The number of mergers and acquisitions (M&A) in Israel was up 34% in 2019, with 166 deals in the year compared to 124 deals in 2018 (according to the PwC Israel 2019 M&A Report). The overall value of the deals reached USD20.4 billion in 2019, a slight decrease of 6% compared to the USD21.6 billion record set in 2018, which was boosted by the USD7.1 billion 2018 acquisition of TASE and LSE-listed Frutarom by NYSE-listed International Flavors & Fragrances (IFF), in which Naschitz Brandes Amir (NBA) acted as Frutarom’s counsel.
The number of deals in the range of USD400 million to USD1 billion more than doubled in 2019, from four deals in 2018 to nine deals in 2019, accounting for more than 42% of all M&A activity. Four M&A deals had a price tag in excess of USD1 billion in 2019, compared to five deals in 2018.
As emerging Israeli companies continue to mature and the size of private financing rounds increase, the average size of M&A deals continues to remain high.
US investors continued to express significant interest in the Israeli market, with the value of deals by US entities reaching USD11.5 billion in 2019. Though the number was lower than the USD12.9 billion in 2018, the strong 2019 figure comes despite a US tax reform, which shifted conditions for offshore investment. M&A transactions led by Chinese and other Asian players remained at similar overall levels in 2019, but the average deal price in 2019 tanked to USD75 million from USD452 million in 2018, as Chinese investors struggle to make large deals in the Israeli market.
Similar to past years, hi-tech M&A deals led the pack in 2019 with USD9.1 billion in deal value, followed by the industrial production sector with USD4 billion.
The industrial production sector was prominent thanks to the USD3.4 billion acquisition of Israeli-based electronics and industrial products manufacturer Orbotech by US semiconductor equipment maker KLA-Tencor.
There are three primary methods of acquiring a public company in Israel: a statutory merger, a tender offer and a court-approved merger.
Pursuant to Israel’s Companies Law 5759-1999 (Companies Law), a merger may only be effected between two Israeli companies. Therefore, most acquisitions of Israeli companies by non-Israeli buyers are effected by means of a reverse triangular merger, whereby the acquiring company forms an Israeli subsidiary, which is then merged with and into the Israeli target company.
The second method for acquiring public companies is by way of a tender offer commenced by the buyer and directed to all company shareholders. If, as a result of the tender offer:
then, the Companies Law provides that the purchaser automatically acquires ownership of the remaining shares. However, if the purchaser is unable to purchase (together with the shares it holds) more than 95% or 98% (as applicable) of the company’s shares, the purchaser may not own more than 90% of the shares of the target company. In light of the high squeeze-out threshold, buyers rarely use a tender offer if the goal is to acquire 100% of a public company.
Court-Approved Mergers (Scheme of Arrangement)
The third method available for acquiring public companies is a court-approved merger. This procedure involves an application to a court in Israel on behalf of the target company. The court is authorised to approve the merger, after at least 75% of the shares participating in the vote of the target company, as well as a simple majority of those shareholders attending and voting at such a meeting (as well as creditors, if applicable), approve the merger.
In addition, Israeli law permits the acquisition of all or a significant portion of the assets of an Israeli public company, in which case the approval of the selling company’s shareholders is not required.
The primary regulators for M&A activity in Israel are the Israeli Securities Authority (ISA), the Israel Competition Authority and the Israel Tax Authority. In addition, the Supervisor of Capital Market, Insurance and Savings in the Ministry of Finance is the primary regulator responsible for approving acquisitions of regulated financial companies and fills a key role in such acquisitions.
There are no general restrictions on foreign ownership of shares in Israeli companies, other than restrictions on residents of countries in a state of war with the State of Israel.
Israeli companies that participate in certain governmental funding programmes, eg, the research and development grants of the Israel Innovation Authority (formerly known as the Office of the Chief Scientist), and tax incentives of the Investment Centre, require the approval of these agencies prior to certain changes in their shareholding, including when non-Israeli shareholders acquire specified ownership levels.
Generally, an antitrust filing will be required in Israel for a transaction if each of the counterparties (together with controlling, controlled by and under common control entities) has an annual turnover in Israel of at least NIS10 million (which the antitrust authority has proposed be increased to NIS20 million), and both parties together have an aggregate annual turnover in Israel of at least NIS360 million.
In addition, even if these thresholds are not met, a filing would still be required if:
Generally, the approval of employees is not required in M&A transactions. However, a change of control may, in certain circumstances, be deemed a termination of employment, entitling the employees to receive severance payment as if their employment had been terminated. It is also worth noting that employees cannot waive severance rights and certain other employee social rights, and that the enforceability of covenants not to compete in Israel is subject to limitations.
