Client updates

As part of its endeavor to streamline public reporting and ease some of the regulatory burden imposed on publicly listed companies, the Israeli Securities Authority (ISA) this week introduced an amendment to the Securities Regulations governing periodic and immediate reports. The amendment deals with a number of issues, including reporting on agreement negotiations and the companies’ right to delay public reporting.

The Israeli Prime Minister, Benjamin Netanyahu, has instructed the Transport Minister and the Tourism Minister, to evaluate the possibility and ramifications of establishing a brick and mortar casino in Eilat, one of Israel’s main touristic destinations. The review will look into, inter alia, the economic potential of establishing such a casino, the impact it would have on Eilat and the potential social risks involved.

Recently, Judge Ruth Ronen of the Economic Department of the Tel-Aviv District Court handed down a ruling which related to an issue which is pertinent to virtually every publicly listed company.  

When do negotiations reach a point of becoming material information, thereby constituting inside information? The background to this case was that Africa Israel Industries had published a tender offer in 2012 for the purchase of shares in Negev Ceramics, without publicly disclosing that negotiations were being conducted with Olympia, a Canadian company. The Administration Enforcement Committee (established under the Securities Law) had ruled that the publishing of the tender coupled with lack of disclosure constituted insider information. Judge Ronen presided over the appeal against this ruling.  

Judge Ronen ruled that the negotiations had indeed reached the point of becoming material information. Her decision was based on the application of the materiality/magnitude test, which weights the probability of the event occurring against the anticipated impact of the event on the company.

It is not difficult to see the logic in the assumption that the fact that negotiations are underway might be material information and that therefore, whoever executes transactions with securities while in possession of such information is considered as having made use of insider information. However, it appears that the ISA’s Administrative Enforcement Committee was prepared to go even further and expressed the opinion that the same materiality test for the purpose of ascertaining abuse of insider information should be used for the purpose of ascertaining the application of a reporting obligation. The Committee’s position may be interpreted as deciding that, when negotiations reach the point of becoming material, the Company must issue an appropriate immediate report.

Judge Ronen decided that it was unwarranted to examine the correlation between abuse of insider information and a corporation’s general disclosure obligation, within the scope of the petition.

However, the critical question remains: Should every public company assume that it is obliged to publish an immediate report every time it conducts negotiations and they reach the level of becoming “material”?

Firstly, one must consider whether such a requirement is reasonable and feasible. One must keep in mind two salient points: There is never certainty that negotiations, whether or not material, will eventually lead to an agreement and; the very disclosure that negotiations are underway could thwart the transaction or adversely affect its conditions. Secondly, since negotiations are often a dynamic, lengthy process, it is unreasonable to expect public companies to repetitively perform analyses during the course of negotiations in order to ascertain whether, at any given stage, the correlation between the probability of a successful conclusion of the negotiations and the anticipated impact of the current draft of the agreement, has reached a level of “materiality” that dictates the publication of an immediate report.

Even if the conclusion had been that it would be advisable and wise to oblige public companies to publish immediate reports about negotiations, considering the implications and possible repercussions, such an obligation should be clearly and unequivocally defined. For example, the Securities Law prescribes specific provisions regarding insider information. Furthermore, the Securities Regulations include express provisions regarding the imposition of reporting obligations, and require the reporting of any transaction for the purchase of a “material asset.” The Regulations enable the company’s board of directors to delay the reporting under particular circumstances, but do not allow a company to delay reporting in any instance of securities being offered pursuant to a prospectus.

In other words, there are circumstances when information about material negotiations must be published: before the execution of a transaction with securities, before the publishing of a tender offer and before the publication of a prospectus, and in relation to purchases of material assets. However, one should not deduce from this that there is a sweeping obligation to publish an immediate report about negotiations, and certainly, it would be advisable to carefully analyze all relevant considerations, such as reasonability and the appropriate legal source before imposing such an obligation.

The Israeli Tax Authority (ITA) published a draft circular concerning the taxation of foreign corporations that derive income from the provision of services via the internet to Israeli residents.

