The US-Israel legal review 2022


A GLOBAL LEGAL MEDIA & NISHLIS LEGAL MARKETING PUBLICATION THE US-ISRAEL LEGAL REVIEW 2022 IN ASSOCIATION WITH: Israel’s Unicorn Success Story SNNOVATION The US-Israel Legal Review 2022 1 Contents THE US-ISRAEL LEGAL REVIEW 2022 2 WELCOME FROM THE PUBLISHERS Global Legal Media and Nishlis Legal Marketing 4 ECONOMIC HEADWINDS, A HOT WAR AND A TRADE WAR: THE IMPACT ON ISRAEL’S COMPANIES With rising interest rates, rising inflation and reduced growth forecasts, how has that reality been faced by corporate clients and start-ups? Arnon, Tadmor-Levy provide some answers. 8 STRATEGIES FOR SUCCEEDING IN CALIFORNIA what it takes to succeed in California’s diverse and thriving economy – By The California Israel Chamber of Commerce 10 THE NEW ISRAELI FRONTIER – THE SOUTHEAST UNITED STATES The U.S. has long been a hotbed for Israeli startups. Now the Southeast region aims to leverage its heavy corporate base to emerge as the new landing ground for Israeli innovation – By Conexx: America Israel Business Connector 14 ISRAEL’S UNICORN SUCCESS STORY As the world faces economic uncertainty, rising costs, and inflation, the tech scene in Israel offers optimism and relief - By The US-Israel Legal Review 20 ISRAEL DESKS LEAGUE TABLES 2022 The fourth annual edition of Israel Desks League Tables showcases those law firms that are not only involved in Israeli deals and with Israeli clients, but also with a deep understanding of market trends, of their clients’ opportunities, and the challenges to overcome. 60 GENERAL COUNSEL IN THE SPOTLIGHT Cyber attacks stood as the biggest corporate risk in 2022. In this Q&A, Sigal MegedRosen, Israel-based GC for Cyberbit, gives an insight into her role at this leading cyber skill development and training company. A LEGAL GUIDE TO US-ISRAEL INVESTMENT: 64 ISRAEL – CIVIL LITIGATION Civil Litigation in Israel in Theory and Practice – By Arnon, Tadmor-Levy 70 US – DISTRESSED INVESTING Distressed US assets present unique investment opportunities for those willing to accept certain levels of risk and create value – By Chapman 76 US – CAPITAL MARKETS Direct Listings: A Viable Alternative to Traditional IPOs – By Davis Polk 82 ISRAEL – MERGERS & ACQUISITIONS Israeli M&A: Asset Purchase Transactions - By Erdinast, Ben Nathan, Toledano & Co., With Hamburger Evron 88 US – ARBITRATION A Review of Leading Developments in U.S. Courts That Impact International Arbitration– By Fox Rothschild 94 ISRAEL – INSOLVENCY Cross-Border Insolvency Proceedings in Israel – By FWMK 100 ISRAEL – TAX Business Model Change Tax Assessments: Recent Court Update – By Gornitzky 106 ISRAEL – DATA PRIVACY Navigating Through the New Privacy Regimes Under EU and US Laws – By Herzog Fox & Neeman 112 ISRAEL – HIGH-TECH Desert Tech as the Next Investment Opportunity - and Israel’s High Tech Contribution – By Lipa Meir & Co. 118 ISRAEL – INTELLECTUAL PROPERTY How Was 2022 for Israel in Intellectual Property? – By The Luzzatto Group 124 ISRAEL – VENTURE FINANCING Trends in Legal Terms in Venture Financings in Israel: H1 2022 Survey – By Shibolet 130 US – MERGERS & ACQUISITIONS Reality Check: Reviewing M&A Activity in 2022 – By White & Case Co-Publishers: Global Legal Media Danny Collins, Deepak Vohra [email protected][email protected] Nishlis Legal Marketing Idan Nishlis [email protected] 2 The US-Israel Legal Review 2022 Whichever way you slice and dice it, these are challenging economic times around the world, and yet one trade relationship is holding up well. Very well. The US-Israel trade relationship continues to show some strong numbers – backed by the interest of US VC firms in Israel and its technology - and this ripples out to visits by delegations from various individual states in 2022, such as Arizona, Missouri, Connecticut, as well as many binational collaborations in science and technology, addressing the key issues of the day. According to the US Census Bureau, in 2022, US exports to Israel edged up slightly to USD 14.2 billion from USD 12.9 billion (2021) and USD 11.2 billion (2020), while imports FROM Israel widened to USD 21.4 billion, a large jump from USD 18.6 billion (2021) and USD 15.2 billion (2020). The globally recognized tech sector in the Start-Up Nation is not hard to see why. In this edition, we speak to some of the most prominent law firms and thought leaders to take a deep dive into the success of Israel’s unicorns, across a broad range of sectors, and their sales to US companies or listings on Nasdaq, examining the factors for its success, the opportunities, and challenges ahead. With approximately 160 international law firms active for their clients in Israel-related work, the Israel Desks rankings showcase what these law firms and their clients have been up to, ahead of the next round of rankings, and show why this relationship continues to prosper. The Review is a co-publishing venture from the teams at Global Legal Media and Nishlis Legal Marketing. Global Legal Media is a strategic legal and professional services BD and marketing consultancy whose founders have several years’ combined experience working with leading law firms around the world and at the most respected legal publications across the US, UK and Asia. Nishlis Legal Marketing is the premier legal marketing and business development consultancy in Israel, for leading Israeli law firms and foreign law firms venturing into Israel. A truly bilateral relationship for a bilateral publication. We are grateful to our contributing law firms for providing their expertise and insight to illuminate a full range of issues arising from the US-Israeli commercial relationship. The US-Israel Legal Review will be read at law firms, in-house legal departments and in the tech sector across both jurisdictions. If you would like to participate in the next edition, please feel free to contact us at the email addresses below. We hope you enjoy the