Newsletter 63- August 15, 2017

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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 the legal status of Israeli Securities Authority pre-rulings, taxation on the transfer of intellectual property following a company acquisition and the conditions for imposing liability on a controlling shareholder’s sale of his shares.

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 feel free to approach your contact person at our office or contact Yoram Shiv at 972-3-607-4777 or at, or Alex Berman at 972-3-607-4777 or at

You can view previous editions of our newsletter on our website at

Sharir, Shiv & Co., Law Offices


Supreme Court / Status of Israel Securities Authority Pre-Rulings

As part of an appeal on a lower court’s decision to approve a class action The Israeli Supreme Court (“Supreme Court”) discussed the legal status of a pre-ruling issued by the Israel Securities Authority (“ISA”) .

In this case, the request to file a class action concerned a transaction in which the Delek Group Ltd. (“Delek”) purchased shares held by the Cohen and Tadmor families (the “Shareholders”) in Cohen Development and Industrial Buildings Ltd. (the “Company”) and whether the means by which the Shareholders held their shares constituted “joint” or “separate” holdings and consequently whether the Shareholders should be classified as control holders that would exempt the transaction from the special tender offer rules.

Prior to the transaction, despite past filings submitted by the Shareholders that adopted a conflicting position, the Shareholders requested a pre-ruling from the ISA stating that the Shareholders are “joint” holders of the Company’s stock. The Supreme Court noted that the ISA transmitted its response orally and did not present a clear position on the mater presented to it. The ISA only stated that it would not express a position regarding an updated report that the Shareholders intended to submit to the Israeli Stock Exchange stating that the Shareholders constituted a control group and that the ISA would not send any response to the Company following publication of the report.

The Supreme Court ruled that an ISA position provided as a response during a pre-ruling process only has effect vis-à-vis the pre-ruling supplicant and the ISA. Thus, Delek Group Ltd could not rely on the pre-ruling given to the Shareholders.

Additionally, the Supreme Court held that while an ISA pre-ruling represents the professional preliminary position of the ISA with respect to the matter at hand, and may even bind the ISA to the position it presented, a pre-ruling does not create new, or change existing, legal norms regarding control persons and special tender offers.

The Supreme Court also discussed the applicability of Article 6 of The Torts Ordinance, which provides protection against liability in tort for a person acting with reasonable belief or in good faith that there was legal authorization for the wrongdoing committed. It was determined by the Supreme Court that such defense would only be applicable if the ISA had the authority to authorize a certain action – which was not the case in the matter at hand. In addition, given that the ISA did not explicitly grant the requested pre-ruling, the Supreme Court could not find reasonable belief in the existence of legal authorization by the Shareholders of an exemption from the requirements of the publication of a special tender offer. As the Shareholders did not have relief under Article 6 of The Torts Ordinance, Delek as well could not benefit from this protection.

The filing of the class action against the Delek and the Shareholders was approved.


District Court / Taxation of a Transaction involving the Sale of Intellectual Property of a Company Following the Sale of the Company’s Shares and the Transfer of its Business Activity

The District Court of Lod (“District Court”) accepted the position of the Israeli Tax Authority (“ITA”) and reassessed the value of a transaction to sell all of the intellectual property of a company that was entered into after the sale of all of the company’s shares.

In 2006 Microsoft purchased all of Gteko’s shares for approximately USD 90 million. Subsequently, all of Gteko’s employees were hired by Microsoft Israel. Six months later, an agreement was executed between Microsoft and Gteko by which Gteko sold to Microsoft all of its intellectual property for USD 26.6 million, based on a fair value analysis. The ITA claimed that, in essence, the second transaction constituted the sale of Gteko’s entire activity and not only the sale of its intellectual property. The ITA thus valued the transaction at USD 90 million, the purchase price that had been fixed for of all of Gteko’s shares.

