Acquisition Finance 2021

Last Updated May 26, 2021

Israel

Law and Practice

Authors



Herzog Fox & Neeman is Israel’s leading international law firm. Originally established as a niche law firm representing foreign investors in Israel, Herzog is now Israel’s premier law firm in all cross-border M&A and financial transactions, both inbound and outbound. With over 400 lawyers and 150 partners, Herzog is a full-service commercial law firm, providing high-quality, client-tailored legal services to both foreign and domestic clients. Herzog represents the world’s leading corporations, investment funds and entrepreneurs, and is the Israeli law firm of choice for leading law firms around the world. Herzog's banking and finance practice, headed by Alan Sacks, is one of the largest and most diversified finance practices in Israel, in terms of both clients and range of services provided. The firm's expertise includes all types of finance transactions, acquisition finance, aviation finance, structured finance, financial regulation and compliance issues, derivatives and financial products, payment systems, and post-money transactions and regulation. Herzog advises all of the major financial institutions in Israel, and represents the majority of foreign banks operating in Israel.

Acquisition finance in Israel (including leveraged buyouts (LBOs)) is typically arranged or underwritten by Israeli banks, international banks and non-bank lenders. Non-bank lenders have historically been more active in leveraged finance for small- and mid-cap (capitalisation) acquirers, and in recent years, they have played an increasingly important role in a variety of acquisition financings in Israel, including for some larger financial sponsors.

In the case of larger transactions, international or Israeli banks may act as lead or arranger of the transaction and include other international banks, Israeli banks and non-bank lenders. In such cases, one should be aware of possible local competition law limitations which may require approval of the Competition Authority, particularly when involving the larger Israeli banks in a syndication loan. In some cases, it may be necessary to restrict their share in the syndicated loan or their status as lead or arranger in such transactions.

See ‎1.1 Major Lender-Side Players.

Local Effects on the Israeli Market in 2020 due to COVID-19

  • The Israeli market (according to the PwC Israel 2020 M&A Report), experienced a 50% drop in the total volume of transactions in 2020 compared to 2019, due to COVID-19.

The total volume of transactions amounted to approximately USD10 billion, half of the approximately USD20.4 billion in 2019. The decrease in the volume of transactions was due to the COVID-19 pandemic that paralysed the economy during the first months of the closure. The Israeli capital market was the first to react, experiencing a drop of about 30% in the leading stock index during March 2020. The slow-down in the M&A market was delayed, due to the pipeline of ongoing transactions that had commenced before the pandemic and which closed during the early months of the pandemic.

  • The effect of COVID-19 on the Israeli M&A market was more significant in the second half of 2020, especially the third quarter. Quarterly segment analysis shows that the first half of 2020 continued the 2019 trend with a high volume of transactions, including four transactions of over USD1 billion each, and a high number of transactions compared to the five-year average of 2015-19. However, as of the third quarter of 2020, both the number and volume of transactions fell by over 50%, compared to the relevant five-year average (2015-19).
  • Following the global trend, the Israeli M&A market has become a more locally focused market.

The closing of international borders and the imposition of other anti-globalisation measures in order to deal with the global pandemic did not bypass global M&A markets. The M&A market in very many jurisdictions, including Israel, focused more on local transactions. When segmenting the transactions between domestic and foreign investors, the drop in foreign investors is notable, with a 70% drop in the number of completed transactions during the third quarter of 2020 compared to the same period in the previous year. The drop in transactions completed by Israeli investors during the same period dropped by only 30%. The fourth quarter showed a return of foreign investors to the Israeli market, and a significant increase in the number of transactions by local investors (twice the number of transactions compared to the five-year average for 2015-19).

  • The number of transactions completed by Israeli financial investors was exceptionally high, reflecting changes in the market due to the effects of COVID-19.

The number of transactions completed by Israeli financial investors was the highest since 2013. However, the value of the transactions was not high, and the average transaction value was USD75 million, compared to USD181 million in 2019.

COVID-19 Temporary Provisions

Temporary amendments have been made to the Insolvency Law in response to the COVID-19pandemic; for further details, see ‎5.7 General Principles of Enforcement which covers the COVID-19 Temporary Provisions.

Additional adjustments made in order to adapt

COVID-19 restrictions required all relevant market players to make adjustments in order to adapt to the changed environment, including the following developments:

  • remote working;
  • the use of virtual meeting technology as opposed to meeting face to face; and
  • the use of electronic signatures when executing loan documentation (other than documents that specifically require wet-ink signatures).

