M& M&A A in in Is Isra rael el by Barry Levenfeld Se - - PowerPoint PPT Presentation

M& M&A A in in Is Isra rael el

by Barry Levenfeld

US-Israel Cross-Border Corporate Transactions Tuesday, March 29, 2011 4:00 PM to 6:00 PM Boston Bar Association - 16 Beacon Street, Boston, MA

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Se Sele lected ted Rec ecen ent t M& M&A A Tr Tran ansactions actions

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Sel elec ected ted Rec ecen ent t M& M&A Tran ansaction actions s (con

• nt.)

t.)

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Ou Outlin line e of

• f Pr

Pres esen entation tation

 M&A Structures  Regulatory Issues

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

M& M&A S A Struc ucture tures

 Asset Acquisition  Acquisition by way of share purchase

• public target
• private target

 Acquisition by way of merger

• Statutory Merger
• Court Approved Arrangement

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Acquirer Acquirer

• 1. Start:
• 2. Transaction:

Target

Assets

$ or shares Assets

Acquirer Target Target Shareholders

• 3. Finish:

Assets

Target Shareholders Acquirer Shareholders Target

Consideration

Needed Approva rovals ls

• Majority of Board
• Shareholders with Veto Rights

Acquirer Shareholders

As Asset set Ac Acqu quisit isition ion

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

As Asset et Ac Acqu quisit sition ion

Pr Pro

 Can be fastest  Easier decision making

process in target and acquirer (often no shareholder approval is needed)

 Acquirer can avoid unknown

liabilities

Con

 Two levels of tax on seller –

company and shareholder

 Non-Israeli shareholders of

target pay more tax

 Target may be left with

unwanted liabilities

 May have OCS complications  Need to assign contracts,

rehire employees

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

• 1. Start:
• 2. Transaction:

$ and/or shares Shares of Target

Acquirer Target Shareholders

• 3. Finish:

Nee eeded ed Approva provals ls

• 100% of Shareholders
• r
• r
• 80% or less with “bring

along”

• 95% if target is public

Acquirer Target Target Shareholders Acquirer Shareholders Target Acquirer Shareholders

Target Shareholders (if consideration was shares

• f Acquirer)

Acquirer

Sh Shar are e Ac Acqu quisit isition ion

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Share are Purchase hase – Private vate Ta Target et

Pr Pro

 If all shareholders agree,

can be very fast

 In theory, no target board

approval required

 Only capital gains taxes –

foreign shareholders often exempt

Con

 If not all shareholders agree,

need contractual or statutory bring-along

 Bring-along may require 80% or

90%, sometimes less, and may take up to 90 days

 Questions regarding

enforceability if:

• differs from statute
• consideration allocated

according to liquidation preferences

 If no bring along – potential for

blackmail by minority shareholders

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Share are Purchase hase – Public lic Ta Target get (te tender nder off ffer) r)

Pr Pro

 No target board approval

required

 In theory, can be very fast  Relatively simple

documentation

Co Con

 Tender offer rules apply  Need 95% positive

response! – not practical

 Right to appraisal for 3

months following – even if you agreed!

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Re Revers rse e Tr Triangula ular Merger

• 1. Start:

Acquisition Subsidiary

• 2. Transaction:

$ and/or shares

Acquisition Subsidiary (דעי) Target Shareholders Target (תטלוק)

merger

• 3. Finish:

Target (survives merger)

Required Approvals

• Majority of Board
• 51% of shareholders

attending meeting

Acquirer Acquirer Shareholders Target Target Shareholders Acquirer Shareholders

Target Shareholders (if consideration was shares

• f Acquirer)

Acquirer Acquirer

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Rev everse erse Tria iang ngul ular ar Me Merge ger

Pr Pro

 Certainty, if you have majority

(50% or 75%) of target shareholders

• May require class vote
• Can substitute court approval

 US companies/lawyers understand

it better

 All agreements, etc. of target

remain – no assignments needed

 Only capital gains taxes – foreign

shareholders often exempt

 Only viable option for public targets

Co Con

 Originally, some uncertainty

regarding reverse mergers, but now the courts have “blessed” this structure

 Can close only on latter of 50

days from signing or 30 days from shareholder approval

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Court urt Approved roved Plan n Of Of Arrang angement ement



Companies may adopt a “Plan of Arrangement” which is basically a court-approved merger



Application made to the District Court to convene a meeting of Target’s shareholders.



