The Securities Litigation Review: Israel


i Sources of Law

The primary legislative source for Israeli securities law is the Securities Law, 5728–1968 (the Securities Law). The Securities Law defines the primary rules with respect to trading securities in Israel; however, reference is also made to securities listed for trade on stock exchanges overseas. The law sets forth, inter alia, how to carry out an offer and sale to the public, the terms thereof, on whom the responsibility is imposed to publish a prospectus, the reporting obligations of corporations, the terms that apply to the Tel Aviv Stock Exchange, how insider trading should be restricted, what constitutes securities fraud, etc.

Whereas the Securities Law outlines the general framework, there are many existing regulations that specifically relate to particular matters,2 orders,3 notices4 and different guidelines,5 as well as the broad case law by the courts, which provide practical content for the daily application of securities law.

Each of the above constitute the normative framework of securities law in Israel.6

This chapter does not seek to present an exhaustive and comprehensive review of securities law, but rather focuses on the business judgement rule and presents the opinion of the authors on how it was integrated in the Israeli legal system. It examines its applicability, if at all, from the perspective of securities law in Israel. For this purpose, we will briefly present the basic principles of securities law in Israel, examine the evolution of the business judgement rule and its adoption, if at all, from the American legal system into the Israeli legal system and see whether the business judgement rule has the power to aid officers when there are violations of securities law.

ii Regulatory authorities

The Securities Law established the Israeli Securities Authority (ISA), responsible for safeguarding the interests of the public investing in securities.7 The Securities Law affords the ISA regulatory, supervisory and enforcement powers. In the field of enforcement, the ISA operates on three different planes: criminal enforcement, administrative enforcement and involvement in private enforcement proceedings, where the ISA also has the authority to intervene as follows:

  1. in the financing of class actions and derivative actions, when it is convinced that there is a real public interest and there is a chance that the court will approve the suit;8
  2. when reviewing settlements in the scope of securities laws (and here, too, the ISA examines the public interest); and
  3. the ISA submits professional positions in legal proceedings when it believes they have value regarding the position of the regulator. For example, if the claim raises questions of interpretation of the securities laws, it is reasonable that the ISA will appear and provide its professional opinion.

iii Common securities claims

There is a broad range of securities suits in Israel. This section casts a spotlight on constitutive judgments pertaining to the business judgement rule, and specifically refers to reporting obligations according to the Securities Law and the applicability of the rule in all aspects relating to these obligations.

This requires understanding of the business judgement rule and the scope of its applicability in the Israeli legal system.

Succinctly, the business judgement rule creates a quasi-presumption of fairness in favour of the officers, by granting them immunity from suits for a breach of duty of care (and not a fiduciary breach). The significance is that the court is not required to review the merits of the content of the resolution, but rather will examine the decision-making process in the company. The overriding principle is that, if the process is proper, an officer is protected from any material criticism for the fairness of the business decision.9 The business judgement rule is a creation of American case law,10 and after its journey into the depths of Israeli case law, it can be said that, even though it is not a part of the legislation of securities laws, it has been officially adopted by the Israeli courts, specifically in the Verdnikov case. There, the court ruled that the principals of the business judgement rule trickled into Israeli law and constitute a part of that law.

Over the years, the Israeli courts have continued to interpret the rule and have added content. It was determined that an officer is granted immunity when three cumulative conditions are met:11

  1. the resolution adopted was not through a conflict of interest;
  2. the resolution was adopted in good faith (which is subjectively examined); and
  3. the resolution was an 'informed' decision, namely, after weighing the relevant factors and data.

Notwithstanding, we must remember that this is a presumption of fairness. In other words, this is not absolute presumption. If the party claiming a breach by the director met the burden of proof that the conditions of the aforementioned rule are not met (there is no conflict of interest; good faith; informed decision), the burden is transferred to the director to prove that his or her decision meets the criticism of the 'entire fairness' doctrine, in the framework of which the fairness of the transaction or the action in question is examined. In other words, the court examines the contents of the decision.12 Thus, there may be circumstances when the presumption of fairness will be refuted and liability will be imposed on the officers, for example, in cases of omissions by the officers or any irrational decisions that lack any business base.13

The judgment in the Better Place Case14 was an important milestone in the development of the case law and the absorption of the business judgement rule in Israeli law. The court ratified the approach that was customary in case law until that point, according to which, the business judgement rule was designed to allow directors to adopt resolutions in the best interest of the company, without any concerns that taking such a business risk, in the best interest of the company, would retrospectively impose upon them any legal accountability. In this case, the court accepted the motions to dismiss the claims in limine in the name of the companies of the Better Place Group, that were filed by the liquidators appointed to manage them, against the officers of the Better Place Group and the auditor of the companies. The importance of the judgment lies in the details of conditions in which the officers will benefit from the business judgement rule, and the principal issues that the court will review with respect to the scope of applicability of the business judgement rule, which are relevant to the case below.

