Precedent Signals to IPO Companies: Don’t Sell Illusions to Institutional Investors
Institutional investors in Israel are considered the strongest players in the capital market, a result of the enormous volume of assets they manage, totaling 4 trillion shekels. But a precedent-setting ruling by the economic court now says that companies making their first public offering on the stock exchange, and conducting a fundraising road show among institutions as part of it, must treat those bodies exactly like any other investor, without assuming that the institutions will know how to protect themselves better than “regular” investors, and without selling them illusions. ● Exclusive | The fight escalates: At El Al they accuse Cal of “consumer fraud” ● The lawsuit against the directors was dismissed, and the businessman will pay legal costs of 3 million shekels
The precedent arises from a decision handed down last week by Judge Magen Altovia of the Tel Aviv Economic Court, when he approved the handling of a class action lawsuit against Tamar Petroleum, which at the time was a subsidiary of Delek Drilling, now NewMed Energy. The lawsuit was filed by investors who took part in Tamar Petroleum’s 2017 offering, and focused on a marketing move the company used to sell the shares to institutional bodies and qualified investors, that is, eligible investors with substantial capital and investment expertise.
In a marketing document that Tamar Petroleum distributed among these investors, it detailed the dividends it expected to distribute through the end of 2021, stating that they would amount to a cumulative total of 216 million dollars. The plaintiffs argued that this forecast was a central factor in their decision to participate in the offering, but that it was misleading, because the company was missing more than 48 million dollars to meet the forecast due to a reserve cushion it had set aside for bondholders, and its managers knew or should have known this already when they distributed the document to investors.
The investors also claimed that the company worked to conceal the dividend information from the Israel Securities Authority, and did not include the marketing document in the official prospectus for the offering, even though the investors who saw it had already viewed it as part of the information that led them to buy shares.
Not a commitment, only a forecast Tamar Petroleum, for its part, explained that this was not a commitment to distribute dividends but only a future forecast. It added that there is no legal requirement to include a marketing document in the prospectus, and that these were experienced and sophisticated investors who were supposed to analyze the information themselves.
Key points of Judge Altovia’s decision 1. The Economic Court approved a class action lawsuit against Tamar Petroleum over a misleading detail in the 2017 offering 2. The forecast of 216 million dollars in dividend distributions was not considered a commitment to distribute, but there is a reasonable possibility of misleading conduct 3. The duty to disclose all information and the prohibition on including a misleading detail apply not only to a prospectus for the public but also to marketing materials for institutional investors
In deciding to approve the lawsuit as a class action, Altovia accepted the company’s argument that this was not a commitment to pay a dividend, but ruled that there is a reasonable possibility the claim will succeed, based on the argument that the marketing document is prima facie evidence of a misleading detail. In response to the decision, Tamar Petroleum stressed that this was a “business risk undertaken by sophisticated investors,” but clarified that the parties would examine turning to dialogue or mediation.
Meanwhile, Altovia’s decision creates a precedent that could have a dramatic effect on stock exchange offerings. The institutional stage, in which the issuing company first approaches institutions, is a critical stage in many initial public offerings, IPOs. Companies entering the market may sell up to 80 percent of the shares to institutions at this stage. The significance of the decision is therefore that the protections provided by the Securities Law to “regular” investors in an offering also apply to institutions and to the presentations and marketing materials they receive.
“Emptying disclosure of content”
The court came out against the attempt to market to institutions estimates and amounts that do not meet the law’s rules. “Such an outcome would empty the duty of proper disclosure of content, allow systematic circumvention of the official reporting system, and harm public trust in the capital market and the certainty of trading in it,” Altovia wrote.
He stressed that the approach to institutions can indeed be carried out differently than it is for the general public, and some flexibility is allowed on this issue, but the duty to disclose the full information, and the prohibition on including a misleading detail, also apply to information given in a road show. Otherwise, Altovia emphasized, the institutions would not believe the companies and would not participate in offerings.
Altovia also expressed understanding for the investors’ argument that they would not have been able to go through the 640 pages of Tamar Petroleum’s prospectus, and therefore allowed themselves to rely only on summaries and presentations, but he found merit in the company’s claim that the prospectus is ultimately what determines matters, and that the institutions were referred to it. The judge noted that in the future it may be possible to use AI to compare the materials.
“A milestone compared with the current situation”
Attorney and CPA Eyal Neiger, a capital markets partner at Pearl Cohen who previously served as a member of the Securities Authority’s Administrative Enforcement Committee, calls Altovia’s decision “a milestone compared with the existing legislation and case law, which until now assumed that institutions do not require protection because they are sophisticated investors.” According to him, the change in direction by the court may stem from the fact that this was an event that took place in a “prospectus environment,” meaning an offering in which publication to the public of every material detail, prevention of information gaps, and responsibility for information are emphasized.
Attorney Moti Yamin, former head of the Corporations Department at the Securities Authority and now a partner and head of the capital markets and securities department at the firm Ardens, Ben Nathan, Toledano, agrees that Altovia’s decision is precedent-setting. “The decision makes sense to me, and I think it also aligns with the trend the authority is promoting in its publications, according to which marketing materials in a road show must be based on the disclosure in the prospectus.”
Yamin adds that “the very fact that there is a gap between documents for institutions and the prospectus is problematic in itself, so releasing companies from responsibility for disclosure in road show documents could be problematic.” According to him, it may have been preferable to impose legal liability on a company that includes a misleading detail in any document it distributes ahead of the offering, even if it is not a prospectus but materials used in a road show.
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