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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The Israeli M&A market is at an all-time high, with 2016 registering a 25% increase in the total number of M&A deals compared with the average of the previous five years. The biggest increase was in large-cap M&A transactions (over $500 million), which almost doubled in number from 2015.
The overall value of deals by foreign investors grew by 71%, from $6.5 billion in 2015 to $11.1 billion in 2016. During the past few years, the Israeli M&A market has experienced an increase in the overall funds expended by foreign investors in domestic targets, especially those from East Asia.
Due to the regulatory changes resulting from the Centralisation Law, the market is expecting additional large-cap M&A transactions during 2017.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Several economic and political developments are affecting M&A transactions in Israel, including the following:
- The Law for the Promotion of Competition and Reduction of Centralisation (the Centralisation Law) requires that control groups holding both substantial real assets (eg, retail chains and construction companies) and substantial financial assets (eg, banks and insurers) must divest and dispose of one of these two classes of substantial asset by 2019.
- In addition to the negative trends affecting the global initial public offering markets, the Tel Aviv Stock Exchange remains unattractive to local companies seeking to raise equity capital at attractive valuations. As a consequence, M&A deals remain the preferred ‘exit route’ for Israeli companies.
- The availability of private funding – through institutional investors, venture capital, private equity funds and others – combined with low interest rates keeps companies private and leaves the M&A route open for developed companies.
Are any sectors experiencing significant M&A activity?
The technology sectors, along with the pharmaceutical and life sciences sectors, continue to lead the Israeli M&A market in terms of both overall industry-wide deal value and volume.
Are there any proposals for legal reform in your jurisdiction?
The abovementioned Centralisation Law came into effect in 2013.
What legislation governs M&A in your jurisdiction?
The main laws governing M&A deals are:
- the Companies Law 1999, which governs all corporate transactions involving Israeli incorporated companies;
- the Securities Law 1968, which applies to Israeli publicly traded companies; and
- the Restrictive Trade Practices Law 1988, which governs all competition-related matters, including mergers, antitrust and restrictive arrangements.
In addition, numerous sector-specific laws and regulations affect M&A transactions (eg, government licensing requirements for telecommunications, mining, essential infrastructure and power plants). These vary from one deal to another, depending on the nature of the assets that are being sold.
Further, numerous Israeli companies have obtained financing from the National Authority for Technological Innovation (formerly known as the Office of the Chief Scientist) pursuant to the Encouragement of Research and Development Law 1984, which sets certain restrictions for such companies on the transfer of technology and production outside Israel.
How is the M&A market regulated?
The M&A market is regulated by the abovementioned laws and certain sector-specific regulators. For example, the commissioner of capital market, insurance and savings regulates the permits required to obtain control of an institutional body and the banking commissioner provides the required licensing to obtain control of banking institutions.
Are there specific rules for particular sectors?
Various sectors (eg, banking, insurance, gas, electricity, water and other essential infrastructure) are regulated by specific laws and regulations. As the financial technology sector is growing, it falls under the scrutiny of a number of regulators (eg, banking, securities, insurance and privacy).
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
The main ways to acquire a company are as follows:
- Share purchase – the contractual purchase of shares from existing shareholders. Such acquisitions require the consent of all selling shareholders or can be forced on a dissenting minority of shareholders where ‘bring-along’ provisions are incorporated in advance.
- Asset purchase – the purchase of the assets or activities of the company.
- Merger – two entities are combined and a new shareholding structure emerges. Reverse triangular mergers are commonly used to acquire 100% of the shares of publicly traded companies.
- Tender offer – tender offers for the acquisition of shares of publicly traded companies are mandated in certain instances.
- Scheme of arrangement – the acquisition of companies can also be part of a court-approved scheme. Such schemes are commonly used with respect to distressed companies (eg, under trusteeship, liquidation or dissolution).
Due diligence requirements
What due diligence is necessary for buyers?
Buyers usually conduct business, financial, legal and tax due diligence before acquiring a company. The main objective of the due diligence is to identify liabilities and pitfalls in order to mitigate the risk of the transaction.
What information is available to buyers?
All companies must maintain certain public records with the registrar of companies, including the following basic information:
- registered and issued share capital;
- identity of shareholders and their shareholdings;
- identity of directors;
- registered pledges; and
Any person can approach the registrar and obtain the history of notices submitted to it, including with respect to pledge agreements, the company’s articles of association and any other change regarding the company’s shares, shareholders or directors.
