The number of Israeli companies warning of the effect of the government’s overhaul of the judicial system is growing. Israeli companies traded in New York are currently filing their full annual reports, in which they survey potential risks to investors buying their stock.
Almost every Israeli technology company has included among the risks the reforms in the legal system that the Israeli government is advancing.
Among companies that did so last week are cybersecurity company CyberArk, which has a $6.2 billion market cap on Nasdaq; Nova Measuring Systems, which produces inspection equipment for the semiconductor industry, and is traded on Nasdaq and on the Tel Aviv Stock Exchange at a market cap of $2.7 billion; and digital insurance company Lemonade, which has a $1.1 billion market cap on the New York Stock Exchange. Several other companies traded at lower values also reported the risk.
These companies were preceded by three others that filed their reports earlier and included the judicial system overhaul among the risks to investors: solar energy equipment company SolarEdge; geothermal energy company Ormat; and online fraud prevention solutions company Riskified.
Some make no mention
Almost all the companies report the risk arising from the judicial system overhaul as one of the risks of operating in Israel, which also include the possibility of boycotts and of hostilities, and even the fact that employees do reserve duty in the army.
For example, in its Form 20-F filed with the US Securities and Exchange Commission on March 2, under the heading "Risks Relating to Our Incorporation and Location in Israel", CyberArk states: "Furthermore, the Israeli government has recently been pursuing legislative changes which, if adopted, will alter the current state of separation of powers among the three branches of government and, as a result, have sparked a considerable political debate. Many individuals, organizations and institutions, within and outside of Israel, have voiced concerns over the potential negative impacts of such changes and the controversy surrounding them on the business and financial environment in Israel. Such negative impacts may include, among others, a downgrade in Israel’s sovereign credit rating, increased interest rates, currency fluctuations, inflation, civil unrest and volatility in securities markets, which could adversely affect the conditions in which we operate and potentially deter foreign investors and organizations from investing or transacting business in Israel. If any of the foregoing risks were to materialize, it may have an adverse effect on our business, our results of operations and our ability to raise additional funds."
Not every Israeli company has seen fit to comment on the matter in its reports. Fertilizers company ICL (Israel Chemicals), for example, has not, and most of the major Israeli companies traded on Wall Street have yet to file their full reports for 2022, and will do so only over the next few weeks. Among these are Mobileye, Check Point, and Nice Systems.
"Don’t warn automatically"
Companies decide whether to include the judicial system overhaul among the risks they face after consulting legal counsel. Adv. Ron Ben-Menachem, a partner in Herzog, Fox & Neeman’s Corporate and Capital Markets Department, who represents Israeli companies traded in New York, says, "Clients have indeed asked us whether they should include reference to the legal reform in reporting risk factors. It has to be understood that the risk factors in the reports of a company traded in the US are actually an insurance policy. The detailing of risk factors in reports, such as the annual report, is intended to prevent claims against the company by investors, as though we have not disclosed the risk to them and did not warn them.
"Our advice to those clients is not to include this disclosure automatically. The company’s management has to consider the matter and estimate whether the proposed changes in the legal system, or the reactions to the proposed changes, could affect the company’s business or its financial results.
"For example: if the company is about to raise debt from investors, and it fears that they will be deterred from the loan because of what is happening in Israel and the media coverage, then that really is a relevant risk, because the company might not succeed in raising the debt, or may have to raise debt from another source that might be more expensive. A further example is an Israeli company with sales overseas that is affected by exchange rates."
Ben-Menachem says that the analysis is no different from that of any risk factor, so that "if in the view of the company’s management there is a reasonable fear that the change could adversely affect the company’s activity or its financial results, then comment on it should be included in reports."
Published by Globes, Israel business news - en.globes.co.il - on March 6, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.