A recent amendment (Amendment no. 16) to the Israeli Companies Law is expected to affect dealmakers’ choice of the legal technique used for acquiring Israeli public companies (both those listed on the Tel Aviv Stock Exchange and those traded overseas).
The Amendment states that an acquiror may stipulate in tender offer documents that shareholders who agree to tender their shares in the tender offer will not be entitled to appraisal rights with respect to the shares tendered. The welcome result of this amendment is that acquirors will, at the closing of the transaction, know with near certainty the purchase price at which they are acquiring the target company – as opposed to the situation prior to the Amendment.
Following the enactment of the Israeli Companies Law in 1999, dealmakers have encountered two main difficulties in executing an acquisition in Israel through tender offers: the majority required for completion of the tender offer and appraisal rights.
Prior to the Amendment, any shareholder who sold shares in a tender offer, regardless of whether the shareholder agreed to tender shares or was forced to sell, had the right to appeal to court – following completion of the acquisition – to claim that the price paid in the tender offer was not the fair value of the shares sold; if the court accepted the claim, the acquiror was required to pay the selling shareholders the fair value of their shares, as the court determined.
This situation resulted in acquirors being uncertain about the price at which the target company would be acquired, and facing the risk of an increase in the deal price following completion of the transaction, when the acquiror no longer had the option of “leaving the negotiating table”. For example, before the Amendment, if an Israeli public company was acquired in a $1 billion tender offer, and immediately following consummation a shareholder holding a small percentage – say, shares worth $10,000 – exercised appraisal rights, a court could determine that the fair value of the shares should have been 10% higher. The appealing shareholder would receive an additional $1000 by virtue of the decision, but the acquiror would be forced to increase the overall purchase price by $100 million. For that reason, dealmakers refrained from acquiring companies through tender offers and turned to alternative means of acquisition, such as reverse triangular mergers.
Now, following the Amendment, an acquiror can provide that shareholders who agree to tender their shares in the tender offer will not be eligible for an appraisal remedy. Given that holders of 95% of the target shares have to agree to the tender offer in order to “squeeze out” the minority, then, at most, uncertainty regarding the purchase price in the tender offer will remain only with respect to 5% of the overall price.
Despite the welcome change in law resulting from the Amendment, dealmakers should still be aware of the difficulty of using a tender offer to acquire Israeli public companies because of the need to obtain the consent of holders of 95% of the target company’s shares in order to complete the acquisition and squeeze out the minority. In many cases, this hurdle becomes prohibitive to completing the transaction, as it is impossible to locate certain shareholders and reach the requisite majority. By contrast, most mergers require the consent only of holders of over 50% of the shares voting (disregarding abstentions) to approve the merger.
We expect that following the Amendment more Israeli acquisition transactions will be effected through tender offers, especially in the rare cases of hostile acquisitions. However, in many cases where the ability to obtain the requisite majority is questionable, dealmakers are likely to continue to prefer to enter into “friendly” transactions using alternative techniques such as mergers.
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