Any foreign company considering a merger with an Israeli company (or with an international company related to an Israeli company) should familiarize itself with various aspects of the laws governing mergers and aquisitions in Israel. These aspects include the Israel Competition Authority Director General’s broad interpretation of the definitions “presence in Israel” and “merger of companies”; the threshold criteria for reporting a merger (some of which are relatively unique and may also encompass small acquisitions in Israel by international corporations); the new restrictions on merger transactions between food and consumer goods suppliers (even if they pose no harm to competition); the possible obstacles for certain acquisitions by Virtue of the Reduction of Concentration Law and the potential risks in the event of a failure to submit merger notices. This last aspect is one the Competition Authority is currently rigorously addressing.
The Legal Framework of the Control over Mergers
Israeli competition law is regulated by the Economic Competition Law and its accompanying rules and regulations, as well as by supplementary competition legislation. Such supplementary legislation includes the Promotion of Competition in the Food Sector Law and the Promotion of Competition and Reduction of Concentration Law.
The supervisory authority responsible for enforcing competition laws in Israel is the Competition Authority, headed by the Director General.
The provisions of section 19 of the Economic Competition Law address the control over merger transactions:
“Companies shall not merge unless a merger notice has been submitted in advance and the Director General’s consent to the merger has been obtained and, if his consent is conditional, in conformity with the conditions stipulated by the Director General …”
“Merger of Companies” When a Foreign Entity Is a Party to the Transaction
A “merger of companies” is defined as a “company” acquires more than 25% of the share capital, voting rights, right to appoint directors, or right to profits in another “company,” or acquires the “majority of its assets” in a distinct operating segment (and sometimes an asset that constitutes a material component of its competitive capacity). The Director General’s position is also that any transaction that creates (or significantly enhances) a material and continuing influence over the decision-making mechanisms of the companies involved in the transaction, whether directly or indirectly, shall be deemed a “merger of companies,” regardless of the formal structure of the transaction and the techniques employed to create the aforesaid interest.
The Economic Competition Law essentially applies to Israeli entities and defines “company” for the purposes of a “merger of companies” in a manner that encompasses, inter alia, companies incorporated and registered in Israel, as well as foreign companies that are registered in Israel.
However, the Director General’s position is that the Economic Competition Law also applies to a merger between an Israeli entity and a foreign entity that has not been registered as such in Israel if:
- The foreign entity holds more than 25% of an Israeli company.
- More than 25% of the foreign entity’s shares are held by an Israeli company.
- The foreign entity has a “place of business” in Israel. The Director General has also taken this position in the instance of a merger between two foreign companies, assuming both companies fulfill the aforementioned criteria.
The Director General further states that, under particular circumstances, if a foreign entity has an office, agent, or even an exclusive licensee or distributor in Israel, this may suffice to deem it a “company” to which the Economic Competition Law applies. In such instances, it is highly important to scrutinize the circumstances.
For merger control purposes, a foreign company’s presence in Israel is examined at the group level (i.e., the presence in Israel of all entities with direct or indirect control relations with the merging company should be reviewed). In this regard, “control” means holding more than 50% of the voting rights or the right to appoint directors, whether directly or indirectly, in the merging company. (An exception to this may apply to the target company, if the seller severs all of its links to the business sold during the transaction.)
Which “Merger of Companies” Requires the Filing of Merger Notices?
When a transaction creates a “merger of companies” and fulfills at least one of the following criteria, the parties must submit merger notices and wait for the Director General’s approval prior to taking any act that may constitute a starting of the execution of the merger (which will be examined at the group level):
- The turnover criterion: The merging parties’ aggregate sales turnover in Israel for the year preceding the merger exceeded ILS 387.35 million and the sales turnover in Israel of at least two of the merging parties for the year preceding the merger was at least ILS 21.06 million.
- The monopoly criterion: One of the merging companies is a monopolist (holding more than a 50% market share) in any market in Israel, even if such market is irrelevant to the transaction. Note that if the transaction fulfills only this criterion, and the parties can prove that the monopoly in Israel is in a market having no vertical, horizontal, or complementary connection to the transaction, then the parties may apply for an exemption from the obligation to file merger notices.
- The aggregate market share criterion: The merging companies will become a monopolist, in any market in Israel, as a result of the merger.
For parties doing business in Israel and abroad, the aforesaid criteria apply solely to the relevant party’s sales turnover or market share in Israel.
When Will the Director General Oppose a Merger, and What Is the New Obstacle to Mergers in the Food Sector?
The Director General must oppose a merger of companies, or make the approval contingent upon conditions, if the merger gives rise to a reasonable concern of significant harm to the competition or to the public. The Director General must approve any merger that does not give rise to such concerns.
However, as of June 1, 2023 (and until December 31, 2024), a blanket ban was imposed on mergers between a food or consumer goods supplier with a sales turnover in Israel exceeding ILS 307 million and another food or consumer goods supplier whose sales turnover in Israel exceeds ILS 30 million.
