Insights & News

The firm represented AVGOL Industries 1953 Ltd. in its issuance of a new series of debentures (Series C) totaling ILS 502 million. One of the largest financing rounds on the Tel Aviv Stock Exchange this year, the issuance is intended to refinance existing debt and fund the company’s ongoing investments and operations. AVGOL is a global technology company and a world leader in the development, manufacture, and marketing of nonwoven fabrics, primarily for use in diapers and hygiene products. Its customers include major companies such as Procter & Gamble and Kimberly-Clark. The company’s shares are listed on the Tel Aviv Stock Exchange and included in the Tel Aviv 100 Index. To read more, click here.

There is no doubt that Operation Protective Edge has had a material adverse impact on economic activities in Israel. The rocket attacks on communities in southern and central Israel reduced dramatically the revenues of businesses, hurt the tourism and vacation industries, and forced many companies to cope with absences of employees who were called up for active reserve duty.

Business as usual?

Nevertheless, it appears that the Israeli high-tech industry proceeded more or less with business as usual, as if high-tech is the “steadfast cliff” of the local economy. Even during last month, when the inferno in Gaza was at its worst and Israel found itself subject to venomous criticism throughout the world, the robust international activities in the Israel technological sector continued. International merger and acquisition transactions of Israeli technology companies did not stop and public offerings of Israeli high-tech companies on NASDAQ continued.
One should not misconstrue the continuing global activities by Israeli high-tech companies as a reflection of support of the Israeli government’s policy in Gaza or as recognition of its right to protect itself from the barrage of Hamas rockets. The factor driving this activity is, first and foremost, the robust demand for Israeli technology, a demand that is hardly affected by political considerations.

There are two additional factors that contribute to the Israeli high-tech industry’s imperviousness to the impact of the events of Operation Protective Edge. One factor is the fact that the majority of the commercial activities by Israeli high-tech companies is not in the local market. Though, in many instances, the development is located in Israel, the target markets and the vast majority of the sales are global. Therefore, the drop in the local demands has no material impact on the business activities of Israeli technology companies.

The second factor, which is more complex and fragile, is the sense that the fighting in Gaza is not creating a substantive threat to Israel’s security. As long as it is evident that the threat to personal safety in central Israel is marginal, if not negligible, the technology sector can project a sense of “business as usual.” The operation of the Iron Dome systems reinforces this sense of security.

Nevertheless, one must take into account that this sense of security could be extremely fragile. The temporary halting of flights to Israel by foreign companies, as a result of a rocket falling in Yehud, provided clear evidence as to how quickly the situation could change. There was a good reason for the intensive political efforts to resume flights. Were it not for the decision to resume air travel with Israel within 24 hours, it is doubtful whether the atmosphere of normalcy could have been sustained.

For anyone who needs a reminder of the possible correlation between personal safety and routine activity in the technology sector, one merely needs to recall the period of the Second Intifada. At the beginning of the 2000s, the suicide attacks caused visitors from overseas to stay away from Israel. Even though the technology sector was also suffering from the impact of the technology bubble burst during those same years, one cannot disregard the impact of the security threat on the recession that also hit the Israeli high-tech industry at that time.

In light of this, while we can look with pride and some amazement at the continuing business activity in the Israeli technology sector, we must keep in mind that it is never impervious. The continuation of Operation Protective Edge or an expansion of the military operations into central Israel is liable to have a material adverse impact on the high-tech industry as well.

The author, Adv. Micky Barnea, is the managing partner at Barnea & Co.

The Startup Open competition is underway, and the field has narrowed to seven finalists. Selected from nearly 100 entrants, the finalists will compete in the national final on September 22, 2014, in Jerusalem. Adv. Micky Barnea, our managing partner, said, “As part of our longstanding relationship with Israel’s entrepreneurial community, Barnea is proud to participate in the Startup Open competition. During the semi-final, we identified several promising and innovative ventures, and I look forward to selecting the winning start-up at the final. The wide range of business ideas and industries represented by the finalists reflects the talent and creativity of Israel’s start-up and high-tech sector.”