publication. Danny Collins Idan Nishlis Director / Global Legal Media CEO / Nishlis Legal Marketing [email protected][email protected] Welcome Dear Colleagues, We want to thank our exceptional partners, Israeli and International law firms, who supported the corporate counsel community in Israel during the challenging times of Covid-19, hosting phenomenal webinars, workshops and meet-ups – we couldn’t do it without you. THANK YOU FOR STICKING AROUND! Agmon & Co. Rosenberg Hachohen & Co Asserson Law AYR - Amar Reiter Jeanne Shochatovitch & Co Barnea Jaffa Lande Erdinast, Ben Nathan, Toledano & Co. FISCHER (FBC & Co.) Goldfarb Gross Seligman Gornitzky GNY Greenberg Traurig LLP Herzog Fox Neeman Lipa Meir & Co. Firon Meitar Naschitz, Brandes, Amir and Co. Pearl Cohen Zedek Latzer Baratz S. Friedman &Co. S. Horowitz & Co. Salomon Lipschuts Shibolet & Co. Simmons & Simmons Sullivan LLP Tadmor Levy & Co. Yigal Arnon & Co. Yours truly, Edva Liveanu Justo Region Counsel East Europe, Turkey, and Israel ACC Israel President and Chairwoman ACC is the Association of Corporate Counsel, a global organization based in the United States with more than 45,000 in-house corporate lawyers in 85 countries around the world. ACCI is the Israeli chapter of the ACC and the only In-House association in Israel with 1,700 legal counsels involved in our intensive activities. 4 The US-Israel Legal Review 2022 ISRAEL: INTRODUCTION Rising interest rates, rising inflation and reduced growth forecasts have been felt in Israel just like the rest of the world. The financial effects of Covid-19, which were well-hidden during the first two years of the pandemic, began to surface as restrictions were lifted and governments reduced the financial aid they had provided to businesses, believing that businesses no longer needed financial assistance to remain solvent. The combination of the reduced financial aid, the worldwide supply chain complications caused largely by Covid-19, the Russia-Ukraine war which broke out in February 2022, and the trade war intensifying between China and the U.S. caused prices of goods and services to skyrocket, which quickly led to higher interest rates. The public markets were affected almost immediately. During 2022, the NASDAQ-100 Technology Sector Index (consisting primarily of technology companies) and the BVP Nasdaq Emerging Cloud Index (designed to track the performance of emerging companies providing cloud software and services) were practically sliced in half. Israeli companies traded on NASDAQ were not spared and saw their valuations significantly reduced as well. According to reports, Israeli companies that went public during 2021 saw a steep 65% drop in valuation compared to their valuations in December 2021. Moreover, IPO processes ground to almost a complete stop and the popular SPAC vehicle essentially disappeared instantly. Increased interest rates and market instability left their mark on the private markets as well. Traditionally, private markets take approximately one quarter to catch up with public-market trends, and by the second quarter of 2022 growth numbers that had looked fantastic during 2021 were no longer as rosy. Frothy valuations attributed to companies during 2020 and 2021 simply could no longer be justified. This resulted in a steep decline in venture funding of Israeli companies over the course of 2022, reaching a decline of 77% yearover-year in total funds raised and a decline of 57% year-over-year in total number of transactions. Investors were quick to warn founders of the current macroeconomic environment. Many of them even published memos and letters to their portfolio companies, encouraging them to cut costs, shy away from seeking growth at any cost, and focus on what they referred to as the ‘fundamentals’. Investors, many of whom were only marginally involved in managing their portfolio companies as valuations soared in 2020- 2021, were now demanding of their founders a healthier businesses model involving reduced costs and delayed fundraising. Founders were told that only those who achieve these goals will likely survive the current turmoil. Companies that are not at a profit generating stage remain completely dependent on fund raising and will likely have to adjust their valuation expectations while also better articulating their market-fit in order to draw attention from potential investors. The new reality requires start-up companies to become more efficient. This mainly means Investors will expect founders to spend less in order to increase their profitability. This is obviously easier said than done when large Economic Headwinds, a Hot War and a Trade War: The Impact on Israel’s Companies With rising interest rates, rising inflation and reduced growth forecasts, how has that reality been faced by corporate clients and start-ups? The US-Israel Legal Review 2022 5 corporations are also looking to cut their own expenditure, causing corporations to think twice before purchasing products and services from tech companies. Sale cycles have also grown considerably longer which founders will need to take into consideration as they seek to expand their customer base during these times. The M&A market remained fairly active during 2022, but the numbers were somewhat misleading. The total deal-count was similar to 2020, yet significantly lower than 2021. And while the total value of M&A activity in Israel in 2022 was significantly higher than in 2021 ($18 billion in 2022 in comparison to $11.6 billion in 2011), it was drastically affected by two large transactions – Intel’s $5.4 billion acquisition of Tower (in which our firm represented Intel) and Unity’s $4.4 billion acquisition of IronSource, the combined transactions encompassing more than 50% of the total value of 2022 M&A activity in Israel. It remains to be seen how the challenging economic conditions affect the M&A market in 2023, but the challenging economics