The first issue is the scope of personal applicability of the rule – the rule pertains to defence from business decisions adopted by a company's internal personnel who owe the company a duty of care (e.g., directors and other officers). Therefore, the rule does not apply to external consultants such as the company's attorneys and accountants.

This issue is important in light of case law that permits imposing secondary liability in securities law. Thus, only recently, a court imposed liability, at the administrative level, against a public company's external legal counsel, who were involved in the inclusion of misleading details in the company statements.15 There, it was determined that there is no room to exclude external attorneys from an administrative enforcement proceeding that is aimed at streamlining the enforcement actions of the ISA.

The second issue is that the business judgement rule does not apply to reporting requirements according to the Securities Law. The business judgement rule pertains to the company's business decisions, and not decisions relating to compliance with disclosure requirements imposed upon the company. The reason for this lies with the general goal of the business judgement rule. As mentioned, the rule was designed to allow officers to adopt decisions in the best interest of the company, without any concerns that legal accountability will be imposed on them retroactively. The rule was not designed to apply when dealing with disclosure requirements to the public according to the Securities Law, since the purpose of these requirements is to protect third parties such as potential investors.

Private enforcement

i Forms of action

Private enforcement in the field of securities law transpires mainly by filing class actions and derivative actions.

A class action suit is an action conducted in the civil arena, in the scope of which one individual sues on behalf of the same group he or she is requesting to represent. Mainly, these are cases when the damages incurred by one injured party are relatively low, and therefore it is not cost-effective for the individual to file an independent claim. The class action mechanism allows for compensation to be given to all the members of the class, without them having to initiate any active measure. The representative plaintiff, who represents the class, will receive compensation that is considerably higher owing to his or her efforts.

An interesting example of a class action suit in securities law that raised an issue pertaining to the applicability of the business judgement rule was reviewed in Class Action Suit (Central District) 7554-11-13 Dror Cohen v. Eyal Zion Zabida (published by Nevo, 24 December 2017) (the Cohen case). There, it was argued that the company's officers and controlling holders were responsible for presenting to the buyers of the company's debentures a misrepresentation pursuant to which there is no reasonable concern that the company would not meet its obligations. Particularly, the reference was to the publication of the company's reports, in the scope of which it was written that the board of directors had a meeting and determined that there was no reasonable concern that, during the forecasted cash-flow period, the company would not meet its existing obligations. Accordingly, and considering the Securities Regulations (Periodic and Immediate Reports) (as were in effect at the time), a forecasted cash flow was not published – a publication that would have been warranted if not for the representation. In fact, shortly after this representation, the company went bankrupt. Although the parties reached a settlement agreement, and the court approved the arrangement, one of the claims by the officers was that the decision on whether to publish certain information in accordance with the Securities Regulations is a decision that could be covered under the business judgement rule. The court clarified that the business judgement rule pertains to the company's business decisions and not decisions pertaining to compliance with the disclosure requirements imposed upon the company, based on the reasons presented above. Exercising the business judgement rule in the best interest of the company cannot release the officers from meeting disclosure obligations to third parties such as future buyers of the company's securities. Thus, the court concluded that in this case the business judgement rule defence does not apply.

The class action tool can also be used by the public when dealing with secondary liability of gatekeepers in the securities field. Thus, in the framework of Class Action Suit (Economic) 49602-11-11 Shlomo Pigo v. Michael Hirschberg (published by Nevo, 28 July 2016) (the Pigo case),16 the court accepted the motion to approve a class action suit that dealt with the liability of the directors and the accounts with respect to the damages caused to the holders of the public company's debentures due to the publication of misleading information in the quarterly reports. It was determined that the error that was published for the public was material, and thus constituted the publication of misleading information. The court determined that gatekeepers (specifically when the public company has executive officers who are relatives, as was the case), whether they are directors or an auditor, are required to check the financial figures with more restraint and take action, if required. Accountants should be measured according to the reasonable accountant standard and not the perfect accountant standard; in other words, an accountant should adopt reasonable cautionary measures so that reports have no errors.

Alongside class action suits, there is also the derivative action mechanism. A derivative action is filed according to the Companies Law17 by a shareholder or director, on behalf of the company, when the company is abstaining from exhausting its rights, by means of filing suit.