The Director General may exempt such companies from the ban on mergers if they prove the merger is not likely to have any impact on competition in Israel, or if one of the companies is a “failing firm” according to the doctrine’s criteria. (Namely, the company would discontinue operations without the merger, a merger with no other company would be better for competition in Israel, and the benefit from the merger exceeds the benefit from prohibiting the merger.) Such companies must still file merger notices, unless the Director General exempts them from this obligation.
Potential Risks If a Merger Is Executed without Obtaining the Director General’s Approval
Any operative measures taken prior to receiving the Director General’s required approval, such as transfers of funds or shares, the provision of a loan to the target company or the seller, the appointment of an officer or director, any involvement in the activities of the business being acquired, etc., may be deemed de facto execution of a merger. These could expose the parties to various law enforcement measures (administrative or even criminal).
The enforcement measures that would be chosen in the relevant case depend upon the circumstances, inter alia, the implications of the merger, the threat to competition in Israel (if any), the parties’ market position, the parties’ breaches of the Economic Competition Law, the awareness of the parties to the breach of the law etc.
The Competition Authority has placed significant emphasis on enforcing this prohibition in the past year. Thus, it is scrutinizing concerns of violations of the law, imposing fines on offenders, and delaying merger examinations in instances such as these.
Additional Procedural Aspects of Filing Merger Notices in Israel
If the filing of merger notices is required, there are several additional procedural aspects:
- Each of the merging parties must file a notice on its own behalf. An appropriate officer of the filing party must sign the notice. An in-house or external legal counsel must certify that the signatory is authorized to sign on behalf of the party.
- The Competition Authority may issue requests for information to the parties and to third parties (such as to competitors, suppliers, customers, etc.). The time frame the Competition Authority requires to issue such requests, receive responses, and analyze the information is not deducted from the statutory merger examination period. It is compulsory to respond to the Competition Authority’s requests for information.
- The parties may submit any material they deem relevant for the examination of the merger. Third parties may also submit documents, opinions, and arguments to the Director General in this regard.
- The team examining the merger will submit its written opinion to an advisory committee, which can concur with the team’s opinion or ask the team to perform additional examinations. Alternatively, it may reject the opinion. The Director General is not obliged to accept the committee’s recommendation.
- The Director General must issue his/her decision by 30 calendar days after the filing date of the completed merger notices. The Director General will issue most merger decisions within this 30-day period. Recently, however, there has been a significant increase in the number of cases in which the Director General issued a decision only several months later (even for unconditional approval).
- If the Director General decides not to approve a merger or to approve it conditionally, the parties may appeal to the Competition Tribunal. Any person harmed by the merger, professional associations, and consumer organizations may also appeal a decision to approve a merger (conditionally or unconditionally).
Possible Obstacles to Executing Acquisition Transactions, by Virtue of the Reduction of Concentration Law
The Promotion of Competition and the Reduction of Concentration Law was enacted in 2013. Its aim was to enhance supervision of the potential impact of transactions to acquire rights in essential infrastructure, or transactions to acquire means of control over a party holding such rights, on concentration in the entire economy and on sectoral competition. Some of the law’s key provisions have the power to thwart (or at least delay) particular types of acquisition transactions, even if such transactions do not constitute a “merger of companies” that must obtain the Director General’s approval.
For example, the Reduction of Concentration Law prescribes that when a “concentrated entity” (that is included in a list containing major financial entities, entities wielding influence in the fields of broadcasting or the printed press, entities holding a significant share of essential infrastructure, or entities holding rights in several essential infrastructure assets) contends for a license in an essential infrastructure field, seeks approval to transfer such a license to another party, or seeks approval to acquire means of control at the volume of at least 5% of a licensee in an essential infrastructure field, the regulatory authority granting the license must obtain an opinion from the Concentration Committee. This committee, headed by Competition Authority Director General, analyzes the impact of the transaction on concentration in the economy as a whole.
The law further prescribes that when allocating a right included in the list of rights defined by the Director General (rights to access essential resources, such as natural resources, communications, energy, health, etc.), the regulatory authority must, prior to allocating the right, obtain an opinion from the Director General regarding the impact of the allocation on sectoral competition.
Thus, even transactions to acquire particular rights or licenses, mainly in essential infrastructures of the State of Israel, or to acquire means of control in companies holding such rights or licenses may be delayed as a result of the need to examine their impact on concentration in the entire economy or on sectoral competition. This is true even if these transactions do not constitute a “merger of companies” pursuant to the Economic Competition Law (and thus do not require the Director General’s approval). Furthermore, these transactions may even be blocked because of such impact.
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Adv. Gal Rozent heads Barnea Jaffa lande’s Antitrust and Competition Department.
Barne Jaffa Lande is at your disposal for any inquiries on doing business in israel.