Establishing a bank account in Israel for a foreign company or a subsidiary is a task more complex than what one might assume. The main obstacles are documentation, compliance requirements and the interface between two different legal systems and practices.

First, it is important to stress the difference between registering a local branch versus a subsidiary. A local branch is only “local” in the sense that it operates in Israel. The entity that will actually be acting (opening a bank account, contracting, hiring) will be the foreign company and not a true local entity. Rather a branch is a foreign company with a “license” to operate in Israel. On the other hand, a subsidiary is a true Israeli entity that will be owned by a foreign company.

Documentation is the easiest obstacle to overcome though not without cost in time and money. De Jura, any official document received by the bank needs to be signed and authenticated by a notary public/lawyer and then also be legalized with apostil. Alternatively, the document can be sometimes authenticated by an Israeli consul/diplomat.

 

Different banks have different internal practices regarding which documents they require authentication for. Most do not require all documents to be authenticated but all require some of them. The problem is both monetary and logistic: some documents need to be signed originally by several people, some not living in the same countries depending upon the entity involved, and then authenticated and legalized. This is becoming increasingly cumbersome as sometimes banks will issue demands for further documents and authentications, mid-way.

The difficulty of meeting Compliance requirements is a result of the recent development in worldwide efforts in fighting terrorism funding and money laundering, and in particular due to Israel’s recent joining of the FATCA protocol. Banks are usually worried when facing a company/corporation with an elaborate ownership structure. A letter form a lawyer elaborating upon a company’s ownership structure is usually enough to solve the issue, but this usually requires us to receive information from both the company and its legal counsels. This is usually a back-and-forth process between us, the bank and the company.

Which brings us to the final issue of this post – the interface between different legal practices. In order to sign all the legal documents and bank forms, some lawyer’s signatures and opinions will have to be made regarding information that is not readily available to us as it is either based on foreign law or the company’s history. This is where both creativity and flexibility are required in order to provide solutions to friction points and solve deadlocks.

For that matter, a branch will be harder to manage and operate then a subsidiary: since a branch is a foreign entity, an Israeli lawyer might not be able to certify a great many things that will be required by the bank, as it and cannot attest for entities acting under foreign law.
For example, in opening a bank account, the bank might require a lawyer’s confirmation that the company does not bear a first degree floating charge. We will not be able to confirm that, since that company shall be a foreign company, subject to foreign property laws. This would mean that the company’s foreign lawyers will have to attest the same, which may, from our experience, create further complications (such as foreign lawyers not willing to sign documents that are in a wording that is not customary in their own country).
On the other hand, if the entity of choice shall be an Israeli subsidiary, it will be subject to Israeli property laws and thus – we could attest for the subsidiary’s legal status.
We believe most issues can be dealt with, regardless of the type of entity chosen, with effort and creativity.

Dardik, Gross & Co. has great experience providing legal advice in these situations and can provide multiple means for overcoming various obstacles along the way. We hope to be your lawyers of choice in you Israel corporate and transactional needs.

Like many other countries with social-democratic characteristics, Israel enforces a national retirement plan, colloquially referred to as PENSION. Generally speaking, each employee in Israel is obliged by law to maintain a Pension fund. Seeing as most Israelis are wage-earners rather than self-employed, the Israeli Legislative and Executive branches of government found it efficient to regulate and enforce the Pension funds through Labor and Employment Laws.  
 
Since the enactment of the Extension Order for Economic Comprehensive Pension Insurance Order of 2008, every employee is guaranteed a monthly sum allowed for his/her retirement fund. The allowance is financed by two sources: the employee him/her self, which contributes 5.5% of his/her own salary; and the employer who has to allow a 6% of the employee’s salary at the employer’s expense.
 
Seeing that this is a fundamental part of Israeli citizens’ social security, compliance with it is strictly enforced. Employers failing to comply with the Order, as well as with other legislative and executive acts regarding social security and benefits, may face criminal charges and harsh fines. Thus, close attention to changes in this kind of regulation is advisable, especially when drafting employment contracts.
 
Recently, the above-mentioned Extension Order was updated, expanding upon the compulsory allowance to the Pension fund and increasing it to 5.75% on the employee’s expense and to 6.25% on the employer’s expense. This is planned to be further expanded by July 2017, to 6% and 6.5% respectively.
 
These changes need to be addressed by companies planning to conduct business in Israel. At Dardik, Gross and Co. we take pride in providing our clients with all-encompassing commercial legal services, including social securities and benefits legislation. The latest expansion to the Extension Order for Economic Comprehensive Pension Insurance Order is available (albeit in Hebrew) here.  

Anti-Corruption in Israel

Anti-Corruption laws in Israel impose strict scrutiny and compliance requirements in conducting business in Israel or with Israeli agents and officials. Alas, anti-corruption norms are not codified and the code of conduct is scattered among multiple Acts of legislation, regulations, stare decisis, official communiqué and administrative precedence.

Thus, anti-corruption compliance is sometimes tricky as, more often than not, compliance mistakes, if discovered, are irreversible.

Key Points in Israeli Anti-Corruption Practice

Anti-bribery provision

The Israeli Penal Code prohibits corrupt payments, offers or promises of money, valuable consideration, a service or any other benefit, to influence any act or decision (including a decision not to act) of a foreign or local government official to induce the official to use his or her influence to affect an administrative act (or failure to act) or decision, in order to obtain, to assure or to promote business activity or other advantage in relation to business activity.

