Q: Do you confirm that you did it because you assumed that the report said there would be oil? He says things like that in my name, so I say, it's not accurate.
Q: I ask what you thought when you took a quarter of a million shekels and invested in oil stocks? Did you think there would be no oil or would there be oil?
A: That's not true. Formulate the question that relates to me"
- Hence, the plaintiff's claim is different from that described by the defendants. According to him, the data that was known to the defendants prior to the report of September 8, 2013 were material data that showed "serious problems" in the drilling, and these were hidden from the investing public. It was argued that in light of the alleged "serious problems" the report, including its title, was false, since in practice there were no significant signs of oil. In view of this argument of the plaintiff, especially in view of the fact that we are dealing with a claim for a misleading detail by default, it is not possible to make the discussion of the question of the significance of the data in Shemen's possession and whether disclosure is required.
- Has the cause of action under the Securities Law been proven?
F.1 Disclosure and Reporting Obligations and the Prohibition of Misleading Details in the Company's Reports
- Securities law is based on the principle of "due diligence" of information about the company. This is because, in the words of the Honorable Justice (as described at the time) A. Hayut, "Information is the 'lifeblood of the capital market'..." (Civil Appeal 7510/15 Brandeis v. Babylon Ltd., paragraph 12 [Nevo] (March 15, 2017) (hereinafter: The Brandeis Matter)). The centrality of the principle of discovery stems from of the unique characteristics of securities. First and foremost, for the reason that the value of a security is determined by the company's strength and profitability, but in this matter there are Information gaps between the company, which holds the information, and the unexposed investing public 36. Another characteristic of public companies is the separation between ownership and control, which creates the "representative problem" since the shareholders do not have effective control and this can be in the hands of a limited number of controlling shareholders. This state of affairs is liable to lead to the controlling shareholders preferring their interests over that of the investing public. To this it should be added that sometimes market forces encourage non-optimal discovery (Civil Appeal 218/96 Iskar in a Tax Appeal v. Discount Investment Company Ltd., paragraph 24 [Nevo] (August 21, 1997) (hereinafter: The Iscar Matter); Criminal Appeal 2103/07 Horowitz v. State of Israel, paragraphs 31-32 [Nevo] (December 31, 2008), (hereinafter: The Horowitz Matter) (a request for a further hearing was rejected in a criminal hearing 493/09 Perko v. State of Israel [Nevo] (17.2.2009); Civil Appeal 5320/90 A.Z. Baranovitz Properties and Rental in a Tax Appeal v. Israel Securities Authority, 46(2) 818, 831 (hereinafter: The Baranowitz Matter); Criminal Appeal 5640/97 Reich v. State of Israel, 35(2) 433, 460 (1999); Leah Paserman-Josefov, Securities Law - Duty The Discovery, (2009), pp. 10-28, 43-47, 102-108 (hereinafter: Paserman Josefov)). Hence, the main purposes that the imposition of the duty of disclosure is intended to serve: fairness towards investors, a desire to establish an efficient and fair capital market, maintaining corporate governance, supervising the actions of those in power in public companies and deterring them from improper behavior (The Brandeis Matter, paragraph 12; The Iscar Matter, paragraphs 21-23; Criminal Appeal Authority 4827/95 H.G. Pollak in Tax Appeal v. State of Israel, 55(2) 97, para. 9 (1997)). The disclosure obligation that applies to the corporation is an ongoing obligation - it applies in the "primary" market, i.e., by raising capital from the public through the issuance of securities, and it continues to apply in the "secondary" market in which the company's securities are traded on the stock exchange (The Brandeis Matter, paragraph 12; The Iscar Matter, paragraph 20).
- The Securities Law and the regulations enacted pursuant thereto impose continuous reporting obligations on a public company - one-time disclosure expressed in the prospectus, and continuous disclosure from the date of the company's IPO, which is expressed in periodic and immediate reports (The Iscar Matter, paragraph 20; The Horowitz Matter, paragraph 31; Civil Appeal 1928/93 Israel Securities Authority v. Gabor Sabrina Textile Factories Ltd., 49(3) 177, para. 9 (1995) (hereinafter: The Matter of Gabor Sabrina); Class Action (Tel Aviv District) 13382-04-20 Gabrieli v. Delek Group Ltd., paragraph 42 [Nevo] (November 15, 2022) (hereinafter: The Gabrieli Matter)). As for discovery in the "secondary" market, it states Section 36(a) The Securities Law obligates the corporation whose securities have been offered to the public to submit reports to the stock exchange and the Israel Securities Authority. The Reporting Regulations Enacted by Virtue of Section 36(b) The law determines the nature of the required reports. In accordance with the Reporting Regulations, a public company must submit periodic and quarterly reports (chapters) II and IV of the Reporting Regulations) as well as immediate reports on the controls of certain events specified in the Regulations (Chapter Tuesday to the Reporting Regulations). In addition to reporting obligations on defined dates and events, the Regulations also establish a general provision, according to which a corporation must report on "Any event or matter that deviates from the ordinary business of the corporation due to its nature, scope or possible outcome, and which has or may have a material impact on the corporation, as well as any event or matter that can significantly affect the price of the corporation's securities" (Regulation 36 (a) to the Reporting Regulations).