Publicly traded companies are subject to a strict reporting regime. They must issue immediate reports regarding any material events in the company’s course of business and publish annual audited financials and interim quarterly financial statements. Such information is publicly available on the Israeli Tel Aviv Stock Exchange website and the Israeli Securities Authority public companies’ reporting website.
What information can and cannot be disclosed when dealing with a public company?
Any material information that is not made public by the company cannot be disclosed by it, other than in special circumstances and subject to confidentiality and standstill.
As a rule of thumb, any information that could affect the company’s share price and is not publicly disclosed is material and could be considered inside information. However, in the event of an M&A transaction, it is customary for the parties to execute a non-disclosure agreement, pursuant to which the buyer undertakes not to disclose the company’s confidential information and not to trade in the company’s shares.
How is stakebuilding regulated?
Once a shareholder holds (directly or indirectly) 5% or more of the voting rights of a public company, it must report its identity to the company and thereafter report any additional acquisition of securities, providing the details of the number of securities acquired, the consideration paid and other additional relevant information. The company must publicly disclose such information. If a shareholder reaches a 25% threshold of holdings in the company (in a public company with no other shareholder holding 25% or more) or the buyer reaches a 45% threshold (in a public company with no other shareholder holding 45% or more) and wishes to acquire additional shares, it becomes subject to special tender offer requirements pursuant to the Companies Law and the Securities Law, which in general require it to make the tender offer public and on equal terms to all shareholders.
What preliminary agreements are commonly drafted?
A non-binding term sheet (or a letter of intent) is commonly used, which covers the main commercial terms of the transaction, such as:
- the type and number of shares to be purchased;
- the consideration;
- the transaction structure;
- payment terms;
- escrow amounts;
- material conditions to closing; and
- treatment of current officers and employees.
In addition, the term sheet includes certain legal provisions, such as confidentiality and ‘no-shop’ provisions (ie, an agreed period during which the target may not solicit or respond to other offers to buy the company’s shares). Such legal provisions – unlike the other provisions in the term sheet – are binding on the parties.
Before negotiating the term sheet, a non-disclosure agreement is usually executed in order to prohibit the buyer from using any confidential information of the company which is provided to the buyer in the due diligence process.
What documents are required?
The following documents are used:
- A share purchase agreement or a merger agreement governs the sale of the shares and the consideration to the company or shareholders. Alternatively, in an asset purchase transaction an asset purchase agreement governs the sale of the company’s assets and their consideration.
- A shareholders’ agreement is customary if certain shareholders remain shareholders of the company after the transaction.
- Revised articles of association of the company.
- An escrow agreement governs the holding and release of the amount placed in escrow to secure any indemnification claims by the buyer. It is common to use a trustee as a paying agent in the event of numerous sellers (eg, employees).
- Retention agreements with key employees whose employment in the company is continued post-acquisition.
- Numerous other principal documents, including share transfer deeds, notices to the registrar, board/shareholders resolutions and legal opinions.
Which side normally prepares the first drafts?
The buyer usually prepares the first drafts of the principal documentation.
What are the substantive clauses that comprise an acquisition agreement?
Clauses covering the following elements are usually included in the agreement:
- determination of the asset being purchased (shares or assets) and treatment of options;
- consideration, payment terms and price adjustment;
- representations and warranties by the selling shareholders (and the company, if applicable);
- representations and warranties of the purchaser;
- conduct of the ordinary course of business during the interim period between the signing of the transaction agreement and the closing of the transaction;
- conditions precedent;
- closing and closing deliverables;
- indemnification by sellers for breach of representations (including any limitations on such indemnification) and specific indemnities;
- post-closing covenants; and
- miscellaneous other provisions, including with regard to dispute resolution.
What provisions are made for deal protection?
The no-shop provision of the term sheet usually takes into consideration an agreed time period for the execution of the final agreement.
Breakup fee provisions, which penalise a party that wishes to cancel the transaction, are uncommon.
A right of first refusal provision in case of a superior offer is often included, which enables the buyer to match any higher bid.
What documents are normally executed at signing and closing?
On signing, the share purchase agreement, merger agreement or asset purchase agreement (as applicable) is executed.
On closing, all other ancillary transaction documents are executed, including share transfer deeds, updated stock ledgers, notices to the registrar, board/shareholders’ resolutions and legal opinions.
Are there formalities for the execution of documents by foreign companies?
There are no formalities for the execution of documents by foreign companies, but such companies will usually need to submit authentic copies of their certificate of incorporation to the registrar.