 

The Israeli Penal Law defines “foreign public official” as any employee of a foreign country or of a public international organization, or any person acting in an official capacity for or on behalf of a foreign country, a public body constituted by an enactment of a foreign country, or a public international organization. It is mentionable that the definition also applies to entities over which the foreign country exercises, directly or indirectly, control, including where more than one foreign government exercises such control, such as in the case of State-owned enterprises. Consequentially, the scope of the prohibition is wide and enforcement is firm. Thus, foreign and Israeli companies must tread lightly when semblance of misconduct is possible.

 

As noted above, the prohibition applies to more than just payments and offers and promises of payments: an offer or promise would (in itself) be sufficient to complete the offence of bribery. Non-pecuniary advantages such as sexual favors, or appointments to a public position are also strictly forbidden. Most importantly, Israel has chosen not to introduce an exception of small “facilitation” payments.

 

Conflict of interests

The prohibition on conflict of interests is a principle fundamental to Israeli administrative law. This prohibition holds that a public official may not serve in an office if there are reasonable grounds to suspect that he may be influenced by interests contradicting those he is supposed to promote in his office. This principle has wide applications. The prohibition applies not only to situations in which the public official might be influenced by personal interests (his own or those of relatives or friends). It also applies in situations in which the official serves in another public position, for the advancement of which he may need to support conflicting considerations. Compliance with this principle calls for thorough internal inquiries and disclosure whenever a corporation might be seen as to be wrongfully benefitting from its, of indeed, its lawyer’s, well-established connections within the government’s higher echelons.  

The prohibition on conflict of interests is one of the main reasons for the more specific prohibition on the delegation of statutory powers to private actors. This prohibition, which is especially important in the context of privatization and transaction on a national scale or national importance, derives, among other things, from the concern that a private actor will be influenced by the desire to promote his own private interests at the expense of the public.

 

Responsibility of Legal Persons and Protection of Whistleblowers

Legal persons, by virtue of the general provisions of the Penal Code, are held criminally liable for the offence of bribery of public officials.

In appropriate circumstances, both the legal person and the individuals responsible for committing the offence, or involved in the same, may be held criminally liable for the bribery offence. It is highly recommended to raise awareness amongst employees to the bribery offence, to develop training programs aimed at internalizing the severity of the action and to create internal mechanisms to prevent it.

 

It is also advised to take measures to encourage employees to report to company management bodies on suspicions of acts of bribery of local and foreign public officials by the company. Israeli Law emphasizes the importance of exposing acts of corruption to the authorities and thus, the protection provided by law to whistleblowing employees according to the Protection of Employees (Exposure of Offences, of Unethical Conduct and of Improper Administration) Law, 1997 is expansive and broad. Means of reporting of corruption and misconduct (and applying for the protection granted by law) is explicitly made simple – a form filled at any police station or even a call to the general police call center is usually enough to trigger a full-on investigation.

 

 

Dear Friends and colleagues,
 
It gives us great honor to inform you that Dardik, Gross & Co. was recently praised by the two leading Israeli business information companies: BDI – Coface and Dun & Bradstreet.
 
BDI – Coface nominated our firm an “Outstanding Leader” in Israel in multiple fields of practice: International Commercial Law, M&A and Corporate Immigration Law; while Dun & Bradstreet ranked our firm as a “Well Known Firm” in the field of International Commercial Law for many years (2011-2023)!
 
This ranking goes to show that hard work, dedication and teamwork pay off. Our strength as a firm comes from our ability to consistently provide our clients with excellent services at a cost-efficient manner and with a sharp business approach. This reliability is reflected by the consistency of our ranking and our impeccable reputation, which the rankings represent.
 
We would also like to take this opportunity to inform you that our firm’s Litigation, Real Estate, Telecommunication and Labor practices continue to expand and those departments have recently won several major cases which were handled by our top-notch respective departments.
 
Our thanks go to all of our employees who have contributed to this ranking and we would like to take this opportunity to thank all of our clients for your trust.
 We will continue to support our clients with Corporate, Commercial, Regulatory and Labor law services of the highest quality that you have become accustomed to receiving from Dardik, Gross & Co.
 We look forward to continuing and expanding our practice and to work with you to provide top-quality, fast and cost effective legal services.
 
Many thanks
Dardik, Gross & Co.

Hi-tech in Israel

Israel is a country covering a small geographical area. The concentration of hi-tech firms across much of the country is recognized as one large cluster. Most activity is located in the densely populated coastal plain (Silicon Wadi[1]) of metropolitan Tel Aviv, Haifa (Matam), and Jerusalem (Technology Park, Malha, Har Hotzvim and JVP Media Quarter. There is also additional activity around Beer Sheba and Kiryat Gat, and the Western Galilee, including Yokneam Illit. The total area is half that of California’s Silicon Valley.

 

VC and private equity

Israeli VC is focused on seed and early stage companies and on technology- companies in the fields of: communications and components; software; semiconductor chip design and manufacture; Internet and e-commerce; Bio-tech; Cleantech; medical devices.

 

Office of the Chief Scientist (OCS)

The OCS provides grants for research and development (R&D) programs. The grants are repaid with royalties from sales. The OCS sets limitations on the assignment out of Israel of ownership of IP rights to products developed from the grants from the OCS.

 

Types of company

In VC transactions, companies may be seed/pre-seed stage companies or later-stage companies. The companies may be registered in Israel or be corporations registered in Delaware with Israeli subsidiaries.