There is currently no general national security review of acquisitions in Israel. However, in October 2019, the Israeli government formed a new oversight committee to review national security aspects of foreign investments in Israel, which is tasked with evaluating and recommending whether, and in what scope, to implement such an acquisition review process. In addition, Israel may retain certain veto or other rights with respect to natural resources and companies providing essential services.
A key development that has affected Israeli M&A activity in 2019 was the adoption of the Law for the Promotion of Competition and Reduction of Centralisation. The law, enacted in 2013, required investors holding both substantial non-financial assets and substantial financial assets to divest certain assets by the end of 2019. As a result, many investment groups have been active during the course of 2019 in order to meet the divestment deadline.
Legislation requiring the leading Israeli banks to divest their credit card holdings has also put the two major credit card companies on the shelf, with Warburg Pincus completing the acquisition of Leumi Card in 2019, and Bank Hapoalim considering spinoff and M&A alternatives for its holdings in IsraCard.
See 1 Trends.
The Companies Law provides that an acquisition of shares in a public company must be made by means of a "special tender offer" if, as a result of the acquisition, the purchaser would hold 25% or more of the voting rights in the company, unless there is already another shareholder of the company with 25% or more of the voting rights.
Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if, as a result of the acquisition, the purchaser would hold more than 45% of the voting rights in the company, unless there is already a shareholder with more than 45% of the voting rights in the company.
Accordingly, the ability to build a stake in a target that equals or exceeds 25% prior to launching a special tender offer or entering into merger discussions with the target is limited.
Any person who acquires an interest of greater than 5% in a company listed on the Tel Aviv Stock Exchange (TASE) is required to notify the company of the acquisition. The company is then required to file a notice of this acquisition with the TASE and the ISA. Thereafter, any further sales or purchases of shares by that shareholder, for so long as the shareholder holds an interest above 5%, are subject to similar disclosure requirements.
Shareholders seeking to cross the 25% or 45% ownership thresholds are required to commence a special tender offer as described in the response to 4.1 Principal Stakebuilding Strategies.
Shareholders of public Israeli companies listed on stock exchanges in the US or the UK are subject to the reporting requirements that apply in such jurisdictions.
Although there is no specific Israeli law that prohibits a company from introducing additional reporting thresholds beyond the mandatory statutory reporting requirements, Israeli companies do not introduce such requirements in their articles of association.
Exceptions apply for companies in industries that require special regulatory approval for passing ownership thresholds, such as companies with licences from the Ministry of Communications, or banks and other regulated financial companies that require the approval of the Supervisor of Capital Market, Insurance and Savings in the Ministry of Finance when passing specified thresholds.
Dealing in derivatives is permitted.
Generally, the reporting obligations for derivatives are similar to the reporting obligations that apply to the underlying securities, as described in the responses to prior sections.
A shareholder is required to make known the purpose of its acquisition and intention if the shareholder commences a special tender offer as described in 4.1 Principal Stakebuilding Strategies.
A TASE-listed company is generally required to disclose active negotiations and the receipt of a non-binding letter of interest. However, aside from public leakage, the company may defer disclosure until a definitive agreement is signed, if the Board of Directors determines that the disclosure of the negotiations and/or non-binding letter of intent may jeopardise the consummation of the transaction or have detrimental effect on its terms.
Generally, companies tend to rely on the exception described in the response to 5.1 Requirement to Disclose a Deal to defer disclosure until a definitive agreement is signed.
In the context of friendly negotiated deals, it is common to perform detailed business, legal, accounting, finance, tax, intellectual property and other industry-specialised diligence, recognising that no post-closing indemnity obligations exist in public company deals.
Standstills are generally not common in the Israeli market. On the other hand, it is common for the board of directors of a public company to undertake a certain exclusivity period as part of its business judgement, particularly if the company has already undertaken a market check process. "Go shop" provisions have also been included in several Israeli public deals in recent years.
Tender offer terms are generally not documented in a definitive agreement other than in the case of agreements between the bidder and a significant shareholder agreeing to accept the tender offer.
Following the execution of the definitive merger agreement, each merging party is required to convene a shareholders' meeting to approve the merger (with advance notice of at least 35 days), and to file a formal merger proposal with the Israeli Companies Registrar. The Companies Registrar will effect the merger and issue a certificate of merger after the later of:
A tender offer must remain open for at least 14 days, or if the offer qualifies as a "special tender offer", as discussed in the response to 4.1 Principal Stakebuilding Strategies, for at least 21 days. The maximum time period for maintaining a tender offer is 60 days, which may be extended if a competing bid is issued during that period.
Court-Approved Mergers (Schemes of Arrangement)
Following the execution of the definitive merger agreement, the company files a petition to the Israeli court to approve the convening of a shareholders meeting and a creditors meeting, which can take up to 30 days. The meetings to approve the merger are typically set within 30 days after the date of the order of the court.
See 2.1 Acquiring a Company and 4.1 Principal Stakebuilding Strategies.
