Israeli businessmen, such as Shaul Elovitch, Chaim Katzman, Gershon Salkind,
Nathan Hetz, Eli Barkat, and Zadik Bino may wake up one morning to discover that
they, too, are part of the problem of over-concentration in the economy, and
that the Committee for the Promotion of Competition in the Economy (aka the
Concentration Committee) is aggressively targeting them.
committee was set up in October 2010, it was clear tycoons such as Nochi Dankner
and Yitzhak Tshuva would take the brunt. They control huge conglomerates whose
subsidiaries operate in many sectors of the economy, including sectors with
little competition. It was therefore clear they were waiting tensely to see how
the Concentration Committee’s recommendations would affect their
The committee came through, recommending that Dankner’s IDB
Holding Corp. sell Clal Insurance Enterprises Holdings Ltd., and that Tshuva’s
Delek Group sell The Phoenix Holdings. It even recommends that Bino will have to
choose between Paz Oil Company and First International Bank of
But alongside these predicted recommendations is an entire
chapter that will have a massive effect on at least a third of the companies on
the Tel Aviv 100 Index. Some of these companies are subsidiaries of IDB or Delek
Group, but 18 of them do not readily come to mind when concentration in the
economy is the subject of conversation. They are the “gap companies,” companies
in which, because of the ownership structure, a shareholder with a small stake
has a high proportion of the voting rights, giving de facto control. They will
have a special corporate governance regime, an Israeli
“Several large conglomerates operate in Israel, and their
common denominator is a pyramid structure,” says the report. “Pyramids are
common around the world, but the committee was surprised to discover the greater
extent of the phenomenon in Israel, in terms of the pyramid’s depth and their
size relative to the economy.”
The committee said these pyramids should
be dealt with, and set out some rules for doing so, with the goal of reducing
the power of their controlling shareholder.
The public companies were
taken by surprise.
“I called the CFO of one gap company to talk to him
about this, and he didn’t even know that his company would be affected by the
recommendations,” a capital market source told Globes.
Sources at the gap
companies are infuriated by some of the Concentration Committee’s
“Some of the measures are simply hallucinatory. If I
hadn’t read them, I would have believed it. It would be better to nationalize
the companies rather than apply these rules,” one executive said.
the Concentration Committee’s recommendations for the gap companies could have
far-reaching implications for the management of public companies. Below are the
three most problematic proposals: 1. Expansion of the matters for which a
general shareholders meeting must be convened
The Concentration Committee
recommends that the shareholders of gap companies must approve large
acquisitions, the acquisition of the controlling core of another public company
and the raising of a large amount of capital or debt, including by a subsidiary.
The expansion of topics is designed to strengthen the position of the minority
shareholders. On the face of it, the recommendation adds red tape, possibly
leading to legal complications, which could paralyze business.
that I’m in talks on a large acquisition, and I’ve already agreed on all the
details, but then I have to tell the seller, ‘Wait, I now must wait 45 days for
a general shareholders meeting to approve the deal. I’ll get back to you when I
have the votes.
Who will wait such a long time for me? The need for
approval by a general shareholders meeting will result in us competing on deals
with our hands tied behind our back,” an executive at one company told
“And what will my competitors do while I’m waiting for
shareholders’ approval of the deal? Sit quietly?” Shareholder approval of debt
and capital offerings could also push gap companies into a corner.
shareholders meeting could reject a debt offering, and instead demand that we
sell assets to finance the company’s business. Does the regulator understand
these consequences?” continued the executive.
Another contention against
the great power given the shareholders is that, ultimately, the vote of minority
shareholders is usually decided by the consultants to institutional investors
(headed by Entropy Consultants Ltd.), which publish recommendations on how to
vote at shareholder meetings.
Institutional investors usually abide by
“With all due respect, they are not managing the
company, and they cannot fully understand the issues, but in the end, they will
have a massive influence on the company’s dayto- day conduct.”
some more problems. Do institutional investors know who to run a company better
than the CEO and controlling shareholders? What is the investment institutions’
responsibility for the consequences of decisions? What about investment
institutions’ conflicts of interest, as some of them are likely to be
shareholders in competitors of the company seeking to obtain approval for a
major move? 2. Mandatory offer to purchase
The Concentration Committee sets out
two instances in which the controlling shareholder must publish an offer to
purchase. The first is the sale of the controlling core in a deal that will turn
the sold company into a gap company. In such a case, the new controlling
shareholder (the buyer) must make the public shareholders an offer to buy their
shares at the same price at which he bought the shares of the previous
controlling shareholder. This proposal would enable the public to benefit from a
company’s added value.
In the second case, in which the controlling
shareholder must make an offer to purchase to the public is more problematic.
The committee proposes that if the controlling shareholder rejects an offer from
a third party to buy his shares, the controlling shareholder must make an offer
to the public shareholders to buy their share at the price he
The controlling shareholder is not always required to submit an
offer to buy under these circumstances. The Concentration Committee lists
conditions, such as that the company has been traded on the TASE for at lease
seven years and the offer is 10 percent above the market price. Nonetheless,
there are circumstances in which the controlling shareholder will be compelled
to make the offer to purchase, even though it is not clear if that’s the correct
thing to do from an economic point of view, of if he has the wherewithal to do
For example, had Nochi Dankner rejected the offer by Leo Noe and
Yakov Shalom (Shulem) Fisher for the controlling interest in Shufersal, he would
have had to publish an offer to purchase the public’s shares in the national
supermarket chain at the price he had rejected. Would it be right for the
already highly leveraged IDB to buy more Shufersal shares? Wouldn’t this
increase IDB’s risk, and harm its bondholders and shareholders, who are, in the
end, the investors? Worse, the proposal is open to manipulation, especially in
times of crisis.
“There will be institutional investors who will exploit
this clause to submit offers at a ridiculous price, since prices on the TASE are
already low, in order to take over companies, because the controlling
shareholders will prefer, or be compelled, to sell, rather than submit an offer
to purchase at the price offered,” a company source told Globes.3.
Changing the vote-counting at general shareholder meetings
To prevent a
controlling shareholder who indirectly owns only 20% of a company, but whose
weight in the shareholders meeting is 40% (the size of the holding of the parent
company through which the controlling shareholder controls the gap company), the
Concentration Committee recommends capping the controlling shareholder’s vote to
the indirect stake in the company, i.e. 20%. This proposal is legally
problematic, since it effectively annuls the votes of the minority shareholders
in the parent company.
The Concentration Committee is aware of the
problem, which is why it says the proposal is open to comments from the public.
Sources doubt the proposal will pass.
The Concentration Committee’s
recommendations have not yet been officially submitted. Last week, it announced
an extension for the public to respond to the recommendations until November 27.
The cabinet will discuss the proposals in December, after which the legislative
process will begin, and will likely continue through the summer of
The companies defined as gap companies have no intention of
conceding anything, and some of their controlling shareholders intend to submit
their reservations about the recommendations.
“Israel is the only country
that intends to enact such rules for gap companies,” a company source
“Initially, they wanted Israel to be like the rest of the world, so
they applied International Financial Reporting Standards. Now they’re inventing
a new business method, using us as the experiment. We won’t accept this, and
we’ll go to court to fight it.”