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Israeli Corporate and Securities Law Updates

MARCH 2011

Financial Court in Israel

Commencing December 15, 2010, a Financial Court has been operating in Israel as the financial department of the District Court in Tel-Aviv. The Financial Court was established according to the Courts Law (Amendment no. 59), 2010 and was founded at the inspiration of the ״Court of Chancery״ operating for many years in the State of Delaware in the U.S., which deals largely with corporate issues and is responsible for developing the case law on corporate matters.

The goal of the Financial Court is to provide a specialized tribunal for financial cases, both civil and criminal, which will be decided by a team of three financial-oriented judges nominated by the President of the Supreme Court, in consultation with the Presidents of the District Courts. The appointed judges will sit for a term of four years.

The Financial Court focuses mainly on financial cases arising from both Israeli securities laws and the Israel Companies Law, and it has exclusive jurisdiction in the following matters: indictments regarding offenses under the Securities Law, most civil cases regarding the Companies Law and the Securities Law, including derivative claims and class actions, administrative appeals against the Israel Securities Authority, the Tel Aviv Stock Exchange and the Registrar of Companies, and appeals on resolutions of the discipline committee under the Investment Advisors Law, 1995.

However, the Financial Court will not have jurisdiction in the following matters: compromise procedures, procedures regarding companies for the public good, financial matters in Family Law, piercing the corporate veil matters and appeals of a court registrar’s resolution regarding fines.

Enhancement of Internal Control Over Financial Reporting – New Securities regulations

Pursuant to an amendment to the Securities Regulations (Periodic and Immediate Statements), 1970 (the “Regulations”) published on December 24, 2009, the majority of the Israeli public companies are now required to include in their annual and quarterly reports a report regarding the assessment by the board of directors and by management of the effectiveness of the company’s internal control over financial reporting and by the disclosure effectiveness, similar to certain provisions in the U.S. Sarbanes-Oxley Act of 2002. This requirement begins with the annual report for 2010.

The purpose of the amendment is to improve the quality of financial reporting and disclosure through improvement of the efficiency of internal control and enhancement of managements’ commitment to achieve this purpose.

The report on internal control effectiveness must be set in the form attached as a schedule to the Regulations and include: (a) an external auditors’ report with an opinion regarding the corporation’s internal control effectiveness; (b) a signed statement of the corporation’s CEO; and (c) a signed statement of the most senior officer in the corporation’s finance department.

The report on internal control effectiveness must state, among others, whether the internal control on the financial reporting and disclosure is effective or not due to a “material weakness” that was discovered and specified in the report. In addition, the report may refer to significant deficiencies that were discovered and are not considered to be a “material weakness”.

If a disclosure on a “material weakness” was first provided in the annual report on internal control effectiveness, and the “material weakness” is not rectified until the publication of the following annual report, the company’s periodical reports from the date of that report until the rectification of the “material weakness” will be considered as not in accordance with applicable law. A similar provision also exists regarding a “material weakness” first disclosed in the company’s quarterly report, which is not rectified within the time frame specified in the Regulations.

Amendment to Securities Law Grants to Israeli Securities Authority Power to Administratively Enforce Securities Law

On January 17, 2011, the Knesset passed the Efficiency of Enforcement Procedures in the Securities Authority Act (legislation amendments), 5771-2011. The purpose of the amendment is to make the enforcement by the Israel Securities Authority of the laws regulating the Israeli capital market more efficient. The new enforcement tools granted to the Israel Securities Authority will apply to the Israeli Securities Law, 5728-1968, the Law of Regulating Engagement in Investment Advice, Investment Marketing and Investments Portfolio Management, 5755-1995 (the “Investments Consulting Law”) and the Joint Trusts Investments Act, 5754-1994 (collectively the “Laws”), by shortening the time between a breach of the Laws and the imposition of a punishment on the violator and by adjusting the severity of the punishment to the significance of the degree of the violation.

The main innovation of the amendment is the establishment by the Israel Securities Authority of a procedure for administrative enforcement through a special “Administrative Enforcement Committee” (the “Committee”), which is to investigate breaches of the Laws and, if required, takes enforcement actions. The Committee’s discussions are not adversarial, and the Committee may summon witnesses to appear. The required level of proof for imposing enforcement means is the same as is required in civil law (more than 50%).

Below are the administrative enforcement means available to the Committee:

Monetary sanctions on individuals and on companies (up to a maximum amount) (“Monetary Sanctions”), while prohibiting companies from granting indemnification or insurance for payments made as a result of the administrative enforcement procedure (with certain exceptions).

Payment to victims of the violation, up to some specified percentages of the Monetary Sanctions.

Prohibition on the violator to act as a senior office holder for one year in one of the entities detailed in the amendment (the court has the authority to extend the service prohibition period to five years).

Conditioning the grant of permits for managing trading in financial instruments, permits according to the Investments Consulting Law, permits to act as a fund manager or trustee, permits to hold control means in a fund manager given under the Joint Trust’s Investments Act or active position as registrar in the underwriters register - for up to a year.

The amendment determines that the Chief Executive Officer of a company and a partner (except for a limited partner) must supervise the company’s (or partnership’s) activities and take reasonable actions in order to prevent breaches by the company or by any of its employees.

The amendment also grants authority to the Securities Authority to impose Monetary Sanctions in an accelerated procedure by providing written notice to the violator based on a “reasonable basis to assume that a breach was committed”, in which case there is no requirement for action by a Committee.