Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Acquisitions of private companies may be structured as either a share purchase transaction, an asset purchase transaction or a statutory merger. Typically, parties will choose to carry out an acquisition through a share purchase if there is a small number of shareholders in the target company (owing to the fact that, absent certain circumstances, all shareholders are required to sign the share purchase agreement). If there is a large number of shareholders in the target company (or their signatures are otherwise difficult to obtain), it would be more effective to structure the transaction as a statutory merger as, in most cases, only a simple majority of the shares being voted in the shareholders meeting is required to approve the transaction. An asset purchase transaction will be typically used if only a division of a company is being acquired or if the acquirer wishes to purchase only certain assets or is willing to assume only certain liabilities of the target company.
A typical transaction in Israel contains the following steps:
- the parties execute a letter of intent and a non-disclosure agreement;
- the buyer conducts a due diligence investigation of the target company, or the business or assets to be transferred and the seller prepares a disclosure schedule in response to the representations and warranties in the definitive agreement;
- the parties negotiate and enter into the definitive agreement and the ancillary agreements; and
- usually, certain closing conditions (regulatory or other conditions) need to be fulfilled before the transaction is consummated.
The time necessary to complete an acquisition varies depending on factors such as complexity or structure; however, on average, it takes between three to six months to complete an acquisition of a private company.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The Israeli Companies Law, 1999 and the regulations promulgated thereunder (Companies Law) set out the regulatory framework for Israeli companies. A statutory merger under Israeli law is carried out pursuant to the relevant provisions of the Companies Law. An Israeli company cannot merge with a foreign company. Therefore, a merger with a foreign acquirer is typically carried out by way of a (often, reverse) triangular merger, whereby the foreign acquirer incorporates a wholly-owned Israeli subsidiary that merges with the Israeli target. There are certain other laws and regulations relating to the transfer of employees, title to property, data protection, pensions and competition that are relevant to private acquisitions and disposals.
It is possible (though less typical) for the agreements governing the acquisition of Israeli companies to be governed by foreign law. However, legal formalities applicable to the transfer of shares and assets and liabilities that are subject to Israeli law would have to be complied with.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Under the Companies Law, the prima facie evidence for ownership of shares is the registration of the ownership in the register of shareholders maintained by the company (rather than the possession of a share certificate). Transfer of shares requires a share transfer deed to be executed by the buyer and seller. The transfer of title to assets subject to Israeli law may require notifications to be given, consents from third parties to be obtained and registrations to be made. For example, if real estate is being sold, the new owner should be registered in the Israeli Lands Registration Bureau (Tabu) as the new owner of the real estate. Transfer of personal assets is often reflected in a transfer document along with the physical transfer of possession of those assets from the seller to the buyer (in some cases, transfers should be publicly registered - eg, transfer of vehicles). It is good practice to check in public files whether a charge was registered on the shares or assets to be transferred in the transaction.
Generally, transfer of assets occurs by operation of law in cases of acquisition of companies by way of a statutory merger under the Companies Law.
A trustee can hold shares in trust for the benefit of a shareholder, provided the trustee notifies the company of the trust and the company registers the trustee as such in the register of shareholders maintained by the company.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
If an acquisition is structured as a share purchase, then the consent of all the shareholders in the target company would be required to sell the company. However, minority shareholders may be required to sell their shares pursuant to ‘bring-along’ provisions contained in a company’s articles of association or in a shareholders’ agreement mandating the transfer of title to their shares if specified conditions are satisfied. Further, the Companies Law provides for a procedure through which the buyer can force the acquisition of the shares of minority shareholders who have not accepted the acquirer’s offer to purchase all of the company’s shares, if the holders of at least 80 per cent of the shares to which the offer relates agree to sell their shares pursuant to the offer (the 80 per cent majority is the default majority prescribed in the Companies Law, but a different majority may be determined in the company’s articles of association).
If the target company has a large number of shareholders, the acquisition of a private company would generally be carried out by way of a statutory merger. In general, the approval of a majority of the board of directors (present at the board meeting) and the approval of a majority of the shares (voting at the shareholders’ meeting) would be sufficient to enable the transaction to take place (subject to veto rights, if any, in the company’s articles of association or shareholders’ agreements).Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
A buyer can generally choose which assets or liabilities it wishes to acquire in a transaction that is structured as an asset sale. One exclusion is that to the extent the acquirer rehires employees previously engaged by the target, the acquirer is deemed to have assumed the liabilities relating to seniority rights of the employees (for example, seniority rights with respect to entitlement to a certain number of vacation days, paid leave days and recreation pay under Israeli employment laws).
