Amendment 16 to the Companies Law recently passed, which amended a number of provisions applicable to the acquisition of companies by way of a full tender offer is expected to influence the way buyers of Israeli public companies will choose.
Amendment 16 of the Companies Law recently passed, which amended a number of provisions applicable to the acquisition of companies by way of a full tender offer, is expected to influence the way in which buyers of Israeli public companies (those that are traded in Tel Aviv and those listed overseas) will choose to make the purchase. The amendment states that any purchase by means of a full tender offer may determine that a shareholder who responded to the full tender offer will not be entitled to an “Appraisal Remedy”. The welcome result of the change is that purchasers who will use the technique of the tender offer will receive, upon completion of the transaction, the almost complete certainty as to the purchase price at which they will acquire the company in contrast to the situation before the entrance of the amendment.
Since the entry into force of the Companies Act in 1999, potential buyers of Israeli public companies met with two major difficulties for performing purchase transactions by way of a full tender offer: the first, was the majority required for completion of the tender offer and the other is Appraisal Remedy. In the situation before the amendment, a shareholder who sold his shares in a full tender offer was entitled to ask the court after the closing of the transaction, to determine that the consideration paid in the tender offer, was below the fair value of the shares which had been sold, and that the buyer should pay the selling shareholders the fair value of the shares, as would be determined by the court. Lawyers, bankers and consultants to organizations which considered making a purchase of Israeli companies (even if traded overseas), would advise these entities to avoid the acquisition of companies by way of a full tender offer and turn to other ways of acquisition, such as inverse triangular mergers and the like. This is because, in the prevailing situation, the purchaser would not have any certainty as to the final price at which it acquired the Israeli company and he might find himself required to up the price after the fact and after the completion of the transaction, when he would not have the basic option at the current phase of negotiations, “to leave the table” and to waive the transaction if it found that it was not to his liking.
Thus, for example, if it acquired an Israeli public company costing billions of dollars, following a request by a shareholder holding a fraction of a percent – for example, shares worth NIS 100,000 – the court decided that the fair value of the stock should have been higher by 10%. For that same shareholder, a further consideration of only $ 10,000 is required, but for the buyer – the entire transaction would become more expensive, in retrospect, by an enormous amount of $ 100 million.
Now, after the amendment, those shareholders who responded to the full tender offer, will no longer be eligible for an “Appraisal remedy”. The shareholders who will be entitled to such relief are only those shareholders who missed the tender offer. Given that the majority required for the implementation of a full tender offer is 95% of the shareholders, then, in the worst case, only 5% of the purchase price would remain in question.
However, despite the changes, it still seems that there is a difficulty in using the technique of a full tender offer for the acquisition of companies due to the requirement – which is not changed by Amendment 16 – to obtain the consent of 95% of the shareholders in order to complete the purchase and “pressing” the minority. In many cases, this hurdle may be difficult or impossible to overcome, since sometimes it is not possible to find a certain percentage of shareholders in the company. Nevertheless, in order to complete a merger, a more reasonable and comfortable majority than the 50% (or 75% in certain companies) of the voters at a meeting of shareholders (excluding abstentions), which approved the merger, is required. Because not all shareholders come to vote in the General Assembly (certainly those shareholders that can not be located), the majority required for the approval of such a transaction is significantly lower and is easy to be obtained in relation to the majority required for approval of the full tender offer.
Against this background, we are now expected to encounter more deals being made by way of a tender offer, especially in the rare, but interesting, cases of a hostile acquisition without the consent of the company’s management, then the option for the transaction by way of a merger is not possible, and in other cases where there is an advantage to the buyer (such as taxation benefits) for the transaction by way of an actual tender offer. However, in many cases, buyers will still prefer to complete “friendly” transactions (those made in cooperation and agreement with the company being sold) in alternative techniques of merger because of the difficulty in obtaining the majority required for a full tender offer.
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