 

Investors

In recent years, foreign venture funds and venture lending companies have opened offices in Israel and have invested in local Israeli companies.

 

Tax Incentives

Foreign investors are generally exempt from Israeli capital gains tax on the realization of their investment in Israeli high-tech companies if the following conditions are met:  the shares were purchased on or after 1 January 2009; the shares were not held through a permanent establishment maintained by the non-resident shareholder in Israel; the shares are not in a company whose assets consist primarily of real estate; the shares were not purchased from a related party.

The exemption does not apply to shares in publicly-traded companies.  

 

VC Fund management

VC funds typically establish a management company in Israel, and pay an annual management fee of approximately 2.5% of total fund commitments. This fee may decrease after an investment

 

VC Fund – Limited Partnership

VC funds are not regulated and do not require a license. VC funds are usually limited partnerships and are subject to securities legislation restricting the offering of limited partnership units to no more than 35 persons, excluding certain qualified investors consisting primarily of financial institutions.

 

Investor Protection

The VC fund’s limited partnership agreement governs the relationship between investors and the fund. Investors usually seek: confirmation of limited liability;  restrictions on the use of proceeds; Employee Retirement Security Act 1974 (ERISA) restrictions; restrictions on recourse borrowing; financial reporting; key man provisions; non-competition restrictions preventing promoters from setting up a competing fund until certain time periods have passed; conflicts of interest provisions.

 

Investment Objectives

Long term capital appreciation from high growth, technology companies.

VC funds generally have a 7-10-year term with the ability to extend this term by a number of one-year periods (usually two to three extensions). VC funds usually aim to complete their investment period (deploy capital in new portfolio investments) within 3-4 years of the fund’s initial closing (while retaining capital for management fees and follow-on investments until exit) and to exit most of its investments within 3-5 years of investment.

Since 2001, VC funds in Israel now usually extend their investment periods (sometimes to 6-7 years). The average period between investment and exit has lengthened.

 

Investments

VC funds generally invest in equity in the form of preferred shares. The use of convertible debt is also very common before an investment round, both as bridge financing for immediate use and as a means to circumvent the need to set a company valuation when no third party investors are available to set a valuation.

Venture lending, where lenders provide secured loans to portfolio companies and receive an equity component in the form of warrants or an option to invest in the next round, has increased over the last few years.

 

Valuation

The valuation of companies is one of the most secretive and sensitive matters. Regarding seed and early stage companies, the investee company’s valuation is set based on a sensitivity analysis that takes into account some or all of the following: the percentage holding in the company the fund aims to hold following the investment; the percentage holding the fund aims to hold at exit; the amount of capital the company is projected to require until the next round of financing; the amount of capital the company is projected to require until the exit; the reasonable (or possibly, conservative) expectation for an exit valuation. The result of the sensitivity analysis should provide for a projected internal rate of return greater than the minimal internal rate of return theVC fund has set for itself. Market comparables are also often used, whether in the public markets or, where available, in the private markets. Discounted cash flow and price to earnings ratios are rarely effective for valuing start-up companies except in the case of established, expansion-stage companies with substantial revenue and a broad customer base.

Valuations are effected by competition among funds for high quality deals. Additional factors that may affect valuation include the amount of capital the VC fund must deploy before the end of its investment period and the size of the investing fund, with both factors causing the funds to deploy larger amounts of capital, causing an inflation of valuations.

 

Investigations prior to investment

On a business level, before investing in potential portfolio companies, VC funds typically conduct a thorough investigation of the company’s proposed business including, calls with customers and of the potential market, particularly with respect to the size of the market, potential for dynamic growth and barriers to entry.

VC funds also typically evaluate and size up the entrepreneurs and the potential portfolio company’s management team. Some VC funds carry out preliminary legal due diligence at the term sheet stage to find any obvious fundamental problems from a legal perspective. Once VC funds have resolved to invest in a company, as part of the investment process they usually conduct a legal due diligence review in which they examine: the company’s capital structure; commercial relationships; employment relationships; other legal rights and obligations.

For companies with an operating history and a stronger technology portfolio, VC funds often retain an accounting firm to investigate the company’s financial condition and a law firm to investigate the company’s intellectual property portfolio. Major issues that arise in legal due diligence in relation to the company’s capital structure or its intellectual property rights may be deal breakers. Legal due diligence serves primarily as an opportunity for reorganization in the company particularly in relation to capital structure and keeping proper corporate records.

 

VC Legal Documents

Share purchase agreement – the commercial agreement of the parties, including the amount of investment and valuation of the target company, as well as the representations and warranties of the parties, the closing conditions and certain post-closing covenants.

 

Articles of association

Sets down the rights of the preferred shares, including dividend and liquidation preferences, anti-dilution protection and protective provisions.

 

Investor rights agreement. This contains those rights which may be of more general, on-going application to shareholders of the company, including registration and information rights, and sometimes composition of the board of directors.

Some investments also include additional documentation, including shareholders’ agreements, and a large number of ancillary documents such as indemnification agreements, management rights letters, IP assignments and so on.

 

Investor Protection

Funds investing in a company typically receive the following protections: dividend and liquidation preferences; anti-dilution protection; pre-emptive rights to participate in subsequent financing rounds; rights of first refusal and co-sale; information rights, including rights to financial information and visitation and inspection rights; registration rights; representation on the board of directors; protective voting provisions (veto rights); restrictions on the use of proceeds; directors’ and officers’ and key man insurance.

