ILS 80 Million Penalty for Israeli Banks Over Competing Company Stakes

Bank Hapoalim and Israel Discount Bank will each pay the State Treasury ILS 40 million within the framework of an administrative settlement (“agreed order”), in respect of their acquisitions of minority stakes in a competitor which, according to the director-general of the Competition Authority, constitutes an illegal restrictive arrangement in violation of the Economic Competition law of 1988 (The Competition Law).

This is the first instance of companies paying fines for holding a minority stake in a competitor without obtaining a permit from the director-general (when at issue, is not companies that completed a merger without duly receiving approval).

The backdrop

• The draft orders: acquiring minority stakes in a competitor

The director-general published drafts of agreed orders for public comment recently, which Bank Hapoalim and Israel Discount Bank signed (separately) prior to their submission to the Competition Tribunal for approval.

According to the draft orders, Bank Hapoalim acquired about 20% of the share capital of Neema Shefa Israel Ltd. (“Neema”) a company providing various financial services, 5% of the voting rights therein and the right to appoint a director on its behalf. Israel Discount Bank acquired about 17.5% of Neema’s share capital and the right to appoint a director on its behalf. The two banks also acquired ancillary rights to the share purchases.

• The director-general’s position: the aforesaid acquisitions of minority stakes constitute an illegal restrictive arrangement

According to the director-general, in both instances, each bank’s acquisition of a minority stake in Neema made the respective banks, parties to an illegal restrictive arrangement, due to the fact that the other bank also holds a minority stake in Neema, and due to the fact that Neema and the banks are direct competitors and potential competitors in the provision of particular retail banking services.

It is salient to note that there is no indication that the director-general deemed the aforesaid acquisitions of minority stakes as a merger of companies, which require prior reporting and approval from the director-general.

The director-general’s position is that, under these circumstances, the two banks’ acquisitions of minority stakes in Neema could significantly harm competition (considering the director-general’s apparent position that market concentration exists in the banking sector, including non-competitive dominance, in which Bank Hapoalim and Israel Discount Bank are two of the dominant competitors).

Accordingly, and after both banks had already sold their holdings in Neema, it was agreed that each of them would pay a financial sanction totalling ILS 40 million to the State Treasury in respect of the violation and, in consideration, no additional enforcement measures would be taken against either bank or against any party on their behalf.

Initial insights

• Precedent-setting ruling – first implementation of a declared enforcement policy 

This is the first time that the director-general has taken enforcement measures in respect of an acquisition of a minority stake in a competing company. Moreover, at issue is a drastic enforcement measure since, in addition to paying tens of millions of shekels to the State Treasury, the banks sold their holdings in Neema (i.e. they eliminated the concern about harm to competition). At issue is a first implementation of the policy declared by the director-general (in Public Statement 1/12), whereby financial sanctions would be imposed as a law enforcement measure against any illegal restrictive arrangement, including a restrictive arrangement achieved by way of acquiring a minority stake that does not reach the point of a merger of companies.

• Uncertainty as whether acquiring a minority stake by only one of the banks is deemed a violation

In the draft orders, the director-general describes the violation as not only being in respect of one bank’s holding of a minority stake in Neema, which is a competitor, but that the violation also relates to the other bank’s holding of Neema. Therefore, it is unclear from the draft orders whether, had only one of the banks acquired a minority stake in Neema, the director-general would have also deemed it a violation. However, the mere fact that both banks sold their holdings of Neema serves as an indication that the director-general also deemed the holding of a minority stake in Neema by one of the banks, per se, an illegal restrictive arrangement.

• Uncertainty about what holding ratio creates an illegal restrictive arrangement according to the director-general 

In the incumbent case, a minority stake but not a negligible stake, was acquired. We cannot deduce from this case, whether a significantly lower holding ratio (10%, 5% or even less, for example), or not being granted the right to appoint a director, would have led the director-general to reach a similar conclusion that it is an illegal restrictive arrangement (or perhaps would have led the director-general to conclude that it is not a restrictive arrangement or, alternatively, that even if it is a restrictive arrangement, an exemption may be given to legitimize it).

It will be possible to obtain additional details about this case (including its circumstances and the director-general’s position) from the tribunal’s reasoned ruling after the orders are filed for its approval, and perhaps, also from the director-general’s position to be filed with the tribunal, if it is publicized.

Conclusions and advice

Companies should seek advice from experts in competition law and obtain risk analyses before acquiring holdings in a competitor.

It is not unusual for companies to hold minority stakes – potentially or actually – in competitors. Acquisitions of this kind may be executed by way of an orderly transaction, but also during acquisitions of shares of public companies, in the market.

• Acquisition exceeding 25% – when a company acquires holdings of another company at a ratio exceeding 25%, the situation is more simple legally, since it constitutes a “merger of companies” and, in most cases, the parties are aware that they have to ascertain whether they are under an obligation to obtain the director-general’s approval before executing the transaction.

• Acquisition of less than 25% –when a company however acquires holdings of a competitor – potentially or actually – at a ratio lower than 25% (and assuming that the companies are not merging by receiving additional rights other than through shares), the answer to the question of whether or not this is a restrictive arrangement and particularly, a restrictive arrangement that could harm competition, is not clear at all.

This type of acquisition requires an examination of the specific circumstances, including the ratio of shares (and rights) acquired, the relevant market, the positioning of the parties to the transaction, the degree of market concentration, the intensity of the competition between the parties, etc.

Sometimes, in order to reach the conclusion that no restrictive arrangement has been formed – i.e. that the holdings acquired would not harm competition – an examination by an economist who is an expert in competition law is necessary (in the Chemipal Ltd. v. Neopharm Investments case, for example, the court had to perform a meticulous analysis of the circumstances to ascertain the implications of one competitor acquiring 10% of its competitor).

This type of analysis is essential prior to acquiring holdings, since if it is determined that the holdings of a competitor create a restrictive arrangement – then the purchaser’s very receipt of the holdings creates and activates a restrictive arrangement.

• Obtain expert risk analysis before acquiring holdings – according to the director-general’s policy, the mere reliance on a legal opinion in the event of a violation, does not exempt the parties from fines, and at best, might warrant a relatively insignificant reduction in the fines. Therefore, it is extremely important that you obtain a thorough analysis of the contemplated transaction and its specific circumstances and a risk analysis from experts in competition law, in order to minimize exposures.   

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Adv. Gal Rozent is a partner and heads the firm’s antitrust and competition department.

Adv. Ran Karmi is an associate in the department.

Barnea Jaffa Lande’s antitrust and competition department provides comprehensive legal services, including representing clients in criminal and civil courts before the competition tribunal, the director-general and legislative and regulatory authorities, and provides legal assistance during business courses of action and ongoing legal advisory services.