During a hearing in which the applicants requested permission to
file a class action suit against the directors and officers of a
public company ("Company"), the District Court of Tel
Aviv (Economic Division) ("Court") discussed public
company reporting obligations in the context of a proposed sale of
In the present case, the Company had been negotiating with a
potential buyer ("Potential Buyer") of 75% of the
Company's shares from an existing controlling shareholder for a
transaction price of approximately $125 million. During the
negotiations, which ultimately failed, the Company disclosed
certain information to the potential buyer that was not disclosed
to the general public in the Company's obligatory public
reporting, including information concerning possible tax exposure.
The applicants maintained that this information should also have
been disclosed to shareholders.
The Court held that information required to be released to
shareholders in the framework of a public company's reporting
obligations is not necessarily identical to the information
disclosed during negotiations in connection with a specific
transaction involving the company. Reporting requirements are set
forth in the Israeli Securities Law, in the Reporting Regulations,
and in the rules and case law of the Securities Authority.
Disclosure rules for negotiations arise from agreements between the
parties as well as general rules regarding the management of
negotiations, such as the obligation to negotiate in good
The Court explained that differences between public disclosure
and transactional disclosure arise from the relevant parties'
ability to digest, process and understand information, as well as
from the monetary interest at stake.
For instance, a potential buyer of a controlling interest in a
public company would presumably investigate all corporate data
available. Due diligence on this scale is costly but reasonable,
considering the nature of the intended transaction. Specifically,
in the case at hand, the potential buyer was sophisticated and
capable of not only analyzing all of the information provided to it
by the Company, but also of understanding the relative quality and
significance of each piece of data.
In contrast, the reference point with respect to the typical
public shareholder is that of the "reasonable" investor,
rather than a "sophisticated" investor. The Court
indicated that as typically a reasonable investor does not have the
ability or resources to analyze large quantities of data, flooding
such a shareholder with enormous amounts of information might
reasonably lead to confusion and run counter to the purpose of
public company disclosure obligations. Therefore, public companies
have an obligation to filter information provided to public
investors so that material information, rather than all
information, is provided to them.
In light of the above, the Court held that the mere fact that
the Company provided certain information during negotiations to the
Potential Buyer was insufficient to establish that such same
information should also have been generally provided to all
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The Provisions of the Companies and Allied Matters Act (CAMA) and a Company's Article of Association ("Articles") provides for the transfer and transmission of shares of the shareholders of the Company.
One of the most significant issues in the capital raising process relates to the identity and character of the potential investors.
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