Public Companies
Private Companies

Israel's Companies Law 1999, which came into effect on February 1 2000, introduced a number of significant changes to the existing law on mergers and acquisitions.


Unlike its predecessor, the Companies Ordinance (New Version) 1983, the Companies Law 1999 includes a statutory procedure for the merger of two or more Israeli companies. Previously, in the absence of a statutory merger procedure, the practice had developed of effecting mergers through a shareholders' or creditors' arrangement which was subject to the approval of the Israeli courts.

The new law sets out a merger procedure for Israeli companies that requires corporate approval rather than court approval (although additional regulatory approval may be required for particular companies).

Under the law, a merger is defined as:

"the transfer of the assets and liabilities, including conditional, future, known and unknown liabilities, of the target company to the merging company, as a consequence of which the target company ceases to exist."

For the purposes of this overview, it has been assumed that there are only two merging companies, although the law places no restriction on the number of companies that may merge.

The first step for any merger is to obtain the approval of the board of directors of each company. Each board must consider whether or not there is reasonable concern that, as a consequence of the merger, the merged company will not be able to meet its obligations to its creditors. If this risk exists the board may not approve the merger.

Merger proposal
Following the approval of each company's board, the companies must jointly prepare a merger proposal. The merger proposal is then filed with Israel's Companies Registry by each company. Although not a regulatory requirement, it is generally expected that the actual merger agreement will be attached to the filing, and that the agreement will become a public document.

The merger is also subject to the approval of each company's shareholders. Although the law does not state whether any special majority is required (and therefore it may be supposed that a simple majority of shareholders present and voting would suffice), with respect to any company incorporated before the Companies Law 1999 came into effect, the merger requires the approval of 75% of the shareholders present and voting.

Where the share capital of the target company is divided into different classes of shares, the merger is subject to the approval of each class of shares. In addition, a majority of the uninterested company shareholders present must approve the merger where either of the following conditions are fulfilled: (i) one of the merging companies hold shares in the other merging company; or (ii) a shareholder in one company holds at least 25% of the shares or other means of control of the other merging company.

Although the law only refers to the ownership of shares, it is possible that a voting agreement between a shareholder in one merging company and the other merging company would be sufficient to trigger this special majority requirement.

These provisions are an example of the law's general tenor of increased protection for minority shareholders. They would make a merger between a parent company and a subsidiary, in which it owns 99% of the share capital, dependant on the approval of a majority of the remaining shareholders. To minimize the possibility of small minorities blocking mergers, the courts have jurisdiction to declare that a company has given approval when a merger has been approved by a general meeting but not by a majority of the uninterested shareholders or all of the class meetings. However, this procedure has yet to be tested and it is not certain what criteria a court would consider in making this decision.

Notifying creditors
Each merging company is obliged to notify its creditors of the proposed merger. A copy of the merger proposal must be sent to the secured creditors of each company. Unsecured creditors must also be informed of the merger. Regulations enacted under Companies Law 1999 set out further steps each merging company must take in order to notify its creditors (eg, publication of notice in two daily newspapers). Creditors are entitled to apply to the appropriate court to request a delay or an order preventing the merger.

Each merging company is also required to notify the Companies Registry on the completion of several of the key stages in this procedure.

Conclusion of the merger
Seventy days after the merger proposal was filed with the Companies Registry and assuming that all necessary approvals have been obtained (the law specifically refers to situations in which the merger requires the consent of Israel's antitrust authorities), the companies registrar will register the merger. This is done by transferring all registrations in the merging company to the surviving company and removing the merging company from the registry. A merger certificate will also be issued to the surviving company.

Tax implications
In Israel, as in many jurisdictions, it is possible to effect the tax-free corporate merger of two companies. However, the conditions for this type of merger are extremely difficult to satisfy and make many transactions unattractive to the parties involved. These conditions include:

  • the ratio of the values of the merging companies (before the merger) may not be greater than 1:4;

  • the majority of the assets of the merging companies (before the merger) may not be sold by the merged company for two years from the end of the tax year in which the merger order was given; and

  • the merger is only effective from the end of the tax year.

Consequently, in Israel, the triangular merger structure (where the acquiring company forms a special purpose subsidiary to merge with the target company) that has become common in the United States, would be treated as a taxable sale of assets by the target company.

A revision of the tax law on mergers, to bring it into line with the new Companies Law and current practice, is at the draft legislation stage and is expected to come into effect within a few years.


Companies in Israel can be divided into two categories: (i) public companies, that is, companies whose shares are traded on a stock exchange (either in Israel or a recognized non-Israeli exchange) or whose shares have been offered to the public by prospectus and are held by the public; and (ii) private companies, that is, all non-public companies.

In order to protect the interests of public shareholders, the law imposes a number of restrictions on the acquisition of shares in a public company, while the acquisition of shares in private companies is largely unregulated.

Public Companies

The Companies Law 1999 distinguishes between two sets of requirements for a tender offer which apply, either separately or concurrently, depending on the percentage of shares in the target company which will be held by the prospective purchaser following the completion of the acquisition.

Special tender offer
The acquisition of any shares of a public company which will result in (i) the purchaser acquiring 25% of the issued shares (where before the acquisition no single shareholder held 25% of the issued shares), or (ii) the purchaser owning more than 45% of the voting rights of the company (provided that there is no other shareholder who holds more than 50% of the voting rights) may only be carried out pursuant to a form of public tender offer, referred to as a 'special tender offer'. It is not clear from the law whether the existing holdings (of 25% or 51%) must be held by only one person or whether the aggregate holdings of a related group or a number of shareholders subject to a voting agreement would be sufficient.