Also in this framework, considering the defence claims raised by the same officers for the applicability of the business judgement rule of their actions, there is interesting case law that examines the scope of the business judgement rule – as part of the motion to approve a derivative securities action. Thus, in the framework of Derivate Suit (Economic) 32489-02-12 Roman Altman v. Ormat Industries Ltd (published by Nevo, 3 October 2013), a motion to approve a derivative action was filed pertaining to the process of purchasing shares of Ormat Industries Ltd (Ormat) by two other companies. It was argued that the information about the intent to purchase was 'inside information', and therefore the buyers had to disclose it to the public or abstain from the acquisition.18 The court ruled that this was not 'inside information', applied the business judgement rule and determined that there was no room to intervene in the decision by Ormat's board of directors, who did not file the claim in the name of the company, since the decision was made based on proper information and exercising discretion. They determined that there was no conflict of interest and the decision was in good faith. It was determined that there is no room to intervene in a decision that did not drastically deviate from bounds of reasonability. This trend was ratified by the Israeli Supreme Court, where it was determined that the business judgement rule also applies on a decision by the board of directors on whether to exercise the company's power to sue or not, in light of the motion by the shareholders (albeit not an omission), since this is a business decision for all intents and purposes.19

These trends in the case law illustrate the importance of the business judgement rule in the Israeli legal system and, since it is an integral part thereof, in the cases that examine board of directors' discretion in general, particularly cases dealing with securities.

ii Procedure

In the Israeli legal system, it is possible to file a class action suit only upon the fulfilment of specific grounds set forth in the Second Addendum of the Class Action Suit Law, 5766–2006 (the Class Action Suit Law) or in any matter whereby the law expressly stipulates that a class action suit may be filed.20 Indeed, Section 5 of the Second Addendum of the Class Action Suit Law prescribes, inter alia, that a class action suit may be filed for any grounds arising from any connection to securities. Examples of class action suits of this nature are given above.

In any event, filing a class action suit requires approval from the court.21 The considerations that will be reviewed by the court are:

  1. if the suit raises material common questions for all the members of the class and if there is a reasonable likelihood that they will rule in favour of the class;
  2. is a class action suit the most effective and fair way to rule; and
  3. are there reasonable grounds to assume that the interests of the members of the class will be represented and managed properly and in good faith?22

The procedural mechanism of filing derivate suits is very similar to that of the class action suit. Also here, filing the derivate suit requires approval from the court, when the considerations that will be reviewed by the court are if the claim and its management are allegedly in the best interest of the company and if the plaintiff is not acting in good faith.23 Prior to filing a motion with the court, the shareholder or director must contact the company and demand that it exhaust its rights by filing a suit, unless there is reasonable concern that contacting the company will impair the ability of receiving measures of relief, or if an organ of the company authorised to decide upon filing the claim has a personal interest in the decision.24 An interesting point is that the individual entitled to file a derivative action may turn to the court, also before filing the motion to approve the suit (or thereafter), and request to instruct the company to disclose documents pertaining to the proceeding.25 This is an exception to the ordinary course in civil procedures, when the demand for disclosing documents is filed only after the last of the pleadings are filed in the case. The reason for this is that, in a derivative action, the shareholder or director does not always have the necessary information to file the action (since, as mentioned, the cause of action really belongs to the company itself), and we do not want to have a gap of the information that could lead to a lack of deterrence and an impairment of the right to sue.

iii Settlements

Examples are given above of class action suits for securities when the court approved the settlement arrangement and ruled that the business judgement rule applies and granted immunity to the board of directors (see the Cohen case). Succinctly, for both class actions and derivative actions, the settlement arrangement must be filed with and approved by the court. The underlying notion for this requirement is that the court is responsible for reviewing the arrangement and checking if it is appropriate, fair and reasonable, while considering the interest of all the members of the class;26 and also for not allowing the plaintiff to relinquish or reach another arrangement without approval,27 due to concerns from a conflict of interest or based on personal preference over the best interests of all the members of the class or the company. In any event, a settlement arrangement is published before it is approved so that all relevant individuals have an opportunity to object to the arrangement.28 In most class action claims, an expert examiner in the field of the suit will be appointed to provide an opinion before the approval.29 In certain cases, approval is also required from the legal counsel of the Attorney General.

The rules with respect to attorneys' fees are also similar in both these mechanisms. The court determines the fees for the attorney who represented in the class action or derivative action, and the attorney will not receive fees that are in excess of the amount set by the court.30

To provide the complete picture, this chapter presents, by way of example, considerations reviewed by the court when they determine the fees for class action suits (and compensation for the representative plaintiff). These are the guidelines based on Sections 22(b) and 23(b) of the Class Action Suit, which is not an exhaustive list:

  1. balance between the desire to encourage the filing of proper proceedings and the need to prevent idle proceedings;
  2. the conduct of the representative plaintiff's attorney; and
  3. the relationship between remuneration and fees and the class action as a whole, so that remuneration and fees that unreasonably reduce the benefit to the group are avoided.31

Alongside the ethical considerations, and as a rule, the Israeli Supreme Court has adopted the percentage method as the acceptable method to determine the representative plaintiff's attorney's fees for class actions with monetary measures of relief.32 According to this method, fees are set as a certain percentage of the amount collected in favour of the group in the scope of the judgment or settlement arrangement. Criteria for applying the percentage method are also set in this way.

