As we head into 2018, we wanted to share with you, based on our worldwide advice to clients, some of the likely challenges and opportunities we see facing corporations around the globe in the coming period. We believe the following are key areas to watch for any Israeli company operating an international business.
1. Crisis preparedness: When is enough?
In today’s world businesses can be subject to sudden crises, “life or death” experiences for the firm. In recent years some of the world’s biggest organizations have faced serious crises: Samsung, Volkswagen and Facebook to name a few. Whether it’s the theft or loss of sensitive information, environmental disaster or a cross-border product recall, businesses are vulnerable to potentially lethal levels of risk. As witnessed by the reported writedowns in value by The Weinstein Company investors after news of the Harvey Weinstein scandal broke, the behaviour of a single employee can have devastating consequences for the firm.
While crises are dangerous they may even present opportunity if well-handled. The key is being ready and knowing, to the extent possible, the nature and level of risk your organization faces and having a robust disaster management plan in place. In our experience, being ready to act deftly in the first 48 hours is critical. One helpful step is pre-planning responses to the most likely crisis scenarios and identifying the team, including internal personnel, outside PR advisors and law firms, that you will call upon.
2. Return of the IPO?
Equity markets had a strong year in 2017 and we are seeing renewed interest by companies around the world in going public. While IPO volumes on most major markets are still well below their peaks, securities regulators and stock markets are actively working to woo more companies to list their shares. One trend we expect to continue into 2018, especially if weak liquidity levels continue on the TASE, is an increasingly global outlook for Israeli companies. While Nasdaq will undoubtedly remain the market of choice for most issuers, we are seeing more interest in markets such as London, Frankfurt and Hong Kong, which recently saw its first IPO of an Israeli-incorporated company.
3. Regulatory risk and tone at the top
As any international businessperson can testify, we live in an ever more regulated world. Regulators across different jurisdictions are cooperating with one another more than ever before, so that a bribery problem in Africa can quickly become a problem in the U.S., the EU or Tel Aviv. At the same time, regulators continue to apply often inconsistent or nationalist approaches, which makes compliance across borders exceedingly tricky. Areas such as anti-bribery, trade sanctions, tax and cartel behavior continue to pose potentially devastating risks for corporations that run afoul of regulators.
In addition to robust and fully updated compliance policies, a cornerstone of healthy corporate culture is what has become known as “tone at the top”—the attitude of the board of directors and senior management towards ethical behavior. When companies do trip up, they must act quickly and effectively to handle the problem. The consequences for even minor infractions can be massive if the company was negligent in not implementing appropriate policies or the discovery of an issue was not handled properly: investigations can last years, morph into investigations of other corporate misbehavior, cross borders to other national regulators and spur civil litigation in multiple jurisdictions.
4. Geopolitical risk
The past year has not been as tumultuous geopolitically as 2016. Despite this, global investors and businesses are still digesting the consequences of Donald Trump’s election, the United Kingdom’s referendum to exit the European Union and the unfolding tensions with North Korea. In 2018, significant elections are scheduled to be held in Russia, Iraq, Lebanon and Egypt. In addition to electoral surprises, geopolitical risk lurks in the continued rise of ISIS, natural disasters, wars and migration flows. These sorts of risks, with which Israeli companies are well acquainted, are inherently difficult to predict but must be taken into account in setting strategy for the year to come.
5. Shareholder activism
Activity by activist investors—firms that use stakes in public companies to push for changes in corporate strategy—is by now a well-established phenomenon that should be on the radar of all public companies. By some estimates, activist hedge funds now manage over $200 billion, and in 2017 activists increasingly sought to attack companies outside of the U.S. While the lower liquidity and common presence of controlling stakes found in Israeli public companies have so far limited the impact of activism on companies traded on TASE, we have begun to see the impact of activism on locally traded Israeli companies. In addition, a number of Israeli companies traded on overseas markets, particularly in the U.S., have come under attack. Senior business and legal personnel of Israeli companies traded in the U.S., or companies considering listing there, should review their potential susceptibility to activist campaigns and ready themselves vigilantly to respond quickly and effectively.
