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Business Transparency and Disclosure Requirements

Writer: Tziki Woolfson, Attorney.

In recent years, we have been hearing about the term "transparency". What is transparency? Is it necessary? Why does it exist and what parties does it help?

The term "transparency" is the opposite of the term "ambiguity." When we hear the term "ambiguity", we often attribute it to aspects like, to "security ambiguity," "nuclear ambiguity," and other examples. When we want to clarify something, we sometimes use the phrase "shed light" or "illuminate". When we wish to point out something hidden, usually in a negative context, we use the term "in the dark".

We are used to hearing of "transparency" or "lack of transparency," usually in governmental contexts. It seems clear that governmental transparency is a tool that helps to reduce corruption and increase trust in governmental systems. It is apparent it will take time before that transparency exists. It will be as a clean window on the eve of Passover and even further along until transparency will help eradicate governmental corruption.

In this column, we will try to focus on transparency in business. In business, it doesn’t seem obvious that transparency helps.

The Need for Business Transparency in a Public Company

A "Public company" is a company whose shares are listed for trading on the Stock Exchange or are offered to the public under a prospectus, within the meaning of the Securities Law, or that were offered to the public outside of Israel according to a public offering document required by law outside of Israel, and are held by the public

Public companies are required to be more transparent than private companies. In a private company, those who have invested in the company has a direct relationship with the company, and usually, has information that it can get by virtue of its knowledge and connections with the company's forums, while in public companies this is not the case.

Therefore, the legislature decided that public companies must exercise greater transparency. For example, a public company is required to publish its financial statements on a quarterly basis, to issue an orderly report on various actions of stakeholders, and to report on transactions, events, and various scenarios at the company. Even when a public company is not required to do so, it often acts in a transparent manner. Given the desire to convince the public - that purchases its shares and is potentially a purchaser – of the capabilities of the public company, the company has incentives to report on its results and goals to the public. Today, many companies also publish information on their websites.

However, the desire for transparency can lead to the opposite, that is, "over-transparency" where the details that are reported are not as is - and are - to put it mildly – attempting to put a positive spin on actual reality. This is why there are various laws that to require the companies to publish real data, and if they do not do so, they will be sanctioned. In public companies, there is constant tension between the duty of transparency and the desire for it, and "ambiguity" especially in connection with financial matters and transactions with the controlling shareholders.

In these matters, as well, various laws try to deal with and oblige the company to disclose unusual and radical issues in connection with transactions with controlling shareholders.

In recent years, a number of accounting changes have been made, that have adopted international accounting standards in order to generate more uniformity and clarity in financial statements, and in order to bring about greater transparency.

Private Companies

Private companies also have obligations that can be termed "transparency" - like public companies, but less so - both to investors, to the company's forums, and to themselves.

Fair Disclosure and Due Diligence Checks

Two other concepts related to the world of law and their relevance to business transparency are fair disclosure and due diligence checks.

Fair Disclosure - generally speaking, it is the duty of a person or entity to disclose material facts that may affect the business' operations and legal actions of a third party. For example, business is required to provide consumers with complete information and to avoid misleading them.

Due Diligence Checks - is a legal, financial, and business process that is recommended before investing in or purchasing a business. In fact, during this process, the company being examined can disclose as much as it wishes to participate voluntarily in the process and as part of its examination for business purposes. However, there are also expanded transparency requirements, under which the subject discloses all legal, financial, and other information.

In both components, if it becomes clear in the future that a party has been deceived or leaked incorrect information, it will be subject to legal sanctions, which could nullify a transaction or force the subject to compensate for the damage caused by the transaction.

One can say that in a utopian world where everyone acts in good faith and is law-abiding, duties of this nature would be understood and they would not be needed, but since we live in the world in which we live, the general obligation called "duty of good faith" is derived directly from the duties described above.

Transparency in the Business World - is it Worthwhile?

Having briefly reviewed the obligations of companies to be transparent by law, the question that should be raised is if transparency is harmful to businesses.