The District Court held that in the event of a dispute between the parties regarding a classification and scope of a transaction, the burden of proof is on the taxpayer

The District Court also held that the transaction should be taxed based on the essence of the transaction and not based on the form of the transaction presented by the parties; behind what was presented as a sale of intellectual property was effectively the sale of all of Gteko’s operations.

The District Court did not rule out the possibility that it would be possible to justify a difference in value between a transaction to sell the shares of a company and a transaction for the sale of an activity. For example, in an acquisition of a company where a control premium is paid. On the other hand, synergy (a unique combination of the acquired asset with the purchaser’s activity) would not justify a gap, because the synergy would exist both on the level of the shares transaction and on the level of the intellectual property transaction.

The District Court also ruled that the ability of a company to transfer employees as a single unit to another company may be considered an asset and that such transfer may have great economic value that can be taxed. However, the District Court recognized that there will be purchase price components in a share purchase agreement that should be deducted from the transaction value of a sale of intellectual property, such as payments paid in the share sale transaction as a retention bonus to employees.


District Court / Conditions for Imposing Liability on the Controlling Shareholder in a Sale to a Third Party

The District Court of Lod (“District Court”) determined the conditions for imposing liability on a controlling shareholder for knowingly selling control of a company to a prospective controlling shareholder who will harm the company (such as a known corporate looter). The discussion was in the context of a trustee’s claim that was filed against a controlling shareholder and CEO who sold his shares in the company to a group of investors that led to the company’s collapse.

While Israeli corporate law imposes certain duties upon a controlling shareholder, the District Court ruled that a controlling shareholder may sell his shares to any prospective buyer, unless the controlling shareholder knows that such buyer will cause significant damage to the company. The controlling shareholder will be held liable for such a sale only under exceptional circumstances where three cumulative conditions exist at the time of the sale:

  1. High level of fault of the selling controlling shareholder, which is expressed in knowing, turning a blind eye, or indifference to the buyer’s intention to act illegally in a manner that is expected to cause significant damage to the company.
  2. High level of certainty of the occurrence of significant damage to the company. Such level of certainty to be determined by objective standards.
  3. High probability of a serious deficiency or fault in the buyer’s expected conduct. Usually, this would be improper profit, such as the looting of the company by the purchaser. Also possible are situations where actions are not intended to achieve improper profit, but rather violate the duty of care and loyalty towards the company such as gambling with company property or investing in a reckless manner. This condition is valid only when the intended business path of the purchaser is clearly unreasonable, and it is not sufficient that the controlling seller does not believe in the path’s validity.

An examination of liability for a sale of control must be made based on the knowledge of the controlling shareholder at the date of the sale and not through hindsight. However, examination of the controlling shareholder’s knowledge relates not only to what has actually occurred, but also to what is reasonably conceivable to occur as part of the transaction.

The duties imposed on the controlling seller include a duty to conduct some inquiry of the buyer’s identity and motives, but the nature and scope required for such inquiry is limited and is viewed in light of the overall circumstances of the transaction. Refraining from conducting an inquiry might be seen as turning a blind eye or indifference to the harm that the buyer intends to cause and could constitute the required element of responsibility to prohibit the sale.

Under the circumstances of the case before the District Court, the controlling shareholder was held not liable, since the controlling shareholder could not have foreseen the damage that was caused to the Company as a result of the sale of control.

Additionally, the District Court exonerated the controlling shareholder for his conduct after the transfer of the control of the company, when he continued to serve as CEO and then decided after a short period to leave the company. A CEO has a duty of loyalty to the company which requires him to examine proposals presented to the company by the controlling shareholders professionally and independently, to support these proposals when they are in the best interests of the company and to oppose them when they are not. If a CEO decides to remain in his position, he must comply with validly approved resolutions of the company. When a CEO refuses to remain in office in view of policies of a controlling shareholder that are not acceptable to the CEO, the CEO does not breach his duty of loyalty to the company.

This newsletter provides general information only and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.