Israel Securities Authority Declines Sanctions for Failure to Report Interested Party Status

Public companies in Israel are required to disclose material information to the public and act with full transparency in compliance with the law. Within this framework, anyone deemed a “substantial shareholder” must report to the company any change in status within a designated time frame, and the company must then report that change to the public.

The rationale is simple: the market must know who can influence the company and when an interested party’s status has changed.

Failure to comply with this reporting obligation may result in the imposition of a monetary sanction or an administrative penalty by the Israel Securities Authority (ISA) against corporations as well as against officers, directors, and shareholders.

The Case: Extraordinary Circumstances and the ISA’s Unusual Decision

Our firm accepted a case recently to represent a client who is a resident and citizen of the United States. The client received notice from the ISA of its intention to impose a monetary sanction (as part of its administrative enforcement powers) for a his failure to report that he had become a substantive shareholder in a public company for more than a year, in violation of the law.

The offender, who does not usually invest in Israel, mistakenly thought he was not obligated to report his holdings because he relied on American law. After realizing his mistake, he filed an immediate report in an attempt to rectify the omission.

Our firm presented a unique defense to the ISA, arguing not only that the violation stemmed from an honest mistake and not any attempt to conceal material information, but also presenting our client’s extraordinary personal circumstances. These included many years of significant public activism for the State of Israel and at-risk Jewish communities around the world, including fundraising for social and educational initiatives, rescuing Jewish heritage and cultural assets, promoting public projects, and protecting Jewish interests worldwide, particularly int he wake of October 7, 2023.

Our firm also emphasized that the imposition of a monetary sanction and the subsequent publicity would directly and significantly harm our client’s esteemed reputation, thereby adversely impacting his public and community activities. Considering these circumstances, we argued the damage caused by imposing the sanction would far outweigh the public benefit.

After examining the circumstances of the case and our firm’s arguments, the ISA accepted our position and decided to not impose any sanction, notwithstanding the finding of a de facto violation.

What Makes This Case Unique?

• The ISA’s decision to not impose a monetary sanction, notwithstanding the finding of a de facto violation, is, in itself, exceptional, particularly in a case involving the failure to report on becoming a substantial shareholder. In similar cases, pecuniary sanctions are usually the ISA’s key enforcement measure.
• Our defense strategy relied, in part, on our client’s enormous public contributions, rather than personal distress or economic circumstances, as is usually argued when seeking relief on the grounds of personal circumstances.
• This case demonstrates that the ISA exercises broad discretion if extraordinary circumstances exist, even in the face of a clear technical violation.

The Practical Implications

Investors should carefully examine, already at the investment or purchase stage, whether their status as an interested party has changed, even if the change is due to a “technical” event or a complex mechanism.

• If you have any doubts about a change in status, obtain legal advice immediately, as any delay could result in significant monetary sanctions. This case underscores how our in-depth legal expertise and extensive experience in the field enabled us to formulate both creative and strategic arguments and achieve a successful outcome for our client.
• If you discover a violation, filing an immediate report to rectify the omission may have a favorable impact on the ISA’s position.
• We recommend including an extensive presentation of personal and public circumstances in the defense arguments, since they also may have a favorable impact on the ISA’s exercise of discretion.

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Adv. Hadar Israeli is a partner in our firm’s White-Collar Department.

Barnea Jaffa Lande’s White-Collar Department brings unique experience and a sophisticated approach to white-collar issues, grounded in deep familiarity with the requirements of authorities in Israel and the United States, combined with legal and strategic creativity.