Commencing December 15, 2010, a Financial Court has been operating in Israel as the financial department of the District Court in Tel-Aviv. The Financial Court was established according to the Courts Law (Amendment no. 59), 2010 and was founded at the inspiration of the ״Court of Chancery״ operating for many years in the State of Delaware in the U.S., which deals largely with corporate issues and is responsible for developing the case law on corporate matters.

The goal of the Financial Court is to provide a specialized tribunal for financial cases, both civil and criminal, which will be decided by a team of three financial-oriented judges nominated by the President of the Supreme Court, in consultation with the Presidents of the District Courts. The appointed judges will sit for a term of four years.

The Financial Court focuses mainly on financial cases arising from both Israeli securities laws and the Israel Companies Law, and it has exclusive jurisdiction in the following matters: indictments regarding offenses under the Securities Law, most civil cases regarding the Companies Law and the Securities Law, including derivative claims and class actions, administrative appeals against the Israel Securities Authority, the Tel Aviv Stock Exchange and the Registrar of Companies, and appeals on resolutions of the discipline committee under the Investment Advisors Law, 1995.

Pursuant to an amendment to the Securities Regulations (Periodic and Immediate Statements), 1970 (the “Regulations”) published on December 24, 2009, the majority of the Israeli public companies are now required to include in their annual and quarterly reports a report regarding the assessment by the board of directors and by management of the effectiveness of the company’s internal control over financial reporting and by the disclosure effectiveness, similar to certain provisions in the U.S. Sarbanes-Oxley Act of 2002. This requirement begins with the annual report for 2010.

The purpose of the amendment is to improve the quality of financial reporting and disclosure through improvement of the efficiency of internal control and enhancement of managements’ commitment to achieve this purpose.

The report on internal control effectiveness must be set in the form attached as a schedule to the Regulations and include: (a) an external auditors’ report with an opinion regarding the corporation’s internal control effectiveness; (b) a signed statement of the corporation’s CEO; and (c) a signed statement of the most senior officer in the corporation’s finance department.

The report on internal control effectiveness must state, among others, whether the internal control on the financial reporting and disclosure is effective or not due to a “material weakness” that was discovered and specified in the report. In addition, the report may refer to significant deficiencies that were discovered and are not considered to be a “material weakness”.

If a disclosure on a “material weakness” was first provided in the annual report on internal control effectiveness, and the “material weakness” is not rectified until the publication of the following annual report, the company’s periodical reports from the date of that report until the rectification of the “material weakness” will be considered as not in accordance with applicable law. A similar provision also exists regarding a “material weakness” first disclosed in the company’s quarterly report, which is not rectified within the time frame specified in the Regulations.

On January 17, 2011, the Knesset passed the Efficiency of Enforcement Procedures in the Securities Authority Act (legislation amendments), 5771-2011. The purpose of the amendment is to make the enforcement by the Israel Securities Authority of the laws regulating the Israeli capital market more efficient. The new enforcement tools granted to the Israel Securities Authority will apply to the Israeli Securities Law, 5728-1968, the Law of Regulating Engagement in Investment Advice, Investment Marketing and Investments Portfolio Management, 5755-1995 (the “Investments Consulting Law”) and the Joint Trusts Investments Act, 5754-1994 (collectively the “Laws”), by shortening the time between a breach of the Laws and the imposition of a punishment on the violator and by adjusting the severity of the punishment to the significance of the degree of the violation.

The main innovation of the amendment is the establishment by the Israel Securities Authority of a procedure for administrative enforcement through a special “Administrative Enforcement Committee” (the “Committee”), which is to investigate breaches of the Laws and, if required, takes enforcement actions. The Committee’s discussions are not adversarial, and the Committee may summon witnesses to appear. The required level of proof for imposing enforcement means is the same as is required in civil law (more than 50%).