Loan agreements (including LBOs) are usually governed by Israeli law and are drafted in Hebrew. There are cases where the customer requests the loan documents to be drafted in English and, by default, these will generally still be subject to Israeli law.

The use of English law is more common where the borrower is international or an international bank is leading the transaction or in larger syndication loans that involve international lenders (such transactions are generally in Loan Market Association (LMA) standards). It should be noted, however, that with respect to assets that are secured under these transactions and are located or deemed located in Israel, security documentation will be subject to Israeli law and the security interest will usually be required to be perfected by registration in Israel.

The use of LMA standards is more common with international banks rather than Israeli banks, which prefer to use their local standard documents.

In general, there is a preference to draft loan documentation in Hebrew where the borrower is a less internationally oriented company with little international exposure or where the market is deep enough to raise the relevant funds from Israeli banks, Israeli financial institutions or international banks active in Israel.

It should be noted that, when registering securities, some local Israeli authorities or registrars require filings to be made in Hebrew (for example the Land Registry).

In Israel, it is common that the lenders' counsel prepares the first draft of the loan documentation, including in the case of LBOs. Israeli credit agreements typically include a condition to closing that the borrower’s counsel has delivered customary legal opinions addressed to the lenders and applicable agents, including the administrative agent and collateral agent.

Common opinions will generally include the following:

  • capacity and due authorisation;
  • legality, validity and enforceability of the loan-related documentation;
  • valid existence and good standing of the borrower and the guarantors;
  • “no conflicts” with organisational documents or applicable law, and no required consents;
  • for secured facilities, legal opinions will also often cover the proper grant and perfection of security interests; and
  • if guarantees are obtained from foreign subsidiaries or the parent company of the borrower, that opinion will generally be required to be provided by the borrower's counsel.

The structure of a financing arrangement will depend on the purchaser, the creditors involved and target group. Senior lenders usually comprise Israeli commercial and investment banks. Leveraged acquisition-finance transactions involve a combination of debt and equity financing. The debt financing is usually made available directly to a newly incorporated company or acquisition (special-purpose) vehicle (SPV), which uses the finance to acquire the target company. Aside from the acquisition vehicle, the senior debt may also be made available to the target in order for the target to refinance existing debt and for working-capital purposes. The target group is expected to provide security and may be required to enter into hedging arrangements, subject to financial assistance limitations. Leveraged finance transactions can include a senior and a junior component.

The senior lenders establish their priority by ensuring that other creditors lend to a target group company at a higher level in the group structure (ie, by structural subordination). The senior lenders also rely on protections provided in an intercreditor agreement with other creditors (see 4.1 Typical Elements).

In Israel, corporate acquisition transactions are not as complex as leveraged acquisitions. They may be financed either by using pre-existing loan facilities or by arranging special facilities.

Mezzanine funding in Israeli acquisition-finance transactions can take the form of pure debt, a combination of debt or equity such as preference share funding or a debt instrument with an equity kicker (ie, an equity incentive scheme).

Payment-in-kind (PIK) loans or notes are not common. If used, they are often governed by the laws of another jurisdiction. It is also expected that any PIK loans or notes will be structurally subordinated in the group structure of the borrowing group.

Bridge-loan facilities are frequently used in Israeli acquisition-finance transactions, both corporate and leveraged acquisitions, as short-term financing to allow for the acquisition transaction to be completed. These loans are made available for a limited period and may even be given as intra-day loans. The tenor of bridge loans generally does not extend beyond 12 months. The bridge loan is refinanced on or shortly after the implementation of the acquisition-finance transaction, generally through the provision of the senior long-term debt or bond issuance.

Bonds may be used to finance acquisitions and may often be supported by a bridge loan to help facilitate the time-constraints of the bond issuance. The bridge loan, to the extent drawn, will be repaid using the proceeds of the bond issuance upon or following the completion of the acquisition. See ‎3.3 Bridge Loans.

In a private placement, a company allocates shares or convertible securities to certain offerees (but not to the general public), in exchange for cash or assets. 

A listed company with one type of security may allocate securities only of the type listed for trading. A listed company whose capital includes different types of securities may allocate only securities of the preferred type, in terms of voting rights. A company may allocate convertible securities from series listed for trading, as well as convertible securities from series not listed for trading.

In some cases, as specified under the Israeli Companies Law - 1999, companies are required to convene an audit committee, and at times even a general assembly, in order to approve the private placement. The manner of approving the allocation and the required majority is specified in the Israeli Companies Law.