Such circular was published due to the need of the ITA to provide an interpretation of the Israeli tax legislation, in respect of income derived from e-commerce, so as to accommodate the substantial e-commerce activities taking place in or via Israel. The current definitions and rules, which relate to terms such as permanent establishment or place of doing business, have been commonly used in respect of brick and mortar businesses, and the need has arisen to provide an interpretation for such terms so as to allow them to appropriately be applied to the digital economy.

Introduction

On May 31, 2015, an Israeli District Court issued a ruling that could have a profound effect on Israeli facing e-commerce activity. In a nutshell, the Court ruled that despite a clear section in the terms and conditions of PayPal as to the jurisdiction in which any legal dispute between PayPal and any of its clients should be adjudicated, such a dispute can nevertheless be handled by a different court – which, in this matter, was an Israeli court.

As expected, the Israeli Tax Authority has decided to extend the temporary order regarding anonymous Voluntary Disclosure.

The Israeli Tax Authority announced that the temporary order regarding voluntary disclosure, which was supposed to expire on September 6, 2015, has been extended.

The temporary order was published a year ago and was limited to one year. The regular procedure has been restricted until 31/12/2016.

In total, last year 3290 requests were submitted, about 60% of them anonymous. In light of this success, it was decided to extend the duration of the temporary order.

Additional information regarding the dates will be announced later.

On August 16, 2015, the Israel Tax Authority published a new circular (number 8/2015), which is effective immediately. The circular presents the new material requisite tests and criteria for recognizing an organization as a ‘public institution’ pursuant to section 46 of the Israeli Income Tax Ordinance. Certification issued to an organization pursuant to section 46 of the Income Tax Ordinance confers a tax benefit, by way of tax credits to donors in respect of donations they grant to that organization, at a rate of 35% for an individual donor and 26.5% for a corporate donor (according to the corporate tax rate).

The Tel Aviv District Court recently issued a decision clarifying that a public offer in Israel of securities of a foreign company is subject to the provisions of the Israel Securities Law, even where the investment agreement stipulates that it will be subject to a non-Israeli law and dispute resolution jurisdiction.
 
In the case at issue, a Cayman Island entity raised from a group of more than 100 Israeli investors about USD 10 million to be used for the construction of a hotel in Thailand. The investment agreement included a provision applying Thai laws and specifying Thailand as the exclusive dispute resolution venue.
 
Subsequently, certain of the investors filed a lawsuit claiming that the securities had been sold in violation of the Israeli Securities Law, which prescribes, inter alia, that “no person shall offer securities to the public other than pursuant to a prospectus, the publication of which has been authorized by the Israeli Securities Authority”.
 
The defendants, on their part, filed a motion to dismiss the lawsuit in limine and a motion to hold a hearing on the Thai jurisdiction stipulated in the agreement.
 
In its decision the court rejected the motion to dismiss the claim and ruled that the relevant provisions of the Israeli Securities Law are not discretionary, and that a foreign law and jurisdiction provision in an agreement is not legally binding if it relates to a dispute relating to laws designed to protect the public in Israel. 

About a month ago, the Israeli High Court of Justice deliberated a case petitioning the court to order the Minister of Finance and the Director of the Israeli Tax Authority to impose value added tax on multinational companies, such as Google and Facebook, arguing that they are providing services and selling goods in Israel via the internet, without being required to pay VAT, which gives them an unfair advantage over Israeli competitors.

The Israeli Tax Authorities have recently been very active in its efforts to detect tax evaders and unreported global income of Israeli tax residents. On the 7th of September a New Voluntary Disclosure Program, replacing the previous program, went into effect.

Two pending amendments to Israeli tax legislation will, if adopted, permit the exchange of information about taxpayers in a multinational context. The passing of these amendments will also allow for implementation of multilateral agreements for ‘exchange of information’ regarding individuals and corporate tax payers.

On 21 October 2014, the Haifa District Court handed down its decision in “Yael Zor v the Tax Assessor Haifa” concerning temporary residency abroad. The case relates to a senior employee of a multinational enterprise the shipping company, Zim, who worked in Hong Kong for a subsidiary of the group from January 2006 to August 2008. 