circumstances for technology companies present acquisition opportunities for larger, more stable businesses, and many predict a consolidation of businesses that will increase the deal count. HOW HAS U.S. INVESTMENT IN ISRAELI COMPANIES AND STARTUPS BEEN IN THE PAST 12 MONTHS? The most noticeable impact and the brunt of the overall decrease in investments has come from the significant reduction in growth and mega-financing rounds (i.e., financing rounds of over $25 million). This reduction was caused mainly by an almost complete disappearance of foreign investors, who were extremely active in leading growth and late-stage financing rounds in 2021. These investors have dramatically curtailed their investment activities in Israel during 2022. An astonishing 70% of the investors who lead financing rounds in Israeli companies during 2021 were making their first Israeli investment. And they were not wetting their feet with seed investments; they were jumping right into the aforementioned growth and late-stage financing rounds, contributing tremendously to the fantastic 2021 investment figures. At times, it seemed like all investor spotlights were shinning on the Startup Nation, typically known for its political conflicts and only rarely receiving the respect it should be getting for being the technological powerhouse it has been for years. But this past year has been a completely different story, with only 15% of those investors coming back to lead financing rounds in 2022. WHICH SECTORS ARE ATTRACTING INTEREST, AND WHICH ARE RIPE FOR GROWTH? Technology is not disappearing from our lives, and investors will continue supporting and fostering technological growth. The pace of investment activity might be slower and the amounts invested might be lower, but it is safe to assume that investments will continue to fuel most sectors. In particular, cybersecurity was the most active tech sector in Israel in 2022 by far, both in terms of deal-count and total money raised. It is reasonable to assume that the sectors that are practically recession-proof, such as cybersecurity, BARAK PLATT LEADING PARTNER, ARNON, TADMOR-LEVY DANIEL DAMBORITZ PARTNER, ARNON, TADMOR-LEVY 6 The US-Israel Legal Review 2022 ISRAEL: INTRODUCTION will continue to lead the way. Sectors and solutions that are a necessity rather than a ‘nice-to-have’ will likely be better positioned to continue growing even during the coming year. Machine learning and artificial intelligence are expected to continue remaining a strong source of growth as they have proven they are the core of technological growth. Technologies that optimize cloud and business processes are also expected to continue supporting businesses worldwide and remain ripe for growth. WHAT STEPS WOULD YOU LIKE TO SEE TAKEN TO STIMULATE THE ECONOMY, AS IN PREVIOUS RECORD YEARS? Investors are all talking about this past year being the big cool-down year, the reality check, the return to normalcy and a come back down to earth period after a couple of years of star gazing. Interestingly enough, though, much of the star gazing was caused by investors dreaming big and shooting for the stars as companies were showing fantastic growth numbers. And in an interest-free market, those numbers were indeed incredible and often justified the valuations attributed to companies. However, the new reality affects both founders and investors albeit in different ways. Founders are suddenly finding themselves scrutinized by their investors if they do not hit their KPI’s and are now more often criticized for their (lack of) managerial skills. Numerous founders have admitted that they often now find themselves walking into board meetings to be surprised by investors suddenly applying pressure in a way they have not previously felt. Investors are concerned that as their portfolio companies need to raise additional funds, they will need to do so at reduced valuations. And financing rounds at reduced valuations reflects negatively on the performance of the funds. Justifying previous valuations is going to require investors to embrace their founders, roll up their sleeves and contribute their knowledge and experience to help their founders better define market-fits, cut costs, identify and pursue business opportunities and revenue channels and build better paths to profitability. It is important to note that the slow-down has affected Seed and Series A investments as well, and the number of early-stage investments has declined significantly. Investors have become extremely cautious with deployment of funds and investments into new ventures, leaving the market to wonder if investors are self-guessing new technologies, founders or themselves. The good news, at least for the next few years, is that there’s enough dry powder (i.e., money waiting to be deployed by investors) to continue investing and stimulating the economy. We believe as the new reality sinks in founders and investors will start finding company valuations they can both agree upon which will allow the pace of investments to resume. One can assume that it will take some time before we see the number of investments we got accustomed to during 2020 and 2021, and one can further assume it will take even longer, if ever, before we see the check sizes and valuations that accompanied those transactions. But there is plenty of room for hope and optimism. n ABOUT ARNON, TADMOR-LEVY Arnon, Tadmor-Levy is a preeminent Israeli law firm. With approximately 450 lawyers and interns, including 140 partners, the law firm of Arnon, Tadmor-Levy is a leader in its areas of practice. The firm offers diverse legal services and a proven track record of success to its clients, which include many of Israel’s largest companies, government and public entities, premier investment funds, and leading multinational corporations. Our High-Tech practice is the premier provider of legal services to the high-tech ecosystem of