According to the Tel Aviv Stock Exchange (TASE) Rules and Regulations, prior to making a private placement, the allocating company must apply to the TASE and request its approval for the listing of the allotted securities for trading. As part of the allocation process, there are a number of issues that the TASE must examine before approving the listing.

Asset-based financing in the context of acquisitions is generally carried out by way of securitisation. A securitisation transaction is the issuance of debt certificates that are guaranteed by an expected and defined cash flow which derives from a credit portfolio (the Underlying Assets). The debt certificates are issued by a special-purpose vehicle (SPV), which holds the Underlying Assets, after they have been transferred to it by another corporation (the Originator), in return for the proceeds from the issuance of the debt certificates. The SPV is used in order to connect the credit risk entailed in the debt certificates to the credit risk of the Underlying Assets, and prevent exposure to the credit risk of the Originator. In order to ensure that the risks are properly separated, it is essential for the Underlying Assets to be legally and financially distinct from the Originator. The Underlying Assets serve as the sole source of debt service funds.

To date, several securitisation transactions have been performed in Israel in private markets. Additionally, in recent years there have been several transactions in which banks sold portions of credit portfolios directly to institutional investors. These were mainly mortgage portfolios, but transactions involving consumer debt portfolios were also carried out. 

Intercreditor agreements regulate the relationship between the various creditors in the transaction. In an acquisition-finance transaction, the parties to the intercreditor agreement would generally consist of the senior lenders, hedging counterparties, a security SPV, and, if applicable, any entities providing intra-group loans or other lenders providing general banking facilities.

The form of intercreditor agreement most often used in transactions in Israel follows ideas derived from the LMA format, but generally a simpler document with adjustments considering Israeli law requirements. In addition, and depending on the structure of a transaction, it is common in Israel for lenders to agree to a separate subordination agreement in which junior or other creditors subordinate claims against the target or group companies in favour of senior lenders before or in the event of insolvency.

An intercreditor agreement outlines the ranking between the creditors and governs the agreed distribution of proceeds in the event of enforcement of security. The finance-providers agree on the manner in which decisions should be made by all or a majority of the senior lenders, or all finance-providers, and matters that can only be decided by certain types of finance-providers such as a hedge counterparty or the provider of any general banking facility. Examples of decisions, which typically require the consent of all senior lenders, would be amendments to key definitions in the senior facilities agreement, and any amendments or waivers which amend the interest rate on those facilities.

In the Israeli market (particularly domestic deals), transactions involving local banks are generally funded on a pari passu basis and intercreditor documentation and agreements are fairly straightforward in determining the relationship between the various creditors.

Parties other than the senior lenders are generally restricted in the intercreditor agreement regarding any steps they may take upon default or event of default and any enforcement of security, or from receiving payments prior to the scheduled date. Hedging parties are usually in the same position as the senior lenders with respect to security provided by the target group. However, the circumstances in which hedge-providers can close out their hedging arrangements are typically subject to restrictions.

The intercreditor agreement will typically contain claw-back provisions which enable the facility agent to recover amounts received by a creditor in excess of what that creditor is contractually entitled to receive according to the intercreditor agreement. The intercreditor agreement will also usually govern the appointment, powers and resignation of the administrative or facility agent for the acquisition-finance transaction.

See ‎4.1 Typical Elements.

It is fairly standard in acquisition-financing transactions to have intercreditor agreements among lenders and hedging counterparties, which regulate (i) the pari passu or subordinated ranking of the hedge counterparties vis-à-vis the lenders (including the waterfall of payments), and (ii) the distribution of proceeds in the event of enforcement among lenders and hedge counterparties.

Various types of charges exist under Israeli law, including, among others, liens, pledges, mortgages and assignments by way of security. For security granted over moveable assets, it is common for a "pledge" to be granted, and this would also be the proper description of the collateral to be taken over shares and bank accounts.

Pledges are principally governed by the Pledge Law, 1967 (the Pledge Law), which defines a pledge as a charge over an asset to secure repayment of a debt. A pledge entitles the lender to be repaid out of the proceeds of the sale of the asset if the debt is not repaid. In this context, it should be noted that, in general, autonomous enforcement or appropriation is not available under Israeli law and recovery would be by way of proceeds of sale by a receiver and following a court-supervised sale process (one of the exceptions is enforcement by certain institutional entities under Section 17(3) of the Pledge Law). For more information on enforcement see ‎5.7 General Principles of Enforcement.

