cross border transactions

Posted by: Yaacov Yisraeli, senior partner:

The world economic crisis is not over yet, although it has already left different effects in different locations. In July 2010, one can safely indicate several general conclusions  concerning changes in  the Private Equity industry.

• Mega deals – belong to history

Shortage of financing, loss of confidence among investors and lending institutions, fear from long term engagement and other reasons convinced today’s investors to focus on mid-size and small deals.

• No flips, no quick exits

For all the above reasons, and others, such as the negative effect created on the stock markets around the world, more attention is already being paid to working with the portfolio companies in a serious and professional effort to increase their value. That means that the private equity staff shall need to be less general in their approach, more specialized, their professional staff will have to spend more time with their portfolio companies in the attempt to increase their value. Once the IPO market opens up again one may expect to be faced with a new brand of investors, who ask for more, who are  more choosy, hesitant, and much more demanding.

• More regulatory demands

As already noted in the US and to a lesser extent in some European countries, one may expect more regulatory demand, primarily directed at public companies, but some of which may have an effect over management conduct in private companies as well. That may raise the risk level of directors and officers, lead to the adoption of more detailed compliance programs and may require additional legal counsel and assistance and inflict additional cost on the company.

• Changes in the exit strategies

The depressed IPO’s market, as already mentioned,  forces private equity investors to think harder and earlier about their exit strategy in each particular case. Some of the markets either remain reasonably active (in some of the Asian capitals for example) or become reasonably active again recently, and that still presents for an exit opportunity. However one may expect that such market which became active again shall behave differently. The institutional investors are expected to be more cautious and more demanding. They will be questioning more the company’s potential and they will be pushing hard the price per share down. Other potential exits may rarely include holding companies buying just for the sake of enlarging their portfolios, as was often the case in the past. Under the new circumstances a purchase of a portfolio company may still be expected by another company or a group of companies for commercial reasons (such as buying complementary technology or line of products, easing on competition, or for other strategic reasons. As already mentioned, one should be prepared to stay with the company for a longer period of time and invest more in raising its value, before one contemplates an exit.

Due to the above described slow down and changes concerning exits, it is expected that private equity as well as other investors, when checking new investment opportunities, will be looking harder for profitability of each potential portfolio company and its capability to steadily distribute dividends, bearing in mind the longer exit time and the anticipated pressure of its own investors.

Posted by: Richard M. Roberts, senior partner

Several years ago the Israeli Government resolved to reduce dependence upon fossil fuels by 10% by 2014.

Some of the Ministries have taken action to achieve that goal, however, the regulatory bodies required in order to implement it are dragging their feet so that at this time it is unlikely that the original goal will be achieved in the time frame designated therefor.

• The Israel Land Authority, the owner of more than 90% of Israel’s land, has recently adopted a resolution which has thrown a wrench into the works by deciding that Kibbutz land leased in order to erect p.v. plants will require the Kibbutz to be at least a 26% owner of the project. There are very few (if any) Kibbutzim that have sufficient funds in order to make investments of that magnitude and the other investors cannot justify giving the Kibbutz a “free-ride”. In order to resolve this new issue it most likely will be necessary to file an application to the High Court of Justice and seek its ruling on the matter. Many of the potential p.v. sites are on Kibbutz lands.

• The Ministry of Interior has raised many issues with respect to the town planning and zoning aspects required to erect photovoltaic power plants.

• The Public Utility Authority – Electricity (“PUA“) has been going back and forth on determining the quota of megawatts to be produced using photovoltaic power in given periods of time with the limit for small units (up to 50 KW) initially being determined to be 30 MW, to being unlimited (at least with respect to units being established in the peripheral areas of Israel) and now they are trying to limit that determination, so it has now become unclear as to what will be the limit. The present limit for medium size plants (up to 5Mw) is 300Mw for the coming 2 years. There are many people vying to be included in that quota.

• Plants that are larger than 650 KW require a feasibility study from the Israel Electric Corporation (“IEC”)(the monopoly for producing and transmitting electricity in Israel) as well as a Power Purchase Agreement (“PPA“) to be signed between IEC and each producer. IEC does not have the manpower to prepare the feasibility study in a timely fashion and the draft PPA which they prepared is now being reviewed by PUA and is subject to its approval.

• Some local authorities are attempting to levy local rates which will make it economically unfeasible to carry out the project.

