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6 The US-Israel Legal Review 2019
ISRAEL’S LEGAL SYSTEM
Israeli resident company for Israeli tax purposes.
Venture Capital Funds, if active in Israel, will most
likely have a special tax pre-ruling exempting
their non-Israeli investors; otherwise they may be
subject to tax as well.
Other tax aspects that are common to Israeli
acquisitions include the Israeli Tax Authority’s
treatment of founders’ reverse vesting and
holdback mechanisms and employees’ “102 stock
options” (referring to the provision in the Israeli
Tax Ordinance which allows for the reduced capital
gains rates).
LABOR LAW ISSUES
Even an area of law as standard as Israeli labor
law needs to be understood against the backdrop
of the State of Israel’s socialist origins. Employees
in Israel receive considerable benefits in excess of
their basic salary packages, for which employers
bear the cost, including complex severance pay
mechanisms. Any restructuring and downsizing
of an Israeli company needs careful consideration
and planning in the context of a transaction.
There are rules and regulations contained in
expansion orders that relate to certain industries
that a foreign attorney would not be aware of,
and there are even times when the local employer
has not known about the relevant order and its
implications. There are increasing numbers of
plants where the employees are joining the trade
union (
Histadrut
) and such a move will require the
employer to negotiate and enter into a collective
workers’ agreement that, among other things,
will provide for agreed salary increases over a
number of years, improved terms and conditions of
employment, and providing for a workers’ council.
IP, ACADEMIA AND SERVICE INVENTIONS
Finally, one of the more important focuses for legal
due diligence of an Israeli company with products
developed by employees and consultants, is to
ascertain whether such persons worked at any
time in (or have any affiliations with) academia,
government owned hospitals or the Israel Defense
Forces. It is vital to check whether such persons
had permission to engage in R&D in such private
companies and verify that these institutions do not
have any residuary IP ownership or royalty rights
for the products.
With respect to all employees involved in
R&D, it is always important for foreign buyers to
note that, although Israeli law vests ownership of
employees’ “service inventions” (conceived in the
course and as a result of their employment) with
the employer, Section 134 of the Israeli Patents Law
still grants employees the right to consideration/
royalties from such inventions. An important
part of diligence is to ascertain that the relevant
employment agreements contain the necessary
provisions protecting the company against such
claims. The above highlights certain aspects which US
counsel and local Israeli lawyers should review in
tandem. The dynamic nature of Israel, the ‘Start-
Up Nation’, means that its laws are constantly
being amended and it is perhaps worth mentioning
that many of the leading firms, such as ours, are
intimately involved in thedraftingof newlegislation
and have not only an intimate understanding of
the interpretation of the current law but also an
awareness of draft proposals and discussions on
the table for future legislation. Such knowledge and
insight can be invaluable for the foreign lawyer.
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ABOUT THE AUTHORS
Ezra Gross
is a partner in the International
Corporate Department of Yigal Arnon & Co.,
specializing in M&A, High-tech, Life Sciences, VC,
Private Equity, Banking and Finance.
His clients range from large multinational
corporations, both privately held and publicly
traded, to early-stage start-ups, as well as venture
capital and private equity funds. Ezra has advised
The dynamic nature of Israel,
the ‘Start-Up Nation’, means that
its laws are constantly being
amended. Many of the leading
firms are intimately involved in
the drafting of new legislation.