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The US-Israel Legal Review 2019 49
familiarity with local institutions and bureaucracy
can be a decisive advantage. Starting due diligence
as early as possible, securing financing, and being
able to negotiate swiftly can all mean the difference
between closing headline-grabbing deals, and
going home empty handed. Furthermore, both
buyers and sellers must be wary of litigation risks
from disappointed bidders, and of break-up fees
and other undesirable ‘walk-away’ scenarios.
It is also important to emphasize that, although
the favored deal structure in Israel tends to be
the more traditional post-closing adjustment
mechanism(with terms that are generally favorable
to the selling side), we have been experiencing a
noticeable increase in deals that are structured in
accordance with the ‘Locked Box’ approach where
Warranty & Indemnity Insurance is purchased in
order to secure the business representations and
warranties provided by the seller.
Buyers and sellers in Israel will need to
seek advice and consider the advantages
and disadvantages of each of these types of
transactions. Factors to consider include (but are
certainly not limited to) price certainty, the time
period between the economic and legal transfer,
potential indemnification risks, and speed of
execution. Every transaction must have a tailor-
made strategy with regard to its nature and the
circumstances under which negotiations are taking
place. Choosing themost appropriate deal structure
is critical both in regard to protecting returns and
providing a workable framework within which
fruitful negotiations can take place.
ISRAELI M&A RELATED REGULATION AND
TAX DEVELOPMENTS
Whilst investor and company preferences certainly
affect the market, they are not determinative.
The Israeli regulator does not rest, and whilst
soundbites
trumpeting
reduced
regulation
abound, the regulator continues to set additional
boundaries. As important as market trends are,
without knowledge of the regulatory requirements
investors will find themselves frustrated and ruing
missed opportunities.
Of the recent developments in this field, it is
important to focus on two Guidelines recently
published by the Israeli Tax Authority (ITA) which
we view as particularly relevant to the M&A field.
In early 2018, the ITA issued guidelines that
clarified its position with respect to debt ‘push-
down’ as part of a reverse triangular merger.
According to the guidelines, debt push-down
will generally be deemed either a distribution
of dividends by the target company, or a capital
decrease, which will result in the target company
incurring tax liability. Thus, multinational
corporations acquiring Israeli companies through
reverse triangular mergers will not be able to avoid
tax by treating the cash provided to purchase the
target as a loan to the newly merged surviving
company. The guidelines also discuss when
payment of this tax becomes due, and whether the
cost of the debt-financing by the target company is
deductible. Therefore, whilst structuring deals as a
triangular merger or reverse triangular merger is
still common in Israel, the new guidelines are likely
to reduce debt push-downs and steer companies in
other directions. For example, acquirers will need
to consider creative alternative deal structures
with the aim of mitigating tax liability on revenue
upstream, which is required to service the
acquirer’s debt, such as issuance of redeemable
securities through the corporate holding structure.
The second notable area in which the ITA has
intervened, is in its scrutiny of Employee Stock
Ownership Plans (ESOP) during exits. This issue
demands the attention of both buyers and sellers
from the early stages of a transaction or, ideally,
from the early stages of adopting an ESOP plan in
view of a future exit event. The most recent ITA
guidelines confirmed that the regulator will not be
willing to consider options which vest only upon an
exit event as entitling ESOP participants to the tax
The Israeli market reflects
the trends unfolding on the
global stage, however, a close
understanding of the unique legal
and business environment in
Israel is a must.