iv Damages and remedies

The calculation of damages in securities claims is a complex issue, which deviates from the scope of this chapter and is usually decided by financial experts. If we take securities fraud as an examining case of class action suits (these suits are usually the majority of the securities law enforcement system),33 the Securities Law provides for damages for a person who was injured as a result of fraud.34 In certain cases, when securities were purchased in accordance with a prospectus based on misleading information, the buyers may terminate the acquisition and demand a monetary refund from the issuer, in accordance with the terms set forth in law.35

As a rule, in class action lawsuits, damages must be individually quantified. When this is not possible (e.g., when a class of members cannot be identified, although this is less common in securities class action lawsuits where the class of members can usually be easily identified), a calculation method should be used that examines the damage caused to the entire class. In cases where the damages cannot be calculated at all, it is possible to determine the compensation amount by way of the estimate.36 If we follow the rule, which is individually calculating the damages, the Israeli Supreme Court ruling in the Reichart case presented two alternative methods to calculate the damages:37 the 'out-of-pocket method' where it is necessary to determine the damages according to their value on the date the fraud was committed (this was the method adopted by the courts) and the 'estimated out-of-pocket method' whereby the damages are determined on the date the fraud was discovered. These methods are acceptable according to US law, and Israeli law usually relies upon their interpretation when estimating the damages in securities claims. This is a complex task that usually requires the assistance of opinions from financial experts.

Public enforcement

i Forms of action

The ISA, by virtue of the aforementioned legislation, has criminal enforcement and administrative enforcement powers.

With respect to criminal enforcement, these concern offences of the Securities Law, the most common of which are securities fraud, use of inside information and reporting offences.

Our discussion of offences according to the Securities Law clearly has no relevance to the business judgement rule, and this is not a defence that is afforded to a director charged with a criminal offence. Indeed, the court does not hesitate to impose liability on directors who commit criminal offences according to the Securities Law.38

With respect to administrative enforcement, the Securities Law established the administrative enforcement committee, which is responsible for reviewing and deciding on certain infractions according to the Securities Law, and imposing administrative sanctions accordingly39 that do not reach the threshold of criminal prosecution. However, they are also not trivial to the point that they can be ignored, and thus there is an administrative proceeding, further detailed below.

An example of these enforcement measures is financial sanctions, which are commonly used by the ISA and are part of the variety of measures that the ISA can use for enforcement purposes when there are infractions of securities law, classified under administrative proceedings.40

In the scope of Administrative Appeal (Economic) 32268-11-14 Israel Petrochemical Enterprises Ltd v. The Tel Aviv Securities Authority (published by Nevo, 29 April 2015), an appeal was filed to cancel the financial sanction imposed upon the company due to missing details in the company's board of directors' report about the anticipated cash flow. The appeal was partially accepted; however, the relevant section is the claim of the company that the business judgement rule should be applied to the board of directors' decision to abstain from providing examples (this was one of the issues in which it was claimed that the company violated the provisions of the Securities Regulations (Periodic and Immediate Reports)). Therefore, it was argued that the company's actions based on the decision by the board of directors ought not to be deemed a breach. This claim was dismissed by the court. It was ruled that it is not possible to apply the business judgement rule on the question of whether the company violated the legal provisions, even when a decision of the board of directors was adopted in the absence of any conflict of interest. The court based its ruling on the fact that the question of whether the company violated the provisions of law is a question of interpretation of the regulations. The fact that the board of directors erred in their interpretation of the regulations does not exempt the company from its liability for the violation.

ii Procedure

The decision of whether to initiate a criminal proceeding or an administrative inquiry proceeding is granted to the Chairman of the ISA, when these are the only relevant factors:41

  1. the severity of the act and the circumstances;
  2. an assessment of the quality and intensity of the evidence; and
  3. the ISA's enforcement policy.

Private enforcement, however, is granted to the public and it is the market that will direct and decide whether to file a class action or a derivative action.

At the criminal level, the proceeding first commences with the initiation of a criminal investigation (as mentioned above, following a decision by the Chairman of the ISA). In the framework of the legislation, the ISA has different powers, including powers to search for and demand documents. After the criminal investigation is concluded, the case is submitted to the securities prosecutor for examination, who will make the decision on whether to prosecute or close the case. To the extent that it is decided to file a criminal indictment, securities offences are usually filed with the Economic Department of the Tel-Aviv Jaffa District Court, and thereafter the criminal proceedings will be conducted like any other criminal proceeding.

