i Merger transactions
The Israeli merger control regime is governed by the Israeli Restrictive Trade Practices Law2 as well as the regulations and guidelines thereunder (Antitrust Law).
Under the Antitrust Law, a merger transaction is defined as including any transaction in which a stake in a corporation greater than 25 per cent is purchased, by way of acquiring the share capital, the right to appoint members of the board or the right to profits in the corporation. In addition, a transaction in which a substantial part of a corporation’s business is purchased is also deemed a merger transaction. For such purposes, even if the selling corporation has additional assets, which may even be more significant in their value, the transaction could still constitute a merger transaction if an entire line of business is sold.
Furthermore, certain transactions that de facto combine the control of two corporations, such as long-term lease agreements, may also in certain circumstances be deemed merger transactions.
ii Notification and approval requirement
A merger transaction that triggers one of two types of thresholds – a turnover threshold or a market share threshold – requires notification to the Antitrust Authority and is subject to a review and an approval requirement by the Israeli Antitrust Commissioner (Commissioner) prior to its consummation; i.e., where a notification requirement applies, a transaction may not be consummated prior to receiving the approval.
Consummating a transaction prior to receiving a required approval is deemed a violation of the Antitrust Law and may subject the parties (as well as officers of such parties) to criminal and administrative sanctions3. In addition, the Israeli Antitrust Tribunal (Antitrust Tribunal) may issue an order to unwind a transaction that did not obtain a required approval if it finds that there is a reasonable fear that, as a result of the merger transaction, competition in a certain market, or the public, shall be harmed.
iii Transactions of non-Israeli companies
In order to be defined as such, a merger transaction generally requires a transaction between Israeli corporations. However, under guidelines (Merger Guidelines) issued by the Israeli Antitrust Authority (Antitrust Authority),4 a company need not be incorporated in Israel to be deemed as an Israeli corporation for such purposes. Foreign corporations that were not incorporated in Israel but that have significant activities in Israel will, in certain circumstances, be deemed Israeli corporations for the purposes of the Antitrust Law. In theory, a merger transaction between two foreign corporations that are deemed Israeli corporations would – subject to the applicable thresholds – trigger a notification requirement and require an approval.
Specifically, under the Merger Guidelines a foreign corporation will still be deemed as an Israeli corporation if:
- a it has a place of business in Israel, namely it has an actual office in Israel, it is an Israeli ‘tax resident’, or it can significantly affect the activities of a local representative, agent or distributor (e.g., by determining prices, levels of inventory or other aspects of managing its business); or
- b it has a ‘merger nexus’ with an Israeli corporation, which would exist if it holds more than 25 per cent of the equity or voting rights in an Israeli corporation (whether directly or indirectly, by way of holding shares or even due to contractual rights that effectively provide the foreign corporation with more than 25 per cent of the rights in an Israeli company, or due to the existence of ‘negative control’ (e.g., as a result of certain contractual veto rights in connection with the activities of the Israeli corporation).
iv Possible outcomes of an antitrust review
Following an antitrust review, the Commissioner will render one of three decisions: (1) a merger transaction that is found not to cause a reasonable fear of a significant infringement of competition or an adverse effect on the public in connection with price levels, the quality or the quantity of a certain product or service, will be approved; a merger transaction that does raise one of these concerns will either be (2) rejected (and the Commissioner will issue a notice that it objects to the transaction), or (3) approved subject to conditions that will remove or significantly mitigate such concerns. All of these decisions are subject to an appeal before the Antitrust Tribunal.
II YEAR IN REVIEW
In 2015 the Antitrust Authority decided approximately 150 merger transactions. Of these, all were unconditionally approved, with the exception of one merger transaction, which was approved subject to the parties’ compliance with certain terms and conditions. No resolution was published with respect to merger transactions that were rejected altogether. The resolution described in Section II.ii, infra, was made in 2016 and is, therefore, not counted in the above statistics.
Note that, as further discussed below, when the Antitrust Authority intends to reject a merger transaction, it will often inform the parties of such intention, and if the parties are not planning to challenge the decision before the Antitrust Tribunal, the parties will often withdraw the merger notice (thus, such transactions will not appear in the official data published by the Antitrust Authority regarding merger enforcement). The same sometimes applies also to approvals that are subject to conditions.
