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Legal Business May 2012

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PERFORMANCE In an era of ever-increasing cross-border transactions, it is fitting that Israel’s domestic legal market contains a rapidly growing cohort of international lawyers, just as foreign firms continue to lavish more attention on the jurisdiction CHRIS CROWE

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reshfields Bruckhaus Deringer’s ‘man on the ground’ in Tel Aviv, Adir Waldman, had a relatively typical New England upbringing. Having grown up in Fairfield, Connecticut, the academically gifted Waldman studied at nearby Yale University, before returning two years later to attend Yale Law School, where he became senior editor of The Yale Law Journal.

In between, Waldman took the unusual step of serving in the Israeli army for 18 months. ‘I had been accepted for law school and I knew that I didn’t want to go directly. Thankfully, Yale has a policy of actively encouraging students to take a year or two off to do interesting things,’ he says.

The army was a positive experience and serves him well in his current position. ‘I certainly know most of my Hebrew from the army and I probably feel more at home here as a result,’ he comments.

Waldman is in good company in Tel Aviv.

Israel’s principle financial and legal centre receives a constant influx of Wall Street attorneys, London solicitors and lawyers from other parts of the globe. Many are seeking a new life for religious, cultural, or other reasons. With a steady flow of highly qualified immigrants, Tel Aviv has a high concentration of first-rate lawyers.

‘Israel has a sophisticated legal market with world-class lawyers,’ comments Freshfields’

Photograph SHUTTERSTOCK

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Frank Miller, the London-based corporate partner who is responsible for the firm’s Israel practice. The domestic law firms are now awash with international talent. And many have taken a direct route from Wall Street. Waldman did a seven-year stint at Wachtell, Lipton, Rosen & Katz.

Cliff Felig, a corporate partner at leading domestic firm Meitar Liquornik Geva & Leshem Brandwein, was born in New Haven, Connecticut, also practised at a Wall Street firm – Cravath, Swaine & Moore – for six years before deciding to move to Israel in 1992.

He explains: ‘I was surprised by how little change there was from Wall Street. When I moved here in 1992, Israel was going through a major change to a high-tech and export-led economy. It was becoming much less heavily regulated and the demand for lawyers who could get documents turned around quickly was growing. There were real opportunities for people with these skills rather than connections.

There was a sense that an immigrant lawyer could really flourish here.’

Israel’s law firms have done well to take advantage of the growing influx of internationally qualified lawyers relocating from their native jurisdictions. But what does this new influx of foreign firms mean for Israel’s legal market? u

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ENERGY AND INFRASTRUCTURE PROJECTS Israel’s discovery of huge natural gas reserves off the Mediterranean coast may now be old news, but it is driving wider initiatives to augment Israel’s infrastructure. With the advent of build-operate-transfer (BOT) projects, it is generating a healthy flow of legal work.

Israel’s immense gas reserves include the huge Tamar field, estimated at 247 billion cubic metres and the Leviathan field containing some 453 billion cubic metres. They form part of a giant discovery, but gas underground does not equate to immediate riches.

Simon Jaffa, a partner at Barnea & Co, says there is a huge amount of interest in Israel’s infrastructure and energy initiatives, but there is still a need for international financiers to become more comfortable with these projects: ‘What I see at the moment is a long queue of overseas companies wanting to participate in the construction or operation of these projects, but what I rarely see is foreign

u CROSS-BORDER GROWTH

The growth of capital flows and entrepreneurial activity over the last decade is an attractive phenomenon for both domestic and international law firms. ‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered,’ confirms Herzog Fox & Neeman’s Alan Sacks. ‘There has been a great deal of interest internationally and a steady and significant flow of investment into Israel.’

Cross-border M&A is no longer entirely between Israel and the US, but it is now worldwide. Last year, for example, China National Chemical Corporation (ChinaChem) acquired Israeli agrochemicals manufacturer Makhteshim Agan Industries for some $2.4bn.

This was one of the largest ever deals to involve an Israeli company, with domestic firms Herzog Fox & Neeman advising Makhteshim Agan, while Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co represented ChinaChem.