Disclosure of Trade Secrets

Some argue that transparency - or as they call it as to not "rebel" against the transparency trend, "greater transparency" - harms business. Why is this argued? The same claimants will say that transparency leads to an exposure of trade secrets and as a result, helps competitors.

This is indeed a legitimate argument and sometimes even true. Thus, for example, and in order to prevent a situation of unrestrained competition by exploiting the knowledge of the competitor and which will trigger a lack of motivation to develop, mechanisms that protect patents and trademarks have been developed. Through this universal protective legislation, the fear of disclosure of knowledge and patents is reduced, and thus the transparency mechanism - the need to provide all details to the Registrars of Patents and Trademarks - is actually found to be a supportive and encouraging development.

Who Wants Inspection?

There is no doubt that transparency invites criticism. The natural inclination of the human heart is self-defense when we are criticized by others. We react differently however, when we criticize others. Given the natural tendency of the individual to prevent or reduce the possibility of being criticized, there is a tendency to limit the information given about his actions to another.
This psychological mechanism that prevents or reduces transparency is a mechanism that can cause great damage to a commercial organization. The lack of supervision and control of actions taken by a party as well as the prevention of any preliminary discussion of future actions, considering the desire to limit exposure, inevitably leads to organizational failures, to the prevention of efficiency, to the absence of brainstorming and so to the reduction of profits.

Should I be the Pansy?

Sometimes when a potential customer turns to the service provider and asks for information of one kind or another - usually to check the price requested and to compare it to others - the lack of transparency drives the customer away. Customers - and certainly the Israelis among them - feel that they are to be taken advantage of. That is, they do not want to have the feeling that they bought a product or service at a price higher than the price they could buy it from someone else if seller was very pleased after the buyer had paid for his product or service.

In today's environment, when information about products and services is published in all existing media, and it is easy to check and compare, the lack of transparency can harm the business owner more than it benefits. Today, even if you have ambiguous transactions and caused the customer to buy a product or service from you, when the situation becomes clear to them, their ability to hurt the business is so great and available that eventually, you will lose out. Today, through the Internet, one can easily get information about the product and the company that markets it. One can find different sites that compare prices for different products, and one can write reviews about the shopping experience and the quality of the product bought. This information is available to anyone and everyone. If a company did not supply the product properly or because of a lack of transparency, the customer was disappointed with the purchase, the company will be criticized, and it is likely that it would harm its profits.

For example, in order to justify charging a price greater than the market price, we must show that the product or service that we wish to sell is unique and more successful than any competing product. The more ambiguous we are, the more we cannot distinguish the product or service we sell and explain its price vis-à-vis a competitors' product.


"Social Transparency" or "Wisdom of the Masses"

Another area where the emphasis should be placed on increasing the power of the consumer and the importance of transparency is the development of social networks. Every self-respecting company have multiple social media pages. The company's customers can conduct an open dialogue with the company and express their satisfaction with its conduct and service provided. One can find customers who write on the company's page that the service or product they received met their expectations and that they were very satisfied, and would return to buy more from that company. On the other hand, it is possible to find angry customers who have been disappointed by the company's statements, the expectations that they developed as a result, and the final product they received, which did not match what was expected.

Therefore, it is proper for the business to be run in a transparent manner vis-à-vis its customers, otherwise, it will only harm the transparency that they create for its use through the social networks.

It should be noted that the opposite is also true. A business whose "social transparency" would support it and increase its ability to command profits.

Conclusion

In recent years, the trend of transparency has been expanding. Is transparency the unconditional disclosure of everything at every time? It seems correct to say - in a term borrowed from other legal spheres -a term that has in recent years gained momentum in the Supreme Court's ruling - "proportionate transparency." In other words, one should be as transparent as possible to the extent that this does not harm your business beyond what is necessary and appropriate.

And above all, the duty of fairness and integrity must guide all parties.

As the children's song says, "We have come to exile, we have light and fire." We wish everyone a happy Chanukah, a festival when light will prevail over darkness.

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*This article is not meant to constitute legal advice for a particular client, for which consultation with a qualified attorney is required.