the issue of jurisdiction has not arisen at all. When this issue does arise, and especially when it relates to a young company that has recently IPOed and does not have the human or financial resources to conduct double proceedings and deal with questions of international jurisdiction, the financial savings that may have been achieved in directly listing the Israeli company will seem much less significant, to say the least.

Preparing a company for an IPO and proper construction of the procedure may affect not only the IPO but also the aftermarket trading and therefore the IPO and listing transaction should be structured correctly from the initial stages when the IPO location is determined. In any case, an IPO - and especially an IPO outside the country in which the company operates - is a complex process and it is vital to consult a law firm with experience in the field and not make the decision based on gut feelings or consultation with the company's local lawyer.