‘Israel is no longer purely engaged in a bilateral relationship with the US, but more of a multilateral relationship with other major trading partners in Europe, Asia and elsewhere,’ comments Miller, who admits that Wall Street law firms still have a stranglehold on US-Israeli deals, but explains that his firm’s increasing focus on Israel is down to the flow of capital between it and other regions.

banks wanting to finance these projects.

There are a number of reasons why they are concerned about financing these projects in Israel, including the political risk of taking on a project in the Middle East.’

Despite the tight financing environment, the projects arena remains incredibly active.

The natural gas discovery is believed to have the potential to transform the Israeli economy, but there is a long road from discovery and exploration to actually commercialising these reserves.

Israel’s rather primitive infrastructure is illustrated by residential gas use, which involves the delivery of a ‘gas balloon’. There is still no mains gas supply to homes by underground pipes and there is a constant threat that electricity demand will outstrip supply and lead to the sort of blackouts that occur in California.

Jaffa explains: ‘Israel doesn’t have the infrastructure to provide gas on demand for

‘A lot of the London Stock Exchange IPOs have slowed down, but at the same time there is still a good deal flow of Israelis listing in the US.’ Joshua Kiernan, White & Case Miller believes that Israeli clients have the potential to be an incredibly lucrative source of instructions in the same way that acquisitive private equity houses and strategic buyers are in other parts of the world. ‘Israelis are not afraid of risk. They embrace risk. They see opportunities and say “let’s go there” and then they need to find a law firm that can help them do that,’ he explains.

Freshfields isn’t doing too badly in the region.

In 2011, the firm represented Israeli transit

domestic and commercial use. It needs to build the infrastructure for gas distribution around the country, but exporting it is another matter altogether. How the government commercialises these gas reserves is still open to question.’

Israel’s infrastructure initiatives are not limited to the gas sector. Independent power plants, desalination plants, as well as schools, hospitals and police facilities are also underway.

The energy sector is one that numerous Israeli firms are targeting with some considerable success. Agmon & Co and Rosenberg, Hacohen & Co recently advised the Tamar group on its $8bn gas supply deal with Israel Electric. Herzog Fox & Neeman recently represented the consortium of lenders in connection with the Dorad Energy power plant financing, Israel’s largest IPP project. The firm was also involved in the financing of Jerusalem Light Rail and the Cross-Israel Highway.

bus company Egged on its successful €500m bid to operate the public transport system in Amsterdam for eight years. At the end of 2010, the firm advised Israel-based Zim Integrated Shipping Services on the sale of a 47.5% interest in the Tin-Can Island Container Terminal in Lagos, Nigeria. The deal was led out of London

by Miller and former partner Presley Warner, who has since joined Sullivan & Cromwell.

Israeli companies are also thought to be more willing to be acquired by foreign investors in the current climate. Their traditional exit via an IPO on the domestic or overseas exchange is no longer as attractive as before the global financial crisis. Israel used to boast the second largest number of companies listed on the NASDAQ until China took over. Indeed, Israel headquartered Teva Pharmaceutical Industries remains one of the largest companies by market capitalisation on the NASDAQ. Naschitz Brandes’ Tuvia Geffen believes that the growth in cross-border M&A has more than balanced out the reduction in capital markets activity. Geffen, who has a strong focus on the high-tech sector says: ‘In the past there was a larger focus on IPOs, but now Israelis are more willing to allow the Microsofts of this world to come and buy the company.’ Microsoft has a substantial research and development centre u in Israel, which it launched in April 2006,

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u recognising that Israel is home to the largest startup community outside of the US. Furthermore, in the technology sector Israel is making a substantial and meaningful contribution. It was recently announced that Intel Israel now accounts for some 40% of Intel Corporation’s global revenue. According to a report in The Times, investment in research and development accounts for 4.4% of Israel’s GDP, compared to a mere 1.6% in Britain. Indeed, 50% of Israel’s exports are technology related.

Private equity houses are also demonstrating a keen interest in Israel. Apax Partners owns a majority stake in Israeli food maker Tnuva and a majority shareholding in Israel’s largest investment house Psagot. And last year Israeli conglomerate IDB Holdings Corporation was in talks to sell a 10% stake in Clal Insurance to Permira.