At the administrative level, as given above, the Securities Law established the administrative enforcement committee, which also has various powers that allow the case to be clarified, such as summoning witnesses, disclosing documents and conducting searches (by court order). If the enforcement committee decides that a violation has been committed, it may impose administrative enforcement measures, as set forth below. An administrative petition may be filed with the district court, in its capacity as an administrative court, on the decision of the administrative enforcement committee.42

iii Settlements

At both the criminal level and the administrative level, the Chairman of the ISA has powers to engage in an arrangement to refrain from initiating proceedings or to terminate proceedings under certain conditions, all depending on the specific circumstances of the case.43 Under the framework of the arrangement, the Chairman undertakes to refrain from initiating or progressing with the proceedings, and in return the suspect agrees that he or she will receive an enforcement measure agreed upon by the parties. Sometimes these forms of arrangements may include the consent of the person involved that additional enforcement measures will be imposed on him or her if he or she does not fulfil the obligation under the agreement. In the Securities Law, similar powers are also granted to the district attorney not to prosecute a suspect in a securities offence and to enter into a settlement agreement with him or her.44 Here, too, the prosecutor undertakes to refrain from filing an indictment against the suspect, when in return the suspect agrees that enforcement measures will be imposed on him or her.

iv Sentencing and liability

At the administrative level, the court is authorised to impose various punishments on securities offences. The main punishment is imprisonment (whether actual imprisonment, probation or community service), a fine or both, which all depends on the nature of the crime.45 The current trend is to determine a strict punishment threshold for securities offences, aimed at establishing deterrence and protecting the public interest.

When dealing with directors, the relevance for directors' convictions of criminal offences, in addition to imprisonment or fines, is that for a period of five years from the conviction date the director cannot serve as a director of a public company or private debenture company.46 This reflects an expression of significant liability imposed on directors, and the expectation that they fulfil their position faithfully, and that the business judgement rule cannot rescue them from these kinds of proceedings.

At the administrative level, if the administrative enforcement committee determined that a violation was committed, it may impose administrative enforcement measures, the main ones of which are:47

  1. financial sanctions (the Securities Law determines the range of amounts and distinguishes between a corporation and an individual);
  2. payment of compensation to the person injured by the violation (here too, the law stipulates rules regarding the amount of compensation);
  3. adopting measures to correct the violation and prevent its recurrence; and
  4. similar to the rulings in criminal proceedings, in certain cases it can be determined that the violator is not fit to serve as an executive officer in bodies set forth in the law for one year (and, with court approval – up to five years).48

Cross-border issues

Securities laws are local laws applicable to bodies where the ISA has the authority to supervise their activities. At the same time, there are cross-border issues related to securities laws, the main ones of which deal with two types of corporations:

  1. a foreign corporation, which is a corporation incorporated in Israel with securities that are listed for trade on a foreign stock exchange.49 The Securities Law allows the listing of securities of a foreign corporation for trade on the Israel Stock Exchange, within the framework of the conditions set forth in law;50 and
  2. a foreign corporation that is incorporated outside Israel with securities that are traded on a foreign stock exchange, which requests that its securities also be traded in Israel.51

One of the interesting issues that arises in these contexts is when an Israeli plaintiff (for example, an Israeli investor who has invested in the shares or debentures of a foreign corporation) seeks to file a lawsuit against a foreign corporation incorporated outside Israel that trades inside Israel.52 Litigation in these cases usually includes two main preliminary issues:

  1. What is the proper forum (forum conveniens) to adjudicate the claim?
  2. What is the law applicable to the claim?

The applicable law can impact the forum conveniens. Thus, if it is determined that the applicable law is Israeli law, the chance for an Israeli court to be the forum conveniens to adjudicate the claim may increase (albeit, not necessarily).

With respect to the applicable law,53 there is particular interest in the court's determination that when there is a dual company, such as one incorporated outside Israel, which was first traded on a foreign stock exchange and then sought to be traded in Israel as well, the applicable law with respect to reporting rules and liability rules for breach of reporting obligations is the foreign law and not Israeli law.54

With respect to forum conveniens to adjudicate these actions, these claims will usually be raised in the scope of servicing proceedings. To drag a foreign entity into litigation in Israel, the plaintiff must act according to the provisions of the Rules of Civil Procedure, 5779–2018 (RCP). Thus, a plaintiff may service the pleading overseas,55 after filing a written motion (an ex parte motion) with the court to determine the method of servicing, which is accompanied by an affidavit that substantiates the cause of action, the facts substantiating the cause of servicing, and gives details of the defendant's location.56 In any event, the court may determine that, in the circumstances of the case, the documents cannot be serviced overseas.57 Nevertheless, even if the court permits the servicing of the documents, when de facto, in the vast majority of cases the court permits servicing outside the jurisdiction, the foreign defendant may renounce the jurisdiction of the court in Israel and seek to revoke the permission to service.58 In fact, this opens the door to conduct preliminary proceedings in matters of servicing, even before the main proceeding begins. Then, only if it is determined that the lawsuit was lawfully serviced will the foreign defendant be required to file a statement of defence, and the proceedings will be conducted in Israel.