Below are the administrative enforcement means available to the Committee:

The amendment determines that the Chief Executive Officer of a company and a partner (except for a limited partner) must supervise the company’s (or partnership’s) activities and take reasonable actions in order to prevent breaches by the company or by any of its employees.

Pilot Program for the Encouragement of the Establishment of R&D Centers in Israel for the Service of the International Financial Community

Large foreign multinational financial sector companies may be eligible to obtain approval of multi-year financial R&D projects for up to five years, to be conducted in financial R&D centers in Israel.

In order to qualify as a large foreign multinational financial sector company, the company must:

During the approved project, the approved companies must commit to hire a minimum number of employees in each year, starting with at least 25 R&D employees by the end of the first year, at least 90% of whom are Israeli citizens. The approved companies may execute the projects through a subcontractor so long as the projects are performed in Israel and at least 90% of the subcontractor’s employees working on the projects are Israeli citizens.

The levels of government support within the framework of this program are 40% of total budget approved by the Research Committee for projects to be executed in the first and second years, 30% for the third and fourth years and 25% for the fifth year. Projects executed in geographical areas ascribed status as “Periphery” will enjoy enhanced support levels of 50% for the first and second years, 40% for the third and fourth years and 35% for the fifth year.

The usual ‘strings’ attached to grant moneys from the OCS, which generally impose royalty payments and limits on exporting know-how developed in connection with OCS support, do not apply to this pilot program for the service of the international financial community. Any know-how and its derivatives developed within the framework of the financial R&D centers, including intellectual property rights and its derivatives, will be the sole property of the company, which will have the right to freely use them, in Israel or elsewhere. There will be no obligation to make any royalty payments as part of this program, and the know-how may be freely exported from Israel without penalty.

Pursuant to new orders published in November 2010, investment managers and stock exchange members are required to set policies, create certain facilities and to take risk management actions with respect to the prohibition of money laundering and terror activity funding. Failure to take such actions may result in claims against directors and officeholders of such entities with respect to money laundering.

These steps are part of Israel’s public effort to strengthen its ties with the OECD and adopt similar protective policies.

Amendments to the Law for Encouragement of Capital Investments

The Law for Encouragement of Capital Investments (the “Investments Law”) provides tax benefits and cash grants to industrial activity in Israel in accordance with a certain track prescribed under the Investments Law. On December 29, 2010, the Israeli Knesset approved an amendment to the Investments Law (the “Amendment”), which significantly revises the tax incentive regime in Israel, effective as of January, 1 2011. The changes include, inter alia, the following:

Reduced corporate tax rate: The Amendment introduced a new status of “Preferred Enterprise”, replacing the existing status of “Beneficiary Enterprise”. Similarly to “Beneficiary Enterprise” a Preferred Enterprise is an industrial company meeting certain conditions (including a minimum threshold of 25% export).

A Preferred Enterprise is entitled to a reduced flat tax rate, at the following rates:

Special Preferred Enterprise - In addition, the Amendment introduced a new status of a “Special Preferred Enterprise” – which is an industrial company meeting (in addition to the conditions prescribed for a Preferred Enterprise) certain additional conditions (including that the total preferred enterprise income of the preferred enterprise is at least NIS 1.5 billion in the given tax year). The tax rate applicable for a period of 10 years to income generated by such Special Preferred Enterprise will be reduced to 5%, if located in Development Region “A”, or to 8%, if located in other area in the State of Israel.

Dividend distributed by a “Preferred Enterprise”/”Special Preferred Enterprise”

Grant Track

In addition to the tax benefits described above, the Amendment provides that a “Preferred Enterprise”/”Special Preferred Enterprise” may also be entitled to either cash grants or loans to such programs, provided the approved programs is located in Development Region “A”. Previously, the Investments Law provided only cash grants, and such grants were not provided to programs that received certain tax benefits.

