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.
Advisers, negotiation and documentationAppointed advisers
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Parties will typically also appoint accountants to assist with a transaction. The services of a financial adviser may or may not be retained in Israeli private M&A transactions. The accountants will assist with accounting matters, financial and tax diligence and tax structuring. Accountants have standard terms of engagement that would be agreed with the buyer or seller, as the case may be, prior to their hiring. The level of fees will typically depend on the monetary value of the deal, the complexity of the issues, the timetable for the transaction and the nature of any required work product.Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Israeli contract law imposes a general duty to negotiate in good faith. However, the legal status of any form of ‘good faith’ obligations or other pre-contractual liabilities could, in many situations, be rather unclear and will depend upon individual circumstances. If negotiations have been conducted for some time and there exists more than just an outline of an agreement, certain case law may lead to the conclusion that the parties may have an obligation to continue such negotiations in good faith, whereas most practitioners believe that the parties do not have an obligation to complete the negotiations with the purpose of reaching an agreement. In such situations, it cannot be ruled out that if one of the parties is acting unfairly, that party may become liable for the expenses incurred by the other party in connection with the negotiations. Therefore, usually the parties agree in the letter of intent, at the outset of the negotiations, that no binding agreement shall be deemed made until definitive agreements are signed by the parties (other than with respect to exclusivity, confidentiality, etc).
Directors of an Israeli company are subject to fiduciary duties that include the duty to act in good faith and for the benefit of the company.Documentation
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
When acquiring shares, a business or assets, parties to a transaction will customarily enter into:
- a letter of intent setting forth the main terms of the proposed transaction. The terms in the letter of intent are almost always non-binding, except for certain provisions such as exclusivity (if applicable), confidentiality and expenses;
- a confidentiality agreement governing the exchange of confidential information relating to the transaction;
- a sale and purchase agreement setting out the terms of the transaction, which would typically include the terms of the transaction, representations and warranties of the parties, covenants and indemnification obligations;
- a disclosure statement in which general and specific disclosures are made by the seller qualifying the representations and warranties included in the sale and purchase agreement;
- an escrow agreement, to govern the holding and release of the amount placed in escrow to secure indemnification claims by the acquirer.
- documents to transfer or register title that, in respect of the acquisition of shares in an Israeli company, would consist of share transfer deeds and, in respect of the acquisition of a business or assets, would consist of notifications to update registers of, for example, real property and intellectual property;
- key members of management in the target business may enter into new employment agreements to secure their continued employment following completion of the transaction;
- in an asset sale, transition services agreement, if certain employees/facilities are not acquired and remain with the seller, and are necessary for the acquirer to operate the acquired business during an interim period following the closing; and
- in a merger transaction, the acquirer and the target will file together a merger proposal to the Israeli Registrar of Companies.
Are there formalities for executing documents? Are digital signatures enforceable?
In general, there are no special formalities to be observed in executing acquisition or merger agreements, other than ensuring that the agreements are signed by authorised signatories. In an asset sale, depending on the assets being transferred, certain formalities may need to be observed, such as notarising documents effecting the transfer of certain real property.
Agreements that are executed by a corporate entity must be signed by an authorised person (as determined by a resolution of the board of directors). The signature of an authorised signatory on behalf of the company should be accompanied by a stamp bearing the company’s name or by the company’s printed name, unless otherwise specified in the company’s articles of association.
Digital signatures are binding and enforceable as evidence of execution, under and in accordance with the provisions of the Electronic Signature Law 2001.
Due diligence and disclosureScope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
As part of the legal due diligence, legal counsel to the acquirer will typically review and confirm the capitalisation (share ownership) of the target company, terms of commercial agreements, terms of financial obligations, ownership and use of intellectual and real property, physical assets, employee agreements and benefits, litigation, regulatory issues and compliance with law.
In certain cases, typically when bankers manage a tender process (although it is not common market practice), sellers would provide due diligence reports to prospective buyers.Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
A seller can be liable for pre-contractual misrepresentations although, except with respect to fraudulent misrepresentations, sale and purchase agreements would usually exclude liability for pre-contractual and misleading statements.Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
Israeli companies are required to make filings with the Registrar of Companies that are made publicly available online. Details appearing in the Registrar of Companies include:
- the company’s certificate of incorporation;
- the company’s articles of association;
- details of share ownership;
- list of members of the board of directors;
- liens over the company’s assets; and
- whether or not the company is in liquidation process.
Details of the ownership of real estate can be obtained at Tabu. Information on registered intellectual property may be obtained from the Israeli or any other relevant patent and trademark office.