• Recently, one of the developers of photovoltaic plants has filed an application to the District Court to enjoin many local town planning authorities from approving photovoltaic installations on land in their jurisdictions, which will give that developer an advantage in the race to benefit from the quota of 300 MW approved by the PUA for medium sized plants since that developer has acquired rights to rooftop installations . The preliminary hearing is scheduled to be held in the District Court of BeerSheba later this month.

Having said that, the first medium size plant (5 MW) will be built in Kibbutz Ketura located in the Arava, one of preferred locations as far as radiation is concerned (in excess of 2,200 hours annually).

Our firm represents Arava, the developer and owner of the new power plant (which will be erected by a special purpose vehicle, Ketura Sun LP, the ownership of which will be: Kibbutz Ketura – 26% and the balance by Siemens Projects Ventures, Yosef Abramovitz – founder of Arava and other investors from Israel and abroad.

All of the regulatory approvals and the project finance agreement are in the last stages of approval with financial closing scheduled for this month.

We will keep you updated as to the progress of this pioneering project.

According to the Israeli Law

Posted by: Roy Kubovsky, Adv.

A common way available to a foreign manufacturer who wishes to distribute and sell its products in Israel, is to appoint a distributor on it’s behalf in Israel (there are of course other ways which the manufacturer may choose, for instance development of an internal distribution system, etc). 

In general, the relationship between manufacturer and distributor is governed by a distribution agreement (whether oral or written) which is executed between the parties. Unlike the situation in most European countries, where there is specific legislation which regulates and deals with the relationship between manufacturer and distributor, in Israel this issue has yet to receive specific legislation and hence the Israeli Courts are forced to make use of mechanisms from other legal areas (such as contract law, agency law, unlawful enrichment, etc.) in order to deliberate and rule in cases brought before them which deal with these matters. 

Parties to a distribution agreement are free to determine the duration of the agreement, whether it will be for a given period (e.g. 3 years), an unlimited period (e.g. without time limit) or for a given period which renews periodically (e.g. 3 years with extensions of 1 year on a yearly basis). It should be noted that generally, along with the provision regarding the period of the agreement, the agreement will also include a provision regarding the period of the prior notice that should be given before termination. 

Theoretically, a case in which there is a provision in the agreement that determines the duration of the prior notice that a manufacturer should give its distributor before termination, is a simple case, and in such an event, all that is required from the manufacturer who wishes to terminate the relationship is to follow the provision. 

The more complicated case is when the agreement is for an unlimited period (whether this was the contractual consent in the beginning or whether circumstances led to it, for instance by an extension of a written contract beyond the original period), and it contains no provision regarding the prior notice period that should be given before termination. In these cases the Israeli Courts have ruled that since there is a presumption that the parties did not intend to create a contractual relationship for an unlimited time, such relationship can be terminated by giving reasonable prior notice.  

The reasonability of the prior notice is examined in accordance with the specific circumstances of each case and by two main guiding principles as follows: (i) the reasonable period of time since the beginning of the contractual relationship and until the termination – this period of time needs to provide the other side with sufficient time in order to reap enough profits from the relationship and to recover its investment and expenses (in a distribution relationship the general assumption is that the fruits of the investments are not immediately reaped) and (ii) the duration of the prior notice which was given – this period of time needs to provide the other side with sufficient time in order to organize its business towards the termination and to seek and find a new alternative source of income. Alongside these guiding principals additional criteria have been outlined by the Courts, in order to examine the reasonability of the notice, including the nature of the product; the period of time which was required in order to achieve penetration of the products into the market; the extent and timing of the investments and expenses the distributor had bear; the distributor’s expected revenues in comparison with the distributor’s investments; whether the distributor had concentrated all of its resources and its sources of income towards the manufacturer or whether it has alternative sources of income and so forth. 

When the notice which was given is unreasonable from the standpoint of either of the above two principles (or both of them), the manufacturer is in breach and hence the distributor is entitled to recover the damages it suffered due to the termination. As we mentioned above, the resonable period of time differs from case to case since it derives from each case circumstances, and while there are cases where the Courts ruled that a short period of time (3 months) is reasonable, in other cases the Courts have ruled that the the reasonable period of time needs to be significantly longer (one year or even more). 

We noted earlier that in theory, the simple scenario is when there is a provision in the agreement which determines the duration of the prior notice that should be given before termination. This “simple” scenario has of late become complicated when the Israeli District Court ruled that although there was a provision in the distribution agreement, which determined that the agreement can be terminated without cause by giving at least 3 months prior notice, this period of time is unreasonable and the reasonable period of time of the prior notice should be at least one year. This ruling was based on the fact that the relevant provision in the agreement used the words “at least” 3 months, from which the court has concluded that the parties did not intend that 3 months prior notice would be sufficient for any and all kinds of circumstances, but rather that for any case a prior notice of less than 3 months would be insufficient.  

