Newsletter 65- February 15, 2018

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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 extraterritorial service of an application for the approval of an arbitration award, legal standing in approval of settlement following a derivative suit and new tax regulations relating to employee options.

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 yoram@sask.co.il, or Alex Berman at 972-3-607-4777 or at alex@sask.co.il.

You can view previous editions of our newsletter on our website at www.sask.co.il.

Sharir, Shiv & Co., Law Offices

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Supreme Supreme Court / Extraterritorial Service of an Application for the Approval of an Arbitration Award

The Israeli Supreme Court (“Supreme Court“) held by a majority opinion that extraterritorial service of an application for the approval of an Israeli arbitration award based upon an arbitration clause in a contract is invalid.

The ruling involves an appeal submitted by nonresidents of Israel to the Supreme Court to cancel a permit issued by an Israeli Court to serve them an application for approval of an Israeli arbitration award. The Supreme Court ruled that in these circumstances, the person seeking to enforce an arbitration award must obtain the approval (or recognition) of the arbitration award in the country of residence of the party against which the arbitration award is to be enforced. The party seeking enforcement must file an application with a court in the country of residency of the party against whom such arbitration award is to be enforced in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

The Supreme Court noted that the grounds for extraterritorial service stated in the Civil Procedure Regulations are an exhaustive list. The commonality between the grounds is the existence of a connection to Israel. The grounds for extraterritorial service should be narrowly interpreted, and any doubt regarding whether the facts fall within the definition of a given cause will be determined in favor of the foreign party.

The Supreme Court stated while the Civil Procedure Regulation allows extraterritorial service in connection with contractual claims having an affinity to Israel, one may not argue that an application for the approval of an arbitration award is equivalent to a contractual claim. Such a claim is derived from arbitration law, even if the arbitration requirement was set by contract. At the same time, the Supreme Court stated that it cannot be ruled out that under certain circumstances it will be possible to permit extraterritorial service of an application for approval or cancellation of an arbitration award given in Israel. The Supreme Court did not provide an example to such circumstances.

The Supreme Court agreed that this conclusion leads to an undesirable result. A person may be a party to a contract in Israel that includes an arbitration clause, but if an arbitration award is received against such person in Israel while not being physically present in Israel, it will not be possible to serve a request to approve the arbitration award. However, the Court noted that until such time as the Civil Procedure Regulation are amended, this is the legal situation. The courts must not expand the grounds of extraterritorial service through case law, in light of the sensitivity involved in acquiring jurisdiction over a foreign defendant.

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District Court / Approval of a Settlement Agreement in a Derivative Suit

The Court held that it may be possible to transfer the management of the derivative suit from the derivative plaintiff to the company for matters related to negotiations and settlement of a derivative suit if it was determined that the company’s board of directors do not have a conflict of interest.

The ruling involved a request to approve a settlement agreement reached in the derivative suit filed on behalf of Discount Investments (the “Company“) against the then members of the Board of Directors due to damage caused to the Company in its acquisition of a controlling interest in the Ma’ariv newspaper. An out of court mediation proceeding was conducted between the parties, during which a settlement was proposed. The settlement was rejected by the derivative plaintiff. Subsequent to the approval of the derivative suit, the Company’s controlling shareholders and board of directors were replaced. After this change, the Company reversed the derivative plaintiff’s position and accepted the settlement proposal. The Court approved the settlement.

A derivative suit allows stakeholders to realize rights available to a company in situations where there is a failure of corporate governance created by a potential defendant’s ability to influence the decision of the company to file a claim against him. In the matter at hand, the request to file a derivative suit was approved because the Company’s directors at the time of the filing of the suit were conflicted. Once a transfer of control was affected in the Company to another controlling shareholder and the defendants were no longer serving as Company directors and were no longer interested parties, there is no longer a concern that a board decision to approve a settlement agreement is tainted by a conflict of interest. The Court held that in this situation it is appropriate to defer to the business judgment of the Company’s board of directors regarding whether a settlement is in the best interests of the Company.

The Court noted the concern that its holding could have a “chilling effect” on filing derivative suits. However, in the matter at hand, as the derivative claimant did not formally oppose the Company’s approval of the settlement agreement, but instead argued that a higher settlement amount is possible, the Court did not find that approval of the settlement agreement would have a chilling effect on derivative suits. The Court held that the decision of whether it is in the best interest of the Company to settle for the particular amount offered or to continue with the management of the derivative suit is a business decision that should be left to the board of directors of the Company.

In addition, the Court noted that as a rule, negotiations of a possible settlement in a derivative suit must be carried out by the derivative plaintiff and the company is not entitled to conduct negotiations in a way that circumvents the derivative plaintiff without court approval. However, the spectrum of situations in which a court should approve a company request when the court is convinced that the board of directors of the company is not biased is significantly wider than where the board of directors has a conflict of interest. Therefore, in situations where the board of directors does not have a personal interest, management of the derivative claim by the company may be considered not only when where the management of the derivative suit by the derivative claimant “will cause serious and irreversible damage to the Company”, but also in other situations

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New Income Tax Ordinance Regulations / Employee Options – Involuntary Sale

As part of new Income Tax Ordinance Regulations published on November 1, 2017, it was determined that an “involuntary sale” of employee options granted pursuant to Article 102 of the Income Tax Ordinance that occurs prior to the end of the two-year trustee holding period may entitle employees to Article 102 tax benefits in, inter alia, one the following scenarios:

  1. Sale of all the employees’ securities as part of the sale to a purchaser who purchases at least 80% of the company’s issued share capital (including the employees’ shares) and is not an “affiliate” of the company or of a shareholder holding 25% or more of the company’s share capital. In general, the term “affiliate” refers (with respect to the target company) to a holding company, held company and a sister company, with the holding threshold of at least 25%.
  2. Sale of a company’s shares as part of a voluntary liquidation proceeding in connection with which the company’s operations and assets were sold to a person who was not a controlling shareholder, provided there is more than 6 months between the sale of the company’s operations and assets and the commencement date of the voluntary liquidation process.

In each of the aforesaid cases, the Company must apply to the Tax Authority for a pre-ruling in which the details and conditions of taxation will be determined.

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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.