Despite a slowdown in the economy, or perhaps because of that slowdown, the Israeli marketplace continues to see a significant level of M&A activity. At the beginning of 2012, there was much public debate over the economic power concentrated in the hands of the small number of families and family-controlled conglomerates. Public pressure led to draft legislation, which is still passing through Israel’s parliament, to break up large corporate groups, and to separate financial corporations (banks, pension funds and so on) from industrial and other concerns. By the end of 2012, however, market forces have rendered the public debate substantially redundant. As the large corporate groups strain under the burden of mountains of debt, corporate groups are looking to sell off assets in order to meet payment obligations. For example, the IDB Holding Group sold one of its major investment and industrial groups, Clal Industries and Investments, to Access Industries Holdings of the USA. Scailex Corporation finally gave up hope of paying off the finance undertaken in order to acquire Partner Communications Company, one of Israel’s largest mobile telephone companies, and sold a significant interest in the company and assigned the obligation to repay the vendor finance initially provided by the Hutchison Whampoa Group.
Israel’s Companies Law offers considerable flexibility with respect to the organisation of companies and corporate governance. The Law allows for the establishment (and modification) of different class rights and class voting in a private company which enables investors to have creative forms of control. For instance, Israeli law would permit a minority investor to control the board (and therefore the direction of the company) if the relevant stakeholders agree to such an arrangement in writing.
The Companies Law regulates statutory mergers, public tender offers and forced sales of minority interests; however, there is no specific regulation with respect to asset purchases. While an asset sale under the Companies Law requires only board consent from the selling company, many companies provide in their bylaws for supermajority voting on fundamental issues, and many boards of directors will not make a major decision such as an asset sale without express shareholder approval.
Israeli courts have upheld the validity of reverse triangular mergers, which continue to be a popular option.
The Companies Law imposes strict requirements and timeframes for mergers. The board of directors of both the target and the acquiring company, along with the general meetings of shareholders and each class of shareholders of both companies, must approve the merger plan. The merger plan must be submitted to the Companies Registry jointly by the two companies within three days after calling their respective general meetings.
The companies must wait at least 50 days from the submission of the merger plan to the Companies Registry, and at least 30 days from the date of their respective general meetings, before a merger can be closed. This delay can result in uncertainty for companies during the period between the public announcement of the merger and its consummation.
Mergers involving the acquisition of at least 25% of the target require the approval of the Antitrust Commissioner. Under the Restrictive Trade Practices Law, the Antitrust Commissioner must either consent or object to the merger within 30 days of receipt of the merger plan from the companies. Demonstrating to the Antitrust Commissioner that a merger will not give rise to a monopoly (as defined in the Restrictive Trade Practices Law) requires legal expertise and a solid knowledge of the local markets.
In regulated areas such as defence, telecommunications, healthcare, governmental or other regulatory approval is often necessary before a transaction is consummated.
Employment considerations are an integral part of any acquisition, and examination of compliance with the myriad of Israeli employment laws is essential. In hi-tech companies, key employees often represent the true value of the company; the terms for key employee retention strongly influence the direction of negotiations in any acquisition or merger.
Research and Development Activities
Funding for research and development activities in Israel is available from the Office of the Chief Scientist within the Ministry of Industry, Trade and Labour (the “OCS”), as an alternative to private investment. However, if a target company has received such funding, this can carry important implications for deal structures and, more importantly, planning for future use of the target company’s technology. By law, the OCS imposes restrictions on the use and transfer of the technology developed using OCS funding, which can affect the viability of foreign corporate ownership.
Proper tax structuring is an essential component of any corporate acquisition in Israel, especially if the buyer is resident outside Israel. Issues such as the effective rate of tax on dividends or interest paid by an Israeli subsidiary to an overseas parent, and the rate of capital gains tax on a subsequent sale are best considered at the outset, before the sale is completed, rather than as an afterthought. For a seller, almost every sale of shares is subject to withholding tax, unless an exemption can be obtained from the Income Tax Authority in Israel. For instance, certain capital gains exemptions are available for foreign residents that invest in Israeli companies. Israel is a signatory to numerous double taxation treaties that may also afford tax exemptions. Mergers are treated as tax events and therefore give rise to capital gains tax liability at rates that vary depending on whether the shareholder is an individual or a company. It is also important to note that the “approved enterprise status” granted to many hi-tech companies by the Ministry of Industry, Trade and Labour may be lost upon change of control of a company, and therefore the tax benefits enjoyed prior to the transaction may no longer be available after the transaction is completed.