A buyer of a company will typically carry out a search of the information filed with the Registrar of Companies. Searches may also be made with the Israeli Liens Registrar, or in litigation databases to find out if the target company is a party to any litigation proceeding. Nominal fees are generally payable to carry out such searches.Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
In general, if the purchase and sale agreement does not explicitly provide that an acquirer is precluded from making claims with respect to matters about which it has knowledge at the time of the agreement, claims would not be excluded.
Pricing, consideration and financingDeterming pricing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Pricing is customarily determined through negotiations between the parties. Private transactions may include an adjustment mechanism to adjust for deviations from a cash-free debt-free basis and a normalised level of working capital at closing. Alternatively, the locked-box pricing method may also be implemented.Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Cash is the most common form of consideration in private M&A transactions. In certain cases, consideration consists of stock of the acquirer, or a combination of cash or stock.
There is no statutory obligation to pay multiple sellers the same consideration in respect of an acquisition by way of a sale and purchase agreement. However, if the transaction is structured in a manner that the statutory squeeze-out mechanism in the Companies Law is implemented, then the same consideration that is payable to the shareholders that have agreed to sell their shares to the acquirer, must also be paid to the squeezed-out shareholders.Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Earn-outs and escrows are commonly used in Israeli private M&A transactions. An earn-out is typically used where the parties are unable to agree on the valuation of the acquired business. Escrows are used to provide security for indemnity claims by the acquirer with respect to breach of representations and warranties by the seller. Deposits are not commonly used in Israeli private M&A transactions.Financing
How are acquisitions financed? How is assurance provided that financing will be available?
Usually acquirers fund acquisitions of Israeli private companies with their own cash resources. Sometimes, where a private equity fund is the acquirer, it sets up a special purpose vehicle through which the acquisition is made and which is financed by a combination of equity from the private equity fund and bank debt. It is not common to subject the completion of the transaction in a purchase and sale agreement to a financing contingency (ie, financing would typically be fully committed before signing the definitive agreements of the transaction).Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
An Israeli company is permitted to assist an acquirer in the purchase of its shares to the extent it has ‘distributable profits’ (generally, amounts included in the company’s shareholders equity in the balance sheet that are originated from net profits of the company), and provided that such assistance will not cause the company to be unable to satisfy its existing and expected obligations when they become due. In the absence of such profits, such assistance is deemed a reduction in capital and requires court approval.
If a target does not have sufficient distributable profits, it may apply to the court to approve the distribution, irrespective of the lack of distributable profits. The court would approve the distribution if it concludes that, notwithstanding the proposed distribution, the target company would be able to satisfy its existing and expected obligations when they become due.
Conditions, pre-closing covenants and termination rightsClosing conditions
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Transactions are normally subject to closing conditions, unless there are no legal or regulatory obligations to satisfy, in which case signing and closing may take place simultaneously. Customary closing conditions are:
- accuracy of the target’s representations and warranties;
- the target’s compliance with pre-closing covenants;
- receipt of approvals from relevant regulatory authorities (eg, competition) or expiration of waiting periods;
- absence of any law or court order prohibiting the closing;
- absence of material adverse effect; and
- obtaining third-party consents for material commercial contracts of the target that are subject to ‘change of control’ termination rights.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
Usually the buyer and the seller agree to make reasonable efforts to satisfy the closing conditions and to take reasonably necessary actions to complete the transaction. Generally, the buyer insists not to be obligated to make any divestiture or agree to any operational limitations or grant any commercial concession to facilitate the competition authority’s approval. If such approval is expected to be an issue in a specific transaction, the seller would want the buyer to agree to do as much as possible to obtain the approval and therefore would likely attempt to change the required standard in the provision from ‘reasonable efforts’ to ‘best efforts’.Pre-closing covenants
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
A customary pre-closing covenant would be the seller’s undertaking to operate the target business in the ordinary course of business consistent with past practice, including a commitment that, without the acquirer’s prior written consent, the target would not:
- amend its articles of association;
- pay dividends or make any other distributions;
- amend or enter into material contracts;
- issue or make changes to the outstanding shares;
- sell or dispose of material assets and intellectual property rights;
- commit to capital expenditure in excess of a specified value;
- create encumbrances;
- reduce insurance coverage;
- alter terms of employment or benefit entitlements or hire new employees on salaries in excess of a specified amount;
- initiate or settle litigation or waive any claims; and
- acquire any companies or other entities.
A seller would also typically agree to grant access to the target company’s books, records and premises, to maintain the confidentiality of the transaction and to make public announcements relating to the transaction only with the other party’s consent.
