Israel Competition Commissioner imposes an unprecedented pecuniary sanction for merger “gun-jumping”

The Director-General of the Israel Competition Authority recently imposed a pecuniary sanction of an unprecedented amount, approximately ILS 111 million, on Strauss and Wyler Farm. This was due to what the Director-General deemed a “de facto merger” carried out before receiving the required approval, in violation of the Economic Competition Law.

Strauss was subject to a landmark pecuniary sanction at the maximum amount permitted by law, while Wyler was fined approximately ILS 1 million. Additionally, sanctions were imposed on Strauss executives, amounting to approximately ILS 600,000 each, and on Wyler executives, ranging between ILS 110,000 and ILS 150,000.

The Director-General’s Determination: Restricting the target company’s activities during the interim period constituted an unlawful de facto merger

In July 2021, Strauss and Wyler submitted merger notices to the Director-General regarding a transaction in which Strauss sought to acquire 51% of Wyler’s shares and become its controlling shareholder, and applied for the Director-General’s approval for the transaction.

Strauss develops, manufactures, markets, sells and distributes a variety of food products, including dairy substitutes. Wyler manufactures, inter alia, tofu products under the Wyler Farm brand and for private labels, and also manufactures plant-based beverages for Strauss as a subcontractor. The Director-General ruled that Wyler also engaged in the development of dairy substitutes during the period relevant to the violations. 

In February 2022, the Director-General announced that she was opposing the merger between the companies, due to reasonable concerns that the merger would significantly harm competition in the fresh tofu and fresh plant-based beverage markets. The parties did not appeal the Director-General’s decision not to approve the merger, and the transaction was canceled.

During its examination of the merger, the Competition Authority discovered that the transaction documents signed by the parties outlined the operating segments in which Wyler shall engage after the transaction’s consummation. These documents explicitly stipulated that Wyler would not operate in the dairy substitutes segment, while Strauss would engage in this segment independently of Wyler. However, this restriction on Wyler’s operating segments already took effect during the interim period between the signing of the transaction documents and the consummation of the transaction (or, in this case, its cancellation due to the Director-General’s refusal to approve it). The Director-General deemed this a transfer of control over Wyler’s activities in the dairy substitutes segment to Strauss, effectively constituting a de facto merger. Since control was transferred before receiving the Director-General’s approval, the Director-General ruled this to be an unlawful early implementation of a merger, commonly referred to as gun-jumping.

Circumstances that influenced (or did not influence) the level of the sanctions

The severity of the sanctions imposed on the companies and their officers reflects the grave circumstances identified by the Director-General in this case, inter alia:

1. Cessation of activity – the restriction on Wyler’s operating segments during the interim period did not merely prohibit the company from entering new fields of activity but was intended to halt activity in a field where Wyler had already begun operating before the transaction and intended to continue operating. According to the Director-General, absent the transaction, Wyler might have competed with Strauss in the dairy substitutes sector.
2. Duration of the violation – The restriction in question was in effect for an extended period, as more than six months passed between the signing of the agreement and the cancellation of the transaction due to the Director-General’s opposition. The Director-General rejected the parties’ argument that this period was insignificant given the distance Wyler was from independently entering the fresh plant-based beverages market.
3. Concerns about significant harm to competition – According to the Director-General, Wyler’s cessation of activities in the dairy substitutes sector, which also includes the fresh plant-based beverages market, could have raised concerns about significant harm to competition in the fresh plant-based beverages market. This concern – stemming from Wyler’s elimination as a potential competitor – was one of the primary reasons for the Director-General’s opposition to the merger. The Director-General determined that the restriction on Wyler’s activities during the interim period at the very least impaired Wyler’s ability to move forward with entering this market after the Director-General opposed the merger. This harm was particularly significant in the Director-General’s view, given the high entry barriers in this sector, its dominance by a single player (Tnuva), and the absence of any other existing or potential competitors, aside from Strauss or Wyler.

It is important to note that the Director-General rejected the parties’ attempt to rely on legal advice they claimed to have received regarding the agreements during the interim period.

Indeed, according to a public statement previously issued by the Director-General, legal advice that reflects a serious and in-depth consultation process requested in good faith may warrant some leniency in the pecuniary sanction. However, in the present case, the Director-General determined that the legal advice did not meet these criteria. This was, among other reasons, because significant circumstances relevant to the advice were not presented to the legal advisors, the advice was not provided regarding the final version of the relevant clauses signed by the parties, and the consultation process was carried out through vague and unsubstantiated email exchanges.

What, then, is the status of restrictive clauses on the target company during the interim period, from now on?

Despite the impression that may arise, we believe the Director-General’s determination does not categorically rule out all types of negative covenants that can be included in merger agreements for the duration of the interim period. The Director-General acknowledges that, under certain conditions, parties to a merger may include contractual provisions that reasonably limit the target company’s actions in order to prevent significant changes to its business condition and to provide the prospective purchaser with certainty regarding the value of the target. However, the Director-General’s determination indicates that it is necessary to ensure that such negative covenants do not, in practice, fully or partially transfer power to the prospective purchaser to direct the target company’s activities, control its affairs, or subordinate the target company’s interests to its own.

According to the Director-General, whether a specific negative covenant constitutes an act of de facto merger depends on the circumstances of each case and the usual course of business of the corporation. In the present case, the Director-General determined that the restriction on Wyler’s activities in the dairy substitutes sector during the interim period amounted to depriving Wyler of its independent judgment and effectively transferring control of its activities in this area to Strauss, contrary to Wyler’s interest, thus constituting an unlawful act of merger. The Director-General emphasized that the restriction on Wyler’s activities was broad and sweeping, and was not necessary to preserve the value of the asset being sold. Naturally, the fact that Wyler’s activities were restricted in an area where, according to the Director-General, there was actual or potential competition between the parties contributed both to the Director-General’s reasoning behind issuing the determination and to the level of the sanctions imposed.

The Director-General’s policy, as reflected in the determination, indicates that conditions aimed at protecting the value of the acquired asset during the interim period should be carefully scrutinized when drafting the agreement, particularly in transactions between actual or potential competitors. In this context, it is important to consider, among other factors, the relationship between the activities of the parties, the extent of the prospective purchaser’s interference with the target company’s independence, and the duration of the period during which the negative covenants will apply.

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Adv. Gal Rozent heads the Antitrust and Competition Department.

Adv. Irit Brodsky is a partner in the department.