To summarize, a manufacturer who wishes to terminate a distribution relationship should examine the case circumstances in light of the forgoing principles and criteria, and such especially when the agreement does not refer to the duration of the prior notice it should give before termination. In addition, it our recommendation, if the termination will eventually lead to legal dispute, to have legal consultant from the preliminary stage, when the decision to terminate the contractual relationship is taken, in order to perform steps and procedures to shorten the prior notice period. 

In light of the forgoing precedent, it is also important to carefully draft the provision regarding the prior notice period, in a way that will leave no doubt whatsoever about the specific period of the prior notice that should be given and considered sufficient in any case circumstance, and in a way which will deprive any possibility to interpret it otherwise.

The implications of Israel becoming a member of the OECD

Posted by: Gadi Ouzan  & Dani Rinot 

The Organization for Economic Cooperation and Development (OECD) has officially accepted Israel as a full member to its organization. 

The organization was founded in 1961 as a club of developed, democratic and liberal countries, whose representatives meet and work to coordinate their policies in the economic, social environment and financial fields. 

Israel has been trying to join the organization for the past 20 years, but although economically inferior countries have been accepted easily, Israel was not granted an opportunity to join. 

 The implications  of becoming a member of the OECD for a relatively small country like Israel are significant , therefore the Governor of the Bank of Israel, Professor Stanley  Fischer and Israel’s Finance Ministry have decided to rank the matter at top priority and enter into a special process in order to meet the tough acceptance criteria of the OECD. 

The acceptance to the OECD was made possible thanks to Israel transforming into a developed country with a free market while also strictly adhering to responsible and balanced economic policies in recent decades. These policies include reduction of Israel’s debts, maintaining fiscal and development policies, cutting taxes and enhancing capital market efficiency. 

 Israeli authorities believe that the accession to the organization highlights the satisfaction corporations have in Israel’s economy. 

There are many implications to the accession to the OECD:
As Israel is recognized as a member of the leading economies of the world, we believe that it would strengthen investors’ confidence in Israel’s economic standing, thus increasing investments into Israel. 

Additionally, the accession is expected to improve treatment on social issues such as poverty and social inequalities.   This new status serves as a reminder that these issues should be dealt with in a timely and efficient manner. 

Finally, the OECD’s approval reaffirms Israel’s status as a leading economic and technological power.

Posted by: Gadi Ouzan  & Dani Rinot 

A Delaware court, a German defendant and a tower in the middle of Tel Aviv – it is just the time to enforce

Good luck. Two years ago you had entered into a share purchase agreement with a German company, which was later breached by it and caused you substantial damages. Your US lawyers filed a claim to a Delaware court and received a judgment in your favor.  You discovered that the defendant owns a nice building in Tel Aviv.

Naturally, you may consider enforcing the Delaware judgment in Israel, in order to put your hands on the valuable building.

How is this done?   

The Israeli Foreign Enforcement Law sets forth the terms for enforcing a foreign judgment in Israel. In general, it enables the courts in Israel, provided certain conditions are met, to declare a foreign judgment (in a civil matter) as enforceable in Israel, thus transforming it into an exercisable judgment and conferring upon it such status so that it can be enforced and executed in Israel.

If the conditions under law are met, the court may declare such Foreign Judgment as enforceable in Israel. The conditions are as follows:

(i)       The court that issued the judgment was competent to do so, according to the laws of the state in which the judgment was given;

(ii)      The judgment is not subject to an appeal;

(iii)     The obligation in the judgment is enforceable under the laws for enforcement of judgments in Israel and its content does not contradict public policy; and

 (iv)     The judgment is enforceable in the state in which it was given.

The intention is that a Foreign Judgment not be granted any greater standing than its standing in its country of origin (for example, if the Foreign Judgment cannot be enforced in the foreign country, due to the Statute of limitations it will not be valid in Israel).

The burden to prove the existence of the accumulative conditions above is on the applicant requesting the enforcement of the Foreign Judgment.

The Foreign Judgment Law specifies a number of circumstances in which despite the existence of the aforementioned conditions, an Israeli court will be reluctant from declaring a Foreign Judgment as enforceable:

(i)       Reciprocity –The Foreign Judgment was issued in a country in which its laws do not permit the enforcement of judgments of Israeli courts.

