A precedent-setting ruling was recently rendered by the Tel-Aviv District Court’s Economic Department. At the core of this case lies the attempt of Mylan, a leading manufacturer of generic drugs, to carry out a hostile takeover of Perrigo Company by means of a mixed stock and cash tender offer. Against this background, Perrigo petitioned the court seeking an injunction against both Mylan and the Israel Securities Authority (ISA), directing that they cease all activities relating to the tender offer. Perrigo claimed, inter alia, that Mylan cannot register its shares for trade on the Tel Aviv Stock Exchange (TASE) because its articles of association contain a control fortification mechanism (in the court's words) – namely, a 'poison pill'. This mechanism allows Mylan’s board to allocate 50% of the company’s capital and voting rights in order to prevent a hostile takeover by a potential acquiror. Perrigo further claimed that the poison pill mechanism adopted by Mylan contradicts Section 46B of the Israeli Securities Law, which provides that the share capital of a company, whose shares are listed for trade on the TASE, shall consist of one class of shares only, conferring equal voting rights in proportion to their nominal value.
The court rejected Perrigo’s petition and held that the correct interpretation of Section 46B, in so far as such provision relates to foreign companies that have a dual listing, is that such provision does not negate companies that have a control fortification mechanism from being listed for trade on the TASE, and that such companies can be traded in Israel despite the existence of such section, where a decision specifically relating to each company will be made by the ISA in accordance with the circumstances and the relevant considerations.
The court based its decision on the fact that Section 46B does not explicitly and clearly negate the possibility of registering for trade on the TASE a company whose articles of association or contractual provisions concern the control fortification of its management. The section, as worded, applies as aforesaid solely to the obligation of a listed company to have only one class of shares, conferring equal voting rights in proportion to their nominal value.
The court added that the provisions of Section 46B must be interpreted in a manner that will encourage foreign companies to be registered in Israel, or at least not deter them from being so registered, and that, in any event, it is impossible to totally prevent the future existence of a control fortification mechanism in dual listed companies, because even if they dual list without a poison pill or any other control fortification mechanism it will still be possible for them to adopt such mechanism in the future (according to the law of the country in which they are incorporated). In the words of the court, this fact must impact upon the interpretation of the law with regard to those companies who had in place some kind of control fortification mechanism prior to being registered for trade in Israel.
The court's ruling narrows the applicability of Section 46B of the Securities Law in a manner that may both encourage foreign companies to dual list in Israel and cause companies that are already dually listed to consider adopting poison pills as this will not prevent them from continuing to be traded on the TASE.