For Israeli law firms such as Zellermayer Pelossof Rosovsky Tsafrir Toledano & Co, which has a strong focus on private equity, this growth in cross-border deals is immensely positive. Corporate partner Doni Toledano advised Apax on its $1.025bn acquisition of a controlling interest in Tnuva in 2008. And with the imminent break up of Israel’s large conglomerates, this raises the prospect of Israel becoming a genuine hotspot for private equity activity.

‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered.’

FOREIGN INTEREST

Alan Sacks, Herzog Fox & Neeman

Low local rates have not dissuaded foreign law firms from focusing their sights on the deals emanating from or connected to Israel.

According to one partner at another leading domestic firm, the rates for a junior partner in Tel Aviv can be as low as $350 to $360 an hour, a rate that would get little more than a junior associate in London or New York.

Miami-based Greenberg Traurig launched an office in Tel Aviv in January. Senior figures Gary Epstein, the firm’s global corporate and securities chair, and fellow Miami partner and co-chair of the Israel practice Bob Grossman, are in charge of building a permanent team of fee-earners on the ground. The firm will not practise Israeli law. Epstein, who will spend time there without permanently relocating, says that the firm is ambitious about its build-out phase and will not be hindered by the more modest chargeout rates.

‘Greenberg Traurig always charges the local rate. My rates are significantly lower in Miami than my rates in New York,’ he comments. ‘We are able to compete effectively in local jurisdictions with rates that are

commensurate to the local market. Within a day of announcing this new office we had more than 75 unsolicited resumés from people that found this very appealing and were prepared to work at local salaries.’

Epstein says that the intention is to build a full-service offering, modelled on the firm’s offices around the world. He, however, will continue to base himself primarily in Miami.

Greenberg Traurig has been active in Israel since 2002 when the dot-com bubble burst and at the height of the Middle East tensions. Though the legal market has yet to be fully liberalised, Epstein says that the firm has received no resistance from the Israel Bar Association.

‘We do not purport to practise Israeli law and we will not practise Israeli law,’ he states. ‘We hope to provide a service to Israeli clients and continue to do what we have been doing. We will just be providing these services at a more convenient location and at a cost-effective level.’

Epstein says that the launch of the new office is merely a culmination of the work that

it has been doing over the last decade: ‘After ten years we felt that we had accumulated a sufficient critical mass of Israeli clients to be able to provide additional value at the local time.’

The connection is not just with Israeli clients.

In 2006, Epstein acted for IVAX Corporation in its merger with Israel’s Teva Pharmaceutical Industries, creating the largest generic drug company in the world.

Greenberg Traurig aside, international firms have not been fighting en masse to establish offices in Tel Aviv. Yet many are present in Israel’s principle financial and commercial hub.

Freshfields does not have an official office there, though Waldman is located there permanently and is managing director of the firm’s Israel focus group. Over the last decade, the firm has experienced increasing exposure to Israeli deals, including the transactions involving Egged and Zim Integrated Shipping Services.

Joshua Kiernan, a US-qualified corporate and capital markets partner based in White & Case’s London office, spends much of his time in Israel and has advised on many of the headline IPOs that have emanated from the jurisdiction since the late 1990s. He advised on the two largest ever Israeli IPOs, the $1.6bn Tel Aviv listing of Oil Refineries and the $1.4bn London Stock Exchange offering of AFI Development, both in 2007. And despite the slowdown in international equity capital markets activity since the global financial crisis, Kiernan remains busy on Israel-related deals.

In 2011 alone he and the firm worked on five such deals. ‘The capital markets work is still very busy,’ he says. ‘A lot of the London Stock Exchange IPOs have slowed down, but at the same time there is still a good deal flow of Israelis listing in the US.’ Berwin Leighton Paisner is another London-based firm that has successfully targeted the Israeli market. The firm opened a representative office in Tel Aviv late last month.

London corporate finance partner Jonathan Morris is chair of the firm’s Israel desk and is well known within the Tel Aviv legal market, despite not actually being permanently based there. In 2009, Morris represented AIM and Tel Aviv-listed Pilat Media Global on its £16.3m merger with US-based SintecMedia. It was the first such merger to be governed by the UK Takeover Code and the rules of the Israeli Securities Authority.