the “StartUp Nation.” We represent hundreds of active startups at all stages of development, from concept to post-IPO, their financial backers and Fortune 500 tech companies from around the world. As one of the most respected and dynamic law firms in Israel, we are known for our innovative approaches to solving clients’ problems and our outstanding client service and have assisted in many of the largest and most complex transactions in Israel. With our focused practice groups (corporate, securities, tax, labor, real estate and intellectual property, among numerous others), Arnon, TadmorLevy combines the expertise of a specialty boutique practice with the advantages of a large, well-resourced, multidisciplinary law firm. The US-Israel Legal Review 2022 13 The California-Israel Chamber of Commerce (CICC) is an industry-supported nonprofit organization dedicated to promoting and strengthening business, investment, research and entrepreneurship between Israel and California. The CICC offers an extensive range of services including connections to the hi-tech ecosystem through our events program, conferences, investment forums, roundtables, educational seminars, trade missions and much more. Join the Tribe Leadership in action WWW.CI-CC.ORG [email protected] 8 The US-Israel Legal Review 2022 US-ISRAEL TRADE The California Israel Chamber of Commerce (CICC) is a nonprofit, industry-supported organization dedicated to promoting and strengthening the technology and trade relations between the business communities of California and Israel. With its wide and dynamic network of over 10,000 entrepreneurs, companies, business executives, investors and service providers, the CICC provides a networking platform for joint venture programs between the two communities. Through networking events, personalized introductions, mentorship programs, investment forums, round-tables, educational seminars and delegations, CICC contributes to a stronger business and commercial alliance between California and Israel. The California Israel Chamber of Commerce (CICC) is a platform for global corporations and investors to connect with leading Israeli tech companies through personalized introductions, networking events, forums and delegations. In general, the economy of California is diverse and dynamic, with a range of industries including technology, entertainment, agriculture, and tourism. The state is home to many major corporations and is a hub for innovation and entrepreneurship. It is also home to many small businesses and start-ups, which can help drive economic growth and job creation. CICC has partnered with Silicon Valley and global giants such as Salesforce, Intel, Google, Facebook, Cisco, Microsoft, to name a few. Current areas of focus are Life Science & MedTech; Big Data. ML and AI; Cyber Security; Cloud; and Sustainability, Energy & AgriTech. CICC contributes to stronger commercial ties between Silicon Valley, Israel and global companies. California is home to a diverse and thriving economy, with a range of industries including technology, entertainment, agriculture, and tourism. It is also home to many ventures capital firms, corporate, R&D centers, leading universities and of course some of the most enthusiastic and innovative entrepreneurs, which create a special ecosystem that for years help drive innovation. There is no one-size-fits-all answer to what it takes to succeed in California, as success can depend on a variety of factors including an individual’s goals, skills, and circumstances. However, there are some general strategies that can help increase the chances of success in California or any other region. Some of these Strategies for Succeeding in California The California Israel Chamber of Commerce (CICC) is a platform for global corporations and investors to connect with leading Israeli tech companies. In this overview, Executive Director Sharon Vanek outlines what it takes to succeed in California’s diverse economy. California is home to a diverse and thriving economy, with a range of industries including technology, entertainment, agriculture and tourism The US-Israel Legal Review 2022 9 strategies include: • Developing a strong skill set: Building a strong foundation of skills can help increase the chances of success in any career or industry. This may involve pursuing formal education or training, as well as gaining practical experience through volunteering, internships or jobs. In the current situation of massive layoffs, the competition on each open position forces employees to expand their skills and to be visible to potential employers. • Building a professional network: Networking can be a valuable tool for building relationships and making connections in the business world. This can involve attending industry events, joining professional organizations, and building relationships with colleagues and mentors. We invite you to join the CICC’s activities and meet our community of like-minded professionals. • Being adaptable and flexible: The business landscape can change quickly, and it is important to be able to adapt to new circumstances and changing market conditions. This may involve being opened to learning new skills or taking on new roles, and being willing to pivot or change direction when needed. • Having a clear vision and goals: Having a clear sense of purpose and direction can help individuals stay focused and motivated and can also make it easier to make decisions and act. Setting specific, measurable, achievable, relevant, and time-bound (SMART) goals can help individuals stay on track and achieve their objectives. • Seeking professional guidance: Seeking out the advice and guidance of professionals can be a valuable resource for individuals looking to succeed in California or any other region. This may include seeking financial advice from a financial planner, consulting with a business coach or mentor, or working