The Petitioner's Arguments in the Petition
- The Petitioner argues that the company should have reported the borrower's repayment failure, since in the circumstances of the case this is a material detail for a reasonable investor.
- The ISA is of the opinion that the Respondents' delay for several months in discovering a borrower's default on a number of dates in relation to a material loan that constitutes a material asset of the company is not a material event, is erroneous. The Petitioner is of the opinion that the panel did not include the following considerations in its considerations: the dramatic effects of the default on the value of the company as it is a material asset of the company; As long as there is a failure in the payment of payments, this has an impact on the company's cash flow and, as a result, on the possibility of continuing its business activity; that even if there were "good" collateral against the loan, the process of realizing them is complex and may take time and steal resources, as has also happened in practice; And that a failure that repeats several times increases the probability of further defaults. In addition, the panel focused solely on the amount of the debt that was not repaid during the period of the default.
- As to the substance of the loan, it was argued that it was a single and first loan of a corporation that prior to the granting of the loan, engaged in real estate transactions and did not hold a license to provide credit at that time. This is a loan of ILS 10 million, which constitutes a significant percentage of the company's equity, and is a substantial asset of the company. It was argued that in view of the centrality of the loan to the company's activity, a violation of its terms, even if on a limited scale, is liable to signal a risk to the repayment of the entire loan, and hence to a significant harm to the company's financial strength. This signal is reinforced by the fact that the failure in payments began shortly after the loan was granted and lasted for four months.
Under these circumstances, Lorenzi should have published an immediate report reflecting the company's difficulty in collecting the sums of a substantial asset. Insofar as he thought that this was not a significant risk due to the good collateral, he could have noted this figure as well alongside the required publication. It was argued that the company's conduct also showed that it viewed the breach as a material event.
- The ISA further claims that the committee erroneously viewed the company as a "non-bank credit" corporation. The investing public that held the shares was not a public that invests in a non-bank credit company that provides loans frequently. The committee also erred in determining that a failure to repay credit is not an exceptional event in the ordinary course of business of a corporation that provides non-bank credit. According to the ISA, a failure in a very substantial loan justifies reporting to investors, and in this regard, the degree of "risk appetite" of investors in non-bank credit corporations is of no significance.
- The Authority argues that the committee's panel erred in determining that in the circumstances of the case, the "signal" arising from the violation was not sufficient to require immediate reporting. It was argued that the determination that Lorenzi acted efficiently and quickly to deal with the breach of the loan agreement cannot be accepted, especially since the result was an increase in the loan. It was further argued that the determination that the value of the collateral held by the company significantly reduced the risk of breach should not be accepted. In practice, too, the company was required to take various actions until the loan was repaid after two years. Hence, the failure to repay the loan at the beginning was a "true signal" of the company's difficulty in repaying the credit it granted to the borrower.
- It was argued that the committee also erred in not seeing the statements of the lawyers according to which the breach of the loan agreement would require reporting, reinforcing the existence of the material component.
- Another error in the Committee's determinations is found by the Petitioner in its reliance on the "post-factum" test. This is especially the case in our case, where the trading volume of the company's shares was minimal and for many days there was no trading at all.
- It was further argued that the committee erred when it was "perceived" that the failure to repay the credit by the borrower was of a relatively small amount. This was a breach of ILS 770,000, and therefore amounted to about 7% of the loan, and not 0.034% as stated in the panel chairman's decision. It was argued that this was therefore a significant violation of the accepted quantitative tests as well. Moreover, information can be material even when the quantitative data does not have a direct impact on the company's financial statements, as long as it has a qualitative materiality. In addition, it was claimed that this was in fact a transaction with a controlling shareholder, since the loan was given to Dekma, which is a private company controlled by Lorenzi and which lent it to the borrower. The Petitioner is of the opinion that the case at hand is a clear case in which there is a qualitative substantiveness. In the circumstances of the case at hand, the information about the failure to repay the credit was in order to signal the risk of non-repayment of the loan, and therefore the information was subject to immediate reporting.
- The Petitioner argues that in our case, a duty to report also arose by virtue of a regulation 37A2 to the Securities Regulations (Periodic and Immediate Reports), 5730-1970 (hereinafter: Reporting Regulations). This is because the company reported on the granting of the loan, and updated it on its development, and therefore it had to continue to report on developments in connection with this event.
The Respondents' Arguments