In my previous post, I discussed the result of a US pressure campaign on its allies, including Israel, to apply greater scrutiny to foreign direct investment. While US pressure on Israel is not new, it has led Israel to announce the creation of a foreign investment oversight committee.

The Precursor to Israel’s “CFIUS”

Israel’s announcement about the new foreign investment oversight committee has raised concerns for foreign investors and Israeli companies alike. However, this move merely formalizes and makes public oversight that Israeli regulators have been exercising for years.

A new committee likely will put more formal mechanisms and procedures into place. However, existing legislation, disjointed authorities, and a number of public (and not so public) policies already enable the Israeli defense establishment to oversee growing foreign interests in its critical assets.

Foreign Ownership of Sensitive Companies and in Sensitive Sectors

In 2006, Israel’s Knesset passed the Defense Corporations Law-2006, which was intended to protect Israel’s security interests in its defense corporations. Under this law, a team of ministers (the Prime Minister, Minister of Defense, and Minister of Economy and Industry) can classify defense sector corporations as “Defense Corporations.” They can do this if national security likely would be harmed by situations such as the acquisition or holding of control or means of control in that corporation; the execution of a project or merger with another entity; or, ultimately, for any other reason that could threaten national security.

“Defense Corporations” are subject to oversight, including in the form of specific restrictions placed on the transfer, acquisition, and general ownership of their means of control. 

Similar oversight powers can be found under the Defense Export Control Law-2007. As a general rule, this law prohibits the exportation of certain controlled (regulated) goods/technology, know-how, and services without proper registration and licenses. This means that anyone seeking to engage in such exports must first register both him/herself and any controlled exports with the Defense Export Control Agency (DECA) in the Israeli Ministry of Defense. Once registered, the exporter may apply for marketing and export licenses, as applicable. Exports are only permitted following registration and the obtaining of required licenses.

The DECA has wide discretion in issuing marketing and export licenses, which means, essentially, that it can control sales of controlled exports outside of Israel. In other words, the DECA has the power to kill off sales where it identifies policy red flags or otherwise takes issue with a license applicant, that applicant’s product or technology, or potential destinations and end users.

This impacts foreign investment since, under this law, defense exporters must report changes in control to the DECA. If control is transferred to a person or entity that the DECA (or the Ministry of Defense more broadly) disapproves of, this could endanger the future issuance of marketing and export licenses and put that defense exporter’s business at risk.

Inter-Ministerial Consultations

Under the Israeli Lands Law-1960, the Israeli government regulates the transfer of rights in Israeli land to non-Israelis. In this regard, the sale or transfer of rights in Israeli land to foreigners (whether or not for consideration) requires approval from the Chairman of the Israel Lands Council. Part of this approval process requires consultations between the Chairman and the Ministers of Defense and Foreign Affairs, and that the Chairman consider certain influencing factors or consequences of the sale, such as “the public good and its security.”

Importantly, this law defines “rights in property” broadly, and it includes ownership rights, the right to lease property for more than five years or an option to extend a lease for an aggregate period exceeding five years, as well as the right (subject to an undertaking) to transfer such ownership or leasing rights.

The bottom line is that acquiring significant rights in (or title to) Israeli land is subject to a level of scrutiny that includes national security considerations.

Discretion in Granting Regulatory Licenses

As a general rule, the Communications Law (Telecommunications and Broadcasting)-1982 prohibits engaging in “telecommunications activities” without a telecommunications license. This concept, “telecommunications activities,” is defined widely as the broadcasting, transfer or reception of signs, signals, writing, visual forms, sounds or information by means of wire, wireless, optical system or other electromagnetic systems.

In other words, as a baseline, anyone looking to offer telecom services in Israel requires a telecom license (or must be covered by general licenses or permits). 

Moreover, this law offers a number of opportunities to the Minister of Communications to prevent or seriously limit foreign investment in Israeli telecom companies (and the telecom industry). For example, when issuing telecom licenses, the Minister of Communications can include restrictions on and conditions regarding the appointment of officers, shareholdings, and the transfer/acquisition of means of control in the licensee or license applicant. These restrictions and conditions don’t have to be given proactively; they can be amended at the Minister of Communication’s discretion. When issuing or amended a license, an important consideration is “the public good,” which can be understood broadly as including national security considerations.

