Last week the Israeli Antitrust Authority ("IAA") issued two memoranda of Law proposing amendments to the Restrictive Trade Practices Law, 1988 (the "RTPL"):
The first memorandum suggests a major reform in Israeli merger review procedures (the "Merger Memorandum"). The second memorandum seeks to apply the concept of abuse of dominant position to actions against parallel import (the "Parallel Import Memorandum").
Notable implications for international companies are:
- Nexus test will be redundant with regard to the "merger of companies" definition;
- Filing may be required even for international companies with no sales in Israel, if their international turnover exceeds NIS 1 billion (~$250M or ~ €230M);
- First investment in Israel may require filing;
- Possible longer review period for mergers (up to 150 days);
- Limitations on exclusive distributors in Israel.
Normally, a memorandum of law will become a government bill. Once presented to the Knesset (the Israeli parliament) the bill will be discussed by the Knesset's various committees and general assembly before being passed and becoming law. The legislation process offers time and opportunity for different stakeholders to express opinions and request changes in the proposed legislation.
The last date for comments on the import memorandum is May 7th. The last day for comments on the merger memorandum is May 14th.
Below is a more detailed overview of the proposed changes.
The Merger Memorandum
The merger review system in Israel has been left untouched for many years under the assumption that "if it ain't broke don't fix it".
The Merger Memorandum introduces some interesting changes. The main changes are: (i) prohibition of mergers below the filing thresholds if they are likely to harm competition or the public; (ii) changing the definitions of "Company" and "Merger of Companies" to expressly cover natural persons and various entities such as associations and companies registered outside Israel; (iii) changing the filing thresholds including introduction of a complementary international turnover threshold; and (iv) empowering the Israeli Antitrust Commissioner (the "Commissioner") to extend the review period of mergers up to a total of 150 days.
At the same time no change has been proposed to the substantial test for analyzing mergers which require the Commissioner's consent. The existing test is whether or not the merger raises "reasonable concern for significant harm to competition", and this test will not be changed by the Merger Memorandum. The various sanctions for illegal mergers, including criminal and administrative sanctions, will similarly remain unchanged.
Under the current regime substance and procedure are intertwined. The RTPL only regulates transactions that are defined as "merger of companies" and that meet one of the filing thresholds. These merger transactions require the Commissioner's approval prior to their consummation. Other merger transactions are, generally speaking, legal per se.
The definition of "merger of companies" includes a very wide and open-ended definition of "merger". But it also includes a narrower definition of "company", which inter alia is used to regulate nexus to Israel: it is required that at least two of the parties to a merger transaction be deemed "companies". An international entity will be considered a "company" only if it has certain affiliation to Israel, as elaborated in the guidelines issued by the IAA (The "Guidelines").
Once a transaction falls under the "merger of companies" definition, it requires filing if one of the following thresholds is met: (i) As a result of the merger, the combined market share of the merging companies exceeds 50%; (ii) The combined sales turnover of the merging companies in Israel exceeds NIS 150 million (~€35M or ~$38M) and at least of two of the merging companies each have sales turnover in Israel exceeds NIS 10 million (~€2.3M or ~$2.5M ); or (iii) One of the merging companies is a monopoly (i.e., it has a market share that exceeds 50%).
As mentioned above, if filing is not required, the merger will not be regulated by the RTPL.
Proposed Change: Mergers that are below the Filing Thresholds and are likely to Harm Competition or the Public will be Prohibited
According to the Merger Memorandum, mergers which fall below the thresholds will be prohibited if there is reasonable concern for significant harm to competition or harm to the public in terms of prices, quality, quantity or regularity of supply.
This proposed change introduces a dimension of substance which for the most part does not exist under the current merger review regime.
The clear implication is that every merger transaction shall have to be analyzed for competitive effect, even if it does not meet the thresholds. Unfortunately, the burden of such analysis, which is sometimes complex and costly, will be borne by entities which are relatively small in terms of turnovers and market shares.
To somewhat compensate for this, the Merger Memorandum proposes a mechanism of voluntary filing that applies only to mergers that do not meet the thresholds. In the case of such filing, the Commissioner should notify within 15 days whether he intends to review the merger under the usual procedure.
