On 28 February 2019, the Israel Securities Authority (the "ISA") published position paper no. 101-22, regarding reporting obligations with respect to shares that are the underlying assets in Swap transactions (the "Position Paper"). This Position Paper cancels the previous ISA position with respect to minimum public holding requirements.
Pursuant to the Position Paper, swap transactions are defined and described as transactions that separate between the exposure to the variable yield of the underlying shares, and the other rights attached to such shares, for the duration of the transaction. At the end of such swap transactions, there would be a financial settlement between the parties to the transaction in respect of the yield differentials of the underlying shares ("Swap Transactions").
According to the Position Paper, in some cases, a Swap Transaction involves a purchase or sale of shares (as the case may be), which constitutes an integral part of the Swap Transaction. Under this structure, the originator sells the shares held by it, through a financial institution acting as an intermediary, to a third party which is unrelated to the seller. The sale of the shares is characterised as a true sale transaction with no recourse to the seller, in return for a purchase price, that is paid by the intermediary to the seller. At the termination date of the Swap Transaction, the shares are to be sold and a cash settlement will occur.
Generally, according to the Position Paper, the result of such Swap Transaction structure, is that the listed shareholder is indifferent to the performance of the underlying shares because at the termination of the transaction, such shareholder is usually obliged to sell the shares without having any exposure to the variable yield resulting from the sale. As a consequence, according to the Position Paper the party holding the shares appears to have no economic incentive to realise the rights conferred upon it, and in particular the voting rights that are attached to the shares.
In light of the above, the ISA examined the question of how to relate to the "holding" of the shares that are the underlying of the Swap Transaction during the terms of the Swap Transaction, and in particular how the identity of the "holder" of the shares during this period will be determined (as such terms are defined in the Securities Law 5728-1968 (the "Securities Law")). Implications of the determination who is the holder of the shares, include reporting obligations with respect to such shares and the classification of an interested party, as well as the determination of minimum public holdings for the purpose of a corporation being included or removed from the Tel Aviv Stock Exchange indices and preservation list.
In accordance with the Position Paper, in Swap Transactions, or similar transactions, as a general rule, each of the parties to the transaction (other than the financial institution acting as an intermediary) should be regarded as "holding" the shares that are the underlying of the Swap Transaction and should be regarded as "holding together" such shares, in accordance with the meaning of such terms under the Securities Law. The Position Paper came into effect on the date of its publication – February 28, 2019 and will also apply to the renewal of Swap Transactions that were originally entered into prior to the publication of the Position Paper.
In addition to the Position Paper, full disclosure is already required now with respect to details of existing Swap Transactions including the percentage of the relevant company's shares, that are the underlying asset of the Swap Transaction, as well as the terms of the transaction.
In light of the impact of the Position Paper, we are holding discussions with the ISA and will continue to update.
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