Equity

Funds always take preferred shares. Angel investors may take ordinary shares.

 

Preferred Shareholders

Holders of preferred shares typically have the following rights:

Dividend – the right to receive a dividend in priority to the payment of a dividend to any other class of shares. Although this right is very common, most high-tech companies in practice do not pay dividends.

Liquidation preference – The right to a liquidation preference, typically a participating preference entitling the holder to some kind of preferred return (in Israeli companies, with an annual interest component, typically 6% to 8%), followed by the right to participate with the holders of ordinary shares on an “as converted” basis in any remaining proceeds. The liquidation preference applies both to actual liquidation of the company and to most exit events including a sale of all or substantially all of the assets of the company.

Anti-dilution protection, typically implemented by adjustments to the conversion rate under which the preferred shares may be converted into ordinary shares. The protection ranges from full ratchet to broad-based weighted average.

The right to representation on the board of directors. Protective voting provisions, requiring fund approval for various actions including the creation of a class of shares with rights superior to those held by the VC Fund, as well as other corporate activities.

 

Board Representation

Typically, funds receive representation on the board of directors and/or the right to appoint a non-voting observer to the board. This right may be conditional on the fund maintaining a certain level of ownership in the investee company.

 

Protective provisions

As holders of preferred shares, the fund also benefits from protective provisions, requiring the approval of the fund (occasionally of a director appointed by the fund, and occasionally of a specified majority of all holders of preferred shares) for a variety of actions, often including: creation or issuance of a class of securities equal or senior to those held by the fund; approval of exit events (mergers and acquisitions and initial public offerings; the payment of dividends; the repurchase of ordinary shares; adverse changes to the rights of the shares; increasing the size of the board of directors; incurring indebtedness in excess of a specified amount; material changes in the business of the company; management type activities including, hiring and firing of key executives; bank signature rights; establishment of  an annual operational budget.

 

Management rights letter

Funds that require a management rights letter for ERISA purposes typically receive one providing them with certain information and consultation rights in the event that they have not appointed a board member, and sometimes even if they have appointed a board member.

 

Information rights

Funds also commonly obtain information rights which allow them to obtain information about the company so as to enable the fund to prepare financial reports to the fund’s limited investors as well as to facilitate an intelligent exercise of veto rights. Information rights usually include the right to: audited annual financial statements; reviewed quarterly financials and monthly reports; inspection and visitation rights.

 

Right of first refusal.

Investors usually have a right of first refusal in relation to the sale of shares by other shareholders. Sometimes this right is limited to the holders of a certain minimum number of shares (for example, 2% of the outstanding share capital) and is exercised on a pro rata basis. This right is usually not reciprocal, that is, the holders of ordinary shares do not have a right of first refusal in relation to sales of shares by the fund.

Exercise of the right of first refusal is often conditional on the purchase by the shareholders of all the shares being offered. There are exceptions for transfers of shares for estate planning purposes.

 

No sale

Often founders are completely barred from, or severely limited in, selling their shares for a specific period of time (often at least three years, but occasionally until exit). Typically, exceptions are made for transfers of shares to family members or for other bona fide estate planning purposes. These restrictions are intended to ensure that the founders recognize their economic interests as being linked with the success of the company.

 

Securities laws

Transfers of shares are also governed by applicable securities laws, and the investment documents typically contain provisions ensuring that such laws are followed (for example, by marking share certificates). 

 

Minority Shareholder Protection

Investors have the right to sell shares together with the founders (or other holders of ordinary shares), if and when the founders sell shares to third parties. This right (tag-along right or right of co-sale) may be exercised if the investor elects not to exercise its right of first refusal. The rationale is that the investors are investing in the founders, and if the founders decrease their shareholdings, the investors require the right to exit with the founders.

Tag-along rights also serve to make it more difficult for founders to sell their shares and, in practice, force any such sale to be made in full coordination with the investors. It is very uncommon for founders to have tag-along rights in relation to sales of shares by VC funds.

 

Drag-along (bring-along) rights

Drag-along rights (also referred to as bring-along rights) facilitate the sale of the company in the face of opposition from minority shareholders. The articles of association often provide that where a specific percentage of shareholders (often including the holders of a specific percentage of preferred shares) agree to a bona fide third party purchase offer, all shareholders must then sell.

The Companies Law 1999, provides that if the holders of 80% (90% in the case of companies established before 1999) of shares wish to sell, then all shareholders can be forced to sell.

“Deep pocket” strategic investors often attempt to impose restrictions on the exercise of these clauses to ensure that they do not find themselves providing representations, warranties and indemnities that expose them to excessive liability.

 

Pre-emption rights

Investors almost invariably require pre-emptive rights to participate in future financing rounds. Sometimes the right is limited to participation on a pro rata basis; other times the investor obtains a right of over allotment to take up shares that other participating shareholders elect not to purchase. Companies typically attempt to resist the request for over-allotment rights. These rights are generally subject to certain standard exclusions, such as: issuances on exercise of employee share options; issuance on conversion of preferred shares; and also certain issuances of warrants to strategic partners in transactions not primarily intended as financing transactions.

 

Consents

Approval by the company’s shareholders and board of directors is required to complete the investment. In addition, if the company has already raised funds in an earlier investment round, approval by the earlier investor is also likely to be required. If the company has received tax incentives or a grant from the Ministry of Trade and Industry, consent from the department providing the tax incentives or grant is also required.

