2.5 million shekel lawsuit against public company: "The reports did not reflect reality"

Tomer Mazon reported that it received a warning letter before taking legal action, including a request for approval of a class action, and that it learned of the filing of a derivative lawsuit in the Tel Aviv District Court — both regarding the merger deal through which it entered the stock exchange.

The main claim: the financial reports that served as the basis for the valuation in the merger did not reflect the actual operating results, and therefore the allocation ratio between the parties was skewed to the detriment of those who held Ciphia Vision shares on the eve of the merger. The amount of damage claimed in each of the filings is over 2.5 million shekels.

These are two separate proceedings. The first is a warning letter to which a draft class action was attached, on behalf of the plaintiff and everyone who held shares at the time of the merger's completion (excluding the respondents).

Here the claim is economic in nature: if Tomer's numbers were inflated, the company was overvalued, and the veteran shareholders were diluted more than justified.

The second is a derivative lawsuit that has already been filed — a procedure in which a shareholder sues on behalf of the company itself — and it alleges, among other things, a breach of the duty of care and the fiduciary duty of the officers, both present and past, alongside other grounds against the controlling shareholder. Both filings are directed against the company, against Doron Kimelov, and against the serving directors and those who served before the merger.

To understand the claim, one must return to the deal. Tomer, controlled by Kimelov, did not go public through a classic route but entered the stock exchange through a merger with the shell company Ciphia Vision.

As part of the deal, Tomer's value was estimated at approximately 82 million shekels, and the value of the merged company at approximately 100 million shekels. Kimelov received about 71% of the combined company, while the existing shareholders were left with only about 28%.

Here lies the logic of the plaintiffs: the higher Tomer's value was priced, the larger the share Kimelov received at the public's expense. In other words, if, for example, the inventory — the main asset of a food importer — was overvalued, it is possible that the very distribution of shares in the deal is biased.

The claim that the reports "did not reflect reality" comes after an affair that was revealed only a week earlier: Avital Perelstein-Cherni, who was appointed as CFO, refused to take the position due to reservations about the accounting treatment of inventory, and the board of directors ordered an immediate audit of those reports published on April 28 — the reports on which the merger was based.

A class action needs court approval before it becomes a real lawsuit, and this is a real hurdle — there is no certainty that it will be approved, let alone accepted in the end. The company stated that it is examining the letter and the statement of claim and their implications. The accounting audit has also not yet been completed, and at this stage, no correction of reports has been announced.

Nevertheless, for those who hold the stock — which is currently traded at a value of about 138 million shekels — another layer of uncertainty has been added here. Beyond the accounting question marks, a legal cloud is now hovering over the company and its controlling shareholder.