Yet thanks to the longstanding bilateral relationship between Israel and the US, it is Wall Street that is thought to have the closest nexus with Tel Aviv. After years of

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cross-border deals between the US and Israel, and with numerous Israeli corporates listed on the NASDAQ, it is New York’s finest firms that have the greater brand recognition on the streets of Tel Aviv. Notably, Skadden, Arps, Slate, Meagher & Flom has an impressive record on Israeli deals. In 2008, for instance, it advised Israel’s Omrix Biopharmaceuticals on its $438m acquisition by Johnson & Johnson. Since then, one of Skadden’s key Israel-focused partners, David Fox, has joined Kirkland & Ellis. Last year, he advised Teva Pharmaceuticals Industries on its $6.8bn acquisition of US-based Cephalon. Fox is a big name on Wall Street in his own right and spent much of his childhood and early adult life in Israel. Yet even with his move to Kirkland, Skadden retains an immense record on Israeli deals and a strong contingent of well-connected partners, such as New York partners Yossi Vebman and David Goldschmidt.

Overall, UK and US firms in particular have shown genuine interest in the Israeli economy, yet few if any are willing to take the plunge as Greenberg Traurig has and launch an office there.

The modest size of the economy and the relatively low fees charged by domestic firms means that international firms find it hard to see how they could make a Tel Aviv office financially viable.

Israel’s corporate wealth, fast-growing high-tech community and quickly developing energy sector is of genuine interest to international firms, but it still remains a relatively small economy compared to the new economic giants of China, India or Brazil. Freshfields’ Miller calls it a relatively ‘narrow market’, but one with increasing capital flows, entrepreneurial activity and companies that are becoming more global in nature.

FIRM EXPANSION This positive outlook has encouraged substantial growth among Israel’s leading

law firms. They have an enormous talent pool to draw from. Thanks to the law becoming a preferred choice of career for many in Israel and the continuing flow of legally qualified immigrants, the nation now boasts the highest concentration of lawyers per capita in the world. In 2010, Israel’s Courts Administration reported that there were 585 attorneys per 100,000 Israeli residents.

Meitar Liquornik’s Cliff Felig says the increase in cross-border M&A and the demands of foreign clients has encouraged Israeli law firms to expand quickly: ‘The large financial institutions, corporations and private equity houses are used to working with large fullservice law firms. Local firms here are not as large as in many of these clients’ home jurisdictions, but they want to know that they can go to one firm that can provide all the necessary specialist fields of expertise. It has pushed the market in that direction.’ u

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Herzog Fox now boasts over 200 feeearners and Sacks says that this is purely a reflection of the demands on the firm: ‘Our firm has grown and our peers have grown in line with the growth of the Israeli economy as a whole. Our size is a function of the scale of the work that we do and the number of specialisations that we offer.’

In 2011, Israel experienced one of the most newsworthy mergers in its legal history when Goldfarb, Levy, Eran, Meiri, Tzafrir & Co merged with M. Seligman & Co to form Goldfarb Seligman & Co, one of the nation’s largest law firms. Ashok Chandrasekhar, a legacy Goldfarb Levy partner, who is in the new firm’s corporate and securities department and a member of its executive committee, says that the time was ripe for attaining greater resources and visibility.

‘We had long felt that the Israeli legal market was at a mature enough stage to support very large firms by our standards.

We had built the firm over the years to that objective and then we saw a further opportunity with the partners at M. Seligman,’ he reveals. ‘It enables us to provide a broad offering of legal solutions to clients.’

Israeli firms are also expanding due to the sustained flow of immigrant lawyers into the jurisdiction, something that is enabling them to gain even greater exposure to crossborder deals. Among a number of headline transactions for Meitar Liquornik, Felig worked on Berkshire Hathaway’s $4bn acquisition of an 80% stake in Israel-based Iscar Metalworking Companies back in 2006. In 2011, he represented Cool Holdings in its bid to increase its stake in Israel’s HOT Telecommunication Systems.

For Felig, he experienced no shortage of challenging, high-value and cross-border deals,

Davis: Israeli firms can match Wall Street and London

following his relocation to Israel. He says that as a result, the firm now has a ‘high percentage’ of partners and associates that previously practised in New York or London.

