The Israeli Supreme Court ("Supreme Court") held that the test for liability for a public company's failure to file mandatory immediate reports is actual knowledge or willful disregard of the information required to be disclosed.
This case concerned a request for approval of a class action suit against a public company ("Company") and its officers in connection with a breach of the Company's obligation to file an immediate report. The applicants alleged that notwithstanding that the Company's directors and CEO had been aware of the Company's breach of a material agreement, they had not filed an immediate report disclosing such breach. The lower court had denied the applicants' request for a class action suit, and the present case was their appeal of that decision.
In its ruling, the Supreme Court held that the officers of a public company could be found liable for a breach of the company's statutory responsibility to file an immediate report when there was a finding of the officers' actual knowledge or willful disregard of the matter requiring disclosure. The Supreme Court noted that were the standard of willful disregard excluded, the reliability of immediate reports would be eroded, for corporate officers could deliberately fail to clarify facts to avoid having to report on unfavorable matters. The Supreme Court explained that this standard is necessary due to the purpose of immediate reports, which is to protect investors, maintain the efficiency of the capital market and corporate governance, and help prevent manipulation by corporate officers.
The Supreme Court held that the standard for liability for failure to file an immediate report is different from the liability standard for failure to file a periodic report, where officers could also be found liable if they failed to report an event due to negligence regarding their awareness of a situation. The Supreme Court refused to impose this negligence standard for a failure to file an immediate report, noting that the applicable regulation's language does not allow for such an interpretation and the short time frames involved. The Supreme Court further noted that applying a standard of negligence for the failure to file an immediate report would increase uncertainty and impair market efficiency, for a consequence of a negligence criterion for immediate reports would be companies flooding the market with worthless information.
The Supreme Court dismissed the appeal, holding that the applicant failed to meet its evidentiary burden of proving that the Company's directors and CEO knew about the relevant information that should have been reported or had willfully disregarded such information.
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