As noted above, in 2015 only one merger transaction was subject to conditions; in that transaction only limited reasoning was provided. As unconditional approvals of merger transactions are published without the reasons for the approval and without specifying the market and competitive analysis performed by the Antitrust Authority it is sometimes difficult to describe general trends in the merger transaction approval policies of the Antitrust Authority.5
ii Rejection of a merger transaction In Re: Electra Consumer Products and Mey Eden Bar6
Electra imports, distributes and sells electric products and owns certain retail chains for consumer products. Among other things, it imports and distributes purified drinking water devices for home use sold under the Electra brand and provides maintenance services for such devices. Mey Eden is active in the mineral drinking water and purified drinking water markets as well as in certain coffee product markets. In addition, in 2013, Mey Eden began importing and distributing purified drinking water devices for home use that are sold under the Mey Eden brand, as well as maintenance services for such devices. In the transaction, Mey Eden sought to purchase the Electra activities in the field of purified drinking water devices. For a certain time it would be permitted to continue using the Electra brand.
The Commissioner objected to the transaction, finding that it would have a significant adverse impact in the relevant market. In analysing the market, the Antitrust Authority found that there are several methods available to the home consumer of drinking water, including tap water, bottled mineral water, bottled purified water, home water purifying devices that are connected to the kitchen tap, large container mineral water devices and purified drinking water devices. The Antitrust Authority found that none of the alternative methods are substitutes for purified drinking water devices, and provided a detailed analysis with respect to each of the other available solutions and the reason why it would not be deemed a substitute.
However, the Antitrust Authority did not stop at that, but continued to find that not only were the purified drinking water devices part of a separate market, they themselves were further divided into two sub-markets: branded and non-branded purified drinking water devices. The branded purified drinking water devices were found to be significantly differentiated from the non-branded devices, due to the fact, among others, that branded products appeal to quality sensitive consumers, as compared with non-branded products, and that the significant investment in advertising the branded products brings more awareness than for the non-branded products. The low level of public awareness regarding the non-branded purified drinking water devices and the strong brands of the branded companies in this field led the Antitrust Authority to conclude that the non-branded products did not constitute a substitute for the branded products. Another relevant indication was found in the fact that the branded purified drinking water devices can only use replacement and spare parts (primarily filters) that are distributed by the manufacturer (or distributor) of the devices, and they cannot purchase universal replacement parts. The Antitrust Authority also discussed the price differences between the branded and the non-branded devices, as well as the way that the branded companies perceived themselves and their relevant competition in the market. The conclusion, therefore, was that branded and non-branded purified drinking water devices constituted separate and distinct markets. The fact that the proposed transaction would reduce the number of players in the branded purified drinking water devices ultimately led to the objection of the Commissioner to the transaction despite the relatively low market share of the two companies and the significantly higher market share of the other (third) player in this market.
Of additional significance in this decision is the rejection of the parties’ request to apply the failing company doctrine (whereby the fear for adverse effects on competition can sometimes be ignored where the alternative is that the company intended to be purchased will be dissolved). The Antitrust Authority resolved that, in order to meet the burden of proof necessary for application of the failing company doctrine, objective indications have to be brought to show that the target company has no future in the market and that it will cease operations in the near future; that there is no alternative purchaser for the target company; and that from a competition perspective the option of the target company leaving the market is not more favourable than its being purchased in the relevant transaction. In this respect, losses of the target company were not found to be enough to meet the burden, nor the statements of the target’s shareholders that they intend to terminate the business, as such statements were not supported by evidence such as minutes of board meetings, management presentations, and so on. In addition, the target could not show that authentic attempts had been made to try recovering the failed business and it could not show that alternative purchasers of the business had been considered and searched for.