Transaction must be approved by the shareholders (and possibly the creditors).



Vote required is 51% of the voters that are present and that represent 75% of shares present (for each class)



Court must then approve the transaction and find it to be fair

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

When you need a “Plan of Arrangement”



Where stock is used as consideration



Where different consideration provided to different classes

• f shares



In “going private” transactions or any transaction where some shareholders remain in the company



Anywhere the statutory merger might not be available

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Reg egul ulat atory

• ry Con
• ncerns

erns

 Antitrust  Israel Securities Authority  Taxation  Office of the Chief Scientist

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Ant ntitrust itrust

 Restrictive Trade Practices (Antitrust/HSR) approval

required depending on:

• Size of turnover in Israel
• Either party is a declared monopoly
• Merged entity will control over 50% of product or service in Israel

 “Short Form” Merger notice now available  No need if not a “company”  30 day clock

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Sec ecuriti urities es La Law Is Issues ues

 Background: Exemption from Israel Securities Authority (ISA)

required for offering securities to more than 35 Israeli residents in any rolling 12 month period (excluding “qualified investors”).

• Qualified Investors include most financial institutions and VC funds
• Does not include high net worth individuals

 Option Substitution constitutes an offering, but an exemption

is available under Section 15D if appli lied ed for in advanc nce. e.

 New ISA policies allow for monetary sanctions if target

company has previously granted options without complying with Section 15D.

• Diligence and indemnification needed to address possible prior violations

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Sec ecuriti urities es La Law Is Issues ues – Sto tock ck Dea eals ls

 Complications in receiving approvals where U.S. listed

Purchaser uses stock to make acquisition (where there are more than 35 Israeli resident selling shareholders).

 Possible solutions:

• Court approved arrangement – works for Israeli target, but applicability

for Israeli-Related target not clear

• Dual listing on the Tel Aviv Stock Exchange – often not practical
• Israeli prospectus – never practical
• Alternative: offering Israeli residents cash only

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Tax axat ation ion – Cap apit ital al Gai ains ns Tax ax an and P d Pur urchase haser r Wit ithh hhol

• lding

ding Obl blig igat ations ions

 If the sellers are subject to Israeli capital gains tax, then the

Purchaser may be subject to Israeli tax withholding

• bligations

 Withholding obligation may apply to purchase of Delaware

corporation if:

• Management and control exercised from Israel
• Significant assets (IP) held by Israeli subsidiary

 Result – Del Corp buys Del corp needs Israeli withholding

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Im Impo positio sition n of

• f Is

Israe rael l Cap apit ital al Gai ains ns Ta Tax – Whe hen? n?

 Management and Control from Israel – depends on facts

and circumstances, including

• General control of company policy from Israel
• Most board meetings in Israel
• CEO and other key management figures based in Israel

 Majority of Assets – particularly intellectual property –

located in Israel (via the Israeli subsidiary)

• Sometimes linked to OCS funding for research and development

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Tax ax Im Impl plic ications ations fo for Sel elli ling ng Sha hareh ehol

• lde

ders rs

 Israel

aeli i resid ident ents – will pay Israeli capital gains tax

 Ventur

ture e Capital tal Funds – if active in Israel, will most likely have a special tax pre-ruling; otherwise may be subject to tax

 Treaty

ty country try residen dents ts – usually exempt, but need Israel Tax Authority (ITA) confirmation