Are digital signatures binding and enforceable?
There is no need for original signatures to consummate the transaction. However, notices to government bodies (eg, the registrar) require an original signature.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Agreements can provide for a foreign governing law.
What provisions and/or restrictions are there for foreign ownership?
There are generally no limitations on foreign ownership of Israeli companies and assets. The most common exceptions to this general rule are as follows:
- Certain companies – mainly ‘critical infrastructure’ companies – may be subject to limitations or prohibitions regarding control by a non-Israeli individual.
- According to Israel's Trade with the Enemy Ordinance 1939, it is forbidden for an Israeli natural or legal person to have any commercial, financial or other affairs with any person or legal entity which is a citizen or resident of a country in a state of war with Israel. Such enemy states currently include Syria, Lebanon, Iran and Iraq (although trade with Iraq has been permitted by special order until December 31 2017).
Valuation and consideration
How are companies valued?
Public companies are usually valued by their respective traded market value (with control position represented by a certain premium over the current market value). Earnings before interest, tax, depreciation and amortisation (EBITDA) are also applied where market value is not representative of value.
Mature (non-public) companies are usually valued by external valuators who determine the company’s value by analysing its financial statements, market, activities and competition, and by using traditional valuation methods, such as EBITDA/profit multipliers, net asset value valuation and discounted cash flow valuation.
Where legal proceedings are involved, courts favour discounted cash flow to determine company valuation.
What types of consideration can be offered?
The consideration payable to the shareholders of the acquired company may be cash or the buyer’s shares, or a combination of both.
What issues must be considered when preparing a company for sale?
The seller should comprehensively prepare its documents, financial statements and materials in order to expedite the due diligence process (which in many cases is the longest process in an M&A transaction). This requires data collection and gathering all material documentation of the company into one hub.
Any corporate clean-ups should be made before any due diligence process and all disputes regarding shareholdings in the company should be settled in advance. In a technology company, all IP rights should be properly registered and maintained.
What tips would you give when negotiating a deal?
While negotiating a deal it is key to give attention to Israel-specific issues that must be addressed in the representations – for example, compliance with the rigorous (and very pro-employee) Israeli employment law, the Encouragement of Capital Investments Law 1959 (and programmes promulgated thereunder). Certain Israel-specific issues must also be addressed in the ‘conditions to closing’ section, such as obtaining the approval of the National Authority for Technological Innovation in the event of a change of control involving a non-Israeli acquirer.
In addition, careful review of the disclosure schedule which accompanies and qualifies the representations is recommended, since many of the pitfalls are addressed by the seller in such disclosure schedules.
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile takeovers are not prohibited in Israel. The board of directors of the company can apply several hostile takeover defence tactics (eg, staggered boards, golden parachutes and poison pills), although such tactics must be undertaken in accordance with their fiduciary duties as directors. Due to the centralised holding structure of Israeli public companies – where the controlling shareholders usually hold more than 50% of the company’s issued shares – hostile takeovers are uncommon in practice.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties typically cover:
- ownership and title to shares;
- authority to enter into the agreement;
- no conflict with any other agreement or with the company’s governing documents;
- no court orders or claims against the transaction; and
- no infringement of third-party rights.
In addition, the acquired company (and sometimes the seller) will give certain other representations, including with regard to taxes, financial statements, employees, material agreements and intellectual property.
It is in the buyer’s interest to include more warranties in order to minimise its risk, while it is in the interest of the acquired company – and especially its shareholders – to minimise its warranties. The negotiation usually focuses on the most relevant representations (eg, with regard to intellectual property for a technology company), with the seller and the company limiting exposure by inserting knowledge and materiality qualifications. All agreements are accompanied by a disclosure schedule which qualifies the representation; the buyer should carefully review this schedule.
Indemnifications are usually provided for any breach of the representations and warranties made by the seller or company (if applicable). Such indemnification obligations are usually qualified.
Limitations and remedies
Are there limitations on warranties?
In general, the main limitations are as follows:
- Survival period – this limits the period during which claims can be made by the buyer in connection with a breach of representations. Different periods can be agreed with respect to different warranties.
- Cap – this sets a maximum amount of indemnification to which the buyer is entitled.
- Basket – this sets a minimum amount of damages which must be incurred in order for the buyer to seek indemnification from the acquired company and its shareholders.
Limitations do not apply in the event of fraud.
What are the remedies for a breach of warranty?
The remedies for breach of warranty are indemnification of the buyer for damages incurred as a result of the breach; in some cases the indemnification is made by way of issuance of additional shares.