6. Emerging markets
In the eight years since we have had an active Israel-focused practice, we have noted the penchant of Israeli companies to invest in emerging markets. Alongside the potential higher returns afforded by emerging markets, comes higher risk. Careful planning—before the investment is made—can help mitigate much of that risk. For example, structuring your investment through a jurisdiction that has an investment treaty with the target jurisdiction can afford you access to international arbitration rather than relying on local courts in the event of unfair treatment (or worse) from the host government.
7. China outbound investment
In the last twelve months there has been a slowdown in overseas investment from China, primarily as a result of tightening regulatory controls. In late August of this year, Chinese regulatory authorities published new guidelines governing outbound investment. In our view, while these Guiding Opinions are likely to further restrain outbound investment, they provide much-needed clarity and also indicate areas in which transactions are likely to be approved. Transactions between Israeli and Chinese companies bring unique challenges, not least in cultural gaps, yet the wave of Chinese M&A involving Israel seems to be far from over, and with a mixture of patience, hard work and skilled advice these are difficult but doable deals.
8. Competition and the rise of protectionism
Experienced businesspeople will know that antitrust law bears critical implications for their companies, whether in regard to the need to avoid illegal cartel behavior and abusive market dominance, or in regard to competition considerations for winning regulatory approval of mergers and acquisitions. These considerations have continued to gain importance in recent years as antitrust law becomes increasingly institutionalized in previously less regulated economies and as positions taken by companies in one jurisdiction may bear follow-on impacts in other jurisdictions.
In addition to these traditional concerns, antitrust law is now assuming ever greater importance as national regulators in many countries are moving to restrict foreign ownership of sensitive industries or national champions, with principles of antitrust and trade law often playing a role in the analysis. Proposed legislation being considered by the US Congress may make the process for approving foreign acquisitions of US assets, known as CFIUS review, more restrictive. Similar proposals have been raised over the last 12 months in a host of other jurisdictions such as the UK, Germany and the EU.
9. The evolving nature of litigation/arbitration: risk and opportunity
With U.S.-style class action mechanisms becoming more widely available in the EU and elsewhere, companies operating in global markets are increasingly exposed to the threat of group claims. In our view, this trend is also likely to lead to more sophisticated plaintiffs’ bars in many jurisdictions. In our experience, companies facing potential exposure to group liability benefit from giving early thought as to where they may be sued, potential damages exposure, the window of opportunity during which claims may be brought, and critically, how to navigate, and possibly exploit, the substantive and procedural differences between class action regimes.
Litigation and arbitration are of course double-edged swords: while our corporate clients are often on the defensive side of these claims, it bears noting that courts and arbitration forums may also present opportunity, whether to keep a competitor from misusing your proprietary technology or for redress against a wayward counterparty. A trend we see continuing into 2018 is the increasing openness to international arbitration as a more effective and neutral forum for redress than national courts when resolving disputes abroad. Companies entering new ventures with foreign counterparts should consider in advance whether their business agreements should include arbitration provisions.
10. Cybersecurity and data privacy
Managing and protecting data has become a key issue for businesses, particularly as regulators and consumers become more vigilant about how that data is processed and stored. Uber and Equifax are only among the latest high profile names to fall victim to data breaches. It has become increasingly clear that whatever your industry, cybersecurity is a critical concern. As your organization holds more data, and your staff use their own devices to perform professional tasks, you become more vulnerable to security breaches. Companies need to be aware of the rules and regulations across the jurisdictions in which they operate and be prepared to act quickly in the event of a breach.
In May 2018, the new EU-wide General Data Protection Regulation “GDPR” regime takes effect. Companies should already be taking steps towards putting in place policies and procedures to satisfy the new regime.