with a lawyer or other professional to navigate complex legal or regulatory issues. Like in any other place, to succeed in business, it is important to stay up to date on industry developments and to be flexible and adaptable in response to changing market conditions. It is also important to have a solid business plan and to carefully consider factors such as location, target market, and competition. If you need any assistance in understanding the California business environment and require some market analyses, please do not hesitate to reach out to our team. n CONTACT Sharon Vanek is Executive Director of The California Israel Chamber of Commerce. If you would like assistance and relevant information regarding the potential of penetrating the Californian market, please contact the California Israel Chamber of Commerce at: 317 West Portal St. PO Box 27625 San Francisco, CA 94127 Email: [email protected] The state is home to many major corporations, small businesses and start-ups, and is a hub for innovation and entrepreneurship SHARON VANEK EXECUTIVE DIRECTOR 10 The US-Israel Legal Review 2022 US-ISRAELI INNOVATION The New Israeli Frontier – The Southeast United States The Southeast is known for its welcoming people and hospitality but not enough Israelis understand that it is the economic engine for many key industry sectors. Combined, six states in the Southeast region (North Carolina, South Carolina, Georgia, Tennessee, Alabama and Mississippi) of the United States would rank among the top six global economies. Throughout the region, a variety of industries continue to show strength and growth, which supports an overall strong economic picture. Some of the Southeast’s top industries include: • Financial technology • Cyber security • Information technology • Biotechnology and life sciences • Healthcare • Energy; both traditional and renewable • Aerospace and aviation • Automotive • Smart mobility • Smart cities • Smart home • Manufacturing • Logistics • Agriculture • Entertainment • Tourism • Casual Dining • Printing COCA COLA, DELTA, IBM, AND BOA - TO NAME A FEW From Fortune 500 headquarters to large manufacturing operations, the Southeast attracts companies in growth mode that want access to an educated workforce, a favorable tax climate, and access to natural resources and infrastructure that support their business. In addition, individuals follow these companies to Southeast locations because of lifestyle and affordability, in addition to the availability of jobs. The Southeast is home to many superior institutions of higher education including the Georgia Institute of Technology, Duke University, Vanderbilt University, Emory University, University of Alabama, University of Georgia, University of South Carolina, University of North Carolina, Memphis State University, among many others. On a global scale, the Southeast’s geography is ideal for companies seeking a hub for conducting commerce both nationally and internationally. The U.S. has long been a hotbed for Israeli startups. Now the Southeast region aims to leverage its heavy corporate base to emerge as the new landing ground for Israeli innovation. The US-Israel Legal Review 2021 11 Southeast markets are readily accessible by land, water and air, and they are connected by intricate networks of infrastructure. The U.S. Southeast Region and its economic engine finds in Israel a nexus of innovation that propels economic competitiveness. Home to The Coca Cola Company, NCR, Mueller Water Products, HCA Healthcare, InterTech Group, UPS, FedEx, Global Payments, Equifax, Bank of America, McKesson, IBM, First Data, Delta Airlines, Home Depot, The Southern Company, AFLAC, Cox Enterprises, ICE, and Truist. Georgia is a major unsung financial technology (FinTech) powerhouse. 70% of global payments comes thought Atlanta. In fact, the region dubbed by the financial world as “Transaction Alley” is beginning to rack up an impressive list of FinTech credentials: • 7 of the 9 largest U.S. card acquirers are based in Georgia.i • 6 of the 10 largest U.S. payment processing firms are headquartered in the state. • The top 20 Georgia-based FinTech companies generate annual revenue of more than $72 billion.i • More than 38,000 professionals in Georgiai (and over 130,000 globally) are employed by Georgiabased FinTech firms. • These companies process over 128 billion transactions (over $5 trillion) per year.i • There are over 20 blockchain companies based in Georgia and at least 10 of Georgia’s large corporations, such as Coca-Cola, UPS and Cox Enterprises are experimenting with blockchain.ii Atlanta is riding the wave of this digital reinvention of payment processing to become a quiet FinTech powerhouse. Developing and being part of vibrant digital ecosystems is the name of the game. ISRAELI INNOVATION IS NO STRANGER TO THE SOUTHEAST The Southeast is a hotbed for prominent Israeli companies with over 150 Israeli companies calling the Southeast their Americas headquarters. The Israeli digital printing industry is housed in metro Atlanta (Indigo, Scitex, Landa Nanotechnology, Highcon, Massivit3D). The Israeli non-woven manufacturing industry is found in North Carolina. Israeli companies Nice, Verint and Amdocs operate in metro Atlanta. There are four Israeli manufacturing operations in South Georgia (Ceasarstone, Haifa Group, Tosaf and Bram Industries). The aerospace/defense industry is anchored in Huntsville, Alabama with Elbit Systems as an industry leader. Research Triangle Park (RTP) in Durham, North Carolina, is the largest research park and premier global innovation center in the United States and houses hundreds of companies, including science and technology firms, government agencies, academic institutions, startups and nonprofits. Anchored by IBM, Cisco, Fidelity Investments, GlaxoSmithKline and RTI International, the RTP houses companies in pharma, logistics, enterprise