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Safe Harbor Defense Regarding Use of Inside Information

23.11.15 | 11:45  

Section 52 of the Israeli Securities Law- 1968 (the "Securities Law") prohibits forbidden use of inside information, as defined below, of companies whose securities are offered to the public, or traded on a stock exchange and are held by the public ("Insider Trading"). Underlying this prohibition is the principle of fairness and the desire to prevent parties with access to a Company or its information, from abusing their position in order to gain benefits, at the expense of the investors who do not have such access.

The Securities Law defines Inside Information as information regarding the company, which is unknown to the public and which, if was known to the public, would cause a significant change in the price of its securities, or of another security, which the securities of the Company are its fundamental asset ("Inside Information"). Such information can relate to a merger or acquisition, a significant commercial co-operation, legal proceeding against the Company, and so on. Insider Trading refer to situations where an Insider, as defined below, is involved in a transaction concerning the securities of the company, while he/she are in possession of Inside Information.

Both criminal and administrative sanctions, such as a fine of up to one million NIS or up to five years of imprisonment may be imposed on such use of Inside Information. In 2010, the Israel Securities Agency ("ISA") published a Staff Position Paper that defines a defense for companies that wish to adopt a Securities Buyback Plan ("Safe Harbor"). Safe Harbor was designed to address concerns related to Insider Trading when a company carries out a buy-back plan of its securities, even if such plan is being carried out for a legitimate economic cause. While Safe Harbor did not apply initially to Insider Trading by Insiders, this Staff Position Paper stated that the ISA intends to consider applying the plan to them in the future.

In 2014, the ISA presented the final version of legal position No. 101-18, regarding use of Inside Information while performing securities transactions by senior corporate officers, employees, principal shareholders, or any person whose position in the Company or business relations with it have granted him/her with access to Inside Information ("Insiders"). This Safe Harbor protects Insiders who wish to trade in the corporation’s securities, by reducing concerns of committing Insider Trading.

In order to enjoy the protection of Safe Harbor, an Insider who wishes to transact with the corporation’s securities must comply with the following cumulative provisions:

Specifying a written plan- the trader must specify a written plan for trading in securities while specifically stating the amount, price, and date of the securities transaction, or alternatively to provide a written formula or an algorithm which determine the amounts, prices and dates (the "Plan")

Irrevocability- The Plan should be irrevocable in so that the Insider would not be allowed to cancel, modify, suspend, or affect it after its adoption, with regard to the manner, timing, and execution of the transactions.

Timing of adoption and commencement of execution- The Insider must not have any Inside Information at the date the plan was adopted. Furthermore, three months period is required between the Plan adoption date and its execution date ("Blackout Period"). Such provision reduces concerns that the Plan commenced on a date at which the Insider or the Company possess inside information, since during the blackout period, the Company has to publish a periodic or an annual report, in which it is obliged to disclose any essential information, which if not be disclosed, might be considered as Inside Information.

Execution by an independent entity- The Plan must be executed by a TASE member or an independent investment portfolio manager. A measure taken in order to guaranty that the execution is independent of the Insider.

It is clarified that the above is only a summary review of the ISA's position. For further information and consultation on the subject, please contact Shavit, Bar-On, Gal-On, Tzin, Yagur Law firm.