Proposed Change: Broadening the Definitions of "Company" and "Merger of Companies" - Significant Implications to International Companies
The Merger Memorandum strives to make the definition of "Merger of Companies" as wide as possible in terms of the persons and entities covered by it.
For this purpose, the Merger Memorandum seeks to broaden the definition of "company" to include associations, all partnerships (including un-registered and foreign partnerships), as well as foreign companies.
The Merger Memorandum also broadens the definition of "merger", to refer to an acquisition by a "person", including both corporations and natural persons - rather than by a "company" as is the case under the current regime.
According to the proposed regime, if applied, various entities may be parties to mergers regulated by the RTPL, regardless of their formal status, their incorporation method or their registration place. The IAA explains that the formal status of an entity is irrelevant to the objectives of the RTPL and the merger review system, whose objective is to defend competition and Israeli consumers.
Most of these changes are formalizing the IAA's policy, which was already applied de facto by the Guidelines. Nonetheless, a major change will take place with regard to the nexus test, as international entities' affiliation to Israel will no longer be examined as part of the "merger of companies" definition.
Proposed Changes to Filing Thresholds
- Introduction of Complementary Worldwide Turnover Threshold
The Merger Memorandum does not entirely relinquish the nexus requirement. Nexus to Israel issues will be handled through the thresholds' reference to turnovers "in Israel", and not as a preliminary question. Having said that, worldwide turnover, which was entirely irrelevant, becomes a factor:
As mentioned above, the RTPL currently sets a turnover threshold which relates to sales in Israel only. Under the regime proposed by the Merger Memorandum, filing will be required if the parties to the merger have a combined turnover in Israel of more than NIS 250M (~€57.5M or ~ $62.5M) and one of the following applies: (i) at least two of the merging parties each have sales turnover in Israel exceeds NIS 10 million (~€2.3M or ~USD 2.5 M); or (ii) at least one of the parties to the merger had a worldwide turnover of NIS 1B (~$250M or ~ €230M).
According to this amendment, a first investment in Israel of many International companies will trigger filing, if the target turnover in Israel exceeds NIS 250M (~€57.5M or ~$62.5M). This will be a major change vis-à-vis the current situation, where such first investment does not require filing. It may impose filing burdens on many transactions with no competitive effect on Israel.
- Addition of Minimum Turnover to Market Share Thresholds
The RTPL currently sets two market share thresholds: (i) As a result of the merger, the combined market share of the merging companies exceeds 50%; or (ii) One of the merging companies has a market share that exceeds 50%.
Currently these are stand-alone thresholds. According to the Merger Memorandum, a turnover condition will be added to each of these thresholds. Thus, the market share thresholds will apply only when the combined turnover in Israel of the parties to the merger exceeds NIS 100M (~$25M or ~€23M).
Proposed Change: Extending the IAA's Maximum Review Period from 30 Days to 150 Days
Under the current regime and generally speaking, the Commissioner must decide merger cases within 30 days. The Commissioner cannot extend this period without the parties' consent or a judicial decree.
The proposed amendment will allow the Commissioner to extend the 30 days period if there is "special reasoning" to do so, for up to 120 additional days. Hence the total review period may be extended up to 150 days.
The "special reasoning" requirement should serve as a barrier against arbitrary extensions. However, the actual added burden to the merging parties will depend on the way the IAA construes and uses its new extension power.
The Parallel Import Memorandum
"Official importers" i.e. distributors buying directly from the producer outside Israel, have been targeted by the Committee to Enhance Competition and Remove Barriers to Import, which rendered its recommendations on November 2014. These recommendations included a suggestion to amend the RTPL in order to protect parallel import.
The proposed amendment does not prohibit the appointment of an exclusive distributor in Israel (inasmuch as such exclusivity is otherwise permitted: exclusivity may be considered as a restrictive arrangement according to the RTPL, and hence prohibited unless exempted or permitted). However, "official importer" shall be prohibited from abusing their position in a manner liable to reduce competition arising from parallel import.
Furthermore, the Commissioner will be authorized to impose instructions on "official importers" in order to prevent "significant harm" to parallel import, similar to the Commissioner's authority towards monopolies.
The Parallel Import Memorandum uses vague and open terms, and hence it is hard to predict how the IAA and the various judicial instances will apply the new standard of conduct, if accepted. In any case, this memorandum's approach sees "official importers" as dominant players whose conduct should be regulated.