As securities class actions expand within the Middle East, it is clear that Israel has firmly incorporated them into its legislative system, despite its court, the Knesset, remaining cautious in its selection of cases.
As securities class actions expand within the Middle East, it is clear that Israel has firmly incorporated them into its legislative system, despite its court, the Knesset, remaining cautious in its selection of cases.
Since the 1970s, Israeli civil law has undergone a gradual process of codification modelled on continental European law. Major revision to a Securities Law of 1968 was undertaken in 1988. This second phase launched the development of formal rules for representative action in Israel and drew strongly on the example of US class action laws. In the early 1980s, Israeli legal academics and senior law reform civil servants within the Israeli Ministry of Justice were arguably inspired by the US’s experience of class actions. This provided a fertile breeding-ground for dissatisfaction with the system of sector-specific rules for representative actions. A general class action law, 5766-2006, was passed in March 2006 which replaced the previous sector-specific legislation. Claims against banking corporations, in both pre-contractual and contractual relations, became entrenched.
Class action cases are not taken on lightly by the court. The court is very much aware of suits submitted against a body which provides services to the public, such as a banking corporation or essential utilities, and the harm that it might cause to public services and financial stability. Magen and Segal highlight in their report, The Globalization of Class Actions, National Report: Israel, that the Israeli legal framework for group litigation generally lacks specialised, formalised, detailed case management procedures. This leaves a broad degree of discretion for the managing court to direct the course of litigation, subject to the applicable statutory provisions and their authoritative interpretation.
Nevertheless, the basic logic underlying the 2006 law is that it is designed to protect diffuse rights and deter powerful market actors from abusing their power; as Magen and Segal state, “allowing effective action where the harm caused to individual members of the class is too small to allow individual action, but the collective damage is large or shocking enough to merit group action”. The standard method of inclusion in a class is one of ‘opt-out’, where a member of the class who wishes to exclude themselves from the binding decision of the Court must do so actively. Section 12 of the law establishes an ‘opt-in’ procedure in which mass claims may still be processed by means of a representative suit, but only where individual litigants actively join the class certified by the Court.
As in other jurisdictions such as the US, the majority of civil suits in Israel, including representative suits, are eventually resolved by means of a settlement, rather than a judicial decision. Under Section 20 (D) (2) of the law, the court decides in favour of the class or sub-class, either fully or partially. The court decides on the sum of compensation or the manner in which such compensation is to be paid. In their national report on Israel’s class actions, Magen and Segal use the example of the Analyst Mutual Funds Management v. Arad Investments class action case, which saw Justice Barak state: “Special compensation should be awarded where, in filing and pursuing the claim, the representative plaintiff undertook special effort or assumed genuine risk—or where in the absence of the incentive provided by the award of special compensation the claim would not have been filed on account of the small amount of individual damage involved.”
Following the Morrison v. National Australia Bank case in 2010, the US Supreme Court effectively wiped out the eligibility of F-Cubed actions from taking place within the US. This means that a non-US shareholder, suing a non-US company, whose stock was purchased on a non-US exchange, can no longer bring their case in the US courts. Legislators across the world have rapidly been developing legislation in response to the need for securities class actions to be processed in alternative locations. Israel could well establish itself as a home for class actions in the Middle East. Goal Group’s research predicts that by 2020, annual securities class action settlements in the Middle East will reach $150 million annually.
Although the US remains the most developed and dominant centre, recent years have seen the global securities class action market expand rapidly. In the meantime, Israeli investors should inform themselves of global centres which have emerged around the world which include Canada, Australia, The Netherlands, Sweden and Germany, amongst others.
There are now specialist service providers that can automate the complex process of class action participation across international legislatures at a relatively low cost. The pressure of the process can be dramatically eased by such support. For example, specialist providers work on a global basis, covering class actions in all markets, while managing on-going relationships with various legal firms worldwide and a network of paying agents.
Although Israel’s class action legislation exists as one of the most developed of the Middle East region, it is possible to argue that Israeli judges have adopted an unduly conservative, restrictive attitude towards representative actions, which underestimates the broader public benefit of accountability. Some believe that it should be the responsibility of the legislator, litigants, and the free market—not the courts—to shape the use of representative action mechanism.
