The Race to the Bottom in Global Securities Regulation

Sharon Hannes is Professor of Law and Dean and Ehud Kamar is Professor of Law at Tel Aviv University Buchmann Faculty of Law. This post is based on a paper by Professor Hannes and Professor Kamar forthcoming in the Research Handbook on Representative Shareholder LitigationRelated research from the Program on Corporate Governance includes The Market for Corporate Law by Lucian Bebchuk, Oren Bar-Gill, and Michal Barzuza.

In a forthcoming article, we tell the story of our class action against Teva Pharmaceutical Industries as an illustration of the global race to laxity in the regulation of capital markets.

Teva is an Israeli company traded in Israel and the United States. It is the largest generic drug maker in the world. Its market value at the end of 2012 was 37 billion dollars—higher than, say, Deutsche Bank’s. This was the time at which we filed a shareholder class action in the Tel Aviv District Court to compel Teva to disclose executive pay on an individual basis, as required under Israeli law and US law. Teva settled the case with us by agreeing to disclose this information. To ensure other companies did the same, Israel adopted a rule affirmatively requiring this disclosure of all Israeli companies traded abroad. These companies comprise Israel’s entire technology sector and half of all public firms by market value.

Teva’s failure to disclose compensation individually was not the result of oversight. Rather, Teva told us, its practice was legitimate under provisions in the Israeli securities statute that allow companies listed on a national exchange in the United States or the United Kingdom to file in Israel the reports they file abroad.

To us, the claim that Teva could disclose only aggregate pay figures—making it impossible to know, for instance, how much it paid its chief executive—was illogical. Both Israel and the United States require public companies to disclose executive compensation on an individual basis, and each country recognizes the other’s requirements. How could a company traded in both countries be exempt?

That Teva took this position was not surprising, however. Companies frequently prefer to withhold sensitive information if possible. Somewhat more surprising was that the Israel Securities Authority (ISA) never questioned this practice—and ultimately backed it. When Teva chose not to file an answer and settle, the ISA intervened anyway. It advised the court that, though it welcomed the disclosure Teva would make under the settlement, the suit was without merit.

In retrospect, the motivation behind this position is easy to grasp. It was a manifestation of a global trend of watering down local securities regulation to attract listings. The crosslisting laws in Israel and the United States that gave rise to the suit are part of this trend. Their goal is to attract listings. The ISA, in our view, simply went beyond the scope of these laws to advance this goal.

The story had a happy ending. The new rule adopted in the wake of the suit offered something for everyone: It achieved our goal of bringing pay disclosure by Israeli companies listed abroad up to the standard in Israel, it addressed the ISA’s concern of company delisting, and it reassured companies they would not face suits for their failure to disclose this information in the past. It also vindicated the ISA.

Today, all these companies must report executive pay on an individual basis. However, the race to laxity persists on other fronts. Foreign issuers in the United States, for example, continue to disclose less information than do US issuers even if their stock trades only in the United States. Law in the US allows them to file abbreviated annual reports and exempts them from the duty to file quarterly and current reports, insider trading reports, and proxy statements. If they crosslist in Israel, they can file the same reports in Israel as well. Although their stock trades in both countries, they are less transparent than either country normally requires. Their foreign listing thus wins them regulatory concessions both domestically and overseas. We do not argue that regulatory laxity is always bad. However, when it comes to the disclosure of executive pay, we believe it is. There are clear indicators that shareholders want this disclosure and benefit from it.

The complete article is available here.

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