(ii)      Period of enforcement – If the application to enforce a Foreign Judgment is filed after more than five years from the date in which such Foreign Judgment was rendered (unless Israel and the other country in which the Foreign Judgment was given agree to a different period of time, or if the Israeli court finds special reasons that justify the delay in the filing of the application).

(iii)     Prejudice to Israel – If the enforcement of the Foreign Judgment may prejudice the sovereignty or security of Israel.

Moreover, according to the Foreign Enforcement Law, a Foreign Judgment will not be decaled as enforceable if the opposing party proves any one of the following defenses:

(i)       The judgment was obtained by fraud;

(ii)      The Israeli court resolved that the defendant was not afforded a reasonable opportunity to argue his case and bring before the court evidence prior to the issuance of the judgment;

(iii)     The court which issued the judgment was not competent to do so under the rules of private international law applicable in Israel;

(iv)     The Foreign Judgment contradicts another judgment given in the same matter between the same litigants and is still valid; or

(v)       At the time the action was filed in the court of the state in which the Foreign Judgment was given there was a pending action on the same matter and between the same litigants before a court or tribunal in Israel.

 According to the Foreign Enforcement Law, a Foreign Judgment that is declared by a competent Israeli court as enforceable is considered for all execution purposes valid as if such judgment has been rendered in Israel. Namely, it can be enforced by the Execution Office in Israel.

Congratulations, your foreign judgment was enforced by the Israeli court and your Israeli lawyers will be able to impose the necessary pledge or attachment on the defendant’s real estate property for your benefit.

Based on the courts’ precedents, the defendant should be aware that the court will only examine whether the foreign judgment meets the requirements of the law with respect to enforcement in Israel and will be reluctant from reviewing the judgment as a court of appeal. 

The Implications of Israel adhering to the OECD’s Convention for the Prevention of Bribery – Recommendations for Future Steps

Posted by: Gadi Ouzan  & Dani Rinot

A few months ago it was widely reported in the press that a foreign government had frozen engagements with seven international companies, including an Israeli security company, in the wake of suspicions of bribery and corruption of a senior official in such country. It is especially interesting to follow these reports in the context of the recent legislative amendments in Israel, addressing the prohibition to bribe foreign public officials. These amendments are reviewed, for your convenience, below:

On March 11, 2009, Israel joined the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the OECD (the Organization of Economic Cooperation and Development), and in doing so, joined 37 other countries that already signed the Convention. Israel’s accession to this Convention constitutes an important stage in the process of Israel becoming a member of the OECD, a process that began in May, 2007.

As part of Israel’s accession to the Convention and its efforts to be accepted to the OECD, the Israeli legislator initiated several legislative amendments in order for the Israeli internal legislation to conform to the Convention’s principles and the OECD’s requirements, similar to the restrictions imposed on US companies under the US Foreign Corrupt Practices Act (FCPA).

1. Bribing a Foreign Public Official – a Criminal Offense – in the framework of an  amendment to the Penal Law, the offense of bribing was expanded such that “bribing a foreign public official for an act associated with his position to ensure business activity or another benefit regarding business activity”, constitutes a criminal offense, the punishment of which can reach up to 3.5 years imprisonment, and the court is entitled to impose a fine in an amount of up to NIS 202,000 or up to four times the value of the benefit received due to the payment.The consequences  of this amendment is that Israeli citizens and Israeli companies shall now be exposed, inter alia, to criminal charges in Israel for giving benefits to foreign public officials abroad.
2. Payment of Bribery Abroad is not a Recognized Expense – A proposed legislation to amend the Income Tax Ordinance, so that deduction of payments made in violation of any law shall be prohibited for tax purposes, is currently pending. The said amendment was proposed, among other reasons, to comply with the OECD’s requirements, pursuant to which it is necessary to forbid deduction of bribery payments to foreign officials, as income-generating expenses.   

Recommendations for Future Steps
In the framework of corporations’ preparation for the new legislation and rules, it is advised, among other things, to consider taking the following measures: 

1. Review Agreements – In light of the accession to the Convention and the amendment of the Penal Law, we advise Israeli companies that engage in export activity to review their agreements with consultants, agents, distributors and business partners, and incorporate in the agreements detailed provisions addressing the prohibition to give illegal payments to foreign public entities.
2. Adopt Internal Compliance Program – although the law does not determine a special director offense, it is recommended that Israeli companies operating abroad consider adopting a voluntary compliance program addressing this matter. Such a compliance program would generally include preparing a plan determining the organization’s guidelines  and policy; internalizing such guidelines  within the organization; allocating resources for an internal training program for employees and business partners; appointing a senior compliance officer within the company to supervise  the matter; encouraging employees to freely report any suspicion of an offense to the compliance officer (a “hotline”); conducting due diligence examinations  regarding business partners’ activities, etc.

