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Small Corporations shall be exempted from submission of Quarterly Reports

08.08.16 | 08:46  

In April, 2016, the Israel Securities Authority (the "ISA") approved a draft legislation, not yet in force, which will exempt "Small Corporations", as defined in Section 5c to the Securities Regulations (Periodic and Immediate Reports), 1970, from the requirement to submit quarterly reports for the first and third quarters.

This exemption is another step in ISA's efforts to relieve the regulatory burden on Small Corporations whose shares are traded on the Tel Aviv Stock Exchange ("TASE"). This easement is intended to help Small Corporations in reducing the costs of preparing and publishing their periodic reports, a relief which will eventually be beneficial also for the investors.

The entry into force of this exemption will place TASE alongside many other stock exchanges throughout Europe, where the financial reports are submitted on a semi-annual basis. Furthermore, it has recently become known that the US Securities and Exchange Commission (SEC) is currently examining the possibility of applying a similar exemption also upon corporations whose shares are traded in the US stock exchange.

This exemption applies only to Small Corporations that issued or which will issue shares or units of public participation, but not to corporations that issued or will issue debt certificates (that are still in circulation).

It seems that the main reason for this distinction is that applying this exemption upon companies that issued debt certificates will unreasonably harm the ability of debt certificate holders to examine the current financial situation of the corporation, as opposed to shareholders, who are entitled by law to receive such information upon request. Furthermore, this distinction will aggravate the imbalance between private debt certificates holders and financial entities that finance the corporation's operations, since the latters are more frequently exposed to financial information and do not rely only on the periodic reports.

It is proposed that this exemption will be the default reporting requirement for all Small Corporations. In other words, Small Corporations shall be entitled to submit their financial reports in accordance with this exemption without the need to take a resolution by the Board of Directors on this matter. Nevertheless, each Small Corporation shall have discretion to decide whether to continue to submit periodic reports on a quarterly basis, as it has been done so far. The ISA believes it is appropriate that all Small Corporations which are entitled to apply this exemption will submit an immediate report regarding its implementation.

ISA rejected proposals for alternative quarterly reports, such as a Quarterly Highlights Report, the purpose of which is to briefly convey material financial information, or a report similar to a Press Release, as seen mainly in the US stock exchange. It was argued that the implementation of these alternatives may result in harming the goals which this exemption seeks to achieve.

Once this exemption enters into force, shares and participation units of all Small Corporations shall be sorted into two separate reporting lists – one for corporations reporting their financial reports on a semi-annual basis, and another for corporations reporting on a quarterly basis.

The final draft of this exemption and the date of its entrance into force has not yet been determined. The above does not constitute legal advice or a substitute for legal advice.

For more information or advice on this matter, please contact Shavit Bar-On Gal-On Tzin Witkon Law Offices.