 

VC Funds Costs

Investment agreements typically provide that, on closing, the portfolio company covers the VC fund’s costs in connection with the investment, up to a certain agreed cap. These costs usually include legal costs arising from the legal due diligence, and drafting and negotiating the investment agreements and often also include financial and technical due diligence.

If the closing does not occur, the portfolio company does not cover the VC fund’s costs.

Share Options

Israeli companies usually provide incentives to employees (including founders) by granting share options which subject to vesting over a number of years. Founders of Israeli companies sometimes receive shares that are subject to repurchase by the company at par value if the founder ceases to be employed by the company.

Employees typically receive share options, which are exercisable if the employee continues to be employed during the relevant vesting period.

 

Section 102 of the Tax Ordinance provides a mechanism for ensuring that these options are only taxed (at capital gains rates) on the sale of the underlying security (that is, the shares obtained on exercise of the option). To benefit from the beneficial tax treatment, the share option plan must comply with the requirements of section 102, including holding the options in trust for two years.

 

Founders’ Long Term Commitment

Investors typically use a combination of methods to ensure the founders’ long-term commitment to the company. Investors may prohibit the founders from selling any of their shares for a period ranging from a number of years (at the earliest) to the closing of a sale of the company or its IPO (at the latest). The investors typically require that the founders’ shares are subject to a reverse-vesting mechanism, so that if the founder ceases to be employed by the company, the founder loses a portion of his shares Investors often require that founders enter into non-competition undertakings, restricting competition with the business of the company for some period of time following the termination of the founder’s employment. The enforceability of these undertakings under Israeli law is uncertain.

The no-sale and reverse-vesting provisions tend to be heavily negotiated in transactions, with founders often taking the position that they are entitled to all of their shares if their employment is terminated by the company without cause or if the company closes an IPO or M&A transaction.

 

Redemption rights

Redemption rights are designed to enable a VC fund to recover its investment in an unsuccessful company. These rights allow the VC fund to require the portfolio company to repurchase the fund’s shares if the company has not closed an M&A transaction or IPO within a specific number of years following the investment. It is uncommon to find redemption rights provisions in investments due to Israeli corporate law limiting the ability of an Israeli company to repurchase its own shares.

 

Exits

The typical forms of exit of a successful portfolio company, and the relative advantages and disadvantages, are: sale of the portfolio company’s shares by all shareholders of the portfolio company’s shareholders. Depending on the sales price, this is the most efficient and perhaps the most successful exit for a VC fund, in that it involves a sale of all of the fund’s shares in the company, typically in return for cash or tradable securities. A potential disadvantage is that approval of the transaction may require class votes, giving certain shareholders the ability to frustrate the transaction.

 

Sale of the portfolio company’s assets. While a sale of the company’s assets has the advantage of not requiring shareholder approval, it is inefficient from a tax perspective. On a sale of its assets, the portfolio company is subject to capital gains tax, and when the resulting proceeds are distributed by the company to its shareholders, the distribution is often subject to a dividend tax.

IPO

Flotation of a company’s shares on a recognized stock exchange brings liquidity to the VC fund enabling it to begin selling its shares on the public market.

Sales of shares on certain stock exchanges are subject to time and quantity restrictions, which limit a VC fund’s ability to sell all of its shares simultaneously. The share price is also subject to volatility.

Sales

A VC fund may sell its shares in a portfolio company to a third party. Sales are often subject to a right of first refusal of other shareholders in the company. The price to be received by the VC fund is likely to reflect a discount since the third party is purchasing a minority interest in the company, and such sales are relatively uncommon.

Exit Strategy

The VC fund’s exit strategy is built into the investment documents by the inclusion of tag-along and drag-along rights as well as registration rights (the right to force the listing of the VC fund’s shares on the exchange where an IPO has taken place) and sometimes the inclusion of redemption rights.

Dardik Gross & Co., Ramat Gan, Israel

We are a boutique commercial law firm specializing in mergers and acquisitions and VC financing. Our Office is conveniently located in the heart of the Diamond Exchange District. We represent international VC funds and welcome inquiries from funds and investors looking to invest in Israeli technology and enterprises.

The Deputy Legal Advisor to the Government (Advisory and Legislation Department of the Israeli Ministry of Justice) has previously issued a Legal Opinion relating to the applicability of Israeli Law to the Exclusive Economic Zone, relating to the Continental Shelf off Israel’s territorial waters. The Opinion is designed to clarify the legal status of the Exclusive Economic Zone until the proposed Bill relating to Maritime Areas is passed by Israel’s parliament and is of great relevance to companies involved in oil and gas exploration and production.

The Opinion finds support from the United Nations Convention of the Sea (“Convention”), to which Israel is not a signatory but has accepted upon itself the leading principles of the Convention.

Under Article 3 of the Convention, every coastal state has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles (23 km) from the shore.

Under Article 57 of the Convention, Breadth of the exclusive economic zone of a coastal state – is defined as not extending beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured.

In practice, Israel’s exclusive economic zone stretches 130 km from the Northern corner of the shore and 204 km from the Southern corner of the shore and encompasses a very large area, including foreign shipping lanes.

