• Committee on Concentration Submits Final Proposals

In its original findings, the Committee found that the Israeli economy is characterized by a small number of control groups that control major business areas, which may have negative effects on competition, distribution of sources and financing, excessive leverage and risk, conflicts of interests and systemic risk in the Israeli market.

Another issue addressed by the Committee was the pyramid structure used by controlling business groups. This pyramid structure typically involves a public company with a controlling shareholder holding 50% or less of the company’s capital (often through intermediate companies) and whose voting rights in the company exceed its holdings in the capital (a “Gap Company”).

The Committee proposed several recommendations to date to limit such negative effects. These recommendations include:

• Separation between equity holdings in significant¹ non-financial corporate business and equity holdings in significant² financial activities;
• Prohibiting the same directors from serving both in a significant non-financial corporation and in a significant financial corporation;
• Strengthening corporate governance and powers of minority shareholders in Gap Companies and where a pyramid equity holding structure is used;
• Introducing the concept of a Gap Company and creating mechanisms to limit its formation and activity in certain matters;
• Strengthening directors’ independence, including requiring a third of the board to include external directors and approval of their appointment by a majority of the minority shareholders;Special approval process for compensation for senior employees in Gap Companies;
• Transactions with interested parties – requiring a competitive process (such as a tender) before approving certain interested party transactions, and if such competitive process is not conducted, disclosure of the reasons why;
• Strengthening the minority shareholders – including requiring approval of the minority shareholders for material decisions made by the company;
• Encouraging private enforcement by shareholders – including expanding the Israeli Securities Authority financing of class action and derivative lawsuits;
• Encouraging institutional investors activism - including enabling institutional investors to coordinate their positions before shareholder meetings and requiring institutional investors to take into account the quality of corporate governance when making an investment decision;
• Prohibiting listing for trading on the Tel Aviv Stock Exchange of a “Double Action Company”³ and prohibiting future issuances of shares of existing Gap Companies which are subsidiaries of Double Action Companies; and
• Granting an “Exit” option to shareholders – where a company receives a third party full tender offer which satisfies certain conditions and the minority shareholders wish to accept the offer, requiring the controlling shareholder to offer to acquire all of the shares of the public at the tender offer price.

The Committee proposed an additional solution to market concentration, according to which the controlling shareholder’s effective voting rights in a Gap Company would be reduced to more closely reflect its capital holdings in the Gap Company. It is unclear if this proposal is meant to replace the proposals listed above with respect to the pyramid structure.

Adoption of the initial proposals above would have a material impact on the Israeli market and economy. It could encourage market participants to sell certain equity interests in order to avoid the aforementioned limitations. In addition, some of the Committee proposals change core corporate concepts and raise new, unprecedented, issues, leading many market participants to resist the Committee proposals.

• Offering and Selling Securities to High Net Worth Individuals in Israel

Under the Israeli Securities Law, 1968 (the “Securities Law”), an offer or sale in Israel of securities to more than 35 investors (in the aggregate) within any twelve-month period requires the publication of a prospectus approved by the Israeli Securities Authority (the “ISA”). An exemption applies to an offering to certain types of investors, such as mutual funds, provident funds, insurers, banks, etc. (“Qualified Investors”).

The Securities Law has been amended to expand the list of Qualified Investors to include high net worth individuals that satisfy at least two of the following three conditions: (i) the total value of cash, deposits, financial assets and securities held by the individual exceeds NIS 12 million; (ii) the individual has capital market expertise and capabilities or was employed for at least one year in a professional position which requires capital market expertise; and/or (iii) the individual has performed (not by a portfolio manager acting on his behalf) at least thirty (30) transactions in securities or financial assets, on average, in each quarter during the last four quarters.

The amendment also reduced the shareholders’ equity required for a company to be considered as a Qualified Investor - from NIS 250 million to NIS 50 million.

• Scrutiny of Excess Consideration to a Controlling Shareholder

In an important decision in 2011, the District Court of Tel Aviv ruled that special judicial scrutiny should apply in cases of conflict between a company (or its minority shareholders) and its controlling shareholder, particularly where the offer to the minority shareholders is actually an offer brought by the controlling shareholder. The case involved a lawsuit filed by a minority shareholder of Makhteshim Agan Industries Ltd. (“Makhteshim”) against Makhteshim and Koor Industries Ltd. (“Koor”), its main shareholder, relating to the sale of a control interest in Makhteshim to China National Chemical Corp. As part of the transaction, the public’s 53% stake in Makhteshim was sold, while Koor sold a portion of its shares, retained a 40% interest in Makhteshim and received a $960 million non-recourse loan. The loan was not received by other shareholders. Our firm represented ChemChina, which was not party to the lawsuit.