Clifford Davis, an English solicitor who worked at Gouldens before it became the London office of Jones Day, moved to Israel in 1994. His wife was brought up in Israel and the two decided to try living there.

He now co-heads the corporate practice at S. Horowitz & Co. ‘I felt I could really build something and they haven’t fired me yet,’ he jokes about his decision to move. ‘Israeli law firms are excellent. Pound for pound, any of these firms in the top ten can easily match anything you can find in Wall Street or the City of London.’

Tuvia Geffen, a partner at Israeli firm Naschitz Brandes practised for eight years at Sullivan & Cromwell in New York before returning to Israel again in 2006. He says that

while working for a Wall Street firm may be prestigious and give a lawyer greater exposure to higher-value deals, the work in Israel is no less challenging or interesting. ‘It was surprisingly a lot closer to Wall Street than I thought,’ he explains. ‘Originally I thought I might be taking a step back to a slower pace and less exciting deals, but they are doing the same kind of deals with just one less zero. It might just be $100m rather than $1bn, but it’s the same type of work and most deals have a cross-border aspect.’ In 2011, the firm advised Provigent on its $340m acquisition by US-based Broadcom, one of a series of high-value deals involving Israeli high-tech companies.

Sacks moved out to Israel with his wife from the UK in the 1980s just after getting married.

‘There is a steady stream of young quality professionals coming to Israel who are making a life decision as much as a professional decision.

They may work harder here and get paid less, but they are trading one quality of life for another,’ he says.

STRIKING CONNECTIONS Over the years, the large firms have struck up fruitful working relationships with their foreign and international counterparts, but few are willing to go another stage further and develop formal affiliations. With a quickening flow of cross-border M&A, most firms regard multiple sources of referrals as preferable to a guaranteed trickle from one source.

Sacks says: ‘We have excellent relations with many law firms in all of the major cities of the world. We have always avoided exclusive arrangements with any one firm because we don’t want to spoil our relations with so many others.’

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Medium-sized firms have more to gain from allying themselves with or even merging with overseas colleagues, as it is often the large firms that are the first port of call for big referral mandates.

Indeed, smaller firms are already exploring these options. Last year Tel Aviv-based Rosenberg Abramovich Keren-Polak Epelman, Advocates affiliated itself with Spanish firm Cremades & Calvo-Sotelo in an effort to exploit increasing cross-border activity with Spain and Latin America.

Oded Oz, a junior partner at the Israeli firm says that it is working on establishing alliances in a number of other jurisdictions, but is not in a position to announce anything formal at this stage. ‘We have many affiliations that are not formalised yet,’ he confirms.

‘Most of our operation is international by nature and we want to be able to provide more efficient services around the globe.

Once you achieve a certain volume of business between firms it is the natural step to feel more comfortable with publicising this relationship.’

Shenhav, Konforti, Shavit & Co is another medium-sized firm with a similar strategy.

It established an association with US firm McGuireWoods two years ago and is further building its international connections. Partner Yaron Shavit says that trying to develop multiple referral relationships in numerous jurisdictions is not sufficient for his firm: ‘A referral connection is a model that is always there, but it is not good for long-term co-operation. It is built on opportunities that may happen, but you can’t keep an employee in the firm waiting for an opportunity to come, when you have already developed experience

of a deal that was done under a referral. You can’t really build expertise on cross-border deals under that model. Under an association, you develop long-term know-how through these cross-border experiences and this is constantly nourished.’

Shavit says that the firm is receiving substantially more work through its association with McGuireWoods than it did under previous informal relationships. ‘We are working with our partners to build new deals that otherwise would not be here,’ he states.

Shavit says that the firm is developing further ‘co-operations’ in France, China and South America.

Israel was ranked 41st by size of GDP in 2010 by the International Monetary Fund, yet its exposure to cross-border M&A and investment means that it is increasingly becoming a focal point for the international legal community. The rapid growth of Israel’s top firms over the last few years and the nation’s resistance to the global financial crisis and economic downturn means that the

‘We’ve recently seen much more interest shown by foreign banks looking at Israel.’

Moriel Matalon, Gornitzky & Co

outlook remains impressively positive. The only blot on the landscape is Israel’s security.