• US residents only exempt if they hold less than 10% of target voting

securities  Non-Tr

Treat eaty y country try residen dents ts – will pay Israeli tax if they cannot produce an exemption

 Israel

aeli i banks ks and brokers ers – withholding usually not required

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

So Solu luti tions

• ns fo

for Pu Purcha haser ser

 Apply to ITA for withholding tax pre-ruling

• Clarity as to who pays how much
• Clear instructions to paying agent

 Insist on personal Withholding Exemptions (or reductions) for

Israeli and non-Israeli shareholders

 For some shareholders, declarations of residency may suffice

to determine that no withholding is required

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Tax axat ation ion – Opt ptio ion n Cas ash-Out Out or

• r Sub

ubsti titut tutio ion

 Background: virtually all Israeli employees hold options or

RSUs through a incentive stock option plan qualified under the “capital gains track” of Section 102 of the Israel Tax Ordinance

• Qualified Section 102 options taxed at 25% on sale of underlying

security; otherwise tax can be as high as 47% (!)

• To qualify, options must be held by a qualified Section 102 Trustee for at

least 2 years from end of tax year of grant  Issue: cash out or substitution options breaks the 2 year

holding period and can result in loss of tax benefits

 Solution: apply for a option tax pre-ruling  Required both for option assumption and option cash out

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Tax ax Rul ulin ing g fo for Trea eatme tment nt of

• f Opt

ptio ions ns

 “Roll-Over” or Substitution of Options

• To ensure no deemed tax event (sale and purchase)
• To ensure that the 2-year 102 clock does not restart

 Cash Out

• Escrow of funds for vesting and/or 102 compliance
• Maintain 25% tax rate
• To prevent an “early” tax event if the consideration is held in trust
• Treatment of unvested cash consideration uncertain

 Interim Rulings: to allow closing prior to finalizing the option

tax ruling

 Agreement will be required with Section 102 Trustee (also for

future grants of Purchaser options or RSUs)

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Office of the Chief Scientist (“OCS”)

 Background: many Israeli companies receive OCS

funding for R&D

 No such thing as a free lunch: OCS funding comes with

royalty obligations and other strings attached

 Some restrictions may apply to getting the acquisition

done

• Sometimes OCS consent will be required for the change in indirect
• wnership resulting from the acquisition of an Israeli-Related

company

• Other times notice alone will suffice

 Other restrictions will apply after the deal is done

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Pos

• st-Closi

Closing ng OCS Res estrictions trictions

 OCS approval required:

• to transfer OCS-supported technology outside of Israel (even to affiliated

companies)

• to manufacture products based on OCS-supported technology outside of

Israel

 To transfer IP out of Israel – Must pay the great

eater er of:

• Amount of grant, plus interest
• Sale Price multiplied by (amount of all OCS grants / total investment in the

IP), and then depreciated

 To manufacture outside of Israel – may be required to pay royalties

equal to three times the original grant

 Open question – treatment of licenses to do more than just

manufacture

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Con

• nclusio

lusion

 Beware: what looks like a straightforward Delaware deal may

involved Israeli complications

 Identifying and dealing with the Israeli issues early on will

save time and aggravation

 Involve appropriate Israeli counsel early – and you can keep

Israel obstacles to a minimum, saving time and money for your client

Th Thank ank You!

Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il Barry Levenfeld, Yigal Arnon & Co. barry@arnon.co.il

Barry ry Levenfeld enfeld

 Harvard College, AB 1976; Harvard Law School, JD 1979  Made aliyah in 1983  Senior Partner in Yigal Arnon & Co.’s Technology Practice

Group

 International clients include France Telecom, Oracle, Deere &

Company, Sun Microsystems, IBM, Symantec, Polycom, Spansion, Boston Scientific

 Representation of venture funds, technology start-ups, IPO’s

• f Israeli companies, and technology M&A transactions

 Senior Lecturer, Hebrew University Law Faculty, in high tech

corporate finance