Mergers And Acquisitions Update Israel

Author:Mr Barry Levenfeld
Profession:Yigal Arnon & Co

1. Relevant Authorities and Legislation

1.1 What regulates M&A?

The acquisition of publicly-traded Israeli companies is governed

primarily by the Companies Law, 5759-1999 (the "Companies

Law") and the Securities Law, 5728-1968 (the "Securities

Law"). In particular:

Sections 314 to 327 of the Companies Law deal with acquisitions

by way of merger. These sections are augmented by the Companies

Regulations (Merger), 5760-2000.

Acquisitions by way of tender offer are governed by Sections

336 to 340 of the Companies Law, and by the Securities Regulations

(Tender Offer), 5760-2000.

Acquisitions by way of a court-approved merger or similar

arrangements are governed by Sections 350 and 351 of the Companies

Law, as well as by the Companies Regulations (Application for

Settlement or Arrangement), 5762-2002.

The Securities Regulations (Periodical and Immediate Reports),

5730-1970 govern the reporting obligations of public Israeli

companies that are party to a merger.

In the event that securities, and not cash, are used as

consideration for an acquisition, then the provisions of Section 15

of the Securities Law dealing with the requirements for a

prospectus are also implicated.

Additional regulatory schemes also play a role in regulating

acquisitions (see question 1.4 and question 2.12 below).

Please note that often companies known to the business world as

"Israeli companies" are in fact companies organised under

the laws of the State of Delaware or other jurisdictions, operating

in part through Israeli subsidiaries. In these cases, the

acquisition would be governed primarily by U.S. law, but some of

the various regulatory approvals described below may nevertheless

be required.

1.2 Are there different rules for different types of public


For the most part, the acquisition of an Israeli public company

will be structured and implemented in the same manner regardless of

whether the company trades solely on the Tel Aviv Stock Exchange

(TASE) or trades on a foreign exchange. However, Israeli companies

that are traded solely overseas, or that are dual-listed on the

TASE and on a recognised non-Israeli exchange, may benefit from

certain dispensations:

Foreign/dual-listed companies need not conform with the Israeli

law requirements for a Special Tender (see question 5.1 below)

where the relevant foreign law places limitations on such

companies' tenders for acquiring control of target companies,

or where acquiring control obligates the offeror to make a tender

to the shareholders among the general public. [Note that U.S. law

is not deemed to comply with these requirements.]

Under new regulations, Israeli law requirements concerning

proxy statements need not be followed where shareholders will be

provided with proxy statements pursuant to applicable foreign


The reporting requirements under the Securities Regulations

(Periodic and Immediate Reports), 5730- 1970 do not apply to

Israeli companies traded abroad or dual-listed, although the

foreign filings of dual companies are required to be filed in

Israel as well.

1.3 Are there special rules for foreign buyers?

In general, there are no inward investment restrictions and

foreign buyers are encouraged to invest in Israeli companies.

However, there are certain restrictions on the ownership by

non-Israeli entities or persons of interests in Israeli companies

in certain sensitive industries (see question 1.4 below). In

addition, nationals of some countries that are, or have been, in a

state of war with Israel, may not own securities in Israeli


1.4 Are there any special sector-related rules?

There are a number of specific industrial sectors with

regulatory requirements that would affect the process of an


The acquisition of 5% or more of the shares of a bank or a bank

holding company requires a permit issued by the Governor of the

Bank of Israel after consultation with the Bank of Israel's

Licensing Committee.

The acquisition of 5% or more of the shares of an insurance

company requires a permit from the Superintendent of Insurance


The acquisition of certain percentages in companies providing

telecommunications services may require a licence from the Ministry

of Communications.

The acquisition of 5% or more of the shares of El Al (the

Israeli national air carrier) requires a permit from the


In certain cases regarding the acquisition (primarily by means

of privatisation of government companies) of companies controlling

natural resources or essential services, the State of Israel will

retain certain veto rights and other powers.

See also the discussion in question 2.12 below regarding general

consents and regulatory approvals that may be required in an

acquisition transaction.

1.5 What are the principal sources of liability?

Liability, for the most part, will derive from failure to

address the technical rules that apply to the tender offer process

and to any misrepresentation made by an offeror in offer documents.

There are additional rules of general application that apply to

such matters as insider trading and market manipulation. Civil and

criminal sanctions can apply to companies and to their directors

and officers.

2 Mechanics of Acquisition

2.1 What alternative means of acquisition are there?

There are three primary procedures to gain 100% of the shares of

a public company:

Reverse Triangular Merger. Since the coming into effect

of the Companies Law in 2000, the reverse triangular merger has

become the most common way for a non-Israeli company to gain full

ownership of an Israeli public company. The acquirer typically

establishes a wholly-owned subsidiary in Israel ("Merger

Co"). Merger Co merges with and into the Israeli target

company, with the Israeli target surviving the merger and becoming

a wholly-owned subsidiary of the acquirer. The consideration

payable to the shareholders of the Israeli target company may be

cash or the acquirer's stock, or a combination of the two. The

board of directors and the shareholders of the target company need

to approve the transaction in the manner set forth in question 2.12


Tender Offer. The acquirer makes an offer to purchase

some or all of the shares of the target company. The offer may be

conditioned upon successful acquisition of all of the shares of the

target company. If the requisite majority of target shareholders

approve, then the acquirer can acquirer 100% of the shares of the

target. Two problems render this procedure impractical at best if

the goal is to acquire all of the shares of the target:

first, the holders of 95% of the issued and outstanding

shares of the target (not 95% of the shares of responding

shareholders) must respond positively to the offer, a percentage

that most investment bankers and other advisers find daunting;

second, target shareholders, whether or not they accept

the tender offer, have a three-month window, following consummation

of the transaction, to apply to the court to challenge the fairness

of the transaction. These problems are not as acute if the goal is

to acquire control, and not necessarily full ownership, of the


Court-Approved Merger. Sections 350 and 351 of the

Companies Law appear, on their face, to deal with arrangements

between companies and their creditors and shareholders. However, on

the basis of certain English precedents, these statutes have been

used to effect mergers between two companies. The procedure

requires two applications to the court: one to authorise the

convening of a special meeting of the shareholders and creditors of

the target company; and a second to approve the arrangement reached

by the creditors and shareholders. In the current regulatory

climate, this procedure, although cumbersome and requiring court

approval, enables the parties to surmount certain difficulties

posed by Israeli securities law. See question 2.6 below.

Tender offers aimed at acquiring control, but not full

ownership, of the target are discussed in question 5.1 below.

2.2 What advisers do the parties need?

Typically, in order to execute an acquisition transaction, the

parties will need the following advisers:...

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