Disclosing Executive Pay Becomes the Battleground in Israel’s Regulatory Debate

The Securities Authority can’t decide whether to be tough on dual-listed companies reporting top managers’ compensation.

There's a new buzzword in Israel’s capital markets - the "Mellanox effect." CEO Eyal Waldman delisted the high-tech company’s shares from the Tel Aviv Stock Exchange; they now trade on the Nasdaq exclusively.

Mellanox has become the poster boy for companies supposedly fed up with Israel's insufferable stock market regulations. Waldman was upset with Entropy, a company that advises institutional investors; Entropy opposed his serving simultaneously as chairman and CEO. Waldman's griping was soon followed by Israel Chemicals CEO Stefan Burgos’ warning; he said his company might also delist because of intolerable regulation.

Last week, the Israel Securities Authority apparently decided it was time to act so that more dual-listed companies wouldn’t follow Mellanox's path. That accompanied  commentary from the ISA regarding a suit by law professors Sharon Hannes and Ehud Kamar against Teva Pharmaceutical Industries for its alleged failure to disclose management compensation.

Teva, which is traded in Tel Aviv and on the New York Stock Exchange, is seen as Israel's flagship dual-listed company. Hannes and Kamar asserted that under Israeli and U.S. law, the drug company had to break out individual compensation figures for all its top executives. But since Israel enacted its Dual-Listing Law in 2000, Teva has lumped total compensation into a single figure.

That law says that dual-listed companies need only meet the disclosure standards for the overseas market in which they trade – not Israeli regulations. The aim is to encourage Israeli companies that trade overseas to list their shares on the TASE as well by saving them the time and expense of meeting two different regulatory standards.

The ISA commentary published last week states "that disclosure requirements' imposed on dual-listed companies are based in principle on the [relevant] foreign disclosure laws" and that "no additional requirements are imposed on them by local law." The assumption is that the foreign regulatory standards are similar to those in Israel, even if they aren’t identical.

Check the small print

There's a reason this arrangement applies only to the world's most carefully regulated stocks markets such as the NYSE, the Nasdaq and the London Stock Exchange's Main Market. The ISA acknowledges that when the law was approved, legislators understood that the United States had lighter standards for foreign companies traded in its markets and decided that this was acceptable. Only in the margins does it acknowledge that the committee that crafted the law’s original formulation thought that this approach was a mistake.

In their lawsuit against Teva, Hannes and Kamar said U.S. law required that as far as disclosing individual compensation was concerned, local law pertained. If that’s the case, Teva and around 20 other dual-listed companies based in Israel have to follow Israeli regulations.

In June, Teva reached an out-of-court settlement with Hannes and Kamar, part of which requires Teva to break out individual compensation packages. This compromise still requires the approval of the Tel Aviv District Court, and Teva never admitted in the settlement that it was wrong. But its willingness to reach a settlement signaled that it was less than confident on its legal position in  the matter.

This is worrying dual-listed companies and, in turn, has put pressure on the ISA to clarify the situation. Thus the key sentence in the ISA's commentary states that "there is no need to make a distinction between dual-listed companies and other companies listed on foreign stock exchanges."

Does that mean the ISA is exempting dual-listed companies from individual disclosure? Not really. What it is saying is that if U.S. law doesn’t require Israeli companies trading only in New York – for instance, Check Point Software Technologies – to publish figures on individual executives’ compensation, neither do dual-listed companies such as Teva.

On the other hand, one could interpret the ISA's commentary the other way around. If U.S. law does indeed require all Israeli companies trading on Wall Street to disclose executive compensation individually, then dual-listed companies must do the same.

The judge’s choice

So what does U.S. law say? ISA officials are evasive on this. They don't want to impose yet another regulatory burden on dual-listed companies and thus wrote that they that don't want to engage in interpreting American law. But Prof. Jesse Fried of Harvard Law School, who wrote a legal opinion backing Hannes and Kamar, stated unequivocally that Teva and other dual-listed companies must indeed break out their top executives' individual compensation.

He’s not the only one who sees it this way. Because of the settlement, no one knows whether Teva has a different point of view, but the attorney general – who is required to provide the court with an opinion for every out-of-court settlement arising from a class-action suit – offered two surprising commentaries.

The attorney general reveals that the ISA is weighing a rule that would require all Israeli companies, no matter where their shares are traded, to disclose executive compensation costs in the same manner. If so, that would mean individual breakdowns.

Also, according to the attorney general, the ISA acknowledges that most dual-listed companies do not break out their individual executive compensation costs and that "the ISA's position is that this practice is consistent with the purpose and provisions of the dual listing."

That's not what last week’s ISA commentary said. Could it be that the authority is saying two different things? The judge who will be ruling on the compromise, Danya Kareth Meyer, might clear up the matter. She could act in one of three ways.

The first is to approve the settlement without offering an opinion, which would leave the situation as murky as it is now. The second is to support Teva's view that individual disclosure is not required, even if she approves the settlement.

The third is to not just approve the settlement but to rule that dual-listed companies must disclose individual executive compensation packages. This would be consistent with securities regulations that require disclosure and transparency - and would be ideal for investors.

If that’s how the rules are interpreted and the ISA plans to clarify them, what’s behind the legal acrobatics officials engaged in last week?

One possibility is that the ISA doesn’t want to admit that for the last decade it has not been enforcing its own rules on executive disclosure. Another possibility is that to appease critics, ISA Chairman Shmuel Hauser needs an example where his agency eased regulations.

Ofer Vaknin