A transfer of assets or liabilities may require customary third-party consents: for example, a landlord’s consent to the assignment of a lease or a counterparty’s consent to the assignment of a contract (see question 7).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
The Companies Law does not impose restrictions on the transfer of shares in a private company, but allows a company to include restrictions on transfer in its articles of association. It is customary to find clauses in the articles of association requiring that any transfer of securities be approved by the board of directors of the company, and subjecting any transfer to a right of first refusal (or right of first offer) of all or some of the other shareholders of the company and/or to tag-along rights (whereby a selling shareholder must allow other shareholders to participate in a sale of shares by the selling shareholder to a third party). In some cases, the articles of association may disallow, subject to certain approvals, transfers to competitors of the company.
Competition law in Israel is based on the Economic Competition Law, 1988 (Competition Law). The Competition Law is designed to regulate restrictive arrangements such as acquisitions.
An acquisition is defined in the Competition Law as including:
- the acquisition of most of the assets of a company by another company; and
- the acquisition of shares in a company by another company, by which the acquiring company is accorded more than a quarter of the nominal value of the issued share capital or of the voting power; the power to appoint more than a quarter of the directors; or participation in more than a quarter of the profits of the company;
Parties to an acquisition must file a notice with, and receive the approval of, the Israeli competition authority if at least one of the following applies:
- as a result of the acquisition, the market share of the merging companies in Israel, in the production, sale, marketing or purchase of the relevant product, or the provision of a particular service, exceeds 50 per cent;
- the revenues of the merging companies together in the Israeli market, in the fiscal year preceding the merger, exceeded 360 million Israeli shekel, and the revenues of each merging company is at least 10 million Israeli shekel; or
- one of the merging companies is considered a monopoly.
Completion of a merger that requires notification without prior approval of the competition authority is prohibited, and may be subject to criminal and civil sanctions. A merger will be approved unless, in the opinion of the competition authority, there is a reasonable risk that, as a result of the merger, either:
- competition will be substantially lessened (for example, if the merged entity will have a market share of more than 50 per cent); or
- the public will be harmed by the price level, quality, quantity or terms of supply of a particular asset or service.
Transactions in regulated industries (eg, banking, communication, transportation) often require the approval of the relevant governmental agency before transactions in such industries may be completed.
The Companies Law does not impose specific restrictions on the transfer of shares to, or holding of shares by, a foreign buyer. Israeli law imposes restrictions on dealings with persons or entities residing in countries that are in a state of war with the State of Israel (namely Iran, Syria and Lebanon).
Are any other third-party consents commonly required?
In a share purchase transaction, each shareholder needs to agree to transfer its shares to the acquirer (subject to ‘bring-along’ provisions - see question 4).
In a merger transaction, in general, only a majority of the shares of the target voting at the shareholders’ meeting would be required to approve the merger. The approval of the acquirer’s board and shareholders also would be required to approve the merger (which in a triangular merger in which the consideration is cash would only mean the approval of the SPV’s sole shareholder).
In an asset sale, the consent of counterparties to agreements of the target (such as landlords, parties to commercial agreements, etc) would generally be required in connection with the assignment of contracts to the acquirer, unless the relevant agreement provides otherwise.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
See question 6 for details of certain governmental approvals and filings. In a merger transaction, the acquirer and the target must file together a ‘merger proposal’ with the Israeli Registrar of Companies and, in addition, certain other notifications should made to each party’s secured and un-secured creditors. The merger would be consummated only once the Registrar of Companies issues the ‘merger certificate’. Pursuant to the Companies Law, the merger certificate may be issued by the Registrar of Companies only if: (i) at least 30 days have lapsed since the date of approval of the merger by the shareholders of both merging companies; and (ii) at least 50 days have lapsed since the filing of the merger certificate with the Registrar of Companies.
Certain other regulatory filings may be required depending on the relevant facts applicable to the target and the structure of the transaction. For example, the consent of the Israeli Innovation Authority may be required for the transfer outside of Israel of intellectual property that was funded, in whole or in part, by grants of the Innovation Authority. In addition, it is standard to file with the Israeli tax authority requests for tax pre-rulings with respect to the treatment of stock-options and tax withholding in connection with the transaction.