The main claim of the plaintiff was that Koor acted in bad faith and abused its power as a controlling shareholder to receive more than, and discriminate against, the other shareholders.

The Tel Aviv District Court in an interim decision ruled that Koor was not entitled to receive the excess consideration/benefits and that the value of such excess consideration/benefits attributed to the loan should be allocated among all the Makhteshim shareholders. The District Court ruled that approval of a transaction by the applicable special majority requirements under the Companies Law does not provide an automatic exemption from the judicial scrutiny of the court.

The District Court ruled that such judicial scrutiny should apply particularly in cases of potential conflict of interest between the company (or its minority shareholders) and the controlling shareholder, as well as cases in which the offer brought to the approval of the minority shareholders is actually an offer made by the controlling shareholder. The District Court pointed out, that such judicial scrutiny is certainly justified under the specific circumstance of this case in order to ensure a fair process. The relevant circumstances were mainly: (i) a going private transaction; (ii) the negotiations were conducted by persons related to, or identified with, the controlling shareholder; (iii) as a result of the negotiations, the controlling shareholder received a benefit not granted to the public shareholders; and (iv) members of the board of directors Makhteshim also serve as office holders in Koor and its controlling entities.

The District Court concluded that the court should exercise judicial scrutiny in any case in which the principle of equality between the shareholders is violated. Due to the critical significance of going private transactions to the minority shareholders, the District Court ruled that such judicial scrutiny should apply not only in cases in which the controlling shareholder stands on both sides of the transaction (e.g., mergers between parent company and its subsidiary) but also to mergers in which there is a conflict of interest involving the controlling shareholder even though the merger transaction itself is actually performed vis-à-vis a non-related third party.

The court did not explicitly rule out controlling shareholder’s right to receive a control premium in a merger transaction; however, the court indicated that the excess benefit granted to Koor in the merger did not constitute a control premium because only a small portion of its shares were purchased in the transaction, and Koor remained as a substantial shareholder in Makhteshim following the merger.

Tax Law

• The Law for Changing the Tax Burden in Israel

Background

The Law For Changing the Tax Burden in Israel (the “Tax Change Law”) was enacted into law in December 2011. The Tax Change Law was promulgated on the basis of the recommendations of the Trachtenberg Committee for Social and Economic Change (the “Committee”). At this point, not all of the Committee’s recommendations have been enacted into law. For example, the Committee’s recommendation to impose a surcharge on “high income” taxpayers has not yet been implemented.

Tax Amendments Under the Tax Change Law

The summary below addresses the most significant tax changes introduced by the Tax Change Law and is not meant to be an exhaustive review of the law. The tax changes described below became effective on January 1, 2012 (the “Commencement Date”):

Corporate Tax Rates

Prior to the enactment of the Tax Change Law, the corporate tax rates were scheduled to be reduced from 24% in 2011 to 23% in 2012 and ultimately to 18% by 2016. This scheduled gradual reduction in corporate tax rates has been abolished. Instead, the Tax Change Law provides that the corporate tax rate has been increased to 25% as of the Commencement Date.

Individual Tax Rates

Prior to the enactment of the Tax Change Law the individual tax rate for the highest tax bracket was scheduled to be reduced from 45% in 2011 to 44% in 2012 and ultimately to 39% in 2016. Under the Tax Change Law, most of the scheduled gradual reduction in individual tax rates have been abolished. In addition, under the Tax Change Law, the individual tax rate for the highest tax bracket (monthly income of more than NIS41,830) has been increased to 48% as of the Commencement Date.

Increased Tax Rates on Dividends and Interest Received by Individuals

Under the Tax Change Law, dividends distributed on or after the Commencement Date to an individual who is not a Controlling Shareholder” are subject to an increased tax rate of 25% (instead of the previously 20% tax rate); dividend distributions to “controlling shareholders” are subject to a tax rate of 30% (instead of the previously 25% tax rate).

Interest income generated as of the Commencement Date by an individual (who is not a Controlling Shareholder of the paying entity) is subject to an increased tax rate of 25% (instead of the previously 20% tax rate). There is no change in the tax rate of 15% levied on interest which is not linked to Consumer Price Index or to foreign currency.