The security package primarily depends on the lenders' analysis of credit risk of the borrower, and therefore depends on the creditworthiness of the borrower and its group and the type and nature of its business activities. Given the leveraged nature of acquisition financing, lenders will generally require a comprehensive security and guarantee package from the borrower, the target and its material subsidiaries (taking into account financial assistance limitations).

The security package may generally include the following.

  • Pledging the shares of the Israeli group companies – security interests over shares are most commonly created by way of a fixed charge.
  • Pledging receivables – security interests over financial instruments (including receivables) are most commonly created by way of a fixed charge or by way of a floating charge.
  • Pledging of bank accounts – security interests over financial instruments (including bank accounts) are most commonly created by way of a fixed charge or by way of a floating charge.
  • Pledging the entire business (a floating charge) – companies can grant a floating charge over all or part of their assets. A floating charge is governed by the Companies Ordinance [New Version] 1983 (Companies Ordinance). A company whose assets are subject to a floating charge can sell and buy assets and enter into transactions in the ordinary course of business. If certain events occur (as specified in the debenture or other such instrument creating the floating charge), the floating charge crystallises and becomes a fixed charge.
  • Pledge over real estate assets (immovable property) – the most common form of security interest over immovable property is a mortgage. If that immovable property is owned by a company, the mortgage needs to be registered with both the Registrar of Companies and the Israeli Land Registry. In addition, a company may also grant a floating charge over all or part of its assets, which may include immovable property.
  • Pledging of intellectual property rights/assets (depending on the type of business) – security over most forms of intellectual property can be granted by way of a fixed charge or floating charge. A fixed charge over intellectual property such as patents needs to be registered with the Registrar of Patents in addition to the Registrar of Companies (as opposed to a floating charge, where registration with the Registrar of Companies is sufficient).
  • Guarantees corporate/personal – see ‎6.1 Types of Guarantees.

Israeli law security for acquisition financing typically takes the form of a debenture, which purports to take fixed security over as many of the pledgor's identifiable assets as possible, together with a floating charge to sweep up other assets of the pledgor. The aforementioned is a broad indication of the forms of security which can be taken over various types of assets pursuant to a debenture.

When registering a debenture with the relevant registrar (Registrar of Pledges or Registrar of Companies) each registrar requires a pledge registration form to be submitted:

  • Form 10 for registering pledges with the Registrar of Companies;
  • Form 1 for registering pledges with the Registrar of Pledges.

The procedures to be followed when using each of these forms are outlined in each of the respective Registrar's websites.

Perfection of a security interest establishes the validity of the security against third parties and an insolvency official. Perfection generally does not affect the relationship between the debtor and the secured creditor. A security interest that is not duly perfected will not be effective against the debtor's third-party creditors, except for those creditors who knew or should have known about the creation of the security interest (section 4, Israeli Pledge Law - 1967), or an insolvency official.

The primary method of perfection of a security interest is registration with the respective Registrar.

  • Security interests over assets of Israeli-incorporated companies or foreign companies registered in Israel are registered with the Israeli Registrar of Companies. Registrations documents must be filed within 21 days of creation of the security interest (ie, the signing of the security document). If filed within this period, the security interest will be retrospectively valid against third parties from the date it was initially created, unless a stay of proceedings order was issued prior to the date of actual registration. This principle also applies to floating charges;
  • Security interests over assets located or deemed located in Israel of companies that are incorporated outside of Israel and are not registered in Israel as a foreign company are required to be registered with the Israeli Registrar of Pledges, following the creation of the security interest. Security interests over assets of Israeli partnerships and individuals are also required to be registered with the Israeli Registrar of Pledges, following the creation of the security interest. Unlike the Israeli Registrar of Companies, registrations will be valid against third parties from the date of its registration.

Other formalities may apply, depending on the type of asset and type of security being registered. For example:

  • a mortgage over immovable property must also be registered with the Land Registry;
  • a security interest over vessels must be also be registered with the Administration of Shipping and Ports;
  • a security interest over a patent must be registered with the Israeli Patent Office;
  • a pledge or a floating charge over an asset of a company, or over immovable property, requires to be evidenced by an agreement in writing.

With respect to tangible movable assets and for certain commercial instruments, an alternative method of perfection is physically depositing the assets with the secured creditor or a custodian on its behalf.

See ‎6.2 Restrictions.