III THE MERGER CONTROL REGIME
i Merger transaction notification process and timing
Under the Antitrust Law, a merger transaction requires an approval if one of three alternative thresholds is triggered and it cannot be consummated prior to receiving the approval. The applicable share purchase agreement or asset purchase agreement can be executed (in fact, it generally must be executed prior to applying for an approval), but receiving an approval must be a condition precedent to closing and consummating the merger transaction. Consummation of the transaction (even partial) prior to receiving the approval is illegal and exposes the parties to, inter alia, the risk of criminal proceedings. Consummation of a transaction may take several forms for such purposes, and even certain interim actions, such as transferring shares of the purchased company to trustees who control the purchaser, have been deemed as consummation of the merger transaction that should not have been done prior to receiving the approval.7 As noted, the Commissioner imposed fines on two parties that began performing actions that were deemed as consummation of the merger transaction between them prior to receiving an approval. In that case, the purchaser provided the target with a loan and started purchasing merchandise on behalf of the target. Both these actions were deemed to be part of the payment for the purchase, and thus a partial consummation of the transaction prior to receiving approval.8
ii Filing thresholds
The three alternative filing thresholds are:
- a at least two of the merging corporations have an annual turnover in Israel of at least 10 million new Israeli shekels each, and an aggregate annual turnover in Israel of at least 150 million new Israeli shekels;
- b as a result of the merger transaction, the merged company will have a market share in Israel that is greater than 50 per cent of the production, sale, marketing or purchase of a certain product or service; or
- c any of the merging corporations has a market share in any market in Israel (i.e., not necessarily the market that is the subject matter of the merger transaction) that is greater than 50 per cent of the supply or purchase of a certain product or service.
For each of the filing thresholds, not only the actual corporation that is a formal party to the transaction is relevant, but also any corporation under joint control with such corporation. In other words, for each party to a merger transaction, its entire group of parent companies, affiliates or subsidiaries will be taken into account, and not only the specific ‘merging’ entity. However, in all cases, only sales (or purchases) within the Israeli geographical market are relevant. In addition, with respect to the seller only, if as a result of the merger transaction all ties between the selling corporation and the sold corporation will be completely severed, then the seller’s turnover from additional activities or affiliates (which are not a direct part of the merger transaction) need not be taken into account.
To determine whether the turnover threshold is triggered, one has to review the consolidated financial statements of the merging corporations (and where such corporations have ‘ultimate parent entities’, those of their respective parent entities) in the latest fiscal year prior to the year in which the merger transaction was executed. Where a merging company conducts business both in Israel and outside Israel, the revenue that will be taken into account for these purposes is only revenue from sales in Israel.
To assess the market share thresholds the first step is defining the relevant market.9 A market is broadly defined as the smallest group of products in a certain geographical area in respect of which the reactions of customers in and of themselves will not prevent the exertion of market powers by suppliers. In greater detail, it can be said that the market includes the smallest group of products in respect of which a single (and sole) supplier will increase its profits if the terms of sale for at least one of the products (in such group of products) is changed in a way that is adverse to the customers.
To determine the relevant products that comprise the market, one has to assess which products restrain the supplier from exerting such powers. In other words, the relevant products will be those that, from the customers’ perspective, are directly competing with the product being reviewed and can thus be substitutes for such product. This group of substitute (alternative) products will define the market for the relevant product being reviewed.
To obtain the necessary information for such analysis, certain indirect indicators are often referenced, such as the degree of similarity of the characteristics of the different products and the differences in terms of supply (such as price, quality, variety or accessibility).
iii Approval process and timing
Following execution of a transaction agreement that triggers one of the filing thresholds, each of the merging corporations is required to file a merger notice. There are no fees payable to the Antitrust Authority for filing merger notices or for the review.
The Commissioner must render a decision within 30 calendar days. In practice, if such 30-day period is not sufficient for its review, the Antitrust Authority will typically ask the parties for an extension of such period. If the parties do not agree to an extension, the Commissioner can apply to the Antitrust Tribunal for an extension, which will be granted if special circumstances justify it.
The decision of the Commissioner to reject a merger transaction or to approve it subject to conditions can be appealed by the parties to the Antitrust Tribunal within 30 days. A decision to approve a merger transaction, whether or not subject to conditions, can also be appealed by a third party who may be adversely affected by the merger transaction,10 as well as consumer organisations or professional unions.
The Antitrust Tribunal can approve the Commissioner’s decision, reverse it or amend it.
