In a precedent-setting ruling handed down recently in the Tel Aviv District Court [1] , a motion to certify an action as a class action, which was filed against Tower Semiconductor Ltd. and its officers, was dismissed in limine based on the rationale that US law applies to the company in relation to the matter of liability, since Tower is also listed for trading in the United States.

The motion alleged that Tower and its officers had misled investors by artificially improving the company’s financial statements. The petitioners sought to apply Israeli law as it pertains to the matter of liability of Tower’s reports (including its financial statements).

Tower is a dual-listed company whose securities are traded both on NASDAQ and on the Tel Aviv Stock Exchange (TASE) by virtue of the dual-listing arrangement anchored in the Israel Securities Law. Unlike a company that is traded only on the TASE, as a dual-listing company, Tower prepares its financial statements in conformity with U.S. accounting standards and in conformity with the reporting regulations of the U.S. Securities Exchange Commission (SEC). Tower is also subject to auditing by supervisory bodies in the United States. The Israel Securities Authority does not independently examine its financial statements, instead relying on the supervision of the United States.

The court deliberated the question of which law applies to dual-listed companies in relation to the matter of liability in the event of a breach of the ongoing reporting obligation, and whether the mere existence of a number of different securities, some of which are traded in Israel, affects the application of the relevant law. By doing so, the court essentially deliberated on the purpose of the dual-listing arrangement.

The court ruled that the interpretation whereby Israeli law should be applied to the matter of liability within the framework of the dual-listing arrangement runs contrary to the objective of this arrangement, which was designed to reduce the burden on dual-listed companies. According to the court, separating between reporting principles and liability principles is artificial and completely illogical. Therefore, the allegations concerning liability should be clarified through the application of the foreign law, which both the Israeli legislative authority and the Israel Securities Authority deemed as providing adequate protection.

The court also referred to Justice Ruth Ronen’s judgement in Mannkind case from October 2017 [2]. Justice Ronen ruled that it is not warranted to apply the Israel liability principles to dual-listed companies in lieu of the reporting principles of the foreign law, and that the preferable interpretation prescribes that the liability principles of the foreign law apply to the reporting principles under that same law.

The District Court’s judgement in this case constitutes a precedent that may affect dual-listed companies traded in Israel and abroad. It will also likely provide legal certainty with respect to the applicable law in similar cases.