Recently, the Ministry of Justice published Draft Amendment No. 4 to the Class Action Regulations. This amendment proposes to prospectively include in the public electronic database known as the Registry of Class Actions copies of the statements of response filed by respondents (potential defendants) to motions to certify class actions. Statements of response will thus be exposed for all to see. This contrasts with the current situation whereby the registry contains only copies of statements of claim and motions to certify class actions filed by petitioners (potential plaintiffs initiating the proceeding). The explanatory notes to the amendment state that the purpose of the proposed amendment is to expand the scope of information about class actions accessible by the public, due to the importance of the proper management of the registry and in order to improve its use.
Although the proposed amendment advances the worthy goal of increasing transparency, it is extremely prejudicial against respondents to motions to certify class actions. This is especially true of public companies, often the defendants in these types of proceedings. Passage of the amendment could infringe on such companies’ right to privacy and adversely impact their business activities in an imbalanced and disproportionate manner.
Court Regulations (Review of Files)
As is well known, public access to judicial proceedings is recognized in Israel as a constitutional right. However, this is not an absolute right. Accordingly, it does not mean that anyone is automatically entitled to review statements of claim filed in cases to which they are not a party. The possibility of reviewing court case files is regulated by the Courts and Labor Courts Regulations (Review of Files), 2003. These regulations prescribe that when a court examines an application to review a case file, it must strike a balance between the applicant’s right of review and the protected interests of the parties to the proceedings, including the right to privacy of the litigants themselves, particularly the rights to business privacy and to safeguard the confidentiality of sensitive information.
Accordingly, under normal circumstances, a third party applying to review a case file must declare the purpose and scope of the review. The court examines the application and weighs it against the concrete rationale and protected interests presented to the court by the parties to the proceedings. The current proposed amendment to the Class Action Regulations therefore contradicts the Court Regulations (Review of Files). If this amendment is enacted, any person, in any case and without providing justification, may review a statement of response filed by a respondent-company to the motion to certify a class action filed against it.
Foundation Stone of Legal Protection
Unlike a statement of defense in an “ordinary” proceeding, a statement of response filed in relation to a motion to certify a class action is a long and detailed document that serves as the foundation stone of the respondent-company’s legal defense. The statement of response is not merely a tractate of “denials.” Rather, the law requires the respondent to lay out the full factual foundation intended to refute the petitioner’s allegations, as well as its legal arguments. To substantiate their defense arguments, respondent-companies’ statements of response usually must disclose sales data, business plans, queries received from customers, correspondence with the regulatory authorities, management decisions, board of director resolutions, financial data, and more. An affidavit signed by a manager of the respondent-company must support such information. In addition, the respondent-companies must provide confidential documents, such as meeting minutes, presentations, procedures, statements of financial position, ledgers, and summaries of internal discussions.
Under these circumstances, granting a sweeping permit to the general public to review statements of response to class action motions, in any case, may cause substantive harm to respondent-companies. Firstly, it may impede companies’ ability to defend themselves, due to the concern that presenting particular defense arguments will force them to disclose sensitive and non-public information. Secondly, it may cause a chilling effect on free and open discussions during management meetings or with regulatory authorities, due to the concern these sensitive discussions might be exposed at some later date. Thirdly, it may incentivize business competitors and interested parties to file frivolous motions to certify class actions against companies solely for the purpose of forcing them to disclose confidential data, such as sales volumes, which are ordinarily out of reach. Finally, it could even be exploited by interested parties in ordinary legal proceedings against companies to circumvent document discovery procedures in those cases and use the statement of response to reap personal benefit. This constitutes substantive infringement of respondent-companies’ procedural and fundament rights at the earliest stage of a proceeding, particularly because it is certainly possible the motion to certify the class action will ultimately be dismissed in limine.
The Importance of Deliberating Each Case Individually
These concerns are not merely theoretical. A relevant example is the Rybka Technologies case (Permission for Civil Appeal 1619/20) the Israeli Supreme Court recently deliberated. In that case, a shareholder of Israel Chemicals Ltd. filed a motion to certify a class action against ICL alleging concealment of material information from the public in relation to a project promoted by ICL. During the proceeding, Rybka Technologies filed an application to review some 2,000 ICL documents containing trade secrets and sensitive business information, all of which it took from a statement of claim filed by ICL in another proceeding pertaining to that same project. The Supreme Court examined Rybka Technologies’ allegations and weighed them against the nature of the data and the arguments presented by ICL. The Court ultimately rejected Rybka Technologies’ claims that these are technical data pertaining to the project and ruled that the documents constitute confidential information that is not routinely disclosed within the framework of review applications.
The enactment of the proposed amendment to the Class Action Regulations would have quashed the important deliberation of this case. As stated, if the amendment is enacted, not only will the plaintiffs or shareholders of a public company have access to the confidential information, but so will the general public.
A Balanced Arrangement
In the case of public companies, the proposed amendment’s potential harm is even greater. Public companies are subject to public reporting obligations and must take into account, inter alia, the materiality of the information in conformity with securities laws. The mere fact that a motion to certify a class action has been filed should not give plaintiffs, and certainly not the general public, an a priori right to rummage through confidential documents and information, especially not during a preliminary stage before the class action has even been certified. It is inconceivable that the mere filing of a motion to certify a class action, as baseless and futile as it might be, will automatically grant the public a right not vested it under corporate law, securities law, or the Court Regulations (Review of Files).
In lieu of the proposed amendment, a more moderate and balanced arrangement would require a defendant-company to disclose solely the statement of defense that it files in a class action after it has already received certification. This would ensure the public is able to access information only after the courts have already been convinced that a prima facie foundation for a class action was presented. The scope of the information that companies will disclose will also be more moderate since, as stated, statements of defense usually include a condensed version of the defense claims, since there is no obligation to attach the entire evidentiary foundation substantiating the defense arguments to the statement of defense.
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