A company can purchase its own shares or provide any of its shareholders with financial assistance for financing the acquisition of its own shares (including by granting a security interest over a company's asset to secure financing from a third party). Such acts are deemed "distributions", and therefore the company must comply with the two following requirements, according to which a company is permitted to make a distribution (dividend distribution tests), pursuant to the Companies Law 1999 (Companies Law):

  • the company must have sufficient profits for making the distribution;
  • there must be no reasonable concern that any such distribution will prevent the company from being able to repay any of its outstanding and anticipated payment obligations on their respective repayment date.

See ‎6.2 Restrictions.

Under the Pledge Law, a lender can enforce a security interest if the loan is not repaid on time. Usually, the loan agreement or the security interest agreement specifies certain events which, if they occur, will trigger the creditor’s right to accelerate the loan and enforce the security. These events typically include:

  • failure to repay;
  • material breaches of the loan agreement or other specified agreements;
  • insolvency events;
  • changes of control;
  • a decrease in the debtor’s credit rating;
  • other material adverse changes.

Under Israeli law, neither self-help nor appropriation are generally available as methods of realising a security interest, a matter of Israeli law, and the enforcement process will be managed by a court or court execution office-appointed receiver.

One of the exceptions is enforcement by certain Israeli institutional entities under Section 17(3) of the Pledge Law (for example, institutional lenders such as Israeli banks and insurance companies). These institutional entities can realise security interests autonomously (without a judicial order), provided the security interests were granted in their favour over the assets (including securities) that are actually deposited with them. In this case, the charge can be realised by selling the secured assets in a commercially reasonable manner on the market on which the assets are traded, to the extent applicable.

Where realisation occurs outside the context of an insolvency of the company, a fixed charge-holder is likely to have control over the identity of the receiver to be appointed. Where realisation occurs in the context of insolvency, the enforcement process will be managed either by a court-appointed receiver or by the court-appointed trustee for the insolvency proceedings. Generally, if the value of the secured asset materially exceeds the outstanding debt, this process will be managed by the court-nominated trustee instead of the suggested creditor nominee and, if not, the process may be managed by the creditor- Section 248(b) of the Insolvency Law provides the court with the discretion to decide whether the realisation of the secured asset can be carried out by the secured creditor based on the considerations of whether the court believes that it is just under the circumstances and if this will not prejudice the interests of other creditors.

In the case of the realisation of a floating charge, the enforcement process will be managed by a court-appointed receiver and the secured creditor will have little influence, if any, on the identity of the receiver.

Where realisation occurs in the context of insolvency, the court will decide whether to direct the company into a winding-up (liquidation) or to a rehabilitation process.  Generally, the court will direct the company into a rehabilitation process if it is convinced that (i) there is a reasonable chance to rehabilitate the company, (ii) there is no reasonable concern that operating the company will harm the creditors, and (iii) there are means of financing available to support the rehabilitation process. If the aforementioned conditions are not met, the court will direct the company into liquidation.

If the court decides to direct the company into liquidation, the stay remains only vis-à-vis unsecured creditors, not secured creditors (subject to certain procedural requirements).

If the court decides to direct the company into a rehabilitation process, the stay remains vis-à-vis both secured creditors and unsecured creditors. Secured creditors may, however, enforce their security with court approval. The court should grant the approval if it is satisfied that either (i) adequate protection of the secured creditor's rights has not been guaranteed, or (ii) adequate protection of the secured creditor's rights has not been guaranteed, or (iii) the secured asset is not necessary for the rehabilitation of the company.

As previously mentioned, neither self-help nor appropriation is generally available as a matter of Israeli law and a court-nominated receiver will have the right to sell the pledged asset through a court-supervised process. However, in the context of insolvency, the realisation process also includes the following preliminary steps: (i) filing the secured creditor proof of claim, and (ii) giving the trustee 14 days to redeem the outstanding debt.

In practice, in enforcement proceedings, the receiver typically invites the public to participate in a bid/auction by publishing a notice to the press. The process is generally handled and structured by the receiver/auction committee. The court may deviate from the public auction route should it be persuaded that another sale route is more appropriate in the particular circumstances.

Bids for assets being sold in a realisation process are to be submitted within a period determined by the receiver. Typically, the bidders are required to provide a bank guarantee in an amount of 10%-15% of their suggested offer price, in order to secure their bid. The receiver typically reserves the right not to accept the highest bid. However, if the receiver exercises that right, it will be required to provide a strong argument as to why the highest bid was not accepted and this decision is subject to the approval of the court. However, if the pledged assets are publicly traded shares, the receiver may try to sell them in the market, especially if it is not a substantial holding of shares.

