The primary law governing M&A in Israel is the Companies Law of 1999. This law establishes the framework for the registration, incorporation, and dissolution of companies, as well as the rights and obligations of shareholders. It also sets out the rules for the merger and acquisition of companies. In addition, the Israel Securities Authority (ISA) is responsible for enforcing securities laws and regulations related to M&A transactions where public companies are involved.
Another important aspect of M&A in Israel is the issue of intellectual property. Israel has a strong intellectual property regime and foreign buyers should conduct due diligence on the target company's intellectual property assets to ensure that they are valid and enforceable. Additionally, any agreements related to the transfer of intellectual property should be carefully drafted to ensure that the buyer acquires all necessary rights to the intellectual property.
Tax considerations also play a significant role in M&A transactions in Israel. Foreign buyers should be familiar with the Israeli tax system as the newly purchased business unit shall be subject to those post-closing of the M&A, including corporate income tax, value-added tax (VAT), and capital gains tax, as well as any double tax treaties that may be in place with their home country. Tax implications are among the most important, if not the most important, considerations of post-merger integration (PMI) processes in structuring and implementing the new business unit under the buyer's business group.
Regulatory Oversight
One important aspect of M&A in Israel is the requirement for regulatory approvals by the Israel Antitrust Authority (IAA), the Innovation Authority (IIA) as well as other authorities such as the Ministry of Defense, where cyber security or other companies with defense related products are involved.
The Antitrust Authority Approvals
An important aspect of M&A in Israel is antitrust law. Israel has a robust antitrust framework that is enforced by the Israel Antitrust Authority (IAA). The IAA is responsible for ensuring that M&A transactions do not harm competition in the market, and it has the power to block or impose conditions on transactions that are found to be anti-competitive.
When assessing the potential for antitrust issues, foreign buyers should consider whether the transaction will result in a significant concentration of market power or whether it will create or enhance a dominant position in the market. The IAA reviews mergers and acquisitions that meet certain criteria, such as a certain size or market concentration, to ensure that the transaction does not harm competition in the market and is in the best interest of the public.
During the review process, the IAA may require the parties to provide extensive documentation and information about the transaction and the relevant market. It may also require the parties to make divestitures or other structural changes to the transaction in order to mitigate anti-competitive effects. Failure to comply with the IAA's review process or comply with the decision, can result in fines or penalties.
It is important for foreign buyers to take into account the antitrust laws when assessing the M&A opportunities in Israel, conduct a thorough antitrust analysis before proceeding with a transaction.
The Israeli Innovation Authority Approvals
The Israeli Innovation Authority (IIA) plays an important role in the M&A landscape in Israel, particularly for companies in the technology sector. The IIA is a government agency that promotes and supports innovation and high-tech industries in Israel. It offers a wide range of programs and incentives for companies, including grants, loans, and tax incentives.
One of the IIA's main functions is to support the development and growth of startups in Israel. When a foreign company acquires an Israeli startup, the IIA may require the foreign company to meet certain conditions, such as maintaining the startup's operations in Israel, in order to continue receiving support from the agency.
The IIA also plays an important role in the development of industrial research and development projects, by providing funding, grants and other incentives, to companies who undertake them.
It is important for foreign buyers to be aware of the IIA's role and the potential impact it may have on the M&A transaction, if the target company is a startup or in the technology sector and ensure compliance with the IIA's requirements.
The Ministry of Defense Approvals
Some M&A deals in Israel may also require approval from the Ministry of Defense (MOD) if the target company is involved in certain types of defense-related activities. The MOD is responsible for ensuring that the transfer of technology or intellectual property related to defense or security does not compromise the security of Israel.
The MOD has the power to block or impose conditions on M&A transactions that involve companies that develop, produce or operate technologies, products or services that fall under the defense or security sectors. The MOD has wide discretion in determining which technologies, products or services fall under these sectors, and could request additional information, or investigation of the target company before approving the transaction.
Examples of sectors that may require MOD approval include aerospace and defense, cyber security, and other high-tech fields that have potential dual-use applications. If the target company is involved in these activities, foreign buyers should expect a more rigorous regulatory process and longer timelines for approvals.
In order to obtain MOD approval, foreign buyers should work closely with lawyers and other professionals familiar with the MOD's review process and be prepared to provide extensive documentation and information about the transaction and the target company.
Intellectual Property Pitfalls
Foreign buyers should be aware that certain state employees and medical professionals in Israel may be subject to intellectual property (IP) restrictions. These restrictions are designed to prevent state employees and medical professionals from exploiting their position to create or develop intellectual property that may be used for personal gain.
State employees, such as those employed by government-funded research institutions, may be subject to restrictions on the commercial use of intellectual property that they create or develop while working in their official capacity or during the term of their employment (in most cases regardless of whether the intellectual property was actually developed during work hours or within the premises of their workplace). These restrictions are intended to ensure that intellectual property developed using government resources is used for the public good, rather than for personal financial gain.