Thus, the Minister of Communications can restrict foreign acquisition of holdings in Israeli telecom companies, and can encumber their activities by amending existing licenses following foreign investment in a license holder.

Government Procurement Contracts

In addition to oversight through legislation, the Israeli Ministry of Defense, a key customer (or target customer) for many companies in the defense sector, has voiced its ability to exert oversight through its procurement contracts. This type of oversight is expected to take the form of ownership or means of control conditions, such as requiring approval for changes in ownership for a contract to remain in force, supplier representations regarding ownership structure, and agreement to contract with the supplier on the basis of such representations.

It’s not possible to say at this point what other mechanisms might be used in procurement contracts to retain oversight (and even control) over ownership. Such provisions won’t be limited necessarily to Ministry of Defense contracts; they could appear in the government procurement contracts of other governmental bodies as well.

International Trade Policy

Another place where foreign investment oversight can be found is in Israel’s international trade policy. Since the 1980’s, Israel has been entering free trade agreements (FTAs) and bilateral investment treaties (BITs) with other countries to help lower trade barriers and support the Israeli economy in its quest for new markets. The price Israel pays for receiving trade benefits in foreign markets is offering reciprocal benefits, such as “national treatment,” to their treaty counterparts. Generally speaking, this means that Israel must ensure that foreign companies receive the same treatment afforded to domestic Israeli companies in Israel.

Examples of national treatment include preventing regulations that offer tax breaks indiscriminately to Israeli companies (as opposed to foreign companies) and allowing Israeli-origin goods to occupy more “shelf space” in supermarkets than foreign-origin goods. Despite provisions such as national treatment, Israel often demands leeway when it comes to government procurement and preferring Israeli goods and services over foreign ones, particularly in relation to defense and security-related sectors.

Generally speaking, FTA negotiations are led by the Ministry of Economy and Industry and BIT negotiations by the Ministry of Finance, and these negotiations are supported by other governmental bodies as well (such as the Population and Immigration Authority, Ministry of Foreign Affairs, and, of course, the defense establishment). Negotiation support is offered both through active participation in negotiations and through external consultations. While consultations are privileged, one would expect defense establishment bodies to push for limitations on national treatment provisions in FTAs and BITs, particularly in the defense sector.

An example of this can be found in the Israel-Japan BIT. In this BIT, Israel protects its right to maintain certain defense and security measures that don’t comply (or, are “non-conforming”) with the BIT’s national treatment (Article 2) and most favored nation (Article 3) provisions. Moreover, these limitations don’t comply with Articles 6 and 7 either (Articles 6 and 7 prevent the BIT’s parties from imposing requirements on foreign investors regarding the procurement of goods and services in their own territories, hiring a certain numbers of their own nationals, or appointing their own nationals to senior management and executive roles).[1]

Non-conforming measures include, for example:

  • The ability to require board members; position holders (managers); certain officers in “public bodies” (as defined in the Israeli Regulating Security in Public Bodies Law-1988); and persons in positions with cyber security responsibilities to be Israeli nationals or permanent residents in Israel with adequate security clearance.
  • The ability to require the procurement or use of locally produced goods or services offered, when the requirement is cyber security-related and conforms to national cyber security policy.

Until now, general oversight powers found in existing laws and governmental policies have served as the Israeli defense establishment’s toolbox for oversight and control over foreign investment. Now, the National Security Council is centralizing oversight powers and trying to create internal consistency regarding oversight to ensure that it is more encompassing and effective in sectors that Israel sees as critical to its economy, national security, and more broadly, to its relationship with the US.

In this post, I described the mechanisms that already exist in Israeli law and which the Israeli government has used until now to oversee and control foreign direct investment. In my next post, I’ll discuss the little we know about this committee and how Israeli industry should begin preparing for a new era of foreign direct investment.