Israeli law does not regulate the types of consideration that may be paid in a takeover. However, in recent years, cash has been the more common acquisition consideration but in periods when global interest rates are higher the number of deals that include share consideration tends to increase.
If the consideration is paid in the form of shares or other securities, the bidder must comply with the relevant provisions of the Israeli Securities Law 5728-1968 (Israeli Securities Law), including filing and obtaining the approval of the ISA to publish an Israeli prospectus, unless a prospectus exemption is available. An exemption may apply if the buyer dual-lists its securities on the TASE.
With regard to mergers, Israeli law does not restrict the type of closing conditions that the parties may agree to include in the definitive merger agreement.
Tender offers may be subject to conditions only with respect to the receipt of governmental consents, permits or licences that the bidder needs to acquire the shares, and the affirmative offer acceptance by a minimum number of shares specified by the bidder in the tender offer document. A bidder may also withdraw a tender offer if unforeseen and unforeseeable circumstances have occurred since the announcement of the tender offer that have resulted in the offer terms being significantly different from those that a reasonable bidder would have offered had the conditions been known at the time of making the offer.
The level of approvals varies, based on the transaction structure:
A merger requires the approval of the board of directors and the shareholders of each merging company. Generally, a simple majority vote is required. However, a merger involving a controlling shareholder’s personal interest may trigger special majority vote requirements. Furthermore, a company may provide in its articles of association for a higher majority vote threshold. Shares held by the other merging company or certain affiliates are generally excluded from the vote.
In order for the bidder to cross the 90% threshold in the full tender offer, the bidder must acquire either:
However, if the purchaser is unable to purchase more than 95% or 98%, as applicable, of the company’s shares, the purchaser may not own more than 90% of the shares. In the case of a special tender offer to cross the 25% or 45% ownership threshold, as described in 4.1 Principal Stakebuilding Strategies, at least 5% of the shares must accept the special tender offer.
Court-Approved Mergers (Scheme of Arrangement)
In addition to court approval, the merger is also subject to the approval of the holders of at least 75% of the shares present and voted as well as a simple majority of those shareholders attending and voting at the meeting. The approval of creditors may also be required in accordance with the court’s order.
The parties may agree to condition the merger upon the bidder obtaining financing. A bidder cannot condition a tender offer on obtaining financing.
Merger agreements may contain provisions for break-up fees in the event that the merger is not consummated, typically due to the target company’s board exercising its "fiduciary out". Non-solicitation, match-up rights and force-the-vote provisions are also common, however, in recent years, the inclusion of limited period "go shop" provisions, as an exception to the non-solicitation, are also becoming more common, particularly in cases where the company did not perform a comprehensive market check before entering into a definitive merger agreement.
Generally, any agreement between a public company and its controlling shareholder (defined for this purpose as the holder of more than 25% of the shares), requires the special approval of shareholders without a personal interest in the matter. Accordingly, it is difficult for the bidder to obtain special rights from the public company.
Shareholders can vote by proxy in Israel.
See 2.1 Acquiring a Company and 6.5 Minimum Acceptance Conditions. The squeeze-out threshold under Israeli law is very high and therefore the acquisition of 100% of a public company is typically conducted by way of a statutory merger or court-approved merger and not by a tender offer.
In many friendly negotiated merger transactions, significant shareholders execute voting or support agreements with the buyer undertaking to vote in favour of the merger at the general meeting of shareholders.
A voting or support undertaking typically provides that the shareholder may revoke its undertaking if the board of directors of the target company changes its recommendation in accordance with the terms of the merger agreement.
See 5.1 Requirement to Disclose a Deal.
As described in 6.3 Consideration, if the consideration is paid in the form of shares or other securities, the bidder must comply with the relevant provisions of the Israeli Securities Law, including filing and obtaining the approval of the ISA to publish an Israeli prospectus, unless a prospectus exemption is available. An exemption may apply if the buyer dual-lists its securities on the TASE.
Depending on the scope of the transaction, pro forma financial statements may be required to be included in the disclosure documents. Israeli law requires financial statements to be prepared in accordance with International Financial Reporting Standards (IFRS). However, in the event the Israeli company is listed on a US stock exchange and therefore also subject to SEC rules, then the Israeli Securities Law permits the company to report in US generally accepted accounting principles (GAAP).
Generally, the Israeli Securities Law requires detailed disclosure of the key transaction documents, but it is not mandatory to file copies of the documents themselves. However, if the Israeli company, being listed on a US stock exchange, is also subject to SEC rules, then the Israeli Securities Law requires disclosure in the same manner as required under SEC rules, which would also include the filing of copies of the key transaction documents.
The approval of the board of directors is required with respect to a statutory merger and a court-approved merger. In fulfilling such a duty, the board of directors, by virtue of its duty of care and the duty of loyalty, has a duty to maximise shareholder value. In a statutory merger, the board of directors of each merging company is required to consider not only the interest of the shareholders but also the ability of the merged company to meet its obligations to its creditors.