software, agritech, biomanufacturing, data management, life sciences, sustainable building materials, smart home tech, software development, medical devices, blockchain, cloud, alternative energy and The Southeast is the new frontier for Israeli economic opportunity RANDALL FOSTER CHAIR BARRY R. SWARTZ VICE PRESIDENT 12 The US-Israel Legal Review 2022 US-ISRAELI INNOVATION many more. The Medical University of South Carolina has welcomed Israeli innovation in healthcare including neuroscience. Mississippi has cooperated with Israel around ship building, homeland security, aerospace and vocational training. A number of deals between Israeli companies and Southeast U.S. companies have set milestones in bi-national economic activity. Just a sampling highlights the Southeast as a hub for deals. In 1994 Bellsouth (now AT&T Wireless) became a partner in Israel’s second cellular telephone network Cellcom. In 1995 Blades Technology entered into a joint venture with Pratt & Whitney. Jacada established their North American Headquarters in 1995. Following a Georgia Governor lead trade mission to Israel in June 2000, six Israeli companies including Given Imaging established their Americas headquarters in Georgia. In 2000, Delta and El Al established a code share agreement. In 2001, Gulfstream began a 20 year plus relationship with Israel Aerospace Industries. UPS developed an outsourcing relationship and strategic partnership with Motorola Israel to assure competitive advantage in, at that time, the turbulent courier service industry. HP acquired Scitex Vision for $230m and is now headquartered in Alpharetta, GA along with Indigo. McKesson acquired Medcon for $105m in 2005 and is now Change Healthcare. Delta began direct flights from Atlanta to Israel in 2006. Witness Systems was acquired by Verint for $950m in 2007. Cox Communications acquired much of its broadband cable technology in Israel beginning in 2007. In 2012 IDEA Bio-Medical was sold to the Medical University of South Carolina. Endochoice merged with Peer Medical in 2013. NCR purchased Retalix for $650m in 2013. Most recently, Mueller Water Products acquired Krausz Industries for $140m in 2018 and Clearwave acquired Odoro in 2020. Many Israel startup companies have resided in incubators and accelerators in the Southeast, pioneering construction technology, legal referral technology, healthcare instruction software and remote physical therapy, to name a few. There have been over 10 Southeast – Israel projects awarded Binational Research and Development Foundation (BIRD Foundation) grants in diverse industry sectors. Working in partnership, the Consulate General of Israel to the Southeast, and Conexx: America Israel Business Connector collaborate with State economic development agencies, municipalities, Chambers of Commerce, trade associations, global companies, communal organizations and many other partners/channels to bridge the Southeast to Israel’s dynamic innovation and entrepreneurship ecosystems and to open doors for Israeli companies wishing to enter the Southeast U.S. marketplace. The Southeast is the new frontier for Israeli economic opportunity. n ABOUT CONEXX Conexx: America Israel Business Connector is a non-profit, non-governmental agency committed to connecting Southeast Americans (NC, SC, GA, TN, AL, MS) and Israelis through the vehicle of business. Conexx is one of most successful and effective bi-national business organizations in North America. Since its founding almost 30 years ago, Conexx continues to deliver great value to Israeli companies seeking U.S. market entry and to American companies/institutions/ organizations seeking entry into Israel and access to groundbreaking technologies. Conexx offers a powerful network to help our members promote their products or services to the entire Southeast and beyond. Conexx is uniquely qualified to provide individual, tailored services to companies and individuals looking to do business in Israel or seek expansion or partnerships in the U.S. Working with companies in every industry and vertical, Conexx works with over 150 Israeli companies residing in the Southeast, helps drive investments, deals and employment gain in the region and in Israel. For additional information, please contact Barry Swartz, Vice President, Conexx ([email protected] NOTES [i] TAG FinTech and the Financial Services Innovation Lab at the Scheller College of Business at Georgia Tech, 2018 State of Georgia’s FinTech Ecosystem, May 2018. [ii] TAG and the Scheller College of Business at Georgia Tech, 2019 Blockchain Ecosystem Flash Report, State of blockchain ecosystem in Georgia, 2019. LET CONEXX PLUG YOU IN You maybe be missing a great business opportunity in Israel, and Conexx can help you discover and develop it. For a quarter century, Conexx has introduced the right people and cultivated the right relationships to a  ect billions of dollars in economic development in the Southeast U.S. and Israel. Many of the Southeast’s biggest economic engines and employers have been cultivating business with Israeli companies for years, making use of Conexx’s broad and deep connections. Southern Company, Hartsfi eld-Jackson International Airport, Coca-Cola, IBM, and AT&T understand that if you want a source to all that is Israeli innovation, Conexx is the organization to work with to create relationships and results! ABOUT CONEXX Conexx: America Israel Business Connector is the premier America Israel business connector connecting businesses, investors, and infl uencers with business opportunities and technological developments in Israel. Conexx organizes business exchanges, networking events, and corporate business expeditions to Israel, all designed to inspire and support binational business. CONNEX OFFERS • Scouting in Israel • Industry Sector Expertise and Research • Connections to the Startup Nation • An Israel Advisory Board for connections • Expeditions to Israel DISCOVER THE