With ongoing tensions with its Middle East neighbours, particularly Iran, Israel still has to work hard to convince investors that it is a safe haven.

Until now foreign banks have taken a very limited role in Israel fi nancings, but Moriel Matalon, the managing partner of leading Israeli firm Gornitzky & Co, says that Middle East tensions are still a major source of concern for international investors: ‘It is an interesting place for foreign players with the only setback being the political or security issues. The question of Iran is still in the air.’

However, Matalon has already noted a changing sentiment among the foreign and international banks: ‘We’ve recently seen much more interest shown by foreign banks looking at Israel for private wealth but also to participate in financing of major transactions.

In most cases they will probably try to join a consortium of banks with the local bank acting as agent or organiser. When will we see local banks taking a smaller part and letting the foreign banks take a much larger role? I believe with Israel joining the Organisation for Economic Co-operation and Development (OECD) and with banks seeing beyond the security situation or political crisis, I think that the risk attributed to Israel will be minimised.’

With foreign investors and financiers becoming ever more comfortable with the Israel story, it is not surprising that the jurisdiction’s impressively international legal community continues to grow. LB chris@crowemedia.co.uk

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OPEN SEASON As Israeli conglomerates are forced to divest assets due to impending regulations, the country is poised for yet another wave of cross-border M&A CHRIS CROWE u

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Photograph SHUTTERSTOCK

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W

hile many nations in the Middle East witnessed full-scale revolution in 2011, Israel was experiencing civil unrest for more prosaic reasons: the cost of cottage cheese.

In the summer of 2011 a Facebook campaign launched by Israelis against the rising cost of food products spilled onto the streets. The protestors blamed an over-concentration of economic power within Israel’s handful of large business conglomerates.

Israel is a young nation with a developing economy. As it moved towards a Westernstyle capitalist model over the last 20 years, a number of wealthy families developed giant business empires spanning various industries from financial institutions through to food manufacturers, retail outlets and construction companies.

For years the Israeli government had allowed these conglomerates to operate without interference but, given the public antipathy towards rising food and housing costs, and other welfare issues, the tide turned. The thousands of people who took to the streets in Jerusalem, Tel Aviv and other Israeli cities had finally caught the attention of the government.

In February this year, the governmentappointed body charged with dealing with the issue, known in Israel as the Concentration Committee, published its final report.

Although legislation has yet to be enacted, the report indicates that Israel’s major conglomerates will have to be disbanded, in part at least. And with tighter regulations being imposed on business tycoons having multiple business assets under one pyramid holding structure, Israel is bracing itself for a wave of foreign investment.

Moriel Matalon, managing partner of leading Israeli firm Gornitzky & Co, believes that the report signals a milestone in Israel’s economic life cycle. ‘I think we are witnessing a very interesting process with an attempt by the regulators to increase the distribution of wealth in Israel by requiring some of the major groups to disassociate themselves from some of their holdings. It is quite a unique process.’

Simon Jaffa, a founding partner of Israeli law firm Barnea & Co is expecting to see foreign acquirers taking advantage of this economic restructuring. ‘If people have to divest, then their main motivation will be to sell at the highest price possible. It may be that to get the better price they will have to sell to an overseas buyer rather than trying to sell locally,’ he explains.

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And the significance of cottage cheese?

A staple of the Israeli breakfast table, it was reported to have become twice as expensive as in New York. The Israeli media is prone to illustrating the expense of various products by comparing local prices with those in other countries. Jaffa says that Israeli-manufactured soup croutons were discovered to be half the price in America than they were at home. More protests are expected this summer.

He believes that Israel’s existing competition law is inadequate for managing the power of the conglomerates. ‘It stops competition being further reduced, but doesn’t necessarily increase competition,’ he states.

‘There is no doubt that the foreign banks are making their presence felt, but there are still regulatory obstacles to deal with before they can compete.’

Cliff Felig, Meitar Liquornik Geva & Leshem Brandwein It now looks certain that Israel’s large multi-layered conglomerates will be broken up.

The degree to which they will be taken apart is yet to be defined, but it is inevitable that Israel’s already buoyant M&A environment will be further invigorated by the imminent new regulations. Israel’s tycoons are expected to be given a deadline of four years to adhere to the legislation.

