Common use of Improvement of Internal Enforcement Proceedings in the ISA Law, 5770-2010 Clause in Contracts

Improvement of Internal Enforcement Proceedings in the ISA Law, 5770-2010. The Law for the Improvement of Internal Enforcement Proceedings in the Israel Securities Authority, 5770-2010 (the “Law”), which was approved by the Knesset in January 2011, constitutes a significant change that requires reporting companies to immediately address the requirements of the new Law. The main parts of the Law regulate the establishment of an administrative committee that will deal with violations in the area of securities. If the committee reaches the conclusion that it was proven at the level of proof which is customary in civil law (a probability of more than 50%) that a violation was committed, it will be authorized to institute various means of enforcement against the violating party. The committee will deal with various violations that are related to the Securities Law, 5728-1968 (the “Securities Law”) and other relevant laws. The common feature of such violations is that the mens rea that is set forth therein is at most that of negligence. The means of enforcement that the committee will be authorized to impose will be significant fines, a demand to pay damages to the party injured by the violation, a payment to the State treasury which derives from profits that were generated as a result of the violation, a demand to institute acts to remedy the violation and prevent its recurrence, a prohibition on holding office in certain bodies, a suspension or revocation of a license and suspended punishment. As is known, the Law establishes, inter alia, the strict responsibility of the CEO, due to which enforcement measures can be imposed as set forth in the Law. (a) “The CEO of the corporation and a partner other than a limited partner, are obligated to supervise and institute any and all reasonable means under the circumstances of the case to prevent the commission of a violation by the corporation or partnership, as the case may be, or by any of their employees.” (b) If a violation is committed the presumption is that the CEO of the corporation or a partner other than a limited partner in the partnership, as the case may be, has breached his obligation pursuant to Subsection (a) and may be subject to one or more of the means of enforcement as specified below…unless he proves that he has fulfilled his obligation pursuant to Subsection (a): (c) If the corporation has established adequate procedures to prevent a violation as provided in Subsection (b), appointed an officer on its behalf to supervise the compliance therewith, including with regard to providing guidance to the corporation’s employees for the compliance therewith, and instituted reasonable steps to remedy the violation and prevent the recurrence thereof, the presumption is that the CEO or the partner, as the case may be, has fulfilled his obligation as provided in Subsection (a). According to commentators, all the provisions of Subsection (c) lead to an internal enforcement plan. So, too, thought the Israel Securities Authority (the “ISA”), when in August 2011 it released a Document on criteria for recognition of an internal enforcement plan in the area of securities and investment management (the “ISA Document”) and set forth that: “The application in practice of an efficient enforcement plan by the corporation may be viewed favorably by the ISA with respect to the corporation or individuals therein in the context of its discretion in respect of the exercise of its powers of enforcement pursuant to the law.” The ISA’s Document sets forth the standards that will be examined by the ISA when deliberating and deciding whether an efficient enforcement plan exists at a corporation. Based on the requirements of the Law, the ISA’s Document and the understanding of the Company’s management, the relevant information and instructions have been incorporated into the enforcement plan document that is set forth below.