Transition rules

Ownership of Intellectual Property produced by Employees of the Public Health Sector: New Developments and Important Implications for Israeli Medical Devices and Life Sciences Industries

Close analysis of the Rules is essential for the Israeli private sector companies and their investors, in particular in the fields of medical devices and life sciences. The potential proprietary rights of the State of Israel over any intellectual property produced by doctors who are employees of state-owned hospitals and engaged concurrently by companies in the medical devices and life sciences industries may have critical implications for such companies and their investors.

For many years, the State of Israel encountered difficulties in locating and enforcing its intellectual property and realizing its commercial value. Moreover, state-employees lacked the incentive to report their inventions to State. In recent years, the issue of ownership of intellectual property conceived in the public sector in general, and in the public health sector in particular, has attracted significant attention, and became a hot-button issue for State of Israel Ministries of Finance and Health.

Among the most important developments introduced by the Public Health System IP is a default ownership rule significantly expanding the span of State IP ownership. In contrast to the general ownership arrangement under Israeli Patents Law, which generally grants an employer ownership of inventions conceived during and in connection with the inventor’s employment, under the Rules, any intellectual property created or conceived by a state-employee in connection with her employment or alternatively during her employment, will be considered government-owned intellectual property. An exemption from government ownership will require the decision of special Invention Committee which will consider a list of hard-to-meet conditions, and other approvals. The Rules further provide that an employee’s failure to meet her obligation to promptly report the conception of any intellectual property yields a presumption that the employee has waived the right to claim the invention should be exempt from government ownership.

In light of this development, we recommend close scrutiny of potential rights of the State of Israel in the context of regular course of business of companies considering the engagement of doctors as employees or consultant, and in the context of any due diligence regarding investment or fund-raising efforts.

The Israeli Office of Chief Scientist (“OCS”) offers Israeli companies a resource for funding of their R&D expenditures. Under Encouragement of Industrial Research and Development Law, 5744-1984 (the “R&D Law”), recipients of OCS funding become subject to certain obligations and restrictions. These include, aside from obligations to pay the OCS royalties from sales, restrictions on the ability to transfer manufacturing capacity outside of Israel and certain restrictions on the transfer to non-Israeli entities any knowledge developed with OCS funding.  On January 6, 2011, the Israeli Knesset passed an Amendment to the Encouragement of Industrial Research and Development Law, 5744-1984 (the “R&D Law”) which has important implications on technology transfer transactions and mergers transactions between Israeli technology companies and international counterparts.

Increased Royalties in the event of Transfer of Local Manufacturing:  Products developed as a result of OCS funded R&D must, as a general matter, be manufactured in Israel. The transfer of manufacturing capacity outside of Israel is subject to the OCS’s prior written approval and the payment royalties at an increased rate, up to 300% of the grant amount plus interest. Until recently, the transfer of no more than 10% of the manufacturing capacity in the aggregate was exempt under the R&D Law from obtaining the prior approval of the OCS. The recipient company also has the option of declaring in its OCS grant application an intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approval. The Amendment clarifies that an increased royalties rate (up to 300% of the aggregate grant amount) will be due even in those cases where the OCS approval for transfer of manufacturing capacity is not required, namely where the volume of the transferred manufacturing rights is less than 10% of capacity, and when the Company received an advance approval to manufacture abroad in the framework its OCS grant application.

Increased Redemption Fees in the event of Transfer of Know-How as part of Shares Sale:  The Israeli R&D Law restricts the ability to transfer abroad of know-how funded by OCS. Transfer of such know-how requires prior OCS approval and is subject to payment of a redemption fee to the OCS calculated according to formulae provided under the Law. Prior to the amendment, the formula for redemption fees in the case of transfer in the framework of a share purchase whereby the recipient company ceases to exist as an Israeli entity was based on the ratio between the aggregate amounts of the OCS grants to total amount of investment in the grant-recipient Company multiplied by merger sale price. Under the amendment, the redemption fee formula is now based on the ratio between the aggregate OCS grants to the Company’s aggregate R&D expenses, multiplied by the merger sale price. Consequently, the redemption fees in the case of merger are likely to be significantly higher, creating a greater disincentive than before for the export of OCS-funded knowledge by way of the share purchase transactions. While the amendment mentions that regulations will be enacted setting maximum amounts for the increased OCS redemption fees, such regulations have not yet been promulgated.

