Insider Information When it is Certainly Uncertain

Insider Information When it is Certainly Uncertain

Adi Marcus, Adv.
December 10, 2023

Information about material future events in the life of a company is information of the utmost importance, which a public company is obliged to disclose to its investors, and officers of the company are obligated to maintain confidential. However, despite the importance of this information, it is not always clear what is considered “material information” that is prohibited from being used, especially when the information is about an uncertain future event.

In principle, insider information is information about a public company, which is known only to insiders of the company and which may influence the price of the company's shares. The prohibition on the use of insider information stems from the desire to deal with the inequality between corporate insiders and the public, to level the playing field and to prevent insiders from taking advantage of their knowledge about the state of the company or future events in its life, in order to promote their personal economic interests or those of other who are close to them and make a profit at the expense of the public. The concern is that giving the company's insiders the opportunity to use insider information for their own personal benefit will damage public trust in the stock exchange trading mechanisms, will act as a deterrent for ordinary people investing in the market and may damage the market's ability to conduct itself properly.
Thus, a company has the obligation to report any material event that may affect the value of the shares and to give the public and investors any information that may influence their investment, and insiders are prohibited from making use of the same information before the company has made it public. However, an interesting issue is the applicability of the prohibition as to events in the life of a company which are substantial, but, at the same time, uncertain.

The issue came up several years ago during the Covid19 epidemic and may be relevant again during the current war. The epidemic, among its other effects, and the current war, caused extreme business uncertainty and in many cases led to events which may be material, but are also characterized by a high degree of uncertainty of materialization, to such extent that it is not clear whether they constitute insider information that is prohibited from being used.

The most common test in recent caselaw to determine whether uncertain information constitutes insider information prohibited for use, is the expectancy test, which weighs the chance of the event happening against the impact it will have on the company if it does. Thus, even if a transaction is doubtful to take place, or which details have not been finalized, is expected to have a substantial impact, so that if materialized, the company's share is expected to jump significantly - such will be deemed material insider information and the company's insiders will be prohibited from acting on it.

Thus, for example, in a verdict given in December, 2020, at the Tel Aviv Court, brothers were prosecuted, after one of whom was a shareholder in a company close to the CEO who provided him with insider information regarding its activities. The company, which dealt in the medical field, was on the verge of closing an agreement with a large regulatory body regarding an experiment in one of its products - an experiment which very existence was to give the company's product legitimacy and weight in a manner that would lead to an increase in the company's reputation. One brother, an insider of the company, shared the information with his brother who hurried to purchase company shares for himself and even passed the information on to his friends, in a manner which constituted, as the Court stated, an infringement of the prohibition on the use of insider information, even though the information was passed between the brothers at an early stage of the contacts, when the whole transaction was highly uncertain.

Thus, it must always be remembered that every insider in the company, whether a senior officer or a junior employee, has the duty to follow the law prohibiting disclosure of insider information, even if such do not intend to use the information themselves or for their own personal benefit, as the very act of disclosure already constitutes an offense, exposing the insider to both criminal proceedings and civil lawsuits. In any case of doubt regarding information which is uncertain, it is advisable to seek legal advice and until a reasoned legal decision is made, any disclosure that may be perceived as problematic should be avoided, or the person may find himself facing a criminal prosecution, paying heavy fines and even disgorging any profit obtained as a result of a transaction made using the insider information.