Increased Tax Rates on Capital Gains Generated by Individuals

Under the Tax Change law, capital gains generated by an individual, including capital gains generated from the sale of shares in a company in which the individual is not a Controlling Shareholder¹, are taxed at the increased tax rate of 25% (instead of the previously 20% tax rate); capital gains generated by an individual from the sale of shares in a company in which the individual is a Controlling Shareholder are subject to an increased tax rate of 30% (instead of the previously 25% tax rate). There was no change in the tax rates (20% for a Controlling Shareholder/15% for an individual who is not Controlling Shareholder), levied on capital gains derived from the sale of bonds and loans which are not linked to the Consumer Price Index or to a foreign currency.

Privately Held Capital Assets

The calculation of capital gains from the sale of privately held capital assets acquired before the Commencement Date is based on a time apportionment ratio relating to the holding period of such assets, as follows:

• If the asset were acquired prior to January 1, 2003, a marginal tax rate for individuals (up to 48% in 2012) applies to the relative portion of gain attributable to the holding period commencing on the date of the acquisition and ending on January 1, 2003;
• A 20%/25% tax rate (the 25% tax rate is applicable to Controlling Shareholders) applies to the portion of the gain attributable to the period between January 1, 2003 and the Commencement Date; and
• A 25%/30% (the 30% tax rate is applicable to Controlling Shareholders) applies to the remainder of the realized gain.

Tax Credit Points to Fathers

The Tax Change Law provides that Tax credit points are granted to fathers of children under the age of three (each tax credit point equals NIS 2,580 in 2012). The tax credit points to be granted to the father are in addition to the tax credit points received by the mother. The tax credit points apply to the tax imposed on the father’s “earned income”. A father may receive a total of six tax credit points per child as follows:

(i) during each of the tax year in which the child is born and the tax year in which the child becomes three (3) years old, the father receives one (1) tax credit point; and (ii) during the first and second year following the child’s birth, the father receives two (2) tax credit points per year.

National Insurance Payments (Bituach Leumi)

• District Court Acknowledges Service of Judicial Documents on a Foreign Company effected by delivery of documents to a different company domiciled in Israel, due to a commercial cooperation agreement between the two companies

Regulation 482 to the Civil Procedure Regulations 5744-1982 regulates service on an entity located outside the Israeli jurisdiction, which is effected by service on a manager or a representative of that entity located in Israel. By utilizing this course of action, a plaintiff may enjoy an easy service and avoid filing a request for permission to effect service outside the jurisdiction.

Case law had determined that Regulation 482 should be defined broadly; hence service on a representative was permitted even though the person in Israel was not officially authorized to represent the foreign entity in legal proceedings.

The Israeli District Court recently ruled in the matter of Zeguri v. Penn Publishing Ltd. that a commercial cooperation agreement between an Israeli company and a foreign company may indicate an intensive and continuous business relationship between the Israeli and foreign companies for purposes of service of process. According to the court, this relationship creates a reasonable assumption that the Israeli company will notify the foreign company that a claim had been filed against it. Thus, the court exempted the plaintiff from filing a motion for permission to effect service outside the jurisdiction and acknowledged the service effected on the Israeli company as sufficient to constitute legal service on the foreign company.

• Supreme Court rules on whether an arbitral award based on a cause of action not pled by either party must be set aside

In the matter of Arcadi Gaydamak vs. Joseph Troim, an arbitral ruling was challenged. The arbitral judgment had ruled that no agreement was signed between the parties, but still obligated the defendant to pay the plaintiff by virtue of the Unjust Enrichment Law, although this cause of action was not claimed by the plaintiffs. The defendant appealed the decision, claiming that an award based on grounds not pleaded must set aside.

The Israeli Supreme Court ruled that so long as the parties transferred the dispute to arbitration, they cannot complain about the manner in which the dispute was resolved. The fact that the plaintiff claimed that the debt is based on a written agreement, does not derogate from the authority of the arbitrator to determine that the debt is based on another cause of action.

Had the parties wished to limit the authority of the arbitrator, they should have stated so explicitly in their agreement (that the arbitration shall be subject to substantive law and to the law of evidence and that the award and decisions shall be reasoned in writing).

Because the parties did not address the procedure of the arbitration in their agreement, the court ruled that the arbitrator is not subject to any procedural rules and therefore may award remedies based on grounds that were not pleaded.

• Economic Department of the District Court addresses the contractual validity of an online signature and the validity of a foreign jurisdiction clause included in such an agreement.

In the matter of Malka v. Ava Financial Ltd., the Economic Department of the District Court ruled that when using an agreement that is read and signed online, unlike a paper document, companies must ensure that the signer is aware of the conditions in the contract and has read them.

