Corporate and Securities Law
In October 2010, the Israeli government appointed a special committee (the “Committee”) to examine the Israeli concentrated corporate structure and its effect on the level of competition, market efficiency and financial stability. The Committee’s original findings and recommendations were published in the fourth quarter of 2011, and the Committee has submitted to the government its final proposals,which have not yet been made public. The government is expected to adopt or amend the final proposals in the next few weeks.
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:
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.
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.
In order for an investor to be considered as a Qualified Investor, the investor must provide, prior to purchasing any securities, a written consent that it fulfills the conditions required for a Qualified Investor status and declare that it is aware of the implications of being considered a Qualified Investor.
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.
The Makhteshim-Koor case is a key ruling that affects corporate governance in cases of potential conflicts of interest between minority and majority shareholdings. We expect this ruling to increase the incentive of minority shareholders to challenge actions by controlling shareholders, leading to increased scrutiny by the courts.
1A financial corporation that manages assets exceeding NIS 50 billion. This includes assets managed on behalf of other financial entities under its control or under the control of the person controlling the financial entity.
2A corporation which is not a financial entity and: (i) generates sales in Israel exceeding NIS 8 billion or (ii) has a balance sheet exceeding NIS 20 billion, and its assets in Israel comprise over 5% of its assets (calculations will include those of all non-financial business entities under its control or controlled by the person controlling the corporation).
3A holding company for which 70% of its volume of operations, operating profit or total assets is generated via its subsidiary.
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:
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)
Under the Tax Change Law, the monthly ceiling which is subject for National Insurance payments has been reduced from nine times the average salary in Israel (NIS 73,422 in 2011) to five times the average salary in Israel (NIS 40,790 in 2011) as of the Commencement Date.
1A controlling shareholder is a person holding, directly or indirectly, alone or together with another, 10% or more of one of an Israeli resident company’s “means of control” (including, among others, the right to company profits, voting rights, the right to the company’s liquidation proceeds and the right to appoint a company director) at the time of distribution of the dividend or the sale of the asset, as applicable, or at any time during the preceding 12 months (“Controlling Shareholder”).
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.
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.
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.
The court also determined that the existence of a foreign jurisdiction clause is acceptable when one party is not Israeli. If it is proven that the signatory was convinced that the company is Israeli, such signatory may assume that there is no foreign jurisdiction clause.
The law imposes a duty on employers to provide to every employee (within 30 days from the commencement date to adults and within seven days to teenagers) a detailed written notice regarding their employment terms and conditions, in accordance with the applicable law. In addition, employers are required to provide to every employee a written detailed notice of any change in the employment conditions. An employer who violates the law is subject to a fine (currently up to the amount of NIS 14,400).
The amendment created a number of substantive changes, as follows:
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:
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.
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.
According to the proposed law, a breach of its provisions is a criminal offense.
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