The ISA has approved an amendment, to the Securities Law Regulations, allowing companies making an offer of rights not to include in it shareholders residing outside Israel and entitled to aforesaid the rights, providing that in a company’s assessment said shareholders are subject to a foreign law in addition to the Israeli law; that, providing the exclusion does not violate the foreign law.
As part of the underwriting reform, approved in 2004, an addition was made to the Securities Law, stating: “an offer, made according to prospectus, of securities already registered or to be registered for trade on the stock exchange shall be made on terms that are equal to all; however, the Finance Minister is authorized to stipulate terms and circumstances under which provisions of this clause shall not apply, all or in part, vis-?-vis types of offers or purchasers …” The accepted interpretation of the expression “on terms that are equal to all” is that the offer shall be made to the public in Israel for the same price. Regulations that went into effect in 2007, as part of the underwriting reform, stipulate five exceptions – circumstances under which securities can be offered not as part of a uniform offer.
Recently, the ISA and the TASE had to examine a problem raised by an Israeli company, with foreign residents among its shareholders that wants to make an offer of rights to its shareholders and which, according to the existing legislation, might have to issue a prospectus for the corresponding offer of rights in the countries where its foreign shareholders reside.
In the past, it was a dual-listed company, but it had discontinued its dual listing and is now traded only on the TASE. Some of its shareholders are foreign residents.
According to the Securities Law in a foreign country there is an exemption from prospectus publication, stipulating that a company that issues rights, while not incorporated in the country, is authorized to offer its securities to local investors subject to certain conditions, mainly – holdings of shareholders in the same country shall not exceed 10% of all public holdings. However, the company in question does not answer the aforesaid criteria, since total holdings of shareholders in the same country exceed 10% of all public holdings. The company claims that it can not guarantee that the rights will not be purchased by investors in a foreign country, thus the offer of right to all shareholders means the offer of rights to shareholders in a foreign country, which does not come under the exemption and requires prospectus publication. This requirement has wide implications, both in terms of costs and exposure to additional supervision.
The offer by way of rights is a common tool used by companies for raising capital. As far as the shareholders are concerned, the offer of rights is preferable to the issuance of shares, since it preserves their existing rate of holdings. It is also preferable to a private offer, since it doesn’t discriminate between shareholders, and the securities issued according to it are not blocked. Thus, additional regulatory burden of foreign legislation, impeding the issue of rights, means closing one of the most effective ways for raising capital. Furthermore, during the last years, foreign investors play a very important role on the local capital market – activity that doesn’t require further elaboration regarding its importance. In fact, currently existing legal situation does not correspond with the aspiration to encourage foreign investors to continue investing in Israeli companies.
This was the main reason for the ISA’s initiative to amend the law and to allow companies to deviate from equality requirements at the time of issuing rights, which burden companies as a result of holdings held by foreign investors and the regulatory requirements of foreign counties. The ISA’s position is that foreign regulation becomes a burden when the issuance of right in Israel is perceived as the issue of rights in a foreign country and requires prospectus publication.
The proposed amendment intends to resolve this problem that might seriously impede capital raising efforts of Israeli companies as well as prevent foreign investors from further investing in the Israeli capital market. The amendment proposes solutions customary accepted in other countries (England, Holland) and benefits foreign shareholders, by comparison to English and Dutch legislation, by stipulating that a company shall compensate foreign shareholders through equal compensation, representing fair value of rights and the lack of opportunity to realize them; thus equating their financial situation to the one they might have achieved by acquiring the aforesaid rights.
The ISA decision allows the company to exclude foreign shareholders from the offer of rights under the following terms:
1. Company’s general meeting approved the company’s right to exclude foreign shareholders from the offer of rights, any time the rights are offered, by a 75% majority from the total value represented at the meeting, excluding abstainers;
2. Company’s shares are traded on the stock exchange;
3. In company’s opinion the offer by way of rights requires the issue of a prospectus (or its equivalent) in a foreign country;
4. With the offer of rights to eligible shareholders, or shortly after that, the company shall compensate foreign shareholders by equal compensation and in the amount stipulated by the company’s auditing committee and the Board of Directors, representing fair compensation by comparison to the one they might have achieved by acquiring the aforesaid rights.
5. Stipulation that the aforesaid compensation represents fair value of the offered rights shall be supported by professional opinion of an independent valuator.
6. At the time of publishing a prospectus, regarding the offer of rights, the company shall publish an immediate report in English and in Hebrew (where the Hebrew language report will be translation of convenience) announcing the exclusion of foreign shareholders and describing the compensation mechanism, the approval process, arguments put forth by the Board and the Auditing Committee for the aforesaid compensation. This immediate report shall be distributed to eligible shareholders in the way voting letters are distributed.
7. Holding rates of foreign shareholders constitute less then 15% of the shares issued and repaid by the company or its voting rights. For this purpose, convertible securities, carrying the right of vote, shall be perceived as realized.
The amendment has been published on the ISA site for public comments