The Tel Aviv District Court (Economics Department) recently handed down a ruling in the Ceragon Networks Ltd. case. The ruling states that dual-listed companies may face exposure to lawsuits based on the liability rules under Israeli law.
The ruling, which approved a motion to certify a class action against Ceragon (a dual-listed company during the relevant period), addressed the issue of publishing forecasts later discovered to be inaccurate. The company argued there were only minor deviations and that there is no precedent for imposing liability on a dual-listed company because a “forecast” did not come to fruition, considering the foreign law’s approach toward forward-looking information (in this instance, US law).
The legal question posed to the court was whether the liability of a dual-listed company (and its officers) toward holders of its securities in Israel, in respect of an act or omission alleged to constitute a misleading publication or a false representation, derives from the foreign law, similar to the reporting obligations imposed on it, or from Israeli law.
Legal Situation before the Ruling
Prior to the Ceragon ruling, several key rulings stated that dual-listed companies’ liability for breaches of disclosure and reporting obligations should be determined according to the foreign law that applies to them and not according to Israeli law.
During their deliberations of this issue, Israeli courts examined the nature and objectives of the dual-listing arrangement, prescribed in chapter 3 of the Israeli Securities Law. The dual-listing arrangement came into effect in 2000 against the backdrop of globalization processes and the increasing number of Israeli technology companies who sought to recruit capital on stock exchanges in the United States and in England. The arrangement’s objective was to encourage foreign-listed Israeli companies to also register with the Tel Aviv Stock Exchange, by allowing leniency in the registration processes required by the Tel Aviv Stock Exchange. The Israeli legislature also permitted reliance on the foreign law in order to avoid the imposition of an additional regulatory burden on companies, beyond the regulatory burden they already bore as a result of their registration abroad.
The Israel Securities Authority’s position, as reflected in a pronouncement document from 2016 in the VeriFone Holdings, Inc. case, was that civil suits in Israel against dual-listed companies on the grounds of erroneous details in their reports should be clarified according to the foreign law’s liability rules.
The Ruling’s Implications
Despite previous case law, the ruling in the Ceragon case states that the application of liability rules pursuant to foreign law is not necessarily more lenient for Israeli dual-listed companies. The court found that the foreign law might actually be more stringent than the Israeli law. Furthermore, applying liability pursuant to the foreign law increases litigation costs for all parties and gives rise to complex legal questions pertaining to international jurisprudence.
In its ruling, the court stated that although the legislature sought to make it easier for Israeli (and foreign) companies to also register for trading on the Tel Aviv Stock Exchange, it does not rule out the application of Israeli law if at issue is a violation of law by a dual-listed corporation that reports according to the foreign law by virtue of the provisions of the dual-listing arrangement.
Basically, the court’s interpretation applies the liability rules under Israeli law to dual-listed companies, as well as the liability rules that apply to them by virtue of the foreign law. This position creates an anomaly. On the one hand, companies are reporting according to the foreign law’s reporting rules (which are not the same as under Israeli law), but, on the other hand, are also subject to the liability rules under Israeli law.
One potential outcome of this position is that registering for trading in the Israeli capital market will become less attractive, which is the opposite of the legislature’s intent.
Certainly, from now on, Israeli or foreign companies listed on stock exchanges in the United States and in England will think carefully before deciding to register for trading on the Tel Aviv Stock Exchange.