“Good” trouble – on juggling two stock exchanges

“Good” trouble – on juggling two stock exchanges

March 5, 2022

It was the Israeli Securities Authority that hurried to act to cancel the erroneous Tel Aviv Court holding given in May, 2021, which applied the Israeli rules to an Israeli company also traded on the Nasdaq. It seems that the Israeli Securities Authority too understands that that is clear to many Israeli companies choosing to list outside of Israel and to cut any connection to the Israeli Securities Rules – Too strong a grip becomes creates a negative incentive for companies to be traded in Israel.

One of our firm's areas of expertise is accompanying Israeli companies in listing outside Israel, whether in Australia, on Nasdaq or on other stock exchanges. Why outside Israel? If there is one thing that many Israeli companies prefer to avoid, it is the application of Israeli Securities Rules on them. Nevertheless, an IPO outside of Israel may be subject to some of the Israeli rules and in some cases even produce great legal uncertainty, when done incorrectly.

A public Israeli company is subject to two legal systems, those relating to the Israeli Companies Law and those relating to the Israeli Securities Law, with the latter stipulating two types of principal rules: reporting rules and liability rules. The reporting rules address the question of what, and when, a company is required to report to the public and the liability rules address the question of when liability arises for damage caused as a result of a breach of the reporting rules and on who is liable. An Israeli company traded outside of Israel may not be subject to securities laws, however the Israeli Companies Law may still apply certain rules on it, which may not exist (or exist differently and thus may create a conflict) in the country where the company was listed for trade, such as board requirements, internal auditor, appointment of external directors and rules regarding decision making process.

In order to ease the burden on Israeli companies traded outside Israel, the legislature established a series of reliefs which in some cases permit the company to choose the laws of the State of listing over Israeli law (in which case it is important to ensure coordination between the Israeli law firm and the law firm in the State of listing, given the fact that the each law may offer reliefs and choice, and it is important to avoid any conflicts). In addition, in order to encourage companies to register for trading both in Israel and abroad (dual trading), the Israeli legislature established reliefs even in such a case, whether for certain recognized stock-exchanges and whether generally.

The issue that came up in the Economic Department of the Tel Aviv District Court in May, 2021, dealt with the question of the liability of officers in a company traded in both Israel and the United States. Would the Israeli liability rules apply or the American ones? In a re-hearing of the same case, held in January, 2022, following the Securities Authority's motion, the first holding was overturned and it was found that the liability rules applicable in that case are the American ones, as any other result would burden dual companies and will create a negative incentive to be traded also in Israel.

The aforementioned holding dealt with a company traded on the Nasdaq, a stock exchange that is one of the stock exchanges recognized by the Israeli legislature for reliefs. In other stock exchanges a fascinating issue of “competition” between laws may arise (or as we put it in a previous article: "ASX, OMX, SGX and Mrs. Cohen from Singapore…" ). This is one of the reasons that not only should one be accompanied by an Israeli law firm with experience in listings outside Israel (and not settle for a foreign firm or one with an Israeli representative), which will assist the company prepare for the IPO, but to also sometimes consider setting up a holding company to purchase, in parallel to the IPO, all the Israeli company shares or merging into a listed company or one that will be listed concurrently with the transaction (SPAC, CPC or any other structure). Obviously everything must be done with proper planning at the tax level and in a manner that will not cause complete loss of control over the company or create a listed company which is not in a form that the market is accustomed to in a manner that may dampen the tradability of its shares.