Introduction
Derivative and securities class actions
Comment
Derivative and class actions are legal mechanisms that have been established in order to increase the private enforcement of the securities and corporate laws in companies trading in the securities market, and to protect the interests of the minority shareholders in public companies.
In 2010, an amendment to the Courts Law established the Economic Division of the Tel Aviv District Court. This division was established in order to handle cases dealing with securities and corporate law violations. Since then, most derivative and class actions filed in Israel are filed with the Economic Division.
The Israeli Securities Authority (ISA) recently published research regarding the derivative and securities class actions that have been filed in the 10 years since the Economic Division's establishment. The research, which examined 465 proceedings, revealed interesting trends regarding the filing of such proceedings and their outcome. This article analyses those trends in numbers.
Derivative and securities class actions
As shown in figure 1 below, during the years 2011 and 2021, an average of 23 securities class actions and 23 derivative actions were filed each year.
Figure 1: collective proceedings filed between 2011 and 2021
Since 2013, the number of derivative actions filed in Israel has continually increased, leading to a record 43 derivative actions in 2018. During 2018, a large settlement was reached in a derivative action filed against a discount investment company (DIC). This derivative action was filed based on allegations regarding the DIC's directors' liability to loss, which arose from the company's purchase of the newspaper Maariv. A settlement of 100 million new Israeli shekels (approximately $29.3 millions) was paid, which was one of the largest settlements reached at the time in Israel.
The ISA's research shows that only a minority of the claims filed ended with a judgment. The research examined the outcome of the claims filed between 2011 and 2020 and discovered that only 1% of these claims ended with a judgment in favour of the plaintiff. In comparison, 19% ended in a judgment that dismissed the claim, and the remaining proceedings were concluded in settlement agreements, withdrawn by the plaintiffs or are still pending.
Figure 2: outcome of proceedings filed between 2011 and 2021
According to the research, 33 settlements were reached between 2017 and 2020, with payments totalling 615 new Israeli shekels (approximately $18 million) during this period.
The fact that most claims ended without a clear ruling creates uncertainty regarding directors' and officers' liability in various cases. For example, in the past few years, large amounts have been paid for the settlement of derivative actions filed against companies based on the alleged liability of directors and officers to the damage caused to the companies as a result of fines paid by them.
Given this uncertainty, significant settlement amounts have been agreed upon in derivative action proceedings:
- $92 million for the Leumi Bank derivative action;
- $50 million for the Teva derivative actions;
- $23 million for the Mizrachi derivative action; and
- $140 million for the Bank Hapoalim settlement, which is yet to be approved by the Court.
The number of securities class actions and derivative actions has decreased from 41 in 2021 to 11 in 2022 (so far). The question is whether this the beginning of a new trend or merely a downturn that will rise again at the end of the year.
For further information on this topic please contact Moshe Abady, Yael Navon or Addy Margalit at Levitan, Sharon & Co by telephone (+972 3 688 6768), fax (+972 3 688 6769) or email ([email protected], [email protected] or [email protected]). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.