ISRAELI UPDATE – A Proposed Reform in Israeli Merger Control and Supervision of Authorized Distributors
Executive Summary: Memorandum published by the General Director of the Israel Antitrust Authority earlier this year proposed reform that reflects a considerable expansion in the application of Israeli antitrust law to mergers between foreign corporations, as well as mergers involving Israeli and foreign corporations (including the acquisition of an Israeli corporation by a foreign corporation with no previous ties to Israel). Current guidelines of the IAA mandate the General Director to supervise mergers involving foreign corporations that are not registered in Israel in cases where a nexus could be determined to exist between the foreign corporation and Israel. The new proposal foregoes the nexus requirement, by defining “Corporation” as any foreign corporation. This article discusses such proposal as well as additional proposed changes included in the memoranda.
At the beginning of April 2015, the General Director of the Israel Antitrust Authority (the “General Director”) published memoranda of legislation calling for an amendment of the Israeli Restrictive Trade Practices Law, 5748-1988: memorandum of the Restrictive Trade Practices Law (amendment to mergers section and various provisions), 5775-2015 (the “Memorandum”), proposing a significant reform in the merger control regime; and memorandum of the Restrictive Trade Practices Law (removal of import barriers), 5775-2015, calling for the impositions of the special duties that are currently applicable only to monopolies, to authorized distributors that do not hold monopoly positions, where their behavior impairs or impedes parallel import.
The main changes proposed in the memorandum are detailed below.
Mergers involving foreign companies
Currently, the literal definition of a “Merger” in the Israeli Restrictive Trade Practices Law applies to mergers between corporations incorporated in Israel and to foreign corporations that are registered in Israel. Until now, the General Director applied his authority to regulate mergers involving foreign corporations that are not registered in Israel by interpretive means, in cases where nexus could be determined to exist between the foreign corporation and Israel. Guidelines published by the General Director state that a merger involving an unregistered foreign corporation would fall within the definition of “Merger” if such foreign corporation has substantial holdings in Israeli corporations or if it conducts business in Israel, including through local representatives that are subject to the foreign corporation’s influence.
The current proposal wishes to cancel the need to prove nexus to Israel by defining “Corporation” as any foreign corporation. In this respect, the proposed reform reflects a considerable expansion in the application of Israeli antitrust law to mergers between foreign corporations, as well as mergers involving Israeli and foreign corporations (including the acquisition of an Israeli corporation by a foreign corporation with no previous ties to Israel). Due to the potential consequences of this change on foreign investments in Israel, it would be advisable to have a thorough discussion and consider amendments to the Memorandum.
Regulating mergers involving individuals and other forms of corporations
The General Director proposes to amend the definition of “Company” so that Israeli merger control would not be affected by the form of incorporation, and would include mergers where one of the parties is an individual, an unregistered partnership (including a foreign partnership) or an association. Presently, the definition of merger applies only to some of the abovementioned forms of incorporation and to some transactions involving individuals (by way of interpretation).
Prohibition on mergers that fail to meet the thresholds for pre-merger notification
Presently, a merger that fails to meet the minimum threshold for pre-merger notification is immune from intervention, and the parties to such a merger may consummate the transaction even if it entails significant competitive harm.
The General Director proposes to effect a substantive prohibition on any merger that raises reasonable concerns of significant competitive harm or harm to the public. If accepted, this amendment could subject parties to a merger to criminal liability and administrative sanctions, and enable the General Director to order the dissolution of the merger, even if the parties thereto did not have a duty to notify the General Director of the merger, if it is determined that such merger raised reasonable concerns of significant competitive harm. Naturally, this provision creates a great deal of uncertainty, especially due to the fact that in many cases the information required for a full competitive analysis of the merger is not available to the parties prior to the entering into the merger agreement or the consummation of the transaction (for example, information acquired by the General Director from third parties). The costs of such analysis in themselves may deter parties from executing merger transactions.
Mergers that give rise to competitive concerns are sometimes approved subject to certain conditions; however, where there is no requirement to file a merger notification, the merging parties are in fact denied the opportunity to receive a conditional merger approval. To resolve this issue, under the proposed regime, parties could voluntarily file a merger notification, and the General Director would have 15 days to notify them whether or not he intends to review the merger. A negative response or no response will be deemed as an unconditional approval of the merger.
Changing the minimum threshold for pre-merger notification
The General Director proposes to update the minimum thresholds requiring pre-merger notifications. The current minimal joint turnover threshold in Israel of both parties is ILS 150 million (around USD 38M), and is proposed to be raised to ILS 250 million (around USD 63M). The other minimal turnover threshold relates to at least two separate merging parties, and it will remain ILS 10 million. The General Director proposes that even if this threshold is not met, if one of the parties to the merger has a worldwide turnover exceeding ILS 1 billion, a filing of pre-merger notification will be required.
A pre-merger notification is also required where the merger would create a monopoly or if a party to the merger is already a monopoly. The General Director proposes adding a condition to this requirement, requiring that the merging parties have a joint turnover of at least ILS 100 million (around 25M USD). This new condition would decrease the number of transactions requiring merger notification, but as explained above, such mergers will still be subject to the substantive test.
Authorizing the General Director to extend the merger review term
Currently, the Israeli Restrictive Trade Practices Law allows the General Director 30 days to decide whether to approve a merger. In order to extend the 30-day period, the General Director must receive the approval of the parties to the merger or the Antitrust Tribunal. The General Director’s view is that such 30-day period is not sufficient in order to review complex mergers. Therefore, it is proposed to grant the General Director with unilateral authority to extend such period to up to a total of 120 days (excluding the initial 30-day period, i.e. a grand total of 150 days).
This proposed amendment removes the checks and balances existing today with respect to the duration of a merger review, and would deny the parties the ability to turn to judicial review by the Antitrust Tribunal if they feel the review process is prolonged without ample justification.
Other proposed amendments in the Memoranda
Other proposals include enhancing transparency of the merger review process by requiring the publication of an abstract of the records and minutes of meeting of the mergers and exemptions committee; and expanding the General Director’s investigative authority regarding disruption of proceedings in antitrust violation cases. Currently, such investigative powers are limited to disruptions during the General Director’s inquiries. The amendment will broaden the scope of investigation to disruptions prior to the commencement of the inquiry (such as destruction of evidence regarding cartel agreements or tender coordination, intended to obstruct future investigations).
Removal of import barriers
In December 2014, the recommendations of the Import Committee to reduce barriers on import were adopted by the government. This proposed amendment seeks to apply the prohibition on the abuse of monopoly power to authorized distributors that do not hold a monopoly position, to the extent that their behavior impairs or impedes parallel import. The proposed amendment also authorizes the General Director to issue orders against authorized distributors that abuse their position and cause potential significant harm to competition from parallel import. Such authorized distributors may be subject to criminal sanctions (if intent to reduce competition from parallel import is proven) and administrative sanctions.