Public Corporations and Public Announcements – between the Rock of Israeli Competition Law and the Hard Place of Securities Law

Barnea Jaffa Lande & Co.
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Companies’ public disclosures about their business operations are quite common. However, they are also fraught with concerns about violating the Israeli Economic Competition Law.

Public announcements in the media may divulge sensitive business information or indications of future actions between competitors, thereby harming competition. Sometimes the divulging of such information occurs in good faith. In other instances, companies may deliberately use the “legitimate” media to inform their competitors about business information or to convey messages to them. This thereby enables them to coordinate business actions.

The question of using the media in this manner first arose in 2012. Reports showed the Israel Competition Authority was investigating if the wave of announcements by food manufacturers and retail chains regarding planned price hikes constituted collusion between competitors.

In recent months, this issue has made headlines once again. The media reported the Competition Authority is investigating various retail chains and food manufacturers and distributors (including Strauss, Shufersal, Diplomat, Rami Levy, Osem, Victory, and Unilever). The suspicions include unlawful collusion, inter alia, through public announcements, including through financial statements, which public companies must publish pursuant to Israeli securities laws.

While it is important to examine from a particular angle the disclosure of information in the media that may harm competition, the disclosure of information by a public corporation in financial statements or in other reports requires a different examination. It places the reporting corporation in a huge predicament: where does it draw the line between fulfilling its reporting obligations as an offeror of securities to the public and violating its obligations by virtue of competition law?

What Is the Public Disclosure of Sensitive Information?

The Economic Competition Law prohibits any arrangement that may prevent or reduce competition. In particular, the Economic Competition Law takes a grave view of any collusion between competitors pertaining to the commercial terms under which they provide their competing products or services.

Such an arrangement, called a restrictive arrangement, may exist even without any formal agreement. Sometimes, information exchanges between competitors are enough to receive designation as a restrictive arrangement, if this information may lead to the coordination of business actions between them. In 2014, the Competition Authority published a draft position statement entitled “Public Announcements That Harm Competition.” This draft position discussed the question of instances when a competitor’s public announcements divulging business information may constitute a violation of competition law. According to the draft position, information may be “public” even if the media is not the one who publishes it, but rather if corporations provide it during conversations with investors and in reports to the Tel Aviv Stock Exchange. In a later position statement, the then Competition Director-General elaborated on the types of “sensitive information in terms of competition” that competitors may not exchange. Such information includes, inter alia, information about product profitability targets, the production capacity of a product, market shares, competitive strategies, business plans, company policy, and other types of information that, if divulged to competitors, could harm competition.

Between the Disclosure Obligation and the Prohibition on Business Information Exchanges

Contrary to the aspiration of competition law—that competitors shall not publicly divulge business information—securities law imposes a disclosure obligation on reporting corporations to provide due disclosure of complete and up-to-date business information to investors (and, in fact, to the general public). This obligation extends both to initial disclosures (prospectuses) and to ongoing updates of information, both in immediate reports and in periodic reports.

Pursuant to the Securities Regulations, the types of information perceived as material and relevant, and that therefore require disclosure are, inter alia, as follows:

  1. Trends, events, and developments in the corporation’s macro-economic environment having a material current or future impact on its business results or on developments in it or in its field of operation.
  2. Changes in the volume and profitability of its operations.
  3. Changes in the corporation’s array of suppliers and raw materials in its field of operation.
  4. The critical success factors in its field of operation and changes that occur therein.
  5. The structure of the competition in the corporation’s field of operation and changes that occur therein.
  6. The corporation’s key methods for contending with competition and the positive and negative factors affecting its competitive position.
  7. The corporation’s business strategy for each field of operation and its main goals, the means to carry out the strategy, and details of the opportunities and threats deriving from it.
  8. Plans outside the ordinary course of business that may receive implementation in the coming year and may have a material impact on the corporation’s business.

For example, a public corporation must inform the public about how it contends with competition in its field of operation, such as by raising prices, laying off employees, replacing suppliers, or renegotiating with them, and their potential impacts on the corporation’s results.

Thus, while according to securities law, corporations must publicly disclose internal business information (that it otherwise would have kept confidential), according to the Competition Authority, such disclosure may put the corporation and its managers at risk of committing a criminal violation of the Economic Competition Law.

Pursuant to the Economic Competition Law, disclosure of information that is compulsory by law indeed cannot constitute an unlawful restrictive arrangement or an attempt to achieve such an arrangement. However, this exemption is contingent upon whether the information published is “material” and subject to the disclosure obligation. This complex question is widely discussed in literature and in case law.

Furthermore, in order to avoid any risk of enforcement measures due to a violation of the disclosure obligations pursuant to securities law, a corporation may, for reasons of prudence, disclose information even if it is not necessarily material. However, it is precisely such an approach, which aims to avoid any risk of violating securities law, which may expose the corporation to a violation of competition law. 

This exposure, if it materializes, could lead to an inappropriate and unreasonable violation of the rights of public corporations and their managers, who are trying to be law-abiding. This situation may even cause excessive deterrence from disclosing information, thereby violating the rights of investors. It could also result in corporations deciding on a “choice of law” every time they report to the public, i.e., whether to choose the risk of violating securities law or the risk of violating competition law. Another danger is the Competition Authority needing to decide, without appropriate expertise, questions pertaining to securities law, by considering if information a corporation divulges in reporting frameworks is “material” information.

Regulation and Clarification before Enforcement

As stated, this is a known issue. Over the past decade, the Competition Authority has conducted a limited number of investigations about suspected collusion through public announcements. Yet, to date, these ended without the Competition Authority taking any enforcement measures. However, since the Competition Authority is currently investigating such suspicions (inter alia, as a result of announcements made by public companies), it is imperative to regulate said tension prior to taking any enforcement measures by virtue of competition law in respect of public corporations’ reports to investors. 

Therefore, as an inevitable preliminary measure, the relevant State authorities—the Israel Competition Authority, the Israel Securities Authority, and the country’s prosecution apparatus—must hammer out and publish a joint position statement. This statement should regulate the relevant issues and define “safe harbors” that will enable public corporations to disclose information without fear of exposure to violations of competition law.

Enforcing competition law against public corporations due to their reports prior to resolving this predicament will cause severe and disproportionate harm to the rights of corporations and their managers. Insofar as such entities receive an indictment, it may even afford them defense arguments of equitable protection and selective enforcement.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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