Newsletter 57 – February 15, 2016
THE LEGAL NEWSLETTER
We are pleased to present another edition of our periodic newsletter. In this edition we provide a brief synopsis of recent developments in Israeli corporate law affecting both private and public companies, including jurisdiction and choice of law clauses in online user agreements, the validity of non-compete provisions in Articles of Association, and public company reporting requirements.
Our newsletter is intended to create awareness of important practical developments in Israeli corporate and commercial law, and the principles of law upon which these issues are based. We hope that you will find our newsletter informative and helpful, and your comments or suggestions are appreciated.
If you would like further information or have any questions concerning the issues discussed in this newsletter, please contact either Yoram Shiv, 972-3-607-4777, firstname.lastname@example.org, or Alex Berman, 972-3-607-4777, email@example.com.
Sharir, Shiv & Co., Law Offices
District Court of Tel Aviv / Option Grant Costs under “Cost+” Arrangements
The District Court of Tel Aviv (“Court”) recently held that the cost of grants of options to purchase shares in a parent company (“Options”) pursuant to Section 102 of Israel’s Income Tax Ordinance were to be considered “costs” under an intercompany Research and Services Agreement entered into by the subsidiary and its parent company, pursuant to which the parent company paid the subsidiary on a “cost+” basis.
Based on the specific facts of the case, the Court held that the cost of the Options were best classified as “costs expended in the production of income”, as the purpose of granting the Options was to motivate the subsidiary’s employees. The Court also mentioned that the result was notwithstanding the fact that the subsidiary was not entitled to deduct the value of the Options as an expense for reasons related to the terms of the Section 102 Option plan benefiting the employees. The Court reached a similar decision with respect to other social benefits provided by the subsidiary, such as employee pensions, holding that as an objective of these benefits was to motivate employees, they should also be considered part of production costs and included in the “cost+” calculation under the Research and Services Agreement.
The Court rejected the argument that as an employee receiving the Options could classify income from the Options as capital income on tax filings, the same capital income classification should be applicable to the subsidiary with respect to the Options. The Court pointed to case law holding that there is no requirement that payments be classified in the same manner by both payor and payee, or in this case, by both employer and employee.
Finally, the Court also held that the fact that the parent company (and not the subsidiary) had de facto granted the Options to the subsidiary’s employees was irrelevant, as the options had been granted in order to motivate the employees of the subsidiary.
District Court of Tel Aviv / Personal Jurisdiction by Serving Officers of Foreign Companies in Israel
The District Court of Tel Aviv recently held that the Israeli courts gained jurisdiction when a statement of claim was served in Israel on the vice-president of a foreign company.
In a previous decision in this matter, the Court had rejected the Israeli company Premier’s request to serve a claim against the foreign company Amazon outside of Israel, citing an insufficient cause of action. While this matter was pending, Amazon’s vice-president arrived in Israel to attend a conference. During his visit, Premier succeeded in serving him with a statement of claim. Premier claimed that the service on Amazon’s vice-president amounted to service on Amazon itself, considering the vice-president’s high rank in the company. Premier further claimed that because service had been in Israel, the Israeli courts had gained jurisdiction over the matter. In the previous decision the Court disagreed, holding that Premier’s service in Israel had been used to circumvent the Court’s decision to reject Premier’s application to allow service outside of Israel. The Court noted that the way for an Israeli court to gain jurisdiction over a foreign entity is through applying for consent to serve abroad, rather than by serving senior management during their visits to Israel.
In overturning the previous decision, the Court held that in the present case, service within Israel was not only legitimate, but also sufficient to grant the Israeli courts jurisdiction over the matter, and that Premier’s service on Amazon’s vice-president during his visit to Israel was not an abuse of court proceedings.
The Court held that Premier had met the “proximity” test, pursuant to which there must be a sufficiently close relationship between the recipient of served documents and the company for which service is intended. The Court noted that a company’s vice-president, in its capacity as senior management, can provide a company with awareness of the filing of a law suit. Therefore, service on the vice-president in the present case was synonymous with service on Amazon. The Court noted that if, in contrast, service had been to a junior employee, this would not have passed the “proximity” test and service on the individual would not have amounted to service on Amazon.
This newsletter provides general information and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.