These proceedings require the investment of considerable resources, time and money, in order to clarify a lawsuit against a foreign defendant in Israel. However, when the Israeli framework allows foreign companies to trade in Israel, such legal proceedings are not inevitable, and this is an issue that foreign corporations seeking to trade in Israel must take into account, along with the inclination of courts to extend their jurisdiction to such cases. However, every case will be examined as to its own circumstances.

Year in review

Three issues in the field of securities that might be considered unique occurred over the past year and are detailed below.

i Covid-19

The year 2020 was, undoubtedly, marked by covid-19. The ISA could not ignore the health and economic crisis that befell the world and, naturally, the impact on Israel. This section presents several steps that the ISA adopted to facilitate and strengthen the capital market community during this challenging time:

  1. The ISA approved various facilities designed to strengthen and support regulated entities in the capital market industry for the management of public funds.
  2. The ISA authorised portfolio managers and investment advisers and marketers to provide service to clients remotely (when, routinely, these services are not online and require face-to-face meetings). This is an example of a current trend to move to the remote working approach, a trend that began during the covid-19 crisis and intensified during the course thereof.
  3. The ISA emphasised the importance of the disclosures required in ongoing and periodic reports, which are generally intended to enable investors to understand the viability of investments and, in times of crisis, even more so. The ISA issued a position designed to provide corporations with a tool to prepare the first quarterly reports at the start of the crisis in 2020, which first reflected the implications of the covid-19 crisis. Special emphasis was placed on the board's explanations regarding the consequences of the covid-19 crisis.

ii Financial sanctions

Other than the consequences of the covid-19 crisis, during the past year we have actually seen an increase in the use of the administrative enforcement tool of financial sanction. Thus, among others, the administrative enforcement committee imposed a financial sanction (as part of an arrangement) on a company registered as a stock exchange member with a licence to engage in investment marketing, for a total of 1 million shekels for administrative violation of the execution of coordinated transactions that were not marked; a financial sanction of 1.5 million shekels as part of an administrative enforcement arrangement for a construction company; a financial sanction of 250,000 shekels on a private company that provides entrepreneurs and corporations that are not listed on the stock exchange with an internet infrastructure for raising capital from private investors.

iii The State of Israel v. Amir Barmali

At the criminal level, a district court convicted a defendant who was the owner and manager of companies that collapsed, of fraud and deception of investors amounting to approximately 340 million shekels.59 The indictment alleges that the defendant used a 'Ponzi scheme', when he allegedly financed the repayments to his investors with money from the loans he took from new investors. He continued to raise funds while hiding from his investors the heavy losses and while submitting false data. This is one of the most publicised and prominent cases in recent years, and the conviction was issued in October 2020. In February 2021, a sentence was rendered whereby the defendant would serve 10 years in prison and pay a fine of 400,000 shekels. This is one of the most severe sentences handed down in securities law (although more lenient than the position presented by the State Attorney's Office) and is an expression of the trend of severe punishment and deterrence against investor fraud.

Outlook and conclusions

This chapter seeks to review the main points of the regulatory framework and the enforcement system of securities law in Israel. It provides a view of issues concerning directors, and the use of the business judgement rule as a possible defence argument. As reflected in the courts' rulings, this defence was also used in securities law litigation, and we anticipate that this trend will continue and will manifest in additional cases. It is possible that the business judgement rule defence may trickle its way into the primary legislation, and will not only be a creation of the case law. Until then, and in this context, we look forward to the position of the Israeli Supreme Court with regard to the applicability of the scope of the business judgement rule in the framework of the pending appeal in the Better Place case. In this regard, it is interesting to review the contradicting positions presented by the Attorney General and the Official Receiver during the proceedings of the appeal in this matter. The Official Receiver argued that when a company is close to insolvency, the duties of the officers should be increased with regard to their business decisions; in other words, the business judgement rule defence will not apply. On the other hand, the Attorney General argued that the fact that a company is close to insolvency does not change the duties of the officers; in other words, the business judgement rule defence may apply. These opposite opinions emphasise that we have a lot to look forward with regard to the Supreme Court's ruling in the Better Place case.

Looking to the future, it will be interesting to examine over time the implications of the decisions made by various directors during the covid-19 crisis, and the disclosures and reports presented to investors accordingly. We believe that there will be great significance to the business judgement rule in these contexts, especially in light of the distress that many businesses encountered during the covid-19 crisis and how those companies also dealt with investors and shareholders. It remains to be seen what the court's position will be and how much the court will be willing, if at all, to expand (or perhaps narrow) its interpretation of the rule and give protection to directors who acted in a time of extreme uncertainty.


1 Michael Ginsburg is a partner and Hadar Shkolnik is a counsel at Gross & Co. Law Firm.

2 For example, see Securities Regulations (Annual Financial Statements), 5770–2010; Securities Regulations (Manner of Offering to the Public), 5767–2007 and dozens of other regulations designed to further elaborate upon the rules, each specialising in the relevant subject matter.