Any decision by the receiver/auction committee or the court is appealable in accordance with the timeframes prescribed by law. Prior to completing the process, adequate notification is sent to the pledgor, who may object to the sale, particularly on the basis that the debt underlying the secured creditor's rights in the secured asset was satisfied or that the security interest created is not valid. Other third parties may also ask to join the proceedings if their rights may be jeopardised as a consequence of the process.

The sale of the secured assets is subject to the approval of the court. The court will rarely interfere with the discretion of the receivers, although it has the authority to do so. The court may examine, inter alia, the due process of the realisation and sale process, the proposed sale price, the interests and rights of the secured creditors, interests and rights of other parties or the other creditors of the company and the residual rights of the company.

A fixed charge will have priority over all other creditors for all outstanding obligations. A floating charge is subordinate to fixed charges, and to creditors who enjoy statutory preference (such as for certain unpaid taxes).

There is another difference in the treatment of a fixed charge-holder and a floating charge-holder. The Insolvency Law dictates that a floating charge-holder will be entitled to only 75% of the proceeds of realisation of the assets that were subject to the floating charge on the date of commencement of the insolvency proceedings (after satisfying debts preferred by operation of law). Any remaining debts owed to the floating charge-holder after that payment will rank pari passu with the unsecured creditors.

Additionally, for fixed and floating charges, in the context of insolvency proceedings, from the date the court issues a commencement of proceedings order, default interest accruing on outstanding obligations will be subordinated to unsecured debt.

COVID-19 Temporary Provisions

In response to the COVID-19 pandemic, on 4 March 2021 an amendment to the Insolvency Law (Amendment number 4 – Temporary Provisions – the New Coronavirus) 2021 (Temporary Provisions) was published. The Temporary Provisions are effective as of 18 March 2021 and will remain in effect for one year, with the possibility of being extended for two additional periods of up to a further six months each time.

The Temporary Provisions provide a special route for corporations and individuals to apply to the court for a stay of proceedings against them for a period of up to three months (with the possibility of an additional one-month extension) (Stay of Proceedings Order), for the purposes of approving a scheme of arrangement with creditors (Debt Arrangement). This is without the appointment of an external office-holder to replace the current management of the company (but rather an appointment of a Debt Arrangement manager to supervise and assist in formulating the Debt Arrangement). Upon the issuance of a Stay of Proceedings Order, (i) the company may not repay any of its debts from the assets of the company, (ii) all legal proceedings, foreclosure proceedings and collection proceedings against the company will be stayed, including any enforcement of pledged assets of the company (subject to adequate protection), and (iii) the company may not dispose of any of its assets, sell them or change their condition except as part of its ordinary course of business, or other than with the authorisation of the court.

According to the Israeli Guarantee Law-1967 (Section 1), a guarantee is an obligation of a person to fulfil another person's obligation towards a third party. Therefore, in the context of a financing transaction, a third party undertakes to pay to the lenders the amount of the loan or some other guaranteed amount in the event that the borrower is in default under the credit agreement.

Guarantees are generally documented in a written undertaking executed by the guarantor for the benefit of the lender(s).

As a general rule, for an Israeli company to provide a guarantee:

  • the board of the company needs to show there is corporate benefit;
  • the provision of a guarantee is in accordance with the company’s constitutional documents, ie, that there are no restrictions under the company's constitutional documents.

In addition, in some transactions, lenders may request guarantees to be granted by natural persons, such as personal guarantees provided by the shareholders. These guarantees are subject to specific formalities or conditions in accordance with the Guarantee Law – 1967, which include the following requirements:

  • disclosure requirements;
  • priority provision, according to which the guarantee can only be enforced after an attempt has been made to collect the debt from the main creditor;
  • the amount of the guarantee is required to be expressly provided;
  • establishment of several liability only (that is, where a guarantee is provided by more than one guarantor, under several liability, each guarantor is only liable for a proportionate part of the debt (as opposed to joint and several liability, in which each guarantor is liable, on his or her own, for the entire debt)).

Failure to comply with the above requirements may void the guarantee. However, these requirements will not apply to:

  • guarantees that are granted by a partner as security for the debts of a partnership; and
  • guarantees that are granted by shareholders holding 5% or more in a company as security for the debts of the company.