In April 2010, following what has been determined to be significant discoveries of gas in Israel and along its shore-line, Mr. Yuval Shtainetz, the Israeli Minister of Treasury, appointed a public committee in order to examine appropriate taxation of expropriation of petroleum and gas in Israel.

The Shihsinski committee, headed by Prof. Eytan Shihsinski , was instructed to review the current gas and oil taxation regimes in the international community and to examine repercussions that the discovery of petroleum and gas may have on the Israeli economy.

On January 3, 2011, following much public debate, the Shihsinski Committee published its final report, which is expected to be approved by the Knesset in the next few weeks.

Notable recommendations of the committee include a progressive taxation regime, taking into consideration income, with the reduction of project expenses, royalties and tax paid over the past years, and the amounts invested in locating and developing the reservoir. It was recommended that the taxation not exceed 50%.

The proposed taxation provides incentives to investors, as the tax rate will increase only in the later years of production following the return of the initial investment and a certain profit. The Shihsinski Committee indicated in its findings that the proposed regime provides for needed balance between the public’s right to certain natural resources and the high risk for investors in this type of investment.

Liberalization Reforms in the Israeli Communications Market

• Permitting a cellular company’s customers to use a competitors’ SIM card with a new purchased phone;
•  Restricting cellular companies from charging additional fees for cancelation of service, the customer to be “free to go” to any service provider; and 
•  Expanding the ability to apply for a license to operate a mobile virtual network in order that additional cellular providers can enter the market and enhance competition.

Temporary Seizure Orders May be Granted, Regarding Assets in Israel, Even if the Main Proceedings are Held Outside the Country

This ruling provides a certain amount of security, for both Israeli and foreign investors, that assets within the State of Israel will be provided sufficient protection until legal proceeding held outside Israel are adequately resolved.

The Israeli court recently ruled in the matter of the Israeli Phoenix Insurance Company Ltd. v. Sony Overseas S.A. that a court may waive the technical requirements of service related to the manner in which service was performed and that are detailed in the law and the regulations if actual service can be proven in some other manner, whether directly or indirectly. According to the ruling, the actual manner of service is solely a procedural question and it does not affect the fundamental question of whether proceeding can be conducted against a party.

Women׳s Labor Act (Amendment No. 46) (Extension of Maternity Leave) - 2010

Pursuant to the Women’s Labor Act, a female employee who gives birth is entitled to a 14 week maternity leave. During this period a woman is entitled to receive maternity payments, and the employer must continue to make payments to her pension fund. The amendment to the Women’s Labor Act extends the maternity leave period to 26 weeks. According to the amendment, a woman may receive her maternity leave payments only during the first 14 weeks of her maternity leave, and she is entitled to shorten her maternity leave so long as it is not shortened to less than 14 weeks.

In Sagi v. Anastasia (November 15, 2010), the Tel Aviv-Jaffa district labor court determined that if not for the maternity leave, the company would not have needed the employee’s substitute who was revealed to be a superior employee, and the plaintiff would not have been fired. In addition, the dismissal of the plaintiff immediately after the protected period of 60 days is discrimination on account of parenthood and pregnancy.

The court also determined that there was a strong connection between the maternity leave and the dismissal of the plaintiff, and therefore two of the company’s managers have personal liability for the dismissal.

The Haifa district labor court in Shapira v. the Minister of Infrastructures (May 13, 2010) determined that an employer must present to the employee all the arguments to be discussed at the Hearing, against which the employee will have to defend himself. These arguments must be detailed and clear, and the employee is not expected to defend himself against casual or general arguments without being given concrete examples. It was further determined that the right of an employee to review the relevant documents on which the employer relies in the Hearing is a fundamental right of the employee during preparation for the Hearing.