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50 The US-Israel Legal Review 2019
ISRAEL: MERGERS & ACQUISITIONS
benefits generally applicable to employees under
Israeli law (for example, the benefits conferred by
the Capital Gains track). This means that vesting
will be deemed an ‘exit bonus’, and will be taxed as
ordinary employment income, an outcome that the
management of the target company will consider
unwanted. In particular, ESOP plans which include
vesting treatment of options only upon an exit
event are a desirable feature for private equity
funds that often wish to tie their exit success
with the employees’ awards. As such, the recent
guidelines require careful consideration by private
equity fund and others when structuring future
ESOP plans, as well as a recalculation of currently
adopted schemes. ESOP plans, which are already
very popular in the high-tech sector, are becoming
increasingly commonplace in other industries,
and regard to this issue from the outset will
ensure that employees benefit from their desired
taxation scheme upon the vesting of their options,
thus protecting both the buyer and seller from
potential litigation or increased costs. Moreover,
awareness of these issues whilst structuring deals
is advantageous since amendments or grants are
often required, and the execution of a purchase
agreement before ninety days have lapsed from
such grants and amendments may frustrate
the applicability of the desired tax benefit to
management and employees of the target company.
The ITA provided certain extension and relief so
that by June 2019 companies may act to amend, to
a certain extent, their “non-compliant” ESOP plans.
Thus, we expect companies and private equity
funds, especially those which are on the verge of an
exit, to adjust their equity plans in accordance with
those new guidelines.
Not all regulation creates additional burdens
on companies, however. New rules published by
the Israeli Innovation Authority (IAA) enable both
Israeli and non-Israeli multinational corporations
to license their IAA-funded expertise within their
group entities outside of Israel without incurring
the standard IIA license fees that generally apply.
Instead, the fees that are now being imposed
upon those foreign corporations that own
intellectual property in Israel have been reduced
in a bid to incentivize them to continue to invest
in Israeli technology, by allowing them to share
the technology globally, within their group, at a
reasonable cost. Such grants are commonplace
amongst high-tech companies of all sizes, and
as such these developments will affect mergers
and acquisitions, investments, and commercial
transactions involving IAA-funded companies,
as well as providing an opportunity for those
companies to reconsider the structure of their own
operations in order to share their know-how with
non-Israeli group companies.
Continuing the trend of non-onerous regulation,
we will consider a final piece of legislation that is
likely to be of interest to investors in the Israeli
market; this time, on the antitrust front. Recent
amendments to the Economic Competition Law
have increased the threshold for merger approval
requirements, such that instead of annual aggregate
revenues of NIS 150 million, merger clearance is
now required where the annual aggregate revenues
of the merging companies exceed NIS 360 million
(approximately $100 million). This will considerably
lightentheadministrativeloadonsmallercompanies
conducting a merger, and facilitate swift, decisive
activity by foreign investors and acquirers.
Furthermore, the updated legislation has
considerably widened the scope for ‘self-
assessment’ reliance in relation to antitrust
violations. This allows companies to conduct an
internal risk assessment as to whether a proposed
arrangement falls under the narrowed scope of
‘prohibited restrictive arrangement’ which reduces
the workload of the regulatory authority whilst
We anticipate that the trends such
as sky-high valuations, significant
transaction volume, massive
potential for growth, and a strong
preference for M&A exits as
opposed to IPOs will all continue
into 2019.