A court may grant specific performance with respect to a breach of covenant and an acquirer may sue for damages.Termination rights
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Typically parties cannot terminate the purchase agreement in private transactions before closing, except if the transaction has not closed by an agreed date (the ‘drop-dead date’) or if it is obvious that a condition to closing would not be satisfied. In some cases, but less common, a right to terminate arises if the other party is in breach of its representations and warranties or covenants in a manner that would breach the other party’s closing conditions and the breaching party is unable to, or does not, amend the breach within an agreed period.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Although there are no legal restrictions to agreeing to such fees, break-up fees and reverse break-up fees are not common in acquisitions of Israeli private companies, businesses and assets.
Representations, warranties, indemnities and post-closing covenantsScope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
The target will typically provide representations and warranties with respect to:
- the capacity and authority of the target to enter into the purchase agreement;
- the share capital of the target company and its holdings in subsidiaries and affiliates;
- the accuracy of the target’s financial statements;
- the absence of changes to the condition of the business since the date of the financial statements;
- operational aspects of the business relating to employee benefits, real property, indebtedness, commercial contracts, litigation, compliance with law, IP and information technology and governmental grants; and
- in respect of a business acquisition, the condition and adequacy of the assets to be acquired.
The seller will typically provide representations and warranties with respect to ownership and title to the shares, as well as authorisation to enter into the agreement and the absence of conflict with governing documents, court orders, and such like.
It is common for representations and warranties provided by the target and the sellers to be qualified by a disclosure schedule. Certain representations and warranties may also be qualified by ‘knowledge’ and ‘materiality’.
The purchase agreement will typically include indemnity provisions providing the buyer recourse against breaches of representations and warranties by the target and the sellers. In addition, depending on the circumstances, the sellers may provide to the acquirer specific indemnities with respect to specific risks identified through due diligence or disclosure such as in respect of the outcome of ongoing litigation or the cost of remediating a known breach of contract, law or regulation.Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
Limitations on representations and warranties are subject to extensive negotiations between the parties, but will usually include some or all of the following limitations:
- survival period, which limits the time period during which claims may be made by the acquirer against the sellers in connection with a breach of representations and warranties. The survival period is often limited (eg, to a period of 12 to 24 months), with representations and warranties relating to certain fundamental representations (as negotiated by the parties), often subject to a longer survival period (in many cases, until the lapse of the applicable statute of limitations);
- maximum amount of indemnification (a cap), which sets the maximum amount of indemnification that the sellers may be required to pay. A seller’s liability for general breaches of representations and warranties is typically contractually capped at an agreed percentage of the purchase price. Fundamental representations and warranties (such as authority, title to shares and taxes) are usually capped at the purchase price; and
- basket, which sets the minimum amount of damages that must be incurred in order for the acquirer to seek indemnification from the sellers. A basket can be a deductible (ie, a threshold that aggregate damages must exceed before any damages are payable) or a ‘tipping point’ (ie, no damages are recoverable until the aggregate amount of all damages exceeds a specified threshold, at which point all damages (even those below the threshold) are recoverable). Fundamental representations and warranties are usually not subject to the basket limitations.
Typically, these limitations do not apply in the event of fraud or specific indemnification items identified during the due diligence, and consequential damages and punitive damages are usually excluded from damages for which indemnity is available.Transaction insurance
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Transaction insurance in respect of representations and warranties is in its early stages in Israeli transactions, and is not often used yet. The insurance is intended to cover losses suffered by the policyholder where a successful claim can be made for breach of representations and warranties. The insurance is almost always purchased by the buyer (the burden of the cost of the policy may be negotiated by the parties).Post-closing covenants
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
In many cases, the seller will agree to a non-compete with respect to the business being sold and to an undertaking not to solicit employees of the target. To be enforceable, any non-competition covenant must apply to a reasonable time period typically considered to be, in the context of an Israeli M&A transaction and a substantial selling shareholder, the longer of (i) four years following the closing date of the transaction; and (ii) two years following the date of termination of employment with the company (if the selling shareholders is also an employee of the company).
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
In general, under Israeli law, there are no transfer taxes applicable with respect to the sale of shares or assets. However, in a sale of shares in a ‘real estate association’, a transfer tax called ‘purchase tax’ will apply at a certain percentage of the value of the real estate assets owned by the real estate association, and a transfer of real estate assets located in Israel will also be subject to a purchase tax.Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
In general, capital gains tax is imposed on a sale of capital assets (including shares) by an Israeli resident, and on a sale of capital assets by a non-Israeli resident, if the assets are any of the following:
- located in Israel;
- shares or rights to shares in an Israeli resident company; or
- represent, directly or indirectly, rights to assets located in Israel.