For the legal sector at least, it provides numerous opportunities for domestic and cross-border M&A, and also a chance to build relations with the companies that are changing ownership.

PREYING ON THE MARKET Nimrod Rosenblum, a partner at Epstein Rosenblum Maoz (ERM), says that foreign

investors are already identifying opportunities to acquire assets that are on the market or may be coming onto the market. ‘Quite a few of our international clients as well as a number of international law firms with which we work, have asked us about this,’ he explains. ‘We are trying to tell them what we think will happen and what opportunities will become available in the market.’ He also concedes that some of the firm’s domestic clients may be forced to sell assets.

The prospect of the Israeli economy being opened up to greater competition, including an inevitable influx of private equity and strategic buyers, has also grabbed the attention of international law firms.

Freshfields Bruckhaus Deringer recently issued a briefing that stated that ‘these reforms are likely to change the current Israeli M&A landscape and in particular create opportunities for foreign acquirers’. There’s also likely to be a spike in outbound work too: with Israel’s tycoons being forced to sell-off part of their business empires, they are likely to use the proceeds to invest overseas.

Adir Waldman, managing director of Freshfields’ Israel focus group in Tel Aviv, believes the new regulations are going to have a profound effect on the economy.

‘What the final regulations will look like when implemented remains to be seen,’ he says. ‘Having said that, it is clear that the government is committed to breaking up some of the cross-economy conglomerates, particularly those that control both financial institutions as well as non-financial companies. I expect quite a lot of Israeli capital to flow abroad. The capital raised from enforced disposals will be deployed abroad and there will also be a lot of foreign capital entering the economy.’

Waldman suggests that foreign investors will discover that expected new regulations will work in their favour, as Israeli tycoons will now be prevented from holding multiple business assets through their notorious pyramid-structured holding vehicles, which comprise holding companies with subsidiaries and further subsidiaries of these subsidiaries.

‘Foreign private equity funds or strategic buyers will be able to enter into one of these positions in a way that other Israeli conglomerates can’t, because they’ll be facing the same restrictions,’ he says.

The pyramid ownership structures employed by Israeli conglomerates have also led to deep concerns over corporate u

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u governance and investor protection. Many

INWARD AND OUTWARD

of the conglomerates are believed to have a controlling shareholder with the power to transfer resources between companies on a whim. Consequently the government and its committee are intent on boosting the influence of minority shareholders. With financial institutions operating the same pyramid structure as non-financial corporates and borrowers, this is also thought to be a threat to Israel’s financial stability.

For business magnates such as Muzi Wertheim, who owns a dairy business and a Coca-Cola bottling company, as well as the nation’s fourth largest bank, this initiative to break-up Israel’s conglomerates has very serious implications. Nochi Dankner, chairman and controlling shareholder of IDB Holdings Corporation, has indicated that this process is more likely to unsettle the financial system than protect it.

As with any efforts to promote competition and to prevent corporate and financial power being concentrated in too few business groups, there are inevitable openings for foreign investors and acquirers. Holding companies are likely to exit some of their Israeli businesses so that they can comply with what is expected to be a four-year deadline imposed by the Concentration Committee.

The proceeds from these disposals will need reinvesting and with tighter ownership restrictions on cross-economy conglomerates, Israel’s leading business tycoons are expected to look abroad rather than at home.

Local buyers are also likely to struggle to raise additional capital to make acquisitions, according to Jaffa. ‘It may be difficult for them to raise the capital required to make big acquisitions,’ he says. ‘If you look at the major banks, they are all held by the same oligarchs

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and magnates, so you still have the same problem of over-concentration.’

This means that foreign investors and acquirers are in a prime position to pick up some of the assets on sale. Private equity houses are known to be circling, particularly as several have made successful investments in Israel already. Last year, European private equity fund Permira acquired Israeli drip irrigation systems manufacturer Netafim for $870m. Zellermayer Pelossof Rosovsky Tsafrir Toledano & Co, represented Permira and Fischer Behar Chen Well Orion & Co acted for the sellers. Blackstone Group was recently reported to be in preliminary talks to acquire Avgol, an Israeli manufacturer of nonwoven fabrics. Apax Partners has also been active in Israel, having acquired food maker Tnuva and Psagot, Israel’s largest investment house.