Are there time limits or restrictions for bringing claims under warranties?
Unless limited by a survival period, warranties survive until the lapse of the statute of limitations (seven years in Israel).
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Capital gains tax in Israel can reach 30% (for a ‘substantive shareholder’ holding 10% or more of the company’s means of control) and is typically 25% for shareholders that are not substantive shareholders.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
In general, a non-Israeli resident may be exempt from capital gains tax if the gain is derived from a sale of shares of an Israeli company. This exemption is conditional on a number of requirements, such as that the gain is not attributable to a permanent establishment that the non-Israeli seller may have in Israel.
What are the common methods used to mitigate tax liability?
Over the years, Israel has signed more the 50 tax treaties with other countries. In many cases, a sale of shares of an Israeli company will be exempt from capital gains tax even if the gain is not normally exempted by local law. In addition, the tax treaties may lower or even provide exemptions from withholding tax when making payments to foreign entities.
What fees are likely to be involved?
Aside from the typical costs associated with performing an M&A transaction (eg, lawyers’, accountants’ and finders’ fees), no other substantial fees apply. There are no stamp duty fees or similar fees (with the exception of minor merger fees in case of a merger).
Management and directors
What are the rules on management buy-outs?
There are no rules for management buy-outs.
What duties do directors have in relation to M&A?
Duty of care A director must act with a level of care with which a reasonable director in the same position would have acted under the same circumstances. He or she must be proactive and use reasonable means to obtain pertinent information when making decisions regarding the transaction. Moreover, the recent trend in Israeli case law is to adopt a position similar to Delaware's business judgement rule.
Fiduciary duty A director must refrain from any conflict of interest with the company, including competing with or exploiting any business opportunity of the company for personal gain. He or she must act in the best interests of the company and all its shareholders – not merely his or her own interests as a shareholder. He or she must use his or her independent discretion when voting on the board and cannot be party to a voting agreement. Nevertheless, the board can approve certain conflicts if the director:
- acted in good faith and the best interests of the company were not compromised; and
- disclosed the nature of his or her personal interest (including all material information) in advance.
Duty of disclosure A director must disclose to the board any personal interest that he or she may have and all related material information in connection with any existing or proposed transaction of the company. A ‘personal interest’ includes that of any entity in which he or she:
- holds at least a 5% shareholding;
- serves as a director or chief executive officer; or
- has the right to appoint at least one director or the chief executive officer.
Moreover, if the transaction is an ‘extraordinary transaction’ (ie, one that is not in the ordinary course of business, not on market terms or likely to have a material impact on the company's profitability, assets or liabilities), a director must also disclose any personal interest of his or her family members. Directors are also required to disclose whether they have been convicted of certain offences.
Consultation and transfer
How are employees involved in the process?
Unless the employer is a party to a collective agreement that provides for a right of notice or consultation, Israeli law does not impose an obligation to consult or inform employees of a pending acquisition.
In Israeli tech companies, employees often hold options to acquire shares of the company and therefore are often indirectly involved in the M&A transaction. Such options or shares are held by a special trustee which is responsible for the sale of the shares in the event of an M&A transaction, the payment of applicable taxes and the disbursement of the net proceeds to the employees.
What rules govern the transfer of employees to a buyer?
Employees can be transferred by one of two methods:
- Fire and rehire – the employee is terminated and then rehired by the buyer. Upon such termination, the employees will have certain rights, including statutory severance pay, payment in lieu of notice and certain other benefits according to law.
- Continuation of employment – the employee continues with the new employer under the same terms and with the same seniority as with the previous employer. Certain tax rulings must be obtained before transferring an employee pursuant to this method.
What are the rules in relation to company pension rights in the event of an acquisition?
In the event of continuation of employment, a ruling from the Israeli tax authorities is required to transfer the pension funds from the control of the initial employer to the new employer.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The Restrictive Trade Practices Law 1988 and the rules and regulations promulgated thereunder govern competition issues.
Are any anti-bribery provisions in force?
Israel is a member of the Organisation for Economic Cooperation and Development. Therefore, it is subject to broad legislation regarding anti-money laundering and terror financing, as well as laws forbidding trade with terrorist organisations.
What happens if the company being bought is in receivership or bankrupt?
When a company is under liquidation or a re-organisation procedure due to insolvency, it may be purchased only with the approval of the company’s creditors and by an Israeli court, which nominates a receiver in order to assist it in maximising the sale value.