It is not uncommon for Israeli incorporated companies to seek investments abroad. In many cases, such investments are done through public offerings on international stock exchanges. Securities issued by Israeli companies are traded on the NASDAQ, the London Stock Exchange and a variety of other exchanges, including Australia. These situations, which make perfect sense from a business perspective, give rise to interesting and sometimes quite complex legal issues. For example, if a company is incorporated in Israel then Israeli corporate laws apply to it. However, if our Israeli company registered its shares for trading on the NASDAQ then United States Federal securities laws apply. Sometimes this combination is simple to manage, but at the same time – this combination can become extremely challenging.
For instance, what happens when investors on a foreign exchange believe that the management of an Israeli incorporated public company has misled them? Can they bring a class action against the Israeli company before the Israeli courts?
The answer to this question was given by the Tel-Aviv District Court on May 15th, 2017, as it decided to stay a motion to approve a class action, filed by a class of United-Kingdom investors against Digitek SMT Ltd, an Israeli incorporate company.
In this matter, Digitek offered, through a Private Placement Memorandum, loan notes to investors located (solely) in the United Kingdom. A number of years later the Company went bankrupt, and its United-Kingdom investors approached the Tel-Aviv District Court requesting it to approve a class action that is based on Israeli corporate law and Israeli contract law. The Company and the rest of the respondents filed a motion to dismiss, arguing, among other things, that this dispute should be adjudicated pursuant to United-Kingdom law – the governing law of the Private Placement Memorandum, and that Israel is not the appropriate forum to try this case. As mentioned above, the court sided with the respondents and placed a stay on the proceedings, while sending the petitioners back to the United-Kingdom to seek justice.
This decision is important for a number of reasons. First, it should be noted that the court did not reach its decision without true deliberation. It reiterated the protection that Israeli corporate laws grant investors, and pointed out the fact that in Israel, investors may use a favourable method of class actions, that would not be available to them in the United-Kingdom.
That being said, the court explained that in order to determine the most appropriate forum in this case, it must consider three sets of considerations: One – identifying the forum with the most connections to the dispute; Two – identifying the reasonable expectations of the parties with regards to applicable law and jurisdiction; and Three – analysing the relevant public policy considerations that need to be taken into account.
With regards to the first consideration, the court determined that because the members of the class were all residents of the United-Kingdom, the offering was done in the United-Kingdom, in English, pursuant to local law, the United-Kingdom is the most connected jurisdiction, even though the Company was incorporated and active in Israel and the respondents are Israeli. With regards to the second consideration, the court determined that the United-Kingdom was clearly the forum where all of the parties expected to litigate any dispute they have, hence favouring the United-Kingdom as the most appropriate forum. With regards to the third consideration, the court determined that it may certainly take into account the interests of the local court system, and asked itself whether under these circumstances the Israeli court system is “interested” in adjudicating such a dispute, given the effectiveness and costs of taking on the case.
After all is said and done, the most important lesson we learn from the Digitek decision is that foreign investors and local companies need to take into account that in the event of a dispute that is associated with the offering of securities outside of Israel, the Israeli court system will be reluctant to adjudicate the case, and will most probably defer to the jurisdiction in which the securities were offered. However, the court did not slam the door shut and opted not to dismiss the case altogether as requested by the respondents, which leaves some wiggle room enabling a different decision in the future.