With private equity funds struggling to attain the necessary leverage to make acquisitions in the US and Europe, and with them now looking at alternative markets, the potential upheaval in the Israeli economy represents an attractive opportunity.

‘If people have to divest, then their main motivation will be to sell at the highest price possible.’

Simon Jaffa, Barnea & Co

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ISRAEL

In addition, foreign banks, for so long excluded from financing acquisitions in Israel, may soon take a bigger role. ERM’s Nimrod Rosenblum says that the wave of new regulations proposed by the Concentration Committee is likely to hinder Israel’s banks. He explains: ‘The main target of the government through the Concentration Committee is to prevent concentration in the market and the systemic risk associated with it. If a business group is to sell, for example, a large insurance company following the recommendations, it may well be difficult for an Israeli bank to finance such acquisition by itself. It means you have an Israeli bank which substantially owns or has a large exposure to a large insurance company, which may result in systemic risk. This may create opportunities for foreign financial institutions.’

Even so, Cliff Felig, a partner at leading Israeli firm Meitar Liquornik Geva & Leshem Brandwein, says that foreign banks are still going to encounter barriers and so far they have only really penetrated the project finance segment in Israel. ‘There is no doubt that the foreign banks are making their presence felt, but there are still regulatory obstacles to deal with before they can compete head to head with the domestic banks,’ he says. ‘Withholding tax on interest is a real issue. Will the government allow the banks to compete? Most governments would want to encourage the flow of foreign capital into the country, but it is still an open question.’

RISKS AND OPPORTUNITIES For the domestic legal market, this imminent regulatory crackdown delivers risks as well as opportunities. All firms will welcome a wave of M&A activity resulting from the enforced asset sales, yet several have remained the preferred

‘It is clear that the government is committed to breaking up some of the cross-economy conglomerates.’

Adir Waldman, Freshfields Bruckhaus Deringer counsel of one or two conglomerates for years and as a result may lose part of their day-today practice when businesses are sold. Israeli companies do not employ large in-house legal teams and typically will not have a legal panel in place. Relationships between a law firm and client are still often among two individuals; a senior partner at the firm and a senior executive or owner of a business.

With numerous Israeli businesses poised to come under new ownership, this not only represents a shake-up of the economy, but also a potential reshuffle of the legal market. A partner at one of the top firms in Israel admits: ‘A lot of Israeli public companies are closely held by a dominant shareholder who calls the shots on legal counsel. I think this regulatory change is very good for all the medium-sized firms in the market.

There is a lot of opportunity there. I also sense that there will be an additional cultural shift. There is already pressure in Israel for companies to change

their accountants every few years and this may well filter down to legal advisers as well.’

Even so, Gornitzky’s Matalon says that the big firms have not necessarily enjoyed an exclusive hold on legal instructions coming out of one conglomerate. He says that Gornitzky represents roughly a third of Israel’s major business groups and about half of the 12 Israelis listed on Forbes’ billionaires list, yet he stresses that the firm is far from being the sole counsel to each entity.

‘It’s been increasingly the case in recent years that when it comes to a major transaction, the parties will look around for firms to bid for the work. It could be on fees, but they will look into the ability to perform and the merits of the law firms. Major transactions are all subject to some kind of competition among firms,’ he explains.

For firms merely seeking to ride the wave of M&A activity resulting from the economic shakeup, the prospects are bright. ERM’s Rosenblum is particularly upbeat about this. ‘We are positioned as an international firm in Israel – about 60% of our clients are not Israeli,’ he comments. ‘We are being more proactive in telling our clients about the opportunities here and updating our clients on the current situation.’

In March this year, Rosenblum and his team advised Italian insurance giant Assicurazioni Generali on the sale of its controlling stake in Tel Aviv Stock Exchange-listed Migdal Group to Shlomo Eliahu Holdings. Rosenblum expects a flurry of Israeli financial institutions to change ownership in the coming years.

So, while the Israeli government plans to break the vice-like grip the large conglomerates have on the domestic economy, a radical transformation of the legal market in the country seems more than likely. LB chris@crowemedia.co.uk

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