Barnea, together with the Enterprise Forum and Israel Advanced Technology Industries, is pleased to sponsor the 2014 Startup Open competition, to be held on September 22 in Jerusalem. Startup Open is a competition featured during Global Entrepreneurship Week. Launched in 2010 as part of the Kauffman Foundation’s Global Entrepreneurship Week, it promotes and supports aspiring entrepreneurs. It is one of the world’s largest competitions for start-ups, attracting participants from 37 countries. The competition focuses on companies that have made significant progress between November 25, 2013 (Global Entrepreneurship Week 2013), and November 16, 2014 (Global Entrepreneurship Week 2014). For further information, please contact Gil Shourka, National Coordinator for GEW Israel, at [email protected].

Following the successful launch of its MarginProbe System, which received premarket approval (PMA) from the FDA early last year, Dune Medical Devices Ltd. has completed the first stage of a two-stage USD 21 million equity financing. The initial closing raised USD 14 million, with a second tranche of USD 7 million expected to close by October 2014. Dune Medical Devices develops surgical devices and techniques that help surgeons optimize tissue excision in real time during oncology procedures. The company has offices in the United States and Israel.

In 2010, the Committee for Compensation and Royalties issued a groundbreaking ruling on employees’ assignment to their employers of rights to “service inventions,” meaning inventions created in the course of employment. The Committee held that assigning an invention does not, by itself, constitute a waiver of the employee’s right to compensation under section 134 of the Patents Law, 1967. An employer could therefore own the rights to an employee’s invention yet still be required to pay the employee royalties for contributing to the company’s technology. The ruling sent shockwaves through Israel’s high-tech industry. Companies, prospective acquirers, and investors faced uncertainty over whether current and former employees might seek compensation for inventions developed during their employment. A subsequent decision appears to have clarified the position. On May 4, 2014, the Committee rejected a former employee’s claim for royalties, holding that the right to compensation for service inventions is not absolute and may be waived. It also found that a general waiver signed by the employee upon termination was sufficient to release the employer from the obligation to pay royalties, even though the waiver did not specifically refer to inventions or section 134 of the Patents Law. The decision indicates that an assignment of rights to service inventions, combined with a general release upon termination, may be sufficient to bar a subsequent claim for compensation. Nevertheless, employers would be prudent to include an express waiver of the right to compensation for service inventions in their employment agreements.

About a month ago, the Israeli High Court of Justice considered a petition seeking to compel the Minister of Finance and the Director of the Israel Tax Authority to impose value-added tax (VAT) on multinational companies such as Google and Facebook. The petitioner argued that these companies provide services and sell goods in Israel over the internet without being required to pay VAT, giving them an unfair advantage over Israeli competitors. The petitioner maintained that these multinational companies conduct extensive business activities in Israel, including marketing and communicating with Israeli customers in Hebrew and accepting payments in Israeli currency. The petitioner also challenged the Israel Tax Authority’s use of server location as a criterion for determining whether an online transaction takes place in Israel. The court dismissed the petition as premature because the VAT authorities were preparing a circular on the subject, which was expected to be published shortly. The dismissal did not resolve the question of VAT liability, which is likely to be addressed in future legal proceedings. Tax liability, however, is only one of the legal issues arising from online activity. Others include defamation, consumer protection, gambling, foreign exchange trading, pharmaceuticals, privacy, and copyright. Each raises a fundamental question: which jurisdiction’s laws govern the activity and determine whether it is lawful? These challenges are not unique to Israel. Various countries have made significant progress in addressing them, including through judicial rulings.

Barnea's M&A and Kibbutz Sector Departments recently represented Polycad Industries (1989) Ltd., a plastics company based in Shefayim, in the sale of its stake in Bram Industries Ltd., a publicly traded company in the plastics industry. Polycad held approximately 30% of Bram Industries’ shares, acquired three years earlier, and formed part of the company’s controlling shareholder group alongside the Bramley family. Polycad sold its entire stake to companies controlled by the Bramley family for a total of ILS 20 million, ending its involvement in Bram Industries.

Adv. Zohar Lande, a senior partner and head of the Litigation Department, was interviewed by Channel 10 News about the Cadbury antitrust litigation.

In this special edition, Adv. Simon Jaffa discusses the structure of the Israeli economy and the anticipated breakup of monopolies and oligopolies, which are prevalent in Israel.