Under Article 56 – Rights, jurisdiction and duties of the coastal State in the exclusive economic zone

1. In the exclusive economic zone, the coastal State has:

(a) sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources, whether living or non-living, of the waters superjacent to the seabed and of the seabed and its subsoil, and with regard to other activities for the economic exploitation and exploration of the zone, such as the production of energy from the water, currents and winds;

(b) jurisdiction as provided for in the relevant provisions of this Convention with regard to:

(i) the establishment and use of artificial islands, installations and structures;
(ii) marine scientific research;
(iii) the protection and preservation of the marine environment;

(c) other rights and duties provided for in this Convention.

Further to Article 60 – Artificial islands, installations and structures in the exclusive economic zone

1. In the exclusive economic zone, the coastal State shall have the exclusive right to construct and to authorize and regulate the construction, operation and use of:

(a) artificial islands;

(b) installations and structures for the purposes provided for in article 56 and other economic purposes;

(c) installations and structures which may interfere with the exercise of the rights of the coastal State in the zone.

2. The coastal State shall have exclusive jurisdiction over such artificial islands, installations and structures, including jurisdiction with regard to customs, fiscal, health, safety and immigration laws and regulations.

Accordingly, the Deputy Legal Advisor holds that the Israeli laws regulating the fields of natural gas and oil, environmental protection laws and fiscal laws may apply in the Israel’s exclusive economic zone. Based on possible interpretation, additional laws in other fields may be applicable as well.

Currently, the “Knesset” is promoting a draft of the Marine Areas Law whose purpose is to establish a legal framework for activities conducted in Israel’s Mediterranean, including offshore oil and gas exploration and production. However, it’s unknown if and when such legislation process will be concluded.

We believe that companies and personnel involved in oil and gas exploration in Israel’s exclusive economic zone, even in cases where workers reach oil rigs and platforms from other countries or via the sea, without actually passing Israeli border control – should take into consideration the possible enforceability of Israeli law and legal exposure relating to such companies’ activities.

Therefore, companies that transport employees to installations via the sea and not through Israeli borders should not consider themselves exempt from applying for work permits and should consult with legal professionals with an expertise in this field.

Failure to obtain work permits and/or visas unnecessarily exposes a foreign company and its personnel to legal sanctions and penalties as detailed in: https://www.dglaw.co.il/?p=118 .

For more information, please do not hesitate to contact Dan Gross at gross@dglaw.co.il

When a foreign supplier (to an Israeli distributor), an Israeli distributor or the business and/or assets of an Israeli distributor are the target of the M&A activity, the following matters need to be considered, among others:

• Confidential information: It is common practice in Israel that distribution agreements consider almost any information related to the supplier’s business as confidential. Therefore, a due diligence process in itself could jeopardize the distribution agreement. Extreme care should be taken when considering if, in that context, the acquirer’s advisors will be considered as an authorized person to review the confidential information, or, for example, if signing a particular non confidential agreement will satisfy non disclosure provisions.
• Permanent establishment and governing law and forum: The acquisition of an Israeli subsidiary does not per se imply that the subsidiary will become a “permanent establishment” of the foreign holding company or its “authorized representative”. However, it is recommended to avoid certain arrangements in the sale and purchase agreement that could potentially create such statuses.
• Antitrust: M&A activities can revoke the exemption certain exclusive distribution agreements enjoy from the need to be authorized by the relevant regulator. For example, if as a consequence of the acquisition of the foreign supplier or the Israeli distributor the parties of the distribution agreement will be considered as competitors, or the acquisition will prevent the supply of substitute products into the Israeli market, or one of the parties to the distribution agreement will become a monopoly on that product or similar product in the Israeli market, or the distributor’s market share will pass the 30% threshold, etc.
• Financial services: The acquisition of an Israeli financial institution usually requires the prior approval of the relevant regulators, such as the Supervisor of Banks or the Superintendent of Insurance. Only approved entities can hold a license to distribute “financial services”.
• Assignment rights: Under certain circumstances the distribution agreement could be interpreted as limiting the right of the distributor to assign the agreement. Care should be taken when considering a change of control over the distributor as this could be considered as a way of assigning the distributor’s rights and obligations under the agreement.
• Consents and Termination: Some distribution agreements may be terminated by the supplier upon a change of control over the distributor, change of marketing capabilities (e.g. in the case that a business unit is the target of the M&A), or change of key people.

For more information, please do not hesitate to contact Alejandro Skidelsky at alex@dglaw.co.il

Israeli law allows parties to a distribution agreement to freely determine its terms and conditions, with relatively few limitations.

These agreements are regulated mainly, but not exclusively, by contract law and jurisprudence. Israeli contract law is largely based on the German codes and several English common law doctrines. The relevant legislation includes the Contracts Law (General Provisions) – 1973, the Contracts Law (remedies) – 1970, the Unjust Enrichment Law – 1979, and The Sale (International Sale of Goods) Law – 1999, which made  “The United Nations Convention on Contracts for the International Sale of Goods” legally binding in Israel.