3 See, for example Securities Order (Restrictions on Providing Credit to a Single Applicant), 5748–1988.

4 See, for example, the notice pertaining to authorisation to conduct a securities' transaction.

5 See, for example, the guidelines for disclosure for the restatement of the financial statements.

6 Under the supervision of the Israeli Securities Authority, whose position will be defined below, additional relevant laws provide protection: Mutual Trust Investments Law, 5744–1994; Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 5755–1995; Regulation of Activities of Credit Rating Companies Law, 5774–2014.

7 Section 2 of the Securities Law.

8 See Section 55C of the Securities Law pertaining to class action suits and Section 205A of the Companies Law, 5759–1999 (the Companies Law) for derivative suits.

9 CA 7735/14 Ilan Verdnikov v. Shaul Alowitz (published by Nevo, 28 December 2016) (the Verdnikov case).

10 The rule was defined in the American case law in Brehm v. Eisner, 746 A.2d 244, 2000 Del. LEXIS 51 (Del. 9 February 2000).

11 See for example, the Verdnikov case; Derivative Suit (Economic) 17542-11-15 Jonathan Harpaz v. Bank Hapialin Ltd (published by Nevo, 19 November 2017).

12 In the Verdnikov case, the court reviewed three main standards of judicial review for the business decisions made by the company: the business judgement rule, the entire fairness doctrine, and in the interim, the standards of heightened review. In this contact, it is also interesting to examine Class Action Suit (Economic) 40404-03-16 Sharon Atzmon v. Osem Investments Ltd (published by Nevo, 4 August 2020) (the author's firm represented the independent committee on behalf of Osem's director, who examined the transaction), which recently dismissed the motion to approve a class action suit against a transaction executed in the outline of a reverse triangular merger, in the scope of which the controlling holder purchased the company's public shares and as a result the public company became a private company. In the framework of the judgment, the court reviewed the involvement of the officers in the business decision when it determined that the fact that the transaction was approved in accordance with all the requisite approvals according to the Companies Law does not provide absolute protection from the involvement of the court. The Honorable Judge Ruth Ronen examined the judicial review standards that the court will operate, when the range is between the business judgement rule and the entire fairness standard, which is dependent upon the criteria for the approval of the transaction according to the law and the existence of an independent committee. There is a pending appeal for the judgment before the Israeli Supreme Court (CA 8762/20).

13 The Verdnikov case.

14 CC (Central District) 47302-05-16 Better Place Israel (H.T.) 2009 Ltd. (in liquidation) v. Shai Agassi (published by Nevo, 12 September 2018). There is a pending appeal before the Israeli Supreme Court (CA 7829/18).

15 Administrative Appeal (Economic) 18156-12-17 Gal Chat v. the Israeli Securities Authority (published by Nevo, 19 September 2019), which dismissed the attorney's appeal against the decision by the Israeli Securities Authority's administrative committee that imposed liability upon him for the misleading report on behalf of the public company.

16 An appeal of the decision was filed with the Israeli Supreme Court (CA 7809/16), which was dismissed because the respondents did not provide any response. Ultimately, a settlement was reached in the case, which was approved by the court on 12 June 2018.

17 See Sections 194-206 of the Companies Law.

18 The applicant based his claims on Section 52H(a) of the Securities Law, whereby 'Where a profit accrues to a person from a transaction that such person or another person carried out while making use of inside information, the company in respect of whose security the transaction was effected may claim such profit from such person'.

19 CA 4857/16 Ephraim Menashe v. UVision Air Ltd. (published by Nevo, 24 April 2018). Note that if we are dealing with a suit filed by the company against officers or controlling holders for a breach of any duty, then it is reasonable that the decision by the board of directors not to exercise the company's power to sue will most likely be tainted with a conflict of interest, and in any event, the business judgement rule will not apply.

20 Section 3(A) of the Class Action Suit Law.

21 Section 3(B) of the Class Action Suit Law.

22 Section 8 of the Class Action Suit Law.

23 Section 198 of the Companies Law.

24 Section 194 of the Companies Law.

25 Section 198A of the Companies Law.

26 Section 19 of the Class Action Suit Law.

27 Section 202(a) of the Companies Law.

28 Section 202(b) of the Companies Law, with respect to a derivative suit and Section 18 of the Class Action Suit Law with respect to a class action suit.

29 Section 19(b) of the Class Action Suit Law.

30 Section 200A of the Companies Law with respect to a derivative suit and Section 23 of the Class Action Suit Law with respect to a class action suit.

31 The Pigo case.

32 CA 2046/10 The Estate of the Decedent Moseh Shemesh v. Reichart (published by Nevo, 23 May 2012).

33 Sharon Hannes and Alon Klement, Loss Causation and Damages in Securities Fraud Class Actions, Tel Aviv University Law Review, 2013. See their essay for additional details about the calculation of damages in securities class action suits.