   In the United States (where similar legislation has been in effect for many years), the existence of an internal compliance program is taken as a factor by the enforcement authorities when determining whether to initiate legal proceedings against a corporation and its directors, and when considering the penalties to be applied.

   It is likely that also in Israel, adopting and implementing an internal compliance program will assist in providing a better defense for directors and officers of companies accused of such offenses.

Posted By: Moty Ben Yona

The recent financial crises, on one hand, and the growth of private funds, on the other hand, have raised numerous calls for reduction of management fees and more efficient investor protection. Moreover, in order to reach such objectives there have been recently discussions in the U.S and in Europe about the need for regulation of private funds, primarily hedge funds.

Without addressing the question whether regulation of private funds is indeed necessary, it is obvious that a more efficient protection for the interests of the Limited Partners can be achieved by incorporating certain terms and conditions to the limited partnership agreements and the ancillary documents, which govern the relationships of the Limited Partners, the General Partner and the fund managers.

While the typical limited partnership agreements tend to be very long and contain hundreds of clauses, it is important to make sure that these agreements include certain terms and conditions, which are designated to align the interests of the Limited Partners and the General Partner. It is also important to make sure that the fund provides the Limited Partners with adequate transparency.

Below is a short outline of some of the issues required to be addressed prior to executing a subscription agreement by which a Limited Partner will make a solid commitment to invest in a private equity fund:

What is the term of the Fund?
It should be confirmed what is the term of the fund, as throughout such term management fees will be paid to the General Partner (subject to certain adjustments within such term). It is also advisable to take into account that the General partner is usually entitled to extend the fund for additional 1-2 years, at its sole discretion. Also, in most cases the term of the fund may be further extended with the consent of a majority in interest of the Limited Partners. In addition, it is advisable to confirm what is the duration of liquidation and whether the General Partner or the liquidator of the fund will be entitled to fees throughout such period of liquidation.  

What is the Capital Commitment provided by the General Partner?
It is recommended that the General Partner of the Fund will have a substantial capital commitment and a substantial equity interest in the fund. Naturally, while the General Partner invests its own money in the fund a strong alignment of interest with the Limited Partners can be reached. It is also suggested that such investment shall be made by the General Partner in cash rather than by means of waiver on management fees.

What is the method of the calculation of the Carried Interest?
Carried Interest is the share of profits that the General Partner receives as compensation. Traditionally, the amount of Carried Interest is set at around 20-25% of the fund’s annual profit. However, it is necessary to confirm how the Carried Interest is calculated. For instance, it is advisable to confirm whether the Carried Interest is calculated based on net profits or gross profits and whether the carried interest is calculated on an after tax basis.

What is the Structure of Management Fees?
It is advisable to ensure that the Management Fees are not excessive and that they are based on reasonable operating expenses. Also, it should be confirmed whether the management fees cover all the overhead and staff compensation as well as travel and other administrative expenses. It should be confirmed which expenses are not covered by the management fees and whether such expenses should be borne by the Partnership or by the General Partner. For instance, it should be discussed whether the general partner’s insurance will be borne by the Partnership or the General Partner itself. In this context it should be also confirmed whether the Limited Partners’ Advisory Committee has any rights to review the Partnership’s expenses on a periodic basis. It is also advisable to confirm whether the Management Fees are decreased significantly once the investment period is over.

Is there a Clawback Obligation?
A clawback obligation of the General Partner ensures that the General Partner will not keep distributions in excess of a certain percentage which was agreed upon in the Limited Partnership Agreement. The clawback provision will require the General Partner to repay the Limited Partners such amounts which were distributed in excess. To secure the clawback repayment by the General Partner, it is possible to require that the General Partner will maintain a “carry escrow account” with significant reserves to cover potential clawbacks.  

Are there any “No Fault” Clauses?
No fault clauses provide the Limited Partners with the right to demand changes in the operation of the fund upon majority in interest vote. “No Fault Divorce Clause”, for instance, provides the Limited Partners with the right to remove the General Partner of the fund and either terminate the fund or otherwise appoint a new General Partner. Such clause can be activated even if the General Partner is not in breach of the Limited Partnership Agreement, provided that the resolution for the removal of the General Partner was adopted by a special majority of the Limited Partners. Other “No Fault Clauses” provide the Limited Partners with the right to demand the suspension or the termination of the “Investment Period”, during which the General Partner invest the fund’s commitments.