In addition to the above, other legislation may have impact on distribution agreements. Israel lacks specific legislation regarding distribution (such as exists in many EU countries and several US states) and agency (as in German civil and commercial law). Therefore, and on top of the usual concerns affecting any distribution agreement (e.g.  exclusivity and territory, minimum quota, warranties, products’ returns and recalls, intellectual property, parties’ status, remaining stock , termination, etc.), when advising on distribution agreements we consider, among other matters, the following:

• Permanent establishment: The 53 conventions signed by Israel regarding Avoidance of Double Taxation largely follow the OECD Model Convention. These conventions include definition of “permanent establishment” for tax purposes. This definition can include: a place of management, a branch and an office. Distribution agreements should be drafted in a way that minimizes the risk that the distributor or its facilities could be considered as a permanent establishment of the supplier.
• Antitrust: The Restrictive Trade Practices Law, 5748-1988 provides that no person shall be party to a restrictive arrangement unless it obtains the relevant regulatory approval. An exclusive distribution agreement could be classified as a restrictive arrangement. However, a series of rules issued in 2001 by the Antitrust Regulator exempted certain exclusive distribution, agency, and franchise agreements from this requirement. These rules will be valid until 15 March 2016 and chances are that their validity will be extended.
• Employment relationship: There are instances in which the supplier- distributor relationship might be scrutinized under the magnifying glass of employment law. An Israeli employment tribunal will usually look for indications of an employer-employee relationship such as: terms of payment (e.g. fixed price, monthly payment, or commission), distributor’s tax status (self-employed, partnership, etc), distributor’s freedom to set its priorities and activities against level of control exercised by the supplier, ways to report and format of the reports, distributor having other suppliers or activities, and so forth.
• Consumer protection: Provisions of the distribution agreement that are to be replicated back to back into the distributor’s arrangement with its own customers will need to be drafted in compliance with the Consumer Protection Laws 5741-1981 and its regulations. The agreement’s provisions for product guaranties and post-sale services should also take into account the Consumer Protection Regulations (Responsibility and Service Post Sales) 2006, which extends the responsibility of the manufacturer for post-sale activities to the distributor who has imported the goods.
• Product liability: According to the Liability for Defective Products Law, 5750-1980, the distributor that imports the goods is also liable for any damage caused by them. Therefore, it is common practice to include in a distributor agreement provisions that qualify the supplier as having sole responsibility for any liability arising in relation to the goods, provisions that extend the manufacturer’s insurance policy to cover possible customer claims against the distributor, and other provisions that cater for the full indemnity and compensation of the distributor in such cases.
• Compensation: A party to a distribution agreement wishing to terminate the agreement with no cause shall provide the other party a proper opportunity to make a reasonable profit from the engagement, to cover its investments and time to prepare and to locate alternative sources of income. The courts have ruled that this is done by way of issuing an advance notice.
• Governing law and forum: The Civil Law Procedure Regulations, 5744-1984 has specific provisions allowing Israeli courts to hear a case against a defendant that has no permanent presence in Israel. For example by acquiring jurisdiction over foreign defendants upon the service of a statement of claim. This can be done, among many other ways, through an authorized representative who is engaged at that point in time on behalf of the defendant in any activity. This is so even if the “representative” is specifically not authorized by the foreign defendant to receive such service. Under certain circumstances the distributer could be considered as such a representative of its supplier. This risk can be reduced by proper drafting of the distributor agreement and strict adherence to its terms.
• Financial services: When the product to be distributed is a financial service, other laws that regulate the relationship between supplier and distributor may apply e.g. Control of Financial Services (Pensions Counseling and Pension Marketing) Law 5765-2005.

For more information, please do not hesitate to contact Alejandro Skidelsky at alex@dglaw.co.il

Israel’s “Oil Rush”

Israel is currently undergoing an oil and gas exploration boom. Recently, Israel has seen some of the world’s largest discoveries of gas and oil. These new oil and gas discoveries have jumpstarted significant foreign investment into drilling and exploration rights. The most recent discovery in December 2010 named Leviathan was the world’s largest discovery of natural gas in a decade. It is projected to have 16 trillion cubic feet of gas at a market value of $90 billion. Many experts believe there could be more than 4 billion barrels of crude oil below these natural gas deposits.  Israel’s infrastructure minister called this discovery “the most important energy news since the founding of the state.”

 The Leviathan discovery came just a year after the Tamar discovery, which was the world’s largest natural gas discovery in 2009. Discovered in January 2009, Tamar has an estimated 8.4 trillion cubic feet of natural gas. Tamar is expected to begin production in 2012.

With recent advances in energy technology, oil reserves which were previously inaccessible and too expensive to extract are now being able to be developed. Zion Oil & Gas recently announced its interest in developing a large shale oil deposit 30 miles west of Jerusalem. These deposits comprise the 3^rd largest shale oil reserve in the world and expect to yield 250-500 billion barrels of oil.  Many experts believe that Israel has a volume of oil in this reserve and other undiscovered shale oil reserves equivalent to that of Saudi Arabia.

With these 2 discoveries preceded by smaller significant natural gas discoveries, Israel is seeing new entrants into its oil and gas industry. Noble Energy, which has significant ownership in the Leviathan and Tamar fields has the largest footprint in Israel.  ATP Oil & Gas Corporation and Caspian Drilling Company, a subsidiary of State Oil Company of Azerbaijan Republic (SOCAR), one of the world’s largest oil companies are both currently operating in Israel. Other oil and gas companies with smaller operations have started to come such as: GeoGlobal Resources, Transocean, Baker Hughes and Halliburton. However, most of the larger global oil and gas corporations (Shell, Exxon-Mobil etc) have stayed away.  Former Petroleum Supervisor, Dr. Yaakov Mimran said this was due to the fact that those global oil companies would lose oil suppliers in countries hostile to Israel (70% of the world’s oil are located in such countries.) This gives more opportunity for lesser known and smaller firms like Noble and ATP to succeed in a country that is just beginning to see a huge “oil rush.”

