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Dual-Listed Companies – a Fly in the Ointment

Dual listing

Knowing who to divorce is as important as knowing who to marry – that is a common phrase we all know. The latest ruling of the Israel Securities Authority’s Administrative Enforcement Committee on formerly dual-listed company Gadsden Properties Inc. shows this rule also applies in the legal sphere.


The Dual Listing Arrangement



Gadsden (formerly known as FC Global) was incorporated in the United States and listed on the NASDAQ. In 2012, the company was listed on the Tel Aviv Stock Exchange (TASE), thus becoming a dual-listed company. Initially, the dual registration arrangement was intended to encourage Israeli companies already listed for trading on foreign stock exchanges to register for trading in Israel and prevent the “migration” of those companies whose base is already located in Israel. In those years, the number of companies listed on the TASE was limited, and the trading volume was low. Thus, both the TASE and the Israel Securities Authority (ISA) had a strong interest in increasing the number of listed companies on the stock exchange through the dual listing arrangement to attract Israeli and foreign investors.


Over time, the TASE’s and the ISA’s appetite increased. They extended the arrangement to corporations with no link to Israel that incorporated overseas and were traded on different stock exchanges worldwide, yet who wanted to list their shares for trade in Israel. The dual listing arrangement stipulates that a foreign corporation that chooses to trade on the Israeli exchange does not have an obligation to report under Israeli law. The corporation must only meet the duty to report in the country of origin where it is traded. It must then submit copies of the reports published overseas to the Israeli exchange.


For Gadsden, a small company with low-volume trade at the time, the temptation to increase the trading volume of its shares with little effort and minimal resources was strong. Thus, Gadsden opted for trading on the Israeli exchange and bound its fate and future with the Israeli investors and regulators.


End of the Affair



Sadly, in Gadsden’s case, the promise of a glorious future did not come to pass. The company faced difficulties, announcing the delisting of its shares from the NASDAQ. Trading in them would move to the OTC (over-the-counter) market. The problem was that the dual listing arrangement did not apply to the OTC market. After a six-month adjustment period, Gadsden’s honeymoon in Israel ended. It no longer enjoyed exemptions and had to meet the full duty to report under Israeli law.


Yet Gadsden seemed to have other plans (and probably even more significant problems). The company closed off all contact with the Israeli exchange, did not transfer reports to investors, ignored the ISA’s appeals, and disengaged with its Israeli representative. The ISA’s attempts to contact the company were in vain, leading it to swiftly launch an administrative enforcement proceeding. Eventually, the Israeli exchange delisted the Gadsden securities, and the company’s investors lost everything.


The company remained silent and uncooperative during the administrative proceeding and did not submit a defense to the administrative pleading. In the absence of a defense, the Administrative Enforcement Committee accepted the ISA’s claims in full. It imposed an ILS 1,000,000 fine, a massive amount for an administrative enforcement proceeding and a company as small as Gadsden.


New Markets – Temptations and Risks



In this case, everyone lost. The ISA would do well to check its considerations in allowing Gadsden under the dual listing arrangement in the first place. Gadsden had no link to Israel, so it is unsurprising that as soon as things took a turn for the worse, it no longer had any reason or desire to continue playing according to Israel’s rules. Yes, the Administrative Enforcement Committee imposed an ILS 1 million fine, but Gadsden is unlikely ever to pay this amount. The Israeli investors in the company lost as well. The Israeli exchange delisted their investment and they discovered the Israeli regulator could not effectively protect them.


Gadsden’s conduct, in this case, was clumsy and thoughtless. The company or its successors (whose shelf corporation was sold) could face the dire consequences of Gadsden’s actions one day. This affair can teach our customers an important lesson. When venturing into new markets and submitting to foreign regulation, do not be tempted by the immediate benefits promised. Rather, understand the consequences fully and plan a comprehensive legal strategy to address the rewards and risks under the relevant regulation.


Adv. Eran Elharar is an associate in the Capital Markets Department, specializing in the field of enforcement and white collar.

For any additional questions, Barnea law firm is at your service.



Tags: dual listing | TASE