In general, an Israeli company can provide an upstream or cross-stream guarantee/security if there is actual corporate benefit, such as a direct or indirect consideration for the provision of the guarantee/security. This issue must be addressed by the company's directors, who are required to evaluate the existence of corporate benefit. This is typically recorded in a board resolution and shareholder resolution (to the extent additional ratification may be required according to law or under the company's constitutional documents). Furthermore, when approving such resolutions, a subsidiary’s board of directors must act in good faith and for the benefit of the company (the subsidiary) in accordance with their fiduciary duty towards the subsidiary. Therefore, a resolution passed for the purpose of promoting the interests of a parent company, rather than those of the subsidiary, might constitute a breach of the directors’ fiduciary duty and may be deemed a dividend.

In general, there are no legal requirements for guarantee fees. However, the payment of a commercially reasonable fee could be useful to reinforce the finding of corporate benefit.

There are no restrictions on claims of equitable subordination, although the repayment of indebtedness to shareholders may be subordinated to all other debts of the company in the event that the court decides to pierce the corporate veil or classifies the debt as an investment other than debt.

The court may cancel an action (including a transfer, charge or payment) that (i) was made by a debtor at a time during which it was insolvent, (ii) resulted in a repayment to a creditor, or led to that creditor becoming preferred in the order of priorities in an insolvency, and (iii) occurred within the pre-insolvency "suspect period". In this regard, it is presumed that the debtor was insolvent during the suspect period unless proven otherwise. In the case of a "regular" creditor, the suspect period is three months from the date on which the application to obtain a commencement of insolvency proceedings order (Application for Insolvency Proceedings) was filed. In the case of a "related creditor", the suspect period is a year from the date on which the Application for Insolvency Proceedings was filed. It should be noted that the Insolvency and Economic Rehabilitation Law, 2018 (Insolvency Law) does not require that there be an intent to prefer a creditor.

However, the court may not void an action that meets certain conditions set forth therein, including (i) if the debtor received appropriate compensation under the circumstances of the action (repayment of debt in itself will not be considered appropriate compensation), or (ii) if the action was undertaken during the regular course of business of the debtor and the debt repaid was created within the regular course of business of the debtor.

In the event of an action that resulted in reduction of assets of the estate, a court may void an action that (i) was made without consideration or for inappropriate consideration, (ii) was taken within two years prior to the date on which the Application for Insolvency Proceedings was filed, or in the case of a creditor that is related to the debtor, within four years of that date (once again, the "suspect period"), and (iii) was made by a debtor at a time during which it was insolvent, or caused the debtor to become insolvent. In this regard, it is presumed that the debtor was insolvent during the suspect period, unless proven otherwise.

Additionally, the court has discretion to terminate a transaction entered into within seven years prior to the filing of the Application for Insolvency Proceedings, if it is satisfied that the transaction was entered into for the purpose of putting assets beyond the reach of creditors.

Stamp tax is not applicable to financing transactions in Israel.

In general, according to Israeli law, withholding tax on interest will be levied on the cross-border payment of interest to or for the benefit of a “foreign person” lender at the corporate tax rate (currently 23%).

Certain tax exemptions/reliefs are to be available in accordance with an applicable tax treaty, and the rate of withholding may also be reduced under the terms of an applicable double-taxation agreement.

In order to enjoy a reduced rate under a double taxation agreement, the borrower or the lender has to submit an application to the Israeli Income Tax Authority to obtain approval for the reduced rate in accordance with the treaty. Otherwise, the general rate of 23% corporate tax would apply.

It should be noted that it is customary for the borrower to be required to gross up interest payments for any tax payable, and to indemnify the lenders in respect of certain other tax liabilities relating to the loan agreement.

Thin-capitalisation rules are not applicable to financing transactions in Israel.

The following sectors are subject to certain regulatory requirements with respect to an acquisition:

  • telecommunication companies – the acquisition of certain percentages may require a licence from the Ministry of Communications;
  • banks or bank-holding and insurance companies, provident funds and other financial institutions – the acquisition of 5% or more is subject to certain governmental permits;
  • natural resources or essential services – the State of Israel may retain certain vetos or other rights;
  • brokerage firms (members of the Tel Aviv Stock Exchange (TASE)) – the acquisition of more than 5% is subject to the approval of the TASE.

In general, when regulatory approvals are required, the borrower and its financing sources should consider factors such as (i) the time it takes to receive a regulatory approval and how it may impact the timeline to syndicate or market the financing, and (ii) the time period in which the borrower will need to retain any commitments as set forth in the commitment letter (and, from the perspective of a financer, the impact on pricing, market flex or other terms with respect to that time period). In addition, the approval for placing securities on target companies should also be considered.

There are three methods for acquiring the entire share capital of a public company in Israel:

Tender Offer

A tender offer to purchase shares is addressed to all of the shareholders of the company.

