ISA: Expanding Disclosure on Independent Committees
The Israel Securities Authority (ISA) will soon require public companies to disclose details about independent committees tasked with overseeing transactions with controlling shareholders. The staff position, published in late October, was put together due to the increased need for supervision and oversight of decision-making processes in transactions between public companies and their controlling shareholders. This is a result of the prevalence of such transactions in Israel and with the goal of eradicating conflicts of interest (through a market mimicking process). This will help ensure no harm comes to the public shareholders.
One of the mechanisms that could assist in the supervision and oversight of transactions with controlling shareholders is the establishment of an independent committees. The role of these committees is to examine such transactions, inter alia, by negotiating with the controlling shareholder and examining alternatives to the transaction.
The ISA determined that in the summons to a general assembly meeting for approval of a transaction with a controlling shareholder, when the terms of which were set based on the work of a special independent committee, it is necessary to publish a disclosure, as follows:
- The composition of the committee and its powers:
- The committee members’ identities, and if they are not company officers, their names, education, current occupations, and occupations in the previous five years;
- If any of the committee members had a personal interest in the transaction, including a different link to the company, the controlling shareholder, or a party to the transaction, and the nature of that interest; and
- The committee’s powers, including the body that decided to establish the committee and provided its powers, if the committee had authority to explore alternatives to the proposed transactions, and if it had authority to select and hire separate consultants.
- The process performed by the special committee:
- A description of the significant actions taken by the committee, and the period of time during which it was active;
- The identity of consultants or other service providers that assisted it in its work, including if any of them had a personal interest in the transaction, including a different link to the company, the controlling shareholder, or a party to the transaction, and the nature of that interest;
- The type of material information and data the committee used in its work, including professional opinions submitted to it;
- The significant alternatives examined for the proposed transaction, including their nature and the reasons why the committee chose the relevant alternative, and if no alternatives were examined by the committee, its reasons for this;
- A concise description of the arrangements set by the committee (or the company) to ensure the independence of its work, as well as to ensure the controlling shareholders relevant to the transaction were not involved in the committee’s deliberations, the information presented to it, or its decisions.
- The committee’s recommendations: details of the committee’s recommendations and their reasoning, as well as the reasons given by opposing committee members, if any.
We note Judge (Ret.) Dania Keret-Meir first acknowledged the importance of establishing independent committees almost a decade ago, in the Makhteshim Agan case. Her decision held that “critical” transactions (in that case, a “Going Private” transaction) made by public companies with their controlling parties should be examined by the court according to a strict standard of “Full Fairness.” This therefore would require a special independent committee to conduct a negotiation process. The independent committee’s examination joins the “triple approval” required under section 275 of the Companies Law (supervising committee, directorate, and majority of minority shareholders.)
However, case law also reflects different approaches to the importance of independent committees. For example, in the Israeli Supreme Court decision in Verdnikov v. Elovitch, Justice Yitzhak Amit wrote in a way that some might interpret as having reservations with the conclusions of the Machteshim Agan decision. Justice Amit held that a court should review a transaction that withstood the triple approval mechanism only in “extraordinary cases.” This seemingly eliminates the need to establish a special independent committee to approve “critical” transactions with a controlling shareholder.
This relates to Case 4000 (the Bezeq-Walla affair), which alleges Israeli Prime Minister Benjamin Netanyahu took a bribe from Bezeq controlling shareholder Shaul Elovitch. Case 4000 originated in an examination of the activity of independent committees established by Bezeq to represent it in an effective negotiation with Elovitch. The ISA opened a criminal investigation based on the suspicion that information from the independent committees was being leaked to Elovitch, enabling him to tip the scale in his favor in two Bezeq transactions. (The first was a transaction to purchase Elovitch’s shares in Yes, and the second was the signing of an agreement to extend the purchase of satellite broadcasting segments from Space Communication Ltd., a company Elovitch controls.)
Judge Ruth Ronen of the Tel Aviv District Court (Economics Department) recently set a new precedent. Her decision addressed an application for certification of a class action suit filed due to the merger transaction between Osem and Nestle. As part of the merger, Nestle purchased all of Osem’s public shares (despite already being Osem’s controlling shareholder). As a result, Osem became a private company.
The decision held that when an independent committee formulates a transaction between a company and its controlling shareholder, after conducting an effective and impartial negotiation of the transaction, the court shall apply the Business Judgment Rule (BJR). In other words, the court shall practice great restraint in the course of its judicial review over the outcome of the transaction. Judge Ronen emphasized the importance of disclosing to the investing public how the committee determined the consideration (in this case, the value of the shares) in the transaction with the controlling shareholder. On the other hand, Judge Ronen attributed less significance to disclosures regarding the committee’s work processes. Ultimately, the application for certification failed and the Supreme Court will soon review Judge Ronen’s ruling in appeal.
As opposed to Judge Ronen’s approach to disclosures of the committee’s work processes, the ISA’s staff position states that in the summons to the general assembly meeting for the transaction’s approval, the company must provide expanded disclosure on the committee’s members, its powers, the process it ran, and its recommendations. This will serve, inter alia, as assistance to shareholders in reaching their decision on the transaction.
In light of the differing opinions between the court and the ISA on the need for independent committees to disclose work processes, it will be interesting to follow public companies’ future activity in this regard.