With respect to a full tender offer, in the absence of a specific provision regarding the required conduct of the board of directors, there is uncertainty as to whether the board of directors is required to evaluate the price offered and express its view, or leave the shareholders to make their own independent determination on the proposed terms, being a direct transaction between the bidder and the shareholders to which the company is not a party.
In a special tender offer, the Companies Law requires the board of directors to either make a recommendation to its shareholders as to whether the offer is fair and, if it elects not to make such a recommendation, to disclose the reasons for not making a recommendation.
In transactions involving parties in which directors, officers or significant shareholders have a personal interest or a conflict of interest, it is common for the board of directors to establish a special ad hoc committee of non-interested directors (or appoint the audit committee of the board of directors) to negotiate the transaction and present recommendations to the board of directors.
Generally, in the absence of a conflict of interest, Israeli courts defer to the judgment of the board of directors of a target company in a takeover situation in the absence of alleged self-dealing or conflict of interest scenarios. It is also important to note that the Companies Law provides for specific approval procedures for transactions involving personal interests by directors, officers or significant shareholders, which may trigger separate approval requirements by the independent audit committee and by a special majority vote of the non-interested shareholders. Israeli law also mandates personal interest disclosure by directors and prohibits a director from participating and voting at board and committee meetings on matters in which a director has a personal interest.
In many cases, the courts focus their involvement on the manner in which the personal interest was disclosed and addressed in the context of the transaction approval.
In transactions involving parties in which directors, officers or significant shareholders have a personal interest or a conflict of interest, it would be common for the special independent committee to engage its own legal counsel, separate from the target company’s counsel. In certain cases, the special committee would also engage a separate financial adviser, and, depending on the circumstances that adviser would also provide a separate fairness opinion alongside, or instead of, the financial advisor of the entire board.
Conflicts of interest have been the subject of judicial scrutiny in Israel. As noted in 8.4 Independent Outside Advice, given the specific approval procedures for transactions involving personal interests in the Companies Law, Israeli courts focus their judicial review on the manner in which the personal interest was disclosed and addressed in the context of the transaction approval.
Hostile tender offers are permitted in Israel. However, if the intent of the bidder is to acquire 100% of a target company, it is difficult to reach that with a tender offer, bearing in mind the high threshold for squeezing out shareholders who do not accept the tender offer, as described in 2.1 Acquiring a Company and 6.5 Minimum Acceptance Conditions.
Accordingly, hostile M&A activity is typically used as an avenue to engage a resisting incumbent board of directors, and, if successful, eventually leads to a merger structure recommended by the board (in its new or old composition).
The board of directors, by virtue of its duty of loyalty and duty of care, has a duty to maximise shareholder value, and to act in good faith and for the benefit of the company, which, depending on the circumstances, may include the use of defensive measures.
A number of takeover defences are available to Israeli target companies, including a staggered board and the board’s ability to issue blank cheque preferred stock (which is not permitted for companies only traded on the TASE).
See 9.2 Directors' Use of Defensive Measures.
In taking any action to frustrate a takeover attempt, the board of directors must carefully exercise its fiduciary duties to evaluate the proposal together with appropriate advisers, particularly in a scenario in which members of the board may be deemed to have a personal interest. The right of directors to "just say no" has not been tested in an Israeli court.
Although increasing in recent years, litigation is not common in M&A deals in Israel. It usually occurs in alleged self-dealing and conflict of interest scenarios.
When litigation arises, it would typically be filed in the period after a definitive agreement is signed and announced and prior to the shareholders’ vote on the proposed transaction.
Activism has become more popular in Israel in recent years, particularly in Israeli companies traded on a US stock exchange. Since many of the largest Israeli companies are traded on the NYSE and NASDAQ, the scope of activity in such companies has increased.
Activists in Israeli companies typically focus on shaking up the board of directors, bringing in new blood to the board, encouraging M&A activity and cutting expenses.
Activism has encouraged some companies to enter into M&A transactions. A recent example is the stake-holding position Starboard acquired in Mellanox, an Israeli company traded on NASDAQ. The activist attempted to replace the board of directors, and publicly encouraged Mellanox to reduce expenses and engage financial advisers to strategically evaluate M&A alternatives. Following such developments, Mellanox announced in March 2019 that its board of directors had accepted an offer to sell 100% of the company to Nvidia for US6.9 billion, and its delisting from NASDAQ following completion of the recommended sale.
Although rare in the Israeli market, the USD800 million acquisition of NASDAQ-listed EZchip (represented by NBA) by Mellanox became the subject of activism interference by Raging Capital following the announcement of the definitive agreement and prior to the shareholders’ vote on the merger.