Over my years as lawyer I have lead and participated in dozens of international M&A transactions – each one different from the other – but one thing I know for use; things in Israel are different! Maybe it’s because we are located in the Middle East, maybe because we are a young country? It really doesn’t matter why, but it does mean that you (as a foreign entity) have to sometimes accept things that don’t make sense, and your lawyer must be someone you trust implicitly and can rely on.
- Capitalization of the Company. In Israel the document that provides prima facie evidence of a company’s capitalization is the share register kept by the company in its office and not the register duly kept by the official Israeli Companies Registrar. A private company is required to notify the Registrar upon an allotment or transfer of shares, within 14 days of such allotment or transfer and the registers kept by the Registrar are public with copies available upon payment of a small fee. However, notwithstanding the foregoing, and notwithstanding any share certificates or other documents it is the share register kept by the company in its office has the overriding evidentiary value. Make sure you get a copy of this register duly authorized by the Company.
- Data Privacy. In May 2018 the EU General Data Protection Regulations (the “GDPR”) shall enter into force and will affect Israeli companies that do business in Europe. The Israeli Data Security Regulations (Data Protection), 2017, enacted in March 2017, comes into effect in March 2018 (the “IDSR“). The ISDR is relevant to the entire Israeli economy. Israeli companies doing business will be required, as of May 2018, to meet both the GDPR and the IDSR. I would suggest reviewing any applicable Data Protection Policy very carefully to make sure it complies with all the relevant provisions of both the GDPR and the IDSR, with regard to Data Protection.
- Government Funding. The Israel Innovation Authority (formerly known as the Office of the Chief Scientist (the “IIA”) is an independent government entity that offers grants to companies involved in research and development. These grants are paid back in the form of royalties, based on the revenue generated from sales connected to the know-how that was developed using the funding (the “Funded Know-how”). In order to incentivize foreign corporations that acquire or invest in IIA-funded companies to keep the Intellectual Property in Israel, Funded Know-how can now be licensed to foreign corporations subject to IIA approval, payment of a fee and certain reporting obligations. There are certain situations where the fee the Israeli company will land up paying will exceed the sum it will receive as a license fee. It is important to check know how much this fee will be at the early stages of negotiation, and to get a proper answer, and not be satisfied with a typical Israeli response of “don’t worry, it will be okay”.
- Overtime Payment. Israeli labor low is comprised of a set of cogent statutory rules – minimum requirements, which cannot be waived, and amongst others, except for in certain particular situations, employees must be paid for overtime. e.g. Senior employees in a position that requires a special degree of loyalty do not have to be paid overtime. It is extremely common (in particular in hi-tech) for (1) employees’ salaries to be divided into two components – a base salary and global overtime payment.If an employee is classified as a senior employee (but is not in fact an employee in a position that requires a special degree of loyalty – like a CEO) the company will probably be sued by the employee for overtime pay upon termination. If the actual number of overtime hours worked (which is required to be stated on the employees pay slip) is not proportional to the global overtime payment, the employee could sue for additional overtime payments. Please make sure that provisions have been made in the financial documents of the company for any exposures for employee overtime payments.
- Open Source. This Section is not specific to the Israeli market except to the extent that the Israeli market is particularly innovative and responsive and though I am not aware of any official studies, I believe that Israeli developers frequently use open source components, without being aware of the fact that there is a cost associated with the use of open source components. There is of course the compliance required with the applicable open source license and most investor’s or acquires will carry out a open source due diligence to check open source usage and compliance. There is however, a more subtle and devious problem with open source. When you buy a SW component – you can automatically be provided with updates, fixes and patches over the term of your license/service agreement. When you use an OS component – this is not the case – you have to proactively check. There are situations where a failure to keep your OS components up to date can be devastating, as in the recent massive data breach from Equifax. A patch for the exploited Apache Struts have been available for two months. The reason that I am mentioning this even though this is basically a technical issue is because the first person to be terminated from Equifax was its internal legal counsel. It is important that this issue be addressed and a policy for tracking and fixing open source vulnerabilities be implemented, and protection of a Company from lawsuits is definitely a legal issue.
There are of course many more Israeli idiosyncrasies and thinks change rapidly in this field. So when investing in an exciting Israeli innovation, don’t hesitate, just do your diligence properly and don’t assume that because you have a lot of experience in many other countries, that it will be the same here.