The Antitrust Authority recently issued a guideline enabling a quick approval procedure for transactions which prima facie do not raise any competitive concerns. The procedure was defined as a ‘bright green approval procedure’. Parties wishing to fall within the scope of such bright green approval procedure are required to comply with certain requirements (such as filing full merger notices – see below – which will be executed by the chief executive officers and the in-house counsels of the merging corporations, and more). Transactions which fit the criteria for review under the bright green approval procedure will generally be approved within several days.
iv Merger notices
There are two types of merger notices: an abbreviated merger notice and a full merger notice. The antitrust review process will not be affected merely by the question of which of the two types is required (other than, as noted, the bright green approval procedure, which requires the filing of full merger notices). However, if the parties file an abbreviated merger notice and the Antitrust Authority determines that a full merger notice was required, it will require that the parties re-file the proper notice, and this will mean that the 30-day period will commence only following the refiling of the full merger notices.
Each of the merger notices must be executed by an officer on behalf of the respective corporation. Under the Merger Guidelines, a foreign corporation is permitted to submit a merger notice in English and accompany it with a Hebrew translation (normally provided by local Israeli counsel).
The merger notices must be accompanied by financial statements for the two latest fiscal years; copies of merger notices filed by the parties in previous transactions in Israel in the last three years, if any; and copies of prospectuses filed in the past five years, if any.11 In addition, parties may also attach any other information that may be relevant and helpful for the Antitrust Authority’s review (e.g., market studies in the relevant markets, internal studies performed in connection with any of the relevant fields, general market information that can be useful in the context of reviewing the competitive effects of the transaction, minutes of board discussions that can provide relevant information).
An abbreviated merger notice may be filed if all the following conditions are met, and a full merger notice is to be filed if any of the four conditions does not apply:
- a only the turnover threshold had triggered the filing requirement;
- b the aggregate market share of the parties (including affiliates) in the market that is the subject of the transaction (in Israel) is not greater than 30 per cent;
- c none of the parties (including affiliates) has a market share (in Israel) that is greater than 50 per cent in any market that is tangential to the market that is the subject of the transaction; and
- d none of the parties (including affiliates) is party to an agreement with a third party that is a competitor in the market that is the subject of the transaction.
v Review process
During the review process, the Antitrust Authority will typically approach other participants in the relevant market (major customers and suppliers as well as competitors) to hear their views on the possible effects of the transaction on competition in the relevant markets. The Antitrust Authority will also be able to ask the parties themselves as well as third parties for additional information and for responses to follow-up questions, and it will be able to hold conversations with the parties themselves and with relevant third parties.
Under Section 46(b) of the Antitrust Law, the Commissioner is authorised to ask any person for information that is deemed necessary to enable execution of the law. Pursuant to such authority, the Antitrust Authority can (and does) approach third parties, and definitely the parties to the merger transaction themselves, to request additional information. Refusal to provide such information is deemed a violation of the Antitrust Law, and can subject the offender to criminal and administrative proceedings.12
The time during which the Antitrust Authority waits for additional information will normally not be counted towards the 30-day deadline.
A decision to provide an approval for a merger transaction, whether unconditional or subject to conditions, requires consultation with the Mergers and Exemptions Committee (which, in connection with merger transactions, is a committee comprising three members appointed by the Minister of Economy from a list of civil servants and representatives of the general public, all of which have to be proficient in the relevant legal or economic field of antitrust law). A decision to reject a merger transaction does not require such consultation.
In practice, prior to reaching a decision to reject a merger transaction or to approve it subject to conditions, the Antitrust Authority will discuss the matter with the parties, who will normally be free to withdraw their merger notices and decide not to move forward with the merger transaction if the proposed conditions are not agreeable.
vi Merger transactions including restrictive arrangements
Under the Antitrust Law, arrangements that restrict the business conduct of one (or more) of the parties in a way that may limit or be detrimental to competition are known as restrictive arrangements. Restrictive arrangements are generally illegal unless approved by the Antitrust Tribunal or provided with an exemption from the approval requirement by the Commissioner or under law (including specific block exemptions).
One of the block exemptions for restrictive arrangements provides an exemption for certain limitations that are ancillary to a merger transaction, primarily non-compete provisions, continued purchase or supply arrangements (for products and services supplied by the purchased entity) or other limitations that are required in order to maintain the economic value of the purchased entity, in all cases subject to certain conditions.
