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Israeli Court Severely Restricts Ability to Bring Class Actions Against Directors and Officers of Provident Funds

On February 19, 2009, the District Court for the Central District of Israel handed down an important decision holding that Class Actions relating to provident funds may only be brought against the management company of the fund but not against its directors and officers (the “D&Os”). It appears that applying the rational of the decision would lead to the same conclusion with respect to D&Os of insurance companies and banks but not those of mutual funds, stock brokers or other financial institutions or any other commercial companies.

The facts of the case are as follows – Messer. Schlezinger and Zomer (the “Members”) are members of provident funds managed by Halman Aldubi Provident Funds Ltd. (the “Management Company”). They brought a class action against the Management Company and seven of its D&Os. The Members alleged that negligent management of three of the provident funds managed by the Management Company caused excessive losses to funds’ members.

The D&Os filed an application to dismiss the action against them alleging that under the Class Actions Law of 2006 (the “Law”) a class action may only be brought against the Management Company itself and not its D&Os. The Law contains a closed list of actions that may be certified as a class action. The relevant section provides that an action which may be certified as a class action is an action against: “an insurer, an insurance agent or a company managing provident funds….”.
The court gave strict interpretation to this provision and held that, despite the undisputed potential personal liability of directors and officers in general, a class action may be certified only against the company managing the provident fund and not its D&Os.

GOS note – The decision is subject to appeal and therefore is not yet final. Furthermore, this decision is specifically relevant to provident funds, insurers and banks and not to other entities in view of the wording of the Law. With respect to other securities claims the wording of the Law is broader and provides that a class action may be certified on any cause of action relating to securities or units of mutual funds whilst there is no specific limitation on the identity of the defendant. It remains to be seen how courts will interpret this new and important decision.

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