ISRAEL: An Introduction to Corporate/M&A
View firm profile
The Israeli M&A market has experienced steady growth in recent years, reaching a total transaction scale of an estimated USD20.4 billion in 2019. Due to the effects of the COVID-19 pandemic, however, the market has experienced a 50% drop in the total scale of transactions, compared to 2019, totalling only an estimated USD10 billion. This stemmed from the total freezing of the market during the first quarantine months.
The effects of the pandemic and the closure of international borders has also caused the Israeli market to turn to local transactions. Despite a sharp downturn during the third quarter of 2020, the last quarter showed the return of foreign investors, most prominently from the US, as well as the doubling of local transactions.
The high-tech sector continues to lead the market with the largest transactions, totalling approximately USD5 billion in 2020, with such transactions as the purchase of Checkmarx and Armis by foreign investment funds, and the purchase of Moovit by Intel. The energy sector has also risen, mainly due to the purchase of the “Ramat Hovav” power plant, as part of the reform of the Israeli electricity market. This transaction is expected to produce additional large scale transactions in the energy sector in the coming year. The life science and pharma sectors are also prominent in the Israeli M&A market.
The COVID-19 pandemic has caused an economic crisis that put an end to a decade of steady economic growth in Israel. However, the funds currently available and the low interest environment make for unique market conditions which will carry plenty of significance in the recovery process of the economy, and the M&A market specifically.
M&A Regulation in Israel
In general, the acquisition of an Israeli publicly traded company is regulated primarily by the Companies Law, 5759-1999 (the “Companies Law”), the Securities Law, 5728-1968, and the regulations, rules and opinions promulgated under these laws.
Other relevant regulations are: (i) the Economic Competition Law, 5748-1988; and (ii) the Income Tax Ordinance (New Version), 5721-1961. The primary regulators with respect to public M&A transactions in Israel are: (i) the Israel Securities Authority (“ISA”); (ii) the Israel Tax Authority (“ITA”); (iii) the Israel Competition Authority; (iv) the Israeli Innovation Authority (“IIA”); and (v) the Israeli Registrar of Companies.
Different Rules for Different Types of Company
The tender offer (described below) applies only to Israeli companies that are traded publicly, otherwise, when dealing with acquisitions the process will largely be the same, except with respect to the internal approval process and the disclosure requirements of publicly traded companies. Israeli companies that are traded solely on non-Israeli exchanges, or that are dual-listed on the Tel Aviv Stock Exchange (the “TASE”) and on a recognized non-Israeli exchange, may benefit from certain exemptions – for example, with respect to certain reporting obligations. Private companies have less regulations when undergoing an M&A.
Are there special rules for foreign buyers?
Generally, there are no impediments on foreign acquisitions of Israel companies, except for the defence sector, in which companies are subject to restrictions placed on the transfer, acquisition, and general ownership of their means of control.
The following are some examples of sector-related rules:
Pension Funds, Insurance Companies and Banks – Any acquisition of 5% or more of the equity of such entities may require certain governmental consents.
Telecommunications – Acquiring certain holdings in companies providing telecommunications services may require a licence from the Ministry of Communications.
Natural Resources and Essential Services – In certain cases involving the acquisition (usually with respect to privatization of government owned companies) of companies controlling natural resources or essential services, the State of Israel will retain certain veto rights and other powers.
Principal Sources of Liability
Buyer side liability will most likely derive from failure to adhere to the technical rules that apply to the tender offer process and to any misrepresentation made by a bidder in the tender offer or other transaction documents. Additionally, insider trading and market manipulation should be avoided.
Mechanics of Acquisition
The three types of M&A structures permitted under the Companies Law that lead to the full acquisition of the target company are:
Statutory Merger: Israeli law is very permissive with respect to merger structures, as long as the merging companies are Israeli companies. Hence, when dealing with acquisitions by non-Israeli purchasers, the merger structure that is most common is either the “straight” or “reverse” triangular merger (depending on the identity of the surviving merged company). Under such a structure, the non-Israeli acquiring company establishes an Israeli subsidiary (“merger sub”), and a merger between the newly formed Israeli subsidiary and the pre-existing target Israeli company is carried out. As a result of the merger, the two Israeli companies (new and pre-existing target company) merge and become one company under the ownership of the non-Israeli acquiring company.
Full (or Complete) Tender Offer: Although this structure may be the quickest route to take, due to the high threshold approval required for its successful completion, it would typically be used only when the statutory merger option is not feasible because of board opposition. Following are some of the key provisions for a full tender offer mechanism:
● the offer must be made to all shareholders, on identical terms;
● the offer must be open for at least 14 days and not more than 60 days;
● the offer must be irrevocable;
● shareholder acceptance of the offer may be revoked prior to the end of the offer period;
● the offer must be made through a TASE member firm, and the offerer must provide the member with adequate assurance of payment of the cash consideration, often in the form of a guarantee; and
● in the event the tender offer was accepted, the purchaser must offer to acquire all outstanding convertible securities of the target within 30 days from the end of the offer period.
Court-Sanctioned Merger: The court is authorised to approve an application for a merger filed on behalf of the target company if such has been approved by at least 75% of the shares participating in the vote of the target company. In case of different classes of shares, then the same approval level is required from each class, as well as the approval of creditors, which may also be required. This route is rarely used, however.
Additionally, in the acquisition of a private company, it is common to conduct a share purchase if all of the selling shareholders are willing to sign the relevant purchase agreement.
Besides the customary hurdles applicable to any M&A transaction, such as the due diligence investigation, negotiations and the signing of a term sheet and definitive agreements, each of the structures contains a unique hurdle:
Statutory Merger: Adhering to the statutory timeline and procedures required by the law and obtaining the approval of the shareholders of both merging companies.
Tender Offer: Obtaining the required threshold in order to be able to effect a full takeover.
Court-Sanctioned Merger: Obtaining the approval of the shareholders, creditors (if applicable) and of the court.
Regulatory Approvals: Depending on the uniqueness of the transaction, obtaining regulatory approval from the Competition Authority, ISA or the IIA might become a hurdle.