- Regulation 36(a) The Reporting Regulations use the phrase "material impact". The term "material" is not unique to this regulation, and in fact constitutes a principle that governs the requirement of "due diligence" (The Brandeis Matter, paragraph 13; The Horowitz Matterparagraphs 36-37). The interpretation of this vague term is intertwined with the case law of the courts, and it was held, that a "substantial" detail is like this "There is a real chance that it will influence the reasonable investor in his decision regarding investing in the company" (The Horowitz Matter, paragraph 37). It should be emphasized that in order for information to be material, it is not necessary to show that the investor would have changed his decision following its discovery, it is sufficient to show that the information was in order to significantly change the totality of the information that the investor takes into account in making the investment decision (The Baranowitz Matter, p. 838). In the words of the Honorable Judge A. Procaccia, in the Criminal Appeal Authority: 11476/04 State of Israel v. Discount Investment Company Ltd., paragraph 136 [Nevo] (February 21, 2020) (and see also The Brandeis Matter, paragraph 14):
"Material information to a reasonable investor means facts whose knowledge is likely to lead to a change in the picture of the data before him, on the basis of which he makes his decision regarding the security; A material fact in this regard means a fact that may constitute an important element in a person's willingness to purchase or sell a security; A fact is essential if there is a real chance that its omission will have a real impact, direct or indirect, on the decision whether or not to execute a transaction; In order for a given matter to be a material matter that is liable for disclosure, it is not necessary that it be a decisive fact for the purpose of deciding whether to execute a transaction. It is sufficient that it constitutes one figure from a set of important data relevant for this purpose... Material information may be considered as such even if it appears marginal and trivial when it stands on its own, provided that when combined with a comprehensive set of data, its importance may become substantial (Paserman-Yuzufov in her book, at p. 184)."
- Materiality is examined from the perspective of the "reasonable investor" regarding his possible investment decisions (Civil Case 68338-10-18 (Tel Aviv District) Bezeq Israeli Communications Company in Tax Appeal v. A.A.D.A. Liad Holdings (2006) Ltd., paragraph 29 [Nevo] (December 1, 2019) (hereinafter: A flash of interest); Class Action (Tel Aviv District) 14270-11-14 Cohen v. Ilan Ben Dov, paragraph 73 [Nevo] (September 2, 2016); Interest Gabrieli, paragraph 46). It should be emphasized that not every detail relating to the company is a "material" detail, and also flooding investors with details so that they cannot select the important data for the purpose of an investment decision undermines the purposes of the principle of due diligence. The "materiality" test is supposed to ensure that the investor will not be "drowned" in unimportant details for the purpose of making an investment decision, and will have access to the relevant information for making it (The Horowitz Matter, paragraph 38; The Brandeis Matter, paragraph 19; The Baranowitz Matter, p. 837; The Matter of Gabor Sabrina, paragraph 10; The Gabrieli Matter, paragraph 45; Paserman-Josefov, p. 177).
- The prohibition on including a misleading detail in reports submitted in accordance with the law is a complement to the duty of disclosure. This prohibition is fixed In section 44A1 of the Securities Law, according to which "In a draft prospectus, in a prospectus, in a report, in a notice, in a document or in the specification of a tender offer, submitted under this Law to the Authority (in this section - a report), there shall be no misleading detail". Defined Misleading Detail In Section 1 To the law: "Including anything that is liable to mislead a reasonable investor, and anything that is missing, the absence of which may mislead a reasonable investor". Article 31 The law imposes liability for a misleading detail in the prospectus on the person who signed the prospectus, a director, a general manager and a controlling shareholder. Section 38C This provision also applies to a misleading detail that was in a report, notice or document submitted under Securities Law. Although the language of the section does not include a definition of the essence of the "misleading individual", the criterion of the principle of materiality has been established in this regard as well (The Horowitz Matter, paragraphs 35-37; Criminal Appeal 3891/04 Arad Investments and Industrial Development in Tax Appeal v. State of Israel, paragraphs 60-61, IsrSC 60(1) 297 (2005); Motti Yamin and Amir Wasserman, Corporations & Securities (2006), p. 215 (hereinafter: Yamin Wasserman); Passerman-Josefov, pp. 443-455).
