The Substance of the Loan and the Substance of the Information Regarding the Violation
- The Authority's position is that the loan was a material loan from the company's point of view, and hence the materiality of the information about its breach. This was her position in the framework of the administrative proceeding, and this is also the position she presented in the course of the hearing before me (paragraph 33 of the administrative statement of claims; page 91 of the transcript, paras. 14-29).
- The three members of the panel were not satisfied with the substance of the loan in order to determine that its breach by the borrower amounted to material information. In order to formulate their conclusion, they examined, inter alia, the terms of the loan, the scope of the violation, the company's activity, the expected risks and the risk resulting from the violation.
- In the petition, the Authority claims that the committee erred in emphasizing the substance of the loan. It is claimed that "The panel's decision did not take into account the dramatic effects of the default About the company's value When the loan is Substantial Asset hers" (Paragraph 4 of the petition, emphases added – M.R.). It was argued that the information about the breach was material in view of the nature of the loan: it was a material asset of the company, the only and first loan granted by the company, which had previously engaged in real estate activity and did not have a license to provide credit; its scope constituted a significant percentage of the company's equity; and the failure to meet the terms of the loan occurred shortly after the loan (paragraph 46 of the petition). According to the Authority's position in the petition "Credit failure of Substantial Asset casts doubt on the company's ability to collect back the credit it gave." (Paragraph 47 of the petition, emphasis added – M.R.). In other words, according to the Authority, the doubt is structured by the very violation (paragraphs 47-48 and 52 of the petition).
In the course of the hearing that took place before me, it was argued that the reasonable investor wanted to know that the company's only and substantial borrower did not meet the terms of the loan. This is so that he can finance his steps even where the violation is a small in scope (page 91 of the transcript, paras. 14-29). According to the ISA, there is no room to address the question of the risk of full repayment of the loan, nor can it be based on the existence of collateral in this regard.
- In our case, the substance of the loan from the company's point of view is clear and the respondents did not argue otherwise. In my view, too, the characteristics of the loan, mainly its scope in relation to the company's capital, and the fact that it is a single loan, indicate its centrality to the company's activity (see also paragraph 33 of the administrative statement of claims).
I am of the opinion that although usually a breach of a material loan agreement that is central to the company's activity will establish an immediate reporting obligation, this is not an absolute rule and each case must be examined according to its circumstances. This is because there may be cases, even if unique and exceptional, in which a breach of the terms of a substantial loan agreement will not constitute material information. In any given case, it is necessary to examine, according to the tests outlined in the case law, whether the breach in its concrete circumstances deviates from the company's normal course of business and is likely to have a material impact on it (or whether it can have a significant impact on the price of the company's securities). The desire for clear rules does not justify the establishment of sweeping rules that are inconsistent with the flexible standard set by the legislature for defining the materiality of information.
- The substance of the loan also does not stem from the conclusion argued by the Authority in the petition, according to which a violation of the terms of its terms indicates, in any event, doubt about the company's ability to recover the loan or a dramatic damage to the company's value. For the most part, doubt or risk of full repayment of the loan is not known factual data at the time of the breach, but rather an object of evaluation. Moreover, if there is doubt as to the company's ability to collect the full repayment of the loan, then it is indeed significant that it is a material loan, but with regard to the very existence of such doubt, the substantial nature of the loan does not increase or decrease it. In any event, if the ISA wished to claim that in the case at hand the breach gave rise to doubt about its ability to collect the repayment of the loan, then in this framework it should have also addressed the question of the probability of difficulty in this matter in light of the violation. This, given all the concrete circumstances, including the scope of the breach, the risk that it derives from it to the full repayment of the loan, given the existence of collateral, their characteristics, their rate, the terms of the loan, the source of the loan repayment, the company's conduct, and more. It should be noted that Lorenzi submitted to the Committee an expert opinion regarding the reasonableness of the management of the loans and the degree of risk posed to the repayment of the loan (the opinion of Mr. Doron Baumrin, Appendix 2 to the appendices to the reply).
I will note that in this regard it is also possible to learn from the case law to which I referred above relating to the reporting of forward-looking events (compare: the Gabrieli case, paragraph 85; Malka case, paragraphs 75 and 91). As stated, where we are dealing with a future event that, if it occurs, will have a very material impact on society, it seems that there is a consensus in case law according to which the expectancy test should be applied. As noted, this test also includes an examination of the chances of the event occurring.
- Hence, in my opinion, there was no error in the position of the Enforcement Committee that even given the centrality of the loan to the company's activity, it should have examined whether, in the concrete circumstances of the case, the violation of the terms of the loan necessitated the publication of an immediate report (See paragraph 42 of the opinion of the head of the panel; paragraph 5 of the opinion of Kastiel and Dekel-Shafrir).
Has the burden of proof of a breach of the reporting duty been lifted?
- As stated, the Authority's position in the petition was also that the obligation to report immediately stemmed from the fact that this was a material loan in which the borrower violated the terms of its terms, even if to a scope that is not material from a quantitative point of view. Alongside this argument, the Authority raised reasons for rejecting the Committee's determinations, some of which are factual and some of which involve questions of fact and law. As stated, when the Authority's argument that the obligation to report the breach arose from the substance of the loan was rejected, it should have established its position that the duty to report had been breached. I believe that the Authority did not meet this burden.
- The breach in our case is the non-payment of interest on the large loan and the non-repayment of the small loan principal, in an amount that was not material to the company from a quantitative point of view.
The ISA argues that there is no room to distinguish between the two loans, since they were both given to the same borrower under the same circumstances. In its view, the fact that payments were not made in respect of the fund also sharpens the substance of the violation (paragraph 47 of the petition).