The Jerusalem District Court recently issued its ruling in the matter of Dead Sea Works Ltd. vs. the State of Israel. The proceeding included a discussion of Dead Sea Works’ petition to activate the arbitration clause stipulated in its concession agreement with the State of Israel. The petition was filed after the State refused to appoint an arbitrator pursuant to the arbitration clause.

Dead Sea Works sought to refer to arbitration the very formation of the Sheshinski Committee, pleading that it constitutes a violation the State’s covenant not to raise the rate of royalties payable by the Dead Sea Works for its mining license. Indeed, the Sheshinski Committee was formed for the purpose of reviewing the State’s policy on royalties due in consideration for the use of Israel’s natural resources.

The District Court rejected Dead Sea Works’ petition. It ruled that the mere formation of the Sheshinski Committee does not give rise to a dispute according to the arbitration mechanism prescribed in the concession agreement.

The Court issued its ruling based on the specific language of the arbitration clause in the concession agreement; it is conceivable that Dead Sea Works might have been allowed to pursue its position through arbitration proceedings had the arbitration clauses been worded differently.

The recent decision of the Antitrust Commissioner with regard to the existence of a natural gas monopoly illustrates all the more emphatically the absence of an orderly legislative framework to regulate all matters pertaining to oil and gas exploration and production in Israel.

Nevertheless, moves are being made to clarify the regulatory framework concerning off shore Oil & Gas. A few weeks beforethe Commissioner’s decision,  the government had submitted a draft bill to the knesset on the matter of Israel’s maritime zones.

The draft bill is worded in a way that adopts the customary provisions of the international Convention of the Law of the Sea of 1982, even though the State of Israel is not one of its signatories.

The draft bill defines five maritime zones, including the exclusive economic zone of the State of Israel. Besides defining the boundaries of the exclusive economic zone, the draft bill also prescribes the State’s powers and authorities and the laws that shall apply to that zone.

The adoption of the draft bill by the knesset will create certainty and reduce the ambiguity surrounding all issues pertaining to oil and gas exploration, production, utilization and management in Israel’s economic waters. and should encourage foreign companies to consider entry into the Israeli market.

Amendment no. 14 to the Non-Profit Organizations (Amutot) Law, came into effect in February, 2015.
The purpose of the Amendment is to hone the rules of corporate governance that apply to amutot and includes provisions designed to strengthen the nature of the audit in amutot, increasing transparency and strengthening the oversight and investigation authorities of the Registrar of Amutot.

The Amendment sets out provisions for the following issues: mandatory appointment of an internal auditor for an Amutah; expansion of the authorities of the Audit Committee (or the Audit Body of an amutah, as the case may be); granting oversight authorities and certification of supervisors by the Registrar of Amutot; expansion of the oversight authorities of the Registrar of Amutot through the use of external inspectors; expansion of the oversight authorities of the Registrar of Amutot regarding independent investigation of an amutah (and without the appointment of an external investigator); and various general provisions in a number of areas related to the relationship between the Registrar of Amutot and the amutot, and between the amutot themselves.

One of the main changes in the Amendment relates to a new entity in an amutah – the internal auditor. An amutah with a turnover exceeding NIS 10 million (or exceeding a higher amount to be determined by the Minister of Justice) – must appoint an internal auditor (“Internal Auditor”) in addition to the existing internal auditing bodies that are stipulated in the Amutot Law (Audit Committee, or the Audit Body as the case may be, and the Auditing Accountant).

The Internal Auditor will report to the Audit Committee on all matters related to professional issues, and to the Executive Board of the amutah on hierarchical-organizational matters. The appointment of the Internal Auditor will be done by the Executive Board of the amutah with the approval of the Audit Committee, and in the event of a disagreement, the General Assembly will decide.