Disclosure Rules Regarding Companies Holding Oil Assets
- In 2013, the Reporting Regulations were amended and provisions were added relating to corporations engaged in oil and gas exploration. Among other things, regulations have been added 36(A2), 38F The Eleventh Addendum (Securities Regulations (Periodic and Immediate Reports) (Amendment No. 2), 5773-2013, K.T. 7257).
- The amendment of the Reporting Regulations is based, inter alia, on a disclosure directive regarding gas and oil exploration and production activity (as part of a reporting improvement project) published by the Israel Securities Authority in 2011 (in accordance with the parties' agreement on page 15, paras. 12-18, the directive was attached as Appendix 1 to the defendants' summaries, as follows: Disclosure Guidance). The Directive reflects an insight that the reporting model should be adapted to the nature of the activities of the reporting corporations. Specifically, it discusses the difficulties that existed at the time in the reports of corporations operating in the field of oil and gas exploration, and proposes an outline of reports with reference to them.
- Indeed, the Reporting Regulations and the Disclosure Guidelines indicate that they were amended based on an understanding of the unique characteristics of the oil exploration industry and a reference to the difficulties that arose in corporate reporting. The subordinate legislature has created a detailed outline of reports in relation to concrete, expected, events during the exploration of oil or gas. In relation to these events, data that the corporation was required to report was detailed, so that a consolidation was created in the reports of companies, the lack of which was one of the difficulties raised in the disclosure directive. But this is not the sum total of the provisions of the Eleventh Addendum. The addendum also includes provisions regarding reporting obligations in cases that deviate from the events in the routine of the activity. In addition, its provisions indicate that it does not negate the general reporting obligations, However, to the extent that a report is given that does not relate to one of the events detailed therein, an explanation of why it was done is required (see Article 14 to the Eleventh Addendum). In this way, the outline in the Reporting Regulations creates a uniform basis for corporate reporting, along with provisions whose purpose is to prevent underreporting or overreporting on issues that are not included in one of the concrete events.
F.2 "Yam 3" drilling and oil reports mentioned in the lawsuit
- As the name suggests, it was preceded by two drillings - "Yam 1" and "Yam 2". The drilling of "Yam 1" technically failed. In the "Yam 2" drilling, oil flowed during the production tests, but technical difficulties, mainly pressure and temperature conditions, led to the suspension of the production tests. The decision to try to drill again in the licensed area was made in light of the development of technology and the means to deal with the technical difficulties that became apparent in the Yam 2 drilling. The purpose of the drilling was to drill again the layer in which oil flowed in the Yam 2 well and also to deepen the drilling to a depth of 5,800 meters (report dated March 27, 2014 (P/1); paragraphs 22-27 of Levy 1's affidavit).
A drilling license grants its owner the right to search for oil in the area of the license, a unique right to drill trial drilling, development drilling and to produce oil in the area of the license, all subject to the provisions of the Petroleum Law (Section 13 of the Petroleum Law, Section 23 of the Levy 1 affidavit). The license in the "Yam 3" drilling was held by a number of partners, Shemen's holding rate was approximately 77.7%, Zerach Oil Exploration Limited Partnership held 7.5% (hereinafter: Zerach), Caspian Drilling Company Limited, which served as the operator of the drilling (hereinafter: the Operator), held 10%, and Growth Investment House in a tax appeal held only economic rights in the amount of 4.8% (report dated September 1, 2013, Appendix 3 to the plaintiff's affidavit).
- On September 1, 2013, Shemen published a report stating that the "Yam 3" drilling had reached a final depth of 5,700 and that the operator had begun to carry out verifying electrical tests (Open Hole Wireline Logging), on the basis of the results of which the partners in the license are expected to make a decision in the near term whether to carry out production tests in the drilling (Appendix 3 to the plaintiff's affidavit). In the body of the report, it was noted that it was given in relation to an event that is not listed in the Eleventh Addendum and was published in light of the ISA's request.
- On September 8, 2013, Shemen published a report titled "Discovery of significant oil marks and decision to carry out production tests in the "Yam 3" drilling under the Oil 387/'Oil' license". This report is at the center of the claim before me, and therefore I will bring its full text (Appendix 3 to the plaintiff's affidavit):
"Further to the immediate reports dated August 3, 2013 (reference 2013-01-107121), dated August 28, 2013 (reference 2013-01-130344) and dated September 1, 2013 (reference 2013-01-134514), the Company is honored to announce that in accordance with the information provided to the Partners in the License by the drilling operator, Caspian Drilling Limited (hereinafter: the Operator), the Partners in the License have reached the conclusion that there are significant oil marks in the drilling and have made a decision regarding the execution of production tests in the drilling.