The Laws Governing the Israeli Oil and Gas Industry

The laws that apply to the oil and gas industry in Israel are found in the Israel Petroleum Law (1952) and subsequent amendments and regulations. This law has been largely unchanged in its almost 60 year history. The competent authority that grants licenses is, in most cases, the Ministry of National Infrastructure while applications for petroleum rights are submitted to the Petroleum Commissioner.

The Law provides 3 types of rights, 2 relevant to the exploration stage (including preliminary investigations, except for test drilling), and 1 for the production phase.   The rights that a license confers upon the licensee are as follows: the right to explore for petroleum in a certain area (this puts the licensee in the position of a holder of a preliminary permit) and the exclusive right to conduct test or development drilling in the area and to produce petroleum there from. License must be obtained prior to drilling.

Licenses are granted subject to demonstrating capabilities such as financing ability, experience and reputation. Given the recent developments, Israel has been more stringent in what companies it gives licensing rights to, given the rapid increase in applications.

Dardik Gross & Co. Law Firm

Dardik Gross & Co has significant knowledge and advisory experience in obtaining licenses and permits for drilling and exploration rights in Israel. DG can coordinate with the Ministry and Petroleum Commissioner and handle all regulatory issues and negotiations. Further, DG can obtain work permits for foreign workers employed in drilling and exploration, which is a significant part of the oil and gas process.  DG will contact the proper authorities to ensure the fastest most efficient route to taking advantage of the immense oil and gas that Israel offers.

For more information, please do not hesitate to contact Dan Gross at: gross@dglaw.co.il

Aliyah

The field of legal status regulation in Israel is a fascinating and rich field, which is not easy to navigate through, and which can easily be lost in if wrong steps are taken.
The State of Israel is not open to every person who wishes to enter it.
There are clear eligibility criteria to enter Israel, and in case a person does not meet them, a serious struggle against the authorities is expected ahead.
The Aliyah is made within the framework of the Law of Return, 5711-1950. The law was passed in July 1950, and it grants the Diaspora Jewish the right to immigrate to Israel.

In 2018, the Law of Return received a constitutional status as the Basic Law: Israel is the Nation State of the Jewish People has been received by the Knesset.

Under the Law of Return, people who meet the criteria of the law are entitled to immigrate to Israel, whether by virtue of being Jews, that is, children of a Jewish mother, or by virtue of being children of a Jewish father (which by definition are not considered Jewish).
Immigration to Israel can be made either from the person’s country of origin through the Jewish Agency for Israel, or when the person is already in Israel and submits an application for a change of status in Israel via the Population and Immigration Authority.

Applicants for Aliyah, both in Israel and abroad, are required to present documents that support their claim for eligibility under the Law of Return (i.e., Proofs of Judaism): birth certificate, a certificate indicating their current and previous personal status, medical documents and documents indicating that they do not have a criminal record. In some occasions, applicants would be required to submit documents indicating that they do not constitute a danger to the public safety in Israel.

Nevertheless, under some conditions, a person’s right to immigrate to Israel under the Law of Return could be denied.

The Law of Return states provisos, in which when a person meets them, he will find it difficult to exercise his right to immigrate to Israel:
(1) the applicant is engaged in an activity directed against the Jewish people;
(2) is likely to endanger public health or the security of the State.
(3) a person with a criminal record that may endanger public peace.

Did you collect all the documents required to submit the Aliyah application but got refused? If so, apparently, one of the Law’s provisos applies to you.
However, a refusal is not necessarily final, and an appeal can be filed against the initial decision.
In this case, it is advisable to contact an Israeli law firm that specializes in the field of immigration and can assist you in the process.
Dardik Gross & Co., has been practicing in the field of status regulation in Israel for many years and will be happy to assist you to solve the problem.

qMeety released to marketing its  meeting place product.

One of the most important choices any firm makes is the form of the customer communication it chooses. The right customer interaction is tied to results: the ability to convert visitors into buyers, increase customer satisfaction and create a sense of trust and responsiveness. Even at large destination sites, such as news sites or travel sites, the ability to converse with fellow site visitors can make visits longer and provide a more engaging experience.

qMeety will power new meeting places in destination and commercial sites, basing its go-to-market on underserved markets where its technology can bring substantial benefits to users. Its technology will power three types of interaction:

• Publisher to visitor: similar to today’s live chat solutions
• Visitor to visitor: to enable concurrent site visitors to become mutually aware and chat
• qMeety for aggregated sites: letting mini-site owners such as store owners or mini-site creators chat with visitors without integration by the aggregated site owner.

Our firm advises qMeety and other start-ups.

www.qmeety.com

British telecommunications giant BT Group plc (LSE; NYSE: BT) is joining the Office of the Chief Scientist’s corporation R&D cooperation program. Chief Scientist Dr. Eli Opper and BT R&D director Mike Galvin today signed the cooperation agreement.

Minister of Industry, Trade and Labor Benjamin Ben-Eliezer said, “Activity of multinational corporations in Israel makes a strong contribution both to Israeli industrial exports and to job growth by creating broader employment circles than low technology industries and services.”

Opper said that BT Group was the first British company to join the corporation R&D cooperation program following companies from the US, Germany, France, and Denmark.

Opper added, “The Office of the Chief Scientist corporate R&D cooperation program has become the preferred program for many multinationals for carrying out joint projects with innovative Israeli companies.” Galvin said, “The quality of technology developed in Israel is especially high, and for this reason BT sees great value in cooperating with Israeli companies.”

Our law firm has advised BT on this deal.

Published by Globes [online], Israel business news

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