Responsibilities of the Internal Auditor include, inter alia: (a) submitting a proposal for the annual or periodic work plan for the approval of the Executive Board, after the Audit Committee has examined it, and the Executive Board will approve it, with the changes it sees fit; (b) conducting an internal audit, in addition to the aforementioned work plan, on matters that may arise for urgent examination as imposed upon him by the Executive Board or the Audit Committee; (c) submitting a report on the findings as part of the annual and/or periodic work plan – to the Executive Board, CEO and the Audit Committee of the amutah.
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Amendment No. 14 also includes provisions which expand the authorities of the Audit Committee (or the Audit Body of an amutah, as applicable). Such expansion includes identifying and fixing problems in the amutah’s business administration, inter alia, by consulting with the amutah’s Internal Auditor or with its accountant, and to make proposals to the Executive Board regarding ways of correcting such problems.
Additionally, added to the authorities of the Audit Committee, is the authority to examine the internal auditing system, including the Internal Auditor’s work plan, the amutah’s accountant remuneration and also to make arrangements regarding the manner of handling complaints brought by amutah employees regarding flaws in the conduct of its business and regarding the protection that will be provided to employees who complain, as aforementioned. 

The Israel Immigration Authority recently published a new, experimental, streamlined procedure for issuance of work visas for foreign experts, allowing the holder to work in Israel for up to 30 days over a 12 month period.

Previously, multinational companies that wished to send professionals to Israel to work with their Israeli R&D centers or strategic partners for short periods of time were required to apply for and obtain a work permit (from the Ministry of Economy) and then a work visa at an Israeli consulate abroad, all before entering Israel.

Under the new procedure, application for a work permit for an expert employee will be expedited, with full processing completed within 6 days in most cases.  Once the work permit is granted, the expert may enter Israel as a tourist, provided that he or she reports to the Immigration Authority within two business days of arrival, where the tourist visa will be converted to a work visa.

This new process should lessen the burden on multinationals or non-Israeli acquirers that require their expert employees to supervise operations in Israel, and it allows these companies to send their experts to Israel on an urgent basis.

An amendment to the Minimum Wage Law was recently promulgated, which will be gradually applied with reference to four periods. The first period begins on April 1, 2015, when the minimum wage is to be updated to NIS 4,650 (gross). The first update must be made in the April 2015 wage, which is payable at the beginning of May 2015.

All employers in the economy, including employers who are not employing employees at minimum wage, must specify the minimum wage rate in all pay slips. As a result, pay slips must be revised accordingly.

Pursuant to the law, for the purpose of calculating compliance with the minimum wage, base wage/combined wage, cost of living increases and permanent allowances being paid to employees on account of their work must be taken into account.

The subsequent minimum wage updates shall be as follows:

Ÿ     On April 1, 2016, the wage shall be updated to the higher of NIS 4,650 or 47.5% of the average wage in the economy as it shall be on that date.
Ÿ     On July 1, 2016, the wage shall be updated to the higher of the wage during the second period or NIS 4,825.
Ÿ     On January 1, 2017, the minimum wage shall be updated to NIS 5,000.

If you need additional details or advice regarding specific circumstances, feel free to contact our Labor Law Department.

The benefits of operating under a license and regulatory regime

Value

A higher value for the operator, on account of greater certainty to investors and the market in general. “Cleaner” operation is of higher value, even if carries with it smaller revenue.

In May 2015, the Jerusalem District Court issued a judgment imposing personal liability in light of lawful conduct of the affairs of an NPO, on the general manager and authorized signatory of the NPO, as well as on the estate of the general manager’s father, OBM (who had been the chairman of the NPO’s executive board). The Court adjudged them personally to pay the inclusive sum of approximately NIS 13 million.
At issue is an NPO which, according to its formal-registered objectives, was established for the purposes of assisting victims of drug-related crimes, of increasing the public’s awareness of the pervasiveness of drug abuse, of providing information on drug-related issues and of increasing the public’s awareness of drug-induced violence.

