Israel Competition Commissioner Imposes an Unprecedented Pecuniary Sanction for Merger “Gun-Jumping”
The Director-General of the Israel Competition Authority recently imposed pecuniary sanctions totaling approximately ILS 111 million on Strauss and Wyler Farm, an unprecedented amount. The sanctions followed the Director-General’s determination that the companies had carried out a “de facto merger” carried out without the required prior approval, in violation of the Economic Competition Law.
Strauss received a landmark pecuniary sanction at the maximum amount permitted by law, while Wyler was fined approximately ILS 1 million. Sanctions were also imposed on Strauss executives, amounting to approximately ILS 600,000 each, and on Wyler executives, ranging from ILS 110,000 to ILS 150,000.
The Director-General’s Determination: Interim Restrictions Amounted to an Unlawful De Facto Merger
In July 2021, Strauss and Wyler submitted merger notices to the Director-General and sought approval for a transaction in which Strauss would acquire 51% of Wyler’s shares and become its controlling shareholder.
Strauss develops, manufactures, markets, sells and distributes a variety of food products, including dairy substitutes. Wyler manufactures, among other things, tofu products under the Wyler Farm brand and for private labels. It also manufactures plant-based beverages for Strauss as a subcontractor. The Director-General determined that Wyler was also developing dairy substitutes during the period relevant to the violations.
In February 2022, the Director-General announced her opposition to the merger, citing reasonable concerns that it would significantly harm competition in the fresh tofu and fresh plant-based beverage markets. The parties did not appeal the Director-General’s decision, and the transaction was canceled.
During its examination of the merger, the Competition Authority discovered that the signed transaction documents defined the operating segments in which Wyler would engage after the transaction closed. The documents explicitly stipulated that Wyler would not operate in the dairy substitutes segment, while Strauss would operate in that segment independently of Wyler. However, the restriction on Wyler’s activities took effect during the interim period between signing and closing, or, in this case, the transaction’s cancellation following the Director-General’s refusal to approve it. The Director-General deemed this a transfer to Strauss of control over Wyler’s dairy substitutes activities, effectively constituting a de facto merger. Because control was transferred before the Director-General’s approval, she determined that it was an unlawful early implementation of a merger, commonly known as gun-jumping.
What Affected the Sanctions?
The severity of the sanctions imposed on the companies and their officers reflects the serious circumstances identified by the Director-General, including:
- Cessation of activity – The interim restriction on Wyler’s operating segments did more than prohibit it from entering new fields. It was intended to halt activity in a field in which 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.
- Duration of the violation – The restriction remained in effect for an extended period: more than six months passed between the signing of the agreement and the transaction’s cancellation following the Director-General’s opposition. The Director-General rejected the parties’ argument that this period was insignificant given how far Wyler was from independently entering the fresh plant-based beverages market.
- Concerns about significant harm to competition – According to the Director-General, Wyler’s cessation of activities in the dairy substitutes sector, which includes the fresh plant-based beverages market, could have raised concerns about significant harm to competition in that 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 interim restriction on Wyler’s activities had, at the very least, impaired its ability to proceed with entering the market after she opposed the merger. In her view, this harm was particularly significant given the sector’s high entry barriers, its dominance by a single player (Tnuva), and the absence of any other existing or potential competitors aside from Strauss or Wyler.
The Director-General also rejected the parties’ attempt to rely on legal advice they claimed to have received concerning the interim period arrangements.
According to a public statement previously issued by the Director-General, legal advice resulting from a serious and in-depth consultation process undertaken in good faith may warrant some leniency in a pecuniary sanction. In this case, however, the Director-General determined that the advice did not meet these criteria. Among other reasons, significant circumstances relevant to the advice were not presented to the legal advisors, the advice did not address the final version of the clauses signed by the parties, and the consultation process consisted of vague and unsubstantiated email exchanges.
What Does This Mean for Interim Restrictions on a Target Company?
Despite the impression the determination may create, we believe it does not categorically rule out all negative covenants in merger agreements during the interim period. The Director-General acknowledges that, under certain conditions, parties to a merger may include provisions that reasonably limit the target company’s actions to prevent significant changes to its business condition and give the prospective purchaser certainty about the target’s value. However, the determination indicates that such covenants must not, in practice, fully or partially transfer to the prospective purchaser the power to direct the target’s activities, control its affairs, or subordinate its interests to the purchaser’s.
According to the Director-General, whether a specific negative covenant constitutes a de facto merger depends on the circumstances of each case and the corporation’s usual course of business. In this case, she determined that the interim restriction on Wyler’s dairy substitutes activities deprived Wyler of its independent judgment and effectively transferred control of those activities to Strauss, contrary to Wyler’s interests. It therefore constituted an unlawful act of merger. The Director-General emphasized that the restriction was broad and sweeping and was not necessary to preserve the value of the asset being sold. 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 to both her reasoning in issuing the determination and the level of the sanctions.
The Director-General’s policy, as reflected in the determination, indicates that conditions intended to protect 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. Relevant factors include the relationship between the parties’ activities, the extent of the prospective purchaser’s interference with the target company’s independence, and the duration of the negative covenants.
***
Adv. Gal Rozent is a partner and head of the Antitrust and Competition Department.
Adv. Irit Brodsky is a partner in the department.