BEST IN ISRAELI INNOVATION Conexx is uniquely qualifi ed to provide individual, tailored services to companies and individuals looking to do business in Israel. For 25 years, Conexx has successfully helped US companies navigate Israel in every industry and vertical. YOUR BRIDGE TO ISRAELI OPPORTUNITIES It might comes as a surprise that Israel is ranked second by Forbes as best country for innovation. The small, desert country is a hub for technology and its making waves with improvements that touch every industry from healthcare and cyber security to agriculture and artifi cial intelligence. Contact Conexx today to learn more and get plugged in with the best in Israeli business! | [email protected] | 404-843-9426 14 The US-Israel Legal Review 2022 EDITORIAL: ISRAEL MARKET I n Q1 this year, Bloomberg reported over 1,000 unicorns globally, and Israel – with just 0.1% of the global population - accounts for some 8%. In Israel, the number of unicorns is rapidly heading towards the 100-mark. The huge financing deals and large VC funds chasing the next successful investment have raised the value of companies and created unicorns at an unprecedented rate. ISRAELI TECHNOLOGY COMPANIES RAISED ALL-TIME HIGH OF USD 26.6 BILLION IN 2021, OVER TWICE THAT OF 2020 The USD 25.6 billion Israeli firms raised from VC is roughly the same as India, with a 100 times larger population, as well as the UK, the leading innovator in Europe, and half that of the European Union, with more than 400 million people. “At the moment, we’re seeing increased activity at the seed level, new start-ups being formed and new funding available to early stage ventures. We are also seeing Israeli unicorns acquire foreign and local targets that are less optimistic about growth in current conditions or that have remained limited to specific features or single product offering,” adds Yair Geva, head of Start-ups and Emerging Companies at Herzog Fox & Neeman (“Herzog”). BUT WHAT DRIVES ISRAEL’S DISPROPORTIONATE SUCCESS? Israel’s tight-knit entrepreneurial community, strong research and development, educated population and government support, has helped it produce the most start-ups per capita of any country, with nearly 3,000 in Tel Aviv alone. Moreover, every successful ecosystem has institutions which took a leading role in its creation. In many cases, it is either a university, an accelerator or a massive corporation. In Israel, it is the army, which became one of the world’s top start-up accelerators, by accident. There is a tradition and mentality geared towards innovation, where success stories attract more talent and failures generally do not discourage, but encourage additional attempts. Oded Uni, partner at Gornitzky, said: “We see very young students taking computer science and cybersecurity courses at school with a view to be drafted to Israel’s elite technological military units (which, many times, would open the door to a successful hi-tech career). Another reason is what I call ‘the practicality of the invention.’ While in other places we sometimes see a race for the coolest technology, in Israel the unicorns are usually focused on solving real problems which could yield an unbelievable value. Another explanation is that considering Israel’s small size, Israeli startups are set up from inception with an eye towards the global markets. That dictates awareness of market trends and strategic planning customarily found only in more mature companies.” Leading multinationals, growth and earlystage global VCs are now identifying Israel as an unparalleled place of talent and successful innovation. In addition to multinationals such as Google, Meta, Amazon, Intel, Motorola, Medtronic, and many others opening hubs in Israel, now prominent VCs such as Insight Partners, Tiger Global, Blackstone and the Vision Fund are putting people on the ground. WHO IS INVESTING? According to a report by Start-Up Nation Central, an Israeli nonprofit in the technology sector, the Israel’s Unicorn Success Story Boosts Optimism As the world faces economic uncertainty, rising costs, and inflation, the tech scene in Israel offers optimism and relief. The US-Israel Legal Review 2022 15 most active foreign investor in Israeli companies in 2021 was Insight Partners, a New York-based firm that invested in 49 rounds in 2021, up from 17 in 2020. The company’s portfolio includes Israeli success stories like Wix and Monday. com, as well as Shopify and Twitter. American investment firm Tiger Global Management participated in 16 funding rounds in Israeli startups in 2021, up from just three in 2020. Foreign VC funds make up four of the top 10 most active funds in Israel, according to the report. “We are also seeing substantial contribution by existing investors in the financing rounds who wish to maintain their holdings in companies they had previously invested in,” pointed out Yael Benyayer, partner at EBN. “Many, many new funds are closing, new deals are being announced every day,” adds Jeremy Lustman, partner at DLA Piper. “The Israeli market is still on fire, relative to others, but just not at the height we were a few months back.” SOME CAUTION HAS NATURALLY SET IN “These are unique times for Israeli tech, which has demonstrated to date, and in line with historical performance, a high level of resilience to market conditions, but that is naturally facing market challenges similarly to all tech companies,” says Herzog’s Yair Geva. Strategic and financial investors are still looking at Israeli technology and other sectors but with caution. “As before, deals are driven by the potential technological edge, though investors are expected to be now more cautious,” says Amit Steinman, Corporate partner at S. Horowitz & Co. “This is particularly true with respect to assumptions about business models and they hold a more realistic view on synergies, as well as a careful view of capital costs, given these changing