Already in 2011, the court had issued a liquidation order against this NPO, after the Registrar of Amutot (NPOs) had appointed an investigator to investigate the NPO and his report of severe findings had prompted the Registrar to file a motion with the court to liquidate the NPO. At that time, based on the investigator’s report, the court had ruled that it was clearly the court’s duty to liquidate the NPO for the good of the public and appointed a liquidator for the NPO’s assets pursuant to the liquidation order.

The investigator’s report on the NPO indeed contained severe findings: that the NPO’s institutions were dysfunctional and failed to supervise the activities of the NPO’s general manager, whose actions were contrary to the interests of the NPO and had nothing to do with fulfillment and promotion of the NPO’s objectives, while misleading the NPO’s donors and exploiting their goodwill and ingenuousness. Thus, the report found, inter alia, that the NPO had raised a substantial amount of donations from the public, but took no action to promote NPO’s objectives; in fact, the gist of the NPO’s activities amounted to recruiting donations for the purpose of paying salaries to the NPO’s employees (which itself constitutes a prohibited distribution).

The report also found that, in addition to the routine fund-raising setup, the NPO also kept a separate extensive fund-raising setup that was off the NPO’s books; that the funds collected through charity boxes (approximately 1,500 charity boxes dispersed at different places of business) and payment vouchers never reached the NPO, but rather, were unlawfully misappropriated by functionaries at the NPO and used to pay salaries. The report also found that cash payments were being made to employees without duly reporting them to the tax authorities.
In light of all of the above, and as a result of the liquidator’s motion, the court ruled that the NPO’s general manager and the estate of the NPO’s executive board chairman (the general manager’s father) shall each be adjudged to return approximately NIS 6.5 million to the NPO, and collectively, approximately NIS 13 million. The judgment also appointed the liquidator (who was appointed pursuant to the aforesaid liquidation order), as the receiver of the real-estate assets and land rights of that general manager and on all assets of the chairman’s estate for the purpose of realization of the judgment and at the sum of the adjudged debt. Pursuant to the provisions of the Israeli (Non-Profit Organization) (‘amutot’) Law, the proceeds to be received in the NPO’s liquidation account as a result of the realization of the aforesaid assets shall be transferred to other NPOs having similar objectives for use towards fulfilling the objectives for which the public’s donations had originally been raised.
This judgment constitutes an example of the imposition of personal liability on directors and officers of an NPO without requiring any lifting of the corporate veil. Pursuant to the provisions of the law, a person may be held personally liable and adjudged to pay obligations and debts of an NPO if the NPO was being fraudulently operated or if inappropriate use was being made of funds by those in charge, while breaching the duties of fiduciary and care that are imposed on them (pursuant to sections 373 and 374 of the Companies Ordinance, which apply to an NPO under liquidation by virtue of section 54 of the NPO (‘amutot’) Law).

Furthermore, this judgment shines a spotlight on the importance of an NPO to act in accordance with its registered objectives and fulfillment of those. According to the provisions of the law, an NPO must act in accordance with its formal-registered objectives and prohibited from performing actions that do not fall within the scope of its objectives. Moreover, an NPO must utilize its resources (funds, assets, goodwill, equipment etc.) solely for the purpose of promoting its objectives. If an NPO has received funds, whether as donations or as support for the purpose of promoting a particular objective, it must use those funds for the objective for which they were provided and not for any other objective (even if such other objective does fall within the scope of the NPO’s objectives). Furthermore, if the representation given to donors is that a particular use shall be made of funds raised for the NPO, those funds must be expended for that purpose and may not be accumulated or allocated for other uses (even if they do fall within the scope of the NPO’s objectives).

Activities by an NPO that are not in conformity with its stated objectives may lead to its liquidation, to the imposition of personal liability on directors, officers and functionaries of the NPO, and even, in particular instances, to the imposition of criminal sanctions.

The new regulatory regime in respect of own account financial trading recently came into effect in Israel. This followed a legislative process that took more than four and a half years since the enactment of the relevant primary legislation. This legislation assigned the Israeli Securities Authority (ISA) with the role of the regulator in charge of licensing of the relevant stakeholders and overseeing the implementation and enforcement of the legislation.