Public companies whose shares are traded on a non-Israeli stock exchange are exempt from the requirements of a special tender offer, provided that (i) the jurisdiction in which they are traded imposes restrictions on the acquisition of control of the company through the purchase of shares on the exchange, or (ii) the acquisition of control of the company requires the purchaser to offer to acquire publicly-held shares.

Once a special tender offer has been initiated, the board of directors of the target company is obliged to make a recommendation to its shareholders on the tender offer or, if it is unable to make this type of recommendation, explain to its shareholders why it is unable to do so.

An office holder of a company who attempts to frustrate the tender offer may be held personally liable to the offeror and to the company's shareholders for damages caused by his actions, unless the office holder acted in good faith and had a reasonable basis to believe that his actions were for the good of the company.

The office holder is permitted to entertain competing offers or to attempt to improve the offer, although Israeli courts have yet to consider whether office holders have a duty to do so.

The Companies Law 1999 states that, unless a majority of the offerees expressing an opinion approve the offer, a special tender offer may not be completed. (Any affiliates of the offeror may not be counted for this purpose.) The absence of a definition of this phrase makes it unclear as to what is required for a special tender offer to proceed. For example, where a special tender offer is made to acquire 60% of a company and shareholders holding 60% wish to accept the offer, it is not clear that the acquisition could be completed if a numerically greater number of shareholders rejected the offer.

Assuming the necessary level of acceptance, the offeror will acquire the desired number of shares pro rata from the shareholders who accepted the offer (although the remaining shareholders have an additional four days to accept the offer and participate in the sale). If a special tender offer is accepted, the acquiror and its affiliates are prohibited from issuing a further tender offer or merging with the company for one year from the special tender offer, unless it undertook to do so in the terms of the initial tender offer.

Full tender offer
In addition, the acquisition of shares in a public company - in which the aquiror will hold more than 90% of the shares of the target company or any class of its shares after the acquisition - is prohibited, unless the person issues a public offer to acquire all the shares or all the shares of the relevant class (ie, a full tender offer).

In the event that a full tender offer is made and, after the offer has been completed, the percentage of shares held by shareholders who did not accept the offer is less than 5% of the outstanding shares or relevant class of shares (ie, the offeror owns more than 95% of the outstanding shares or relevant class of shares), then the offeror automatically acquires all the outstanding shares or relevant class of shares. The company can automatically register all the remaining shares that did not respond to the offer in the name of the offeror.

The high percentage of shares required to force the sale of the remaining shares has been criticized as being unjustified, especially because the approval of a merger transaction (in which the entire company could, in effect, be sold) is far lower.

Following a forced acquisition, the offerees are entitled to seek a court appraisal of the value of their shares. It is not clear whether only those offerees who rejected the full tender offer are entitled to apply to the courts for appraisal, or whether those who accepted the offer are also entitled. It is likely that reliance on an appropriate fairness opinion or similar document will reduce the risk of this procedure.

In the event that the offeror does not reach the 95% threshold, he is prohibited from acquiring shares in the company as part of the offer which would result in him owning more than 90% of the shares or relevant class of shares of the company. Any shares that are acquired by a person in contravention of the provisions of the law will not grant the owner any rights (ie, they will be 'dormant shares').

Private Companies

Forced sale provision
The Companies Law 1999 introduced a forced sale provision with respect to private companies. Under this provision, where shareholders holding at least 80% of the target company's shares (or, where the company was incorporated prior to February 1 2000, 90%) accept an offer to buy their shares within two months of the offer being made, the offeror may force the remaining shareholders to sell their shares at the same price. However, the shareholders have one month from receipt of notice of the 'squeeze out' to apply to the courts to prevent the sale. The squeeze-out threshold may be raised or lowered in the company's articles of association.

Tax implications
A full review of the tax implications of a share sale is beyond the scope of this article. However, the disposition of shares by the shareholders of the target company is taxable in Israel. It is generally subject to capital gains tax on the difference between the purchase price and the sale price. The rate of tax varies depending on a number of factors, including:

  • whether the shareholder is a corporation or an individual;

  • whether the shares are traded on a non-Israeli stock exchange;

  • when the shares were acquired; and

  • the terms of any applicable double taxation treaty.

Given the frequency with which these type of acquisitions are carried out by means of share swaps (as opposed to cash transactions), in many cases the Israeli tax authorities will issue a pre-ruling. This pre-ruling defers the payment of tax in respect of the share sale until after (i) sale of the shares acquired in the swap or (ii) two years from the date of the transaction or six months after any statutory lock up period, whichever is later.

The revised law has retained the provisions concerning shareholders' and creditors' arrangements and the courts' ability to approve an arrangement whose purpose is the merger of companies and consequently, to order the transfer of the assets of the relevant company to the other company.

However, it is not certain that the possibility of carrying out a merger by means of an arrangement remains. The law now provides a statutory procedure for the conduct of mergers and, therefore it is not clear whether the courts will allow companies to circumvent this procedure by using an arrangement.


The courts have not yet had the opportunity to consider Companies Law 1999 and therefore a number of questions remain unanswered. Similarly, law firms and businesses have yet to develop standard practices for transactions under the law and it will be some time before the new statutory rules for mergers and acquisitions are clarified.

However, in this context, the Companies Law 1999 should be seen as an improvement on the previous situation, especially with regards to mergers that were previously subject to procedural restrictions that were not specifically designed with mergers in mind. The provisions of Companies Law 1999, although far from perfect, allow the parties to a prospective transaction to have a far greater degree of certainty with regards to the requirements and consequences of any particular structure.

For further information on this topic please contact Mark Phillips at Herzog, Fox & Neeman by telephone (+972 3 692 2020) or by fax (+972 3 696 6464) or by e-mail ([email protected]).

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