If the transaction also involves restrictive arrangements that do not fall within an applicable block exemption, the parties may request an exemption for such restrictive arrangements as part of the merger notices (both abbreviated and full form notices). The time for approval of such restrictive arrangements is 90 calendar days from the request, which period can be extended by the Commissioner for an additional 60 days (in the form of a written resolution and subject to the reasons being specified), and it can be further extended by the Antitrust Tribunal in special circumstances. Due to the possible time lapse between the approval of the merger transaction itself and the ancillary restrictive arrangements, if the parties wish to consummate the transaction prior to receiving the exemption, they may contractually decide not to apply the restrictive arrangements until they are approved, in which case the merger transaction itself can be consummated once an approval is received, and only the restrictive arrangements will be pending the further resolution of the Commissioner.
vii Publication of decisions
Once the Commissioner has made a decision, it will be publicly available on the website of the Antitrust Authority as well as in the official Antitrust Registry (and it will further be published in two daily newspapers in Israel). If the approval was subject to conditions, these will also be publicly available, although they may occasionally be redacted, primarily if they contain information that may be sensitive (such as a deadline to dispose of certain assets or limitations on pricing by the merged entity).
Along with the decision, certain parts of the merger notices will also be publicly available while certain parts of the merger notices will remain confidential. The cover letter, which is often attached to merger notices (and often contains additional relevant information for the review process), as well as the appendices of merger notices, will normally not be publicly available.
IV OTHER STRATEGIC CONSIDERATIONS
i Confidentiality of Israeli antitrust proceedings
As a competition authority, the Antitrust Authority is obviously very sensitive to matters of confidentiality of the proceedings as well as the sensitive information that is often provided to the Antitrust Authority as part of the review process. However, as previously noted, the review process will more often than not involve discussions with other market participants, and thus the existence of the merger transaction will no longer be confidential even though the transaction will still not have been consummated, which may end up not occurring at all if the approval is not granted. The Antitrust Authority typically does not agree to hold the review in complete confidentiality, and significant reasons and justifications would have to be presented for this to be considered.
If the merger transaction is not approved, the parties would normally know of this in advance and withdraw the merger notices, and thus they would not be part of the public registry. If the parties do not withdraw the merger notices, the resolution rejecting the merger transaction (as well as the non-confidential parts of the merger notices) will still be publicly available.
If the merger transaction is approved and a third party wants to challenge the approval (or its conditions, if any) in the Antitrust Tribunal, such third party may, under certain circumstances, have access to non-public information that was collected by the Antitrust Authority during the review process. However, such access would normally be limited by the Antitrust Authority and thus require a court order from the Antitrust Tribunal, which would also, of course, be mindful of the issue of confidentiality and sensitivity of material that is presented to the Antitrust Authority during a review process. Moreover, the parties to the merger transaction would in any case have the right to respond to such disclosure requirement prior to the disclosure of information, and even if information is eventually disclosed, disclosure would normally be limited to legal counsel and economic experts who in turn would be required to execute strict non-disclosure commitments.
ii Requesting an exemption from filing
In cases where the sole filing threshold is the market share threshold, which is triggered regardless of the transaction (i.e., that one of the parties has a market share in a non-related market that is greater than 50 per cent), another alternative to filing would exist if the market in which one of the parties has a market share that is greater than 50 per cent is completely unrelated to the markets that are relevant to the merger transaction. In such cases, the Antitrust Authority allows the filing of an ‘exemption request’, which can result in the parties being completely exempt from filing a merger notice. However, it should be noted that if the markets are not completely unrelated, the prospects of receiving such exemption are not high.
iii Pre-ruling application
The Antitrust Law enables the parties to approach the Antitrust Authority with a pre-ruling request. The advantage of such request is that it can be filed prior to execution of the transaction agreement. However, in order for such request to be filed, the parties would have to present good reasons for their request for a pre-ruling, rather than taking the regular course of executing the transaction agreement and then filing merger notices. Moreover, the most significant disadvantage of the pre-ruling procedure is that the decision is not binding upon the Antitrust Authority, which may provide positive indications as to the prospects of approving the merger transaction in the pre-ruling stage, but later reject it or subject it to conditions when the actual merger notices are filed.