According to the Companies Law-1999, a full tender offer must be made in the event of purchasing more than 90% of the shares of a public company. In such a case, the acquirer must either acquire:

  • more than 95% of the target company's shares (including those owned by the acquirer) as well as a majority of the shareholders, who are without a personal interest, accepting the tender offer; or
  • more than 98% of the target company's shares (including those owned by the acquirer). In this case, the remaining shares, whose holders did not approve the offer, are squeezed out.

Once a full tender offer is approved and completed, the company will become a private company and will no longer be traded on the stock exchange.

Statutory Merger

A statutory merger is the merger of one legal entity into another. According to the Israeli Companies Law -1999, a merger can only be completed between two Israeli companies. Therefore, when a non-Israeli acquirer is involved, the transaction structure usually takes the form of a reverse triangular merger, where the non-Israeli acquirer forms a wholly owned subsidiary to act as an acquisition corporation. At the effective time of the merger, the newly formed Israeli subsidiary is merged with and into the Israeli target company, with the Israeli target company surviving the merger. Following the consummation of the merger, the Israeli target company is a wholly owned subsidiary of the non-Israeli acquirer.

Court-Approved Merger

This method requires an application to be made to the court on behalf of the target company. The court may approve the merger if a simple majority of the shareholders (including creditors, if applicable) approves the merger provided at least 75% of the shares participated in the vote.

Squeeze-Out Threshold

Due to the very high threshold in Israel (98%), the full acquisition of a public company is generally performed by way of a statutory merger.

Bidding Requirements

There are no specific requirements from the bidder except for certain disclosure requirements that may be required under the Israeli Securities Law, 1968 and the regulations promulgated thereunder. It is noted that both a statutory merger and a court-approved merger require the approval of both the board of directors and the general meeting of shareholders of the public company and that certain procedural requirements must be met (eg, notices to creditors and the passage of a waiting period) before a merger may be consummated. 

Financing Considerations

Parties may agree under the merger agreement to condition the merger subject to the acquirer obtaining financing.

There is a question under Israeli law, as to whether or not in the framework of reverse triangular merger, the merger-sub, which will merge into the public company, may incur any debt. The question stems from the fact that the merger will result in any such debt being pushed down to the level of the public company, which may be viewed as an unlawful distribution under the Israeli law. In recent years, certain practitioners have adopted the view that a push-down of debt in the framework of a merger is not impermissible.

Enforcement of a Floating Charge

The Insolvency Law dictates that a floating charge-holder will be entitled to only 75% of the proceeds of realisation of the assets that were subject to the floating charge on the date of commencement of the insolvency proceedings (after payment of indebtedness preferred by operation of law). Any remaining debts owed to the floating charge-holder after that payment will rank pari passu with the unsecured creditors.

Competition Law Limitations

Local competition law limitations may require the approval of the Competition Authority, particularly when involving the larger Israeli banks in a syndication loan. In some cases, it may be required to restrict their share in the syndicated loan or their status as lead or arranger in such transactions.

Trade Restrictions

According to Israel's Trade with the Enemy Ordinance 1939, Israeli natural or legal persons are forbidden from having any commercial, financial or any other affairs with any person or legal entity which is a citizen or resident of a country at a state of war with Israel. To date, the enemy states include Iran, Iraq, Syria and Lebanon.

Herzog Fox & Neeman

Asia House
4 Weizmann Street
Tel Aviv
6423904
Israel

+972 3 692 2020

+972 3 696 6464

Contact@herzoglaw.co.il www.herzoglaw.co.il
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Law and Practice

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Herzog Fox & Neeman is Israel’s leading international law firm. Originally established as a niche law firm representing foreign investors in Israel, Herzog is now Israel’s premier law firm in all cross-border M&A and financial transactions, both inbound and outbound. With over 400 lawyers and 150 partners, Herzog is a full-service commercial law firm, providing high-quality, client-tailored legal services to both foreign and domestic clients. Herzog represents the world’s leading corporations, investment funds and entrepreneurs, and is the Israeli law firm of choice for leading law firms around the world. Herzog's banking and finance practice, headed by Alan Sacks, is one of the largest and most diversified finance practices in Israel, in terms of both clients and range of services provided. The firm's expertise includes all types of finance transactions, acquisition finance, aviation finance, structured finance, financial regulation and compliance issues, derivatives and financial products, payment systems, and post-money transactions and regulation. Herzog advises all of the major financial institutions in Israel, and represents the majority of foreign banks operating in Israel.

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