Medical professionals and institutions may also be subject to intellectual property or patient privacy restrictions. For example, they may be prohibited from using patient information for commercial purposes without the patient's consent. They also may be prohibited from using hospital or other medical resources for the development of intellectual property without proper authorization. A proper due diligence check in a medical company should also address these aspects.
It is important for foreign buyers to be aware of these intellectual property restrictions when assessing M&A opportunities in Israel. In some cases, these restrictions may limit the commercial use or value of intellectual property assets, so it is important to conduct a thorough due diligence and identify any potential intellectual property restrictions that may apply to the target company.
Privacy Law Related Pitfalls
Foreign buyers should also be aware of the privacy and data protection laws and pitfalls to note and address in M&A deals in Israel.
Israel has a data protection framework that is intended to protect the privacy rights of individuals and the security of their personal data. While the extent of the enforcement is not yet vast, in recent time the Israeli Privacy Protection Authority has imposed fines on certain businesses that have retained and used data of individuals in breach of the Israeli Protection of Privacy Law.
The main data protection law in Israel is the Protection of Privacy Law of 1981 (including the Protection of Privacy Regulations promulgated under it), which establishes the principles for the collection, use, and dissemination of personal data. The law applies to companies and organizations that process personal data, and it requires organizations to implement appropriate technical and organizational measures to protect the security of personal data.
In addition to the Protection of Privacy Law and the Protection of Privacy Regulations, foreign buyers should also be aware of other laws and regulations that may apply to the target company's data processing activities, such as the GDPR, the EU ePrivacy Directive (which at some point may also become a regulation) and the California Consumer Privacy Act.
Foreign buyers should conduct a thorough legal due diligence to identify any potential data protection compliance issues and liabilities, and to assess whether the target company's data protection policies and practices are adequate and in compliance with the laws and regulations.
It is important to keep in mind that the handling, transfer and sharing of personal data post-M&A will be an important part of the agreement, including but not limited to, agreements to protect personal data, agreements on data retention, data deletion, data sharing, data migration and data security, among others.
Employment Laws Related Pitfalls
Foreign buyers should be aware of the potential employment law pitfalls and employment matters to note and address in M&A deals in Israel. The Israeli labor laws and regulations contain several provisions that can affect M&A transactions.
One important aspect to note is that Israeli labor laws are highly protective of employees, and the termination of employment can be a complex and time-consuming process. In case of the M&A, the buyer will be responsible for the employees of the target company, and the new employer should be aware of the potential legal and financial implications of any employment terminations, including the requirement to provide notice, severance pay, and other benefits.
Another important aspect is the obligation to provide employee benefits and rights, including pension plans, health insurance, and vacation time, in addition to the protections against discrimination and harassment.
In addition, Israeli labor laws also provide for collective bargaining agreements, which dictate the terms of employment for certain groups of employees. Foreign buyers should be aware of the terms of these agreements and how they may affect the operations of the target company post-acquisition.
It is important for foreign buyers to be aware of these employment law considerations when assessing M&A opportunities in Israel, and work closely with experienced employment lawyers to ensure compliance with Israeli labor laws and regulations. They should also conduct a thorough legal due diligence to identify any potential employment-related liabilities or obligations that may be assumed as part of the acquisition, and plan accordingly, in order to have a smooth transition and avoid future legal disputes.
In addition to the other legal and regulatory considerations mentioned above, it's important for foreign buyers to conduct a thorough due diligence when assessing the employment status of the target company. This should include a review of the target company's pay slips, to detect any potential issues or exposures related to employment matters.
During the due diligence process, foreign buyers should review the target company's pay slips, employment agreements and other documents to ensure that they are in compliance with Israeli labor laws and regulations, such as those related to minimum wage, overtime pay, and other benefits. The review of pay slips can also detect any discrepancies or issues related to the payment of severance pay, notice periods, and other benefits that may be required in the event of termination of employment.
It's worth mentioning that failure to comply with labor laws and regulations can lead to significant financial and legal consequences, such as fines, penalties, and liability for unpaid wages and benefits. Therefore, the review of pay slips during the due diligence process is an important step to identify any potential issues and exposures related to employment matters, and plan accordingly.
In Conclusion
In conclusion, understanding the legal and regulatory landscape for M&A in Israel is crucial for foreign buyers looking to acquire or merge with Israeli companies. Familiarizing yourself with the legal and regulatory environment, obtaining the necessary regulatory approvals, conducting due diligence on intellectual property, and assessing tax implications, can help ensure a successful transaction.
Our firm has vast experience in advising and negotiating M&A deals in Israel and can assist buyers of any size to make a fully informed purchase, negotiate the deal as well as navigate the legal and regulatory landscape in order to make sure the transaction is compliant with laws and regulations.