For such reasons, the pre-ruling procedure is not commonly used.
V OUTLOOK and CONCLUSIONS
The Antitrust Authority has proposed a bill (Bill) to amend the chapter in the Antitrust Law that deals with merger transactions. The Bill in its current form proposes certain significant amendments to the Antitrust Law in connection with merger control, such as expanding the definition of a foreign corporation, raising the turnover thresholds and adding a turnover requirement to the market share thresholds (so that the market share threshold will not be triggered by companies that may have a significant market share but do not have significant sales in Israel). It also proposes to extend significantly the time for review of a merger transaction by the Antitrust Authority. The Bill further clarifies that a merger transaction does not necessarily require a corporation as a party; a natural person can be deemed to be party to a merger transaction. Another significant proposed amendment is to apply the notification and approval requirements also to transactions that do not trigger any of the filing thresholds if there is a reasonable fear that, as a result of the merger transaction, competition in a certain market will be significantly adversely affected, or the public may be harmed due to changes in the price levels or the quality or quantity of products or services in the market. It is also proposed to enable parties to file merger notices even if none of the filing thresholds are triggered (currently, if none of the filing thresholds are met, parties are not permitted to file merger notices, and the Antitrust Authority may refuse to review a merger transaction that prima facie does not trigger any of the filing thresholds).
At the time of writing, the Bill is still being discussed, and it is in any event still subject to discussions and approval by Parliament. During the course of such discussions and approval process, it can be expected that at least some of the provisions that are currently proposed in the Bill will eventually be amended prior to their final enactment into law.
1 Ran Ben-Ari is a partner at Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.
2 The Restrictive Trade Practices Law, 5748-1988. An unofficial English version is available at www.antitrust.gov.il/eng/Antitrustlaw.aspx. Note that in this version, the Commissioner is named ‘the General Director’.
3 The Commissioner recently imposed monetary fines on two parties that performed certain actions that were deemed to constitute a consummation of the merger transaction prior to receiving an approval, even though upon review of the transaction the Antitrust Commissioner agreed to the transaction. The decision was appealed and reaffirmed by the Antitrust Tribunal. AT 49471-12-15 Yehuda Berman Ltd v. The Antitrust Commissioner (available at www.antitrust.gov.il/subject/217/item/34118.aspx).
4 The Antitrust Commissioner’s Guidelines for Notification and Review Procedures for Mergers under the Restrictive Trade Practices Law, 5748-1988. Available in Hebrew only at www.antitrust.gov.il/images/docs/Mergers%20Guidelines.pdf.
5 Certain general policies can be deduced from the Merger Guidelines (see footnote 3) and from the Antitrust Commissioner’s Statement 1/11 On Guidelines for Analysing the Competitive Effects of Horizontal Mergers (available in Hebrew at www.antitrust.gov.il/images/docs/01-11.pdf) and the Antitrust Commissioner’s Statement 2/11 On Guidelines for Remedies for Mergers that Create a Reasonable Fear for a Significant Harm to Competition (available in Hebrew at www.antitrust.gov.il/files/10918/2-11.pdf).
6 In Re: Reasoning for Objecting to a Merger Between Electra Consumer Products (1951) Ltd and Mey Eden Bar – First Class Service Ltd (Antitrust Resolutions 500960; 2016).
7 In Re: De Facto Merger of Golkal 1992 Ltd and Tsover Trade Company Ltd (Antitrust Resolutions 3001329; 1998).
8 See footnote 3, supra.
9 See the Antitrust Commissioner’s Statement 1/11 (see footnote 4).
10 Provided that the harm suffered by such third party is of the type that antitrust laws seek to prevent, i.e., harm in the form of a significant adverse effect on competition or the price, quantity or quality levels of a certain product or service. AT 5/98 Edgar Investments and Development v. The Antitrust Commissioner (District Cases 32(C); 310 (1998)).
11 Where the prospectus is available online, the Authority will normally only require a hard copy of the latest prospectus, and a link to previous prospectuses will normally be sufficient.
12 A third party that did not comply with such request was recently fined by the Antitrust Authority. See: In Re: Commissioners Decision to Impose an Administrative Fine on Milano House Ltd (Antitrust Resolutions 500796; 2015).