A non-Israeli resident may be exempt from tax on a capital gain derived from a sale of shares of an Israeli company. This exemption is conditional on a number of requirements. In addition, certain tax treaties signed by Israel provide that a sale of shares of an Israeli company by a non-Israeli resident may, under certain conditions, be exempt from Israeli taxes.
In a share purchase transaction, a capital gain derived by a corporation is subject to corporate tax (currently at a rate of 23 per cent). For individuals, the rate would range from 25 per cent to 30 per cent.
In an asset purchase transaction, a capital gain derived by a corporation from a sale of an asset is subject to tax at the applicable corporate tax rates (currently at a rate of 23 per cent). A sale of a real estate asset located in Israel is subject to the land appreciation tax imposed under the Land Taxation Law. In general, if a seller is a corporation, the land appreciation gain will be subject to tax at the applicable corporate tax rate.
A sale of an asset in Israel is generally subject to value added tax (VAT) currently at the rate of 17 per cent. In general, a sale of shares is not subject to Israeli VAT. There are certain transactions that may be subject to VAT at rate of 0 per cent. Such transactions may include an export of goods and a sale of intangible assets to a foreign resident. The availability of the zero-rate VAT regime is conditional on the satisfaction of certain conditions and requirements provided under law and regulations.
Employees, pensions and benefitsTransfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In a share purchase transaction, the shareholding base of the target company is changing, but the employing entity (target) continues to operate and the company does not alter the employment relationship with its employees.
In an asset purchase transaction, employees of the target are not automatically transferred to the acquirer. In general, to transfer the employment, the employees’ existing employment arrangement would need to be terminated, and the employees to be rehired by the acquirer. Upon termination, the employees will be entitled to certain rights, including statutory severance pay, payment in lieu of notice and certain other benefits.Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Israeli law does not impose an obligation to consult or inform employees of a pending acquisition, unless the employer is a party to a collective bargaining agreement that provides for such right of notice or consultation.Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
In the case of a share purchase transaction, there is continuous employment and the target is required to continue payments to the employee’s pension and provident funds.
In the case of an asset sale involving a transfer of employees from the employ of the target to the employ of the acquirer with continuous employment, a permit from the tax authorities is required for transfer of the pension and provident funds from the control of the initial employer to the new employer. Such permits are routinely granted.
Update and trendsKey developments
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?Key developments36 What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
M&A deal activity in Israel continues to be robust in 2019. Whereas 2018 set a new annual record in total deal value of approximately US$26.5 billion, deal value in the first half of 2019 has already reached US$14.8 billion. Although the Mellanox-Nvidia deal accounts for US$6.9 billion of such total value, even disregarding this deal, overall deal value has increased by about US$1 billion compared with the first half of 2018. Recently, the Israeli market has seen a new trend of ‘mega-deals’ (in Israeli standards), where Israeli companies are acquired for billions of US dollars. In addition to the Mellanox-Ndivia deal mentioned above, in 2018, Israeli company Frutarom was acquired by International Flavors and Fragrances (IFF) for $7 billion and Sodastream was acquired by Pepsi for $3.2 billion. In 2017, Mobileye was acquired by Intel for $15.3 billion. As shown by the Frutarom and Sodastream deals, M&A activity in the Israeli industrial sector has shown recent strength, joining the technology sector that has been the most dominant sector for M&A activity in the last decade. Israeli industrial companies focused on export and with substantial global footprint succeed in creating value and being sought-after targets for international acquirers looking to buy growth against a backdrop of slow global growth.
As to private M&A, a significant trend that is worth tracking in the near future, is the new offering by insurance companies of R&W (representations and warranties) insurance and the adoption of such insurance policies by buyers in M&A deals. We have been involved in several deals in Israel where R&W insurance policies have been obtained and believe that this trend may strengthen in the near future as buyers and sellers become more familiar with the ins and outs of such insurance products. In addition, the Israeli competition authority has recently loosened its criteria for parties to an acquisition transaction to file a merger notice with the Israeli competition authority by determining that notice should be filed if the revenues of the merging companies together in the Israeli market, in the fiscal year preceding the merger, exceeds 360 million Israeli shekel (before such change the threshold was 150 million Israeli shekel). The requirement that the revenues of each merging company is at least 10 million Israeli shekel currently remains without change but there are also proposals to increase that amount.