conditions.” “In 2022, economic uncertainty and rising interest rates have contributed to a significant slowdown in the global capital markets, with the technology industry among the most heavily impacted,” adds Lee Hochbaum, M&A partner at Davis Polk in New York. “However, given the track record of recent Israeli companies and the surplus of human capital, Israeli companies seem well positioned to capitalize when the markets reopen.” Douglas Getter, head of Dechert’s U.S. corporate practice in Europe and London, adds: “We continue to see strong interest in the Israeli tech sector, particularly related to financial services, payments and security, data collection, medical and non-regulated defence, but the downturn, rising interest rates and collapsing multiples have slowed things down on the sell-side as potential sellers adjust to the new reality, and on the buy-side as investors have become more cautious.” Yariv Ben-Ari, partner, at New York based Herrick Feinstein, adds: In light of rising interest rates and prevailing economic concerns, we have been working with our Israeli clients to identify market segments that will present opportunities for well capitalized buyers to transact across the US. While some lenders are more conservative, we have seen continued growth particularly where there are existing relationships with banks and PE funds.” Amir Zolty, partner at Lipa Meir & Co., adds: “We don’t see a rush to invest. Yet, VCs and CVCs keep investing in promising start-ups with strong teams, be it at lower/more realistic valuations. We also see deep pocketed PEs looking for bargains at this day and age.” AND YET, MANY TECH SECTORS ARE PARTICULARLY HOT Israeli high-tech start-ups cover all spheres of life, from technologies that will protect computers and smart phones, to digital medicine that finds innovative ways to treat patients all the way to a lab made hamburger that will revolutionize what and how we eat, and multinationals and VCs remain very interested. “Deals are driven both by groundbreaking technologies and by the ability to acquire highlevel solutions that meet company needs faster and more economically,” points out Dr. Kfir Luzzatto, President of The Luzzatto Group. Notable M&A transactions in 2022 span the range of sectors. They include Intel’s purchases of Israel’s Tower Semiconductor for USD 5.4 billion and Israeli computing tech start-up 16 The US-Israel Legal Review 2022 EDITORIAL: ISRAEL MARKET Granulate for about USD 650 million. Google also bought Israeli threat detection firm Siemplify for USD 500 million, and Qualcomm of the US acquired Cellwize Wireless Technologies, an Israeli maker of cloud and AI software that can speed up deployment of 5G networks, for around USD 350 million. The enormous amount of cash flowing into Israeli ‘Silicon Valley’ has rocketed, and continues to pour into various segments of the high-tech sector, among them enterprise IT and data infrastructure, fin-tech, cybersecurity, data, and bio-med companies – the hottest sectors in recent years. About 65% of the total funding went to companies in these sectors, compared to 52% in 2020. In fact, In March 2022, Glilot Capital, one of Israel’s leading VC funds, raised USD 220 million for its fourth Seed fund, to invest in young companies in the fields of cybersecurity, enterprise software and developer tools. CYBER OUT IN FRONT Israel’s unicorns span a range of verticals, among the most vibrant - cybersecurity. “As Covid-19 has further advanced the shift from in-person interactions to the online-realm, Israeli cybersecurity enterprises, which offer tools and technologies for safeguarding organizations and their critical systems and sensitive information, continue to be a center of attraction and focus for various local and global investors, including VC and private equity funds,” adds EBN’s Yael Benyayer. In December 2021, Japanese investment giant SoftBank co-led a USD 400 million investment in Israeli cybersecurity firm Claroty. Cybersecurity company SentinelOne completed its NYSE offering in June 2021 at a value of USD 9 billion, one of the year’s striking IPOs, while other proactive Israeli cyber unicorns include Armis, Cybereason, BigID, Cato Networks, and Axonius. FINTECH AND BIG DATA REMAIN ROBUST “AI and Fintech are here to stay and grow, and still attract investors” adds Lipa Meir’s Amir Zolty. In fin-tech, there is also a large presence of unicorns: eToro is the Israeli-founded insurance company that had a valuation of USD 10.4 billion in 2021. There is also Forter, Next Insurance, Rapyd, Riskified, Melio, Lemonade and Payoneer, which went public in 2020 and 2021 respectively, and just in March 2022, Capitolis joined the unicorn club, cementing Israel’s position as a leader in Fin-Tech. “One of the hottest areas currently is Web3 and specifically, infrastructure technologies supporting Web3 applications. Other areas that continue to attract significant capital and top tier investors are developers and dev-ops platforms,” adds Herzog’s Yair Geva. “Big data continues to be a hot commercial field, with aspects of how to collect, verify and utilize the data coming into play,” agrees Kobi Ben-Chitrit, M&A partner at Yigal Arnon - Tadmor Levy, the firm’s name since this year’s landmark merger of Yigal Arnon and Tadmor Levy, today the third largest law firm in Israel. He adds: “Businesses are becoming ever more reliant on data in their operations, and being agile enough to collect and process data in real time has become a significant competitive advantage,”. In a recent transaction, we assisted IBM in acquiring an Israeli data observability start-up called Databand.” “Israeli companies benefited from the extremely active global capital markets in 2021, with technology companies in particular attracting significant foreign investment capital and a number of Israeli companies — including ad-tech platform Taboola — taking the opportunity