34 Section 31 of the Securities Law sets forth the responsibility for damages due to misleading information in the prospectus; Section 32 of the Securities Law sets forth the liability of the experts caused for damages arising from misleading information in an opinion; Section 34 of the Securities Law sets forth that if two or more are responsible for the damages, they will be responsible jointly and severally and they will bear liability according to the tort laws; Section 38C of the Securities Law sets forth that there is liability for damages due to any misleading information in any report, notice or document.

35 See Section 35 of the Securities Law.

36 See Section 20(A) of the Class Action Suit Law; Section 9 of the Securities Regulations (Rules of Procedures for Class Action Suits), 5752–1991; CA 345/03 Dan Reichart v. the Heirs of the Decedent Moshe Shemesh, OBM, Israeli Supreme Court Rulings, padi, 62(2) 437 (2007) (the Reichart case). It should be noted that the case was reverted to the District Court to determine the damages, however an appeal was filed with the Israeli Supreme Court on the lower court's ruling, who accepted the settlement offer for the damages amount (CA 2046/10), see footnote 32.

37 These methods were presented in the scope of CA 3654/97 Kertain v. Securities Petition, Israeli Supreme Court Rulings, padi 53(3) 385, which reviewed the issues for calculating the damages for securities. Notwithstanding, the same case dealt with an ordinary suit and not a class action suit and specifically about the portfolio investment manager who breached his fiduciary duties towards his clients and not securities fraud. In addition, there is a third method to calculate damages, 'rescissionary damages', whereby the full investment value must be returned to the buyer. However, the Israeli Supreme Court ruled in the Reichart case that this measure of termination and refund is limited to case when there is a contractual relationship between the parties, for example, Section 35 of the Securities Law, which determines a remedy of refunds only towards the issuer.

38 See, for example CA (Tel Aviv-Jaffa District Court) 70403/03 The State of Israel v. Adi Ben Moshe Eyal 5764 1(1) 49 (2004) (the Eyal case), when the court upheld the conviction of a director of the company for offences for the use of inside information. In the same case, the director purchased shares of the company in the midst of negotiations of a merger with another company. It was determined that the information pertaining to the merger was inside information, which the director exploited during the acquisition.

39 Section 52.32 of the Securities Law.

40 For this purpose, also see Article D, Chapter 4, Section 9 of the Companies Law and Chapter H3 of the Securities Law.

41 Section 52.44 of the Securities Law.

42 See Section 52.61 of the Securities Law.

43 See Article A of Chapter I1 of the Securities Law.

44 See Article B of Chapter I1 of the Securities Law.

45 The penal chapter in the Securities Law (Chapter I) determined the criteria for criminal punishment. By way of example, for securities offences that are deemed more severe (for example, securities fraud), it was determined that there would be five years' imprisonment or a fine that is greater than one million shekels for an individual and 5.5 million shekels for a corporation.

46 Section 226 of the Companies Law; this was also the ruling for the director in the Eyal case.

47 Article C of Chapter H4 of the Securities Law.

48 For this matter also see Section 226A and 232A of the Companies Law.

49 Section 1 of the Securities Law.

50 See Section 35.17 of the Securities Law.

51 See Section 35.30, Section 35.33 1; Section 39A of the Securities Law.

52 With respect to a foreign corporation incorporated in Israel, issues of servicing documents and filing the action are simpler, since there is no servicing outside the jurisdiction. It is important to note that, according to Section 35.26 of the Securities Law, if a lawsuit was filed in a court outside Israel based on the same cause arising from the connection to the securities of a foreign corporation or a similar cause, to a lawsuit filed in a court in Israel, the court may, at the request of a party, delay proceedings in Israel until a judgment is rendered, which cannot be appealed in a lawsuit filed abroad. The reason for this is clear – we want to avoid double litigation, and we certainly want to avoid conflicting decisions. In addition, Section 347 of the Companies Law stipulates that it is possible to service court documents to a foreign company (a corporation, excluding a partnership, incorporated outside Israel) registered in Israel by servicing to an authorised person who has been notified to the Registrar. The challenge, then, is to file a lawsuit against a corporation that is incorporated outside of Israel and is not registered in Israel.

53 With respect to this matter see also Section 35.30(b) and 39A of the Securities Law.

54 Class Action Suite (Economic) 28811-02-16 Gabriel Damti v. MannKind Corporation (published by Nevo, 12 October 2017). A Petition for leave of appeal was filed with the Israeli Supreme Court (PCA 8737/17) for the decision to apply the foreign law. The Israeli Supreme Court found that the lower court was correct when applying foreign law. As a result, thereof, it was agreed to strike the appeal.

55 All in accordance with and if he met the causes of service according to Section 166 of the RCP.

56 Section 167(a) of the RCP.

57 Section 167(b) of the RCP.

58 Section 168 of the RCP.

59 Criminal File (Economic) The State of Israel v. Amir Barmali (published by Nevo, 13 October 2020).

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