In order to determine whether or not the agreement is binding on the signer, the court must examine whether the informed and active consent of the signer was required. The more the required consent to the agreement is informed and active, the more likely the court will validate it. When the agreement appears in a link, the link has to be accessible in order for the court to rule that the online agreement’s terms are binding.

Companies must ensure that signatories perform an act of active reading of the terms of the agreement and that these terms are clear to them.

• Notice to Employee Law (Terms of Employment) (Amendment No. 4), 2011

The amendment created a number of substantive changes, as follows:

• Civil Sanctions- in the case of an employer who knowingly violates the law and does not give a written notice of the employment terms to the employee or written notice of a change in the employment condition as required, the Labor Court may grant compensation to an employee of up to NIS 15,000 without the employee having to show damages (note that an employment agreement is deemed to satisfy the requirement for written notice)
• Shifting the Burden of Proof - once an employer does not give the employee a written notice including all the information required by law, the burden of proof will be imposed on the employer in case of a conflict between the employer and employee regarding issues not included in the notice.

• Extension Order to Expand Compulsory Pension Agreements for Each Employee (hereinafter “Extension Order”)

Until January 2008, there was no general obligation on employers in Israel to provide their employees with pension insurance. Any obligation of this kind stemmed from personal agreements between the employers and their employees or collective agreements and their extension orders.

Commencing on January 1, 2008, an extension order to the General Collective Bargaining Agreement (Framework) on Expand Compulsory Pension Agreements for Each worker (the “Order”) has been applied to all employers in Israel. The Order requires all employers in Israel to provide comprehensive pension insurance plans to all employees, with such plans covering instances of death and disability. The Order is applicable to all employees who do not have a pension arrangement more favorable to the employee than the arrangement required by the Order.

Since 2008, there have been a number of changes in the Order, but the most significant occurred in the second half of 2011 when the Extension Order was signed and ratified. The main revisions are as follows:

• According to the Order, the contribution rates for both saving towards pension and saving towards severance pay will increase progressively. Until the ratification of the Extension Order, the highest contribution rate was 15% (for pension saving – 5% employer, 5% employee and for severance pay 5% employer) as of 2013. The Extension Order increases the contribution rates for 2014 to 17.5% (for pension saving – 6% employer, 5.5% employee and for severance pay - 6% employer).
• The Order applies only to employees that don’t have a beneficiary pension arrangement as defined in the Order. The Extension Order stipulates that as of January 2014, the definition of a beneficiary pension arrangement for purposes of exclusion from the Extension Order will be an arrangement that provides contribution rates of at least 17.5% of the employee’s salary.
• An employer who provides its employee with a pension arrangement more favorable to the employee than the arrangement required by the Extension Order at a later date than the date on which the employee would be entitled to pension insurance according to the Extension Order, will be required to provide its employee the pension arrangement in accordance with the Extension Order during the interim period.

• New regulations enacted by Ministry of Environmental Protection Impose a Significant Levy on the Discharge of Waste-Water to the Sea

The Prevention Of Sea Pollution From Land-Based Sources Law (1998) addresses the major sources of marine pollution. Land-based pollution of the sea and dumping to the sea are strictly regulated under a permit system based on strict criteria stipulated in Israeli legislation and based on the relevant protocols of the Barcelona Convention, imposing environmental quality standards.

In October 2011, new regulations - “ Prevention of Sea Pollution from Land Based Sources (the prevention of marine pollution levy), 2011” - became effective. The purpose of these regulations is to bring about internalization of the ‘external costs’ resulting from the discharge of waste water into the sea, to encourage the reduction of discharge into the sea and to improve the quality of the sewage discharged into the sea in order to protect the public resources.

The regulations impose on entities holding permits for sea discharge a significant financial fee determined based on the type and amount of pollutants they discharge into the sea.

• Ministry of Environmental Protection Releases a Proposed Law Concerning Electronic Equipment Environmental Disposal

The purpose of the proposed law is to regulate the handling of electronic equipment that constitutes solid waste by turning it from a nuisance to a resource by encouraging the reuse of electronic equipment, and by this reducing the amount of waste discharged in landfills.

According to the proposed law, the principle of “extended producer responsibility” will be adopted and through it the liability to bear the costs of collection and recycling of electronic waste will be imposed on manufacturers and importers of electronic goods that they sell. In addition, marketers will be responsible to ‘take back’ electronic waste equipment.

The proposed law is intended to apply to products, equipment or devices designed to operate using an electric current or electromagnetic field; on equipment that manufacture, transfer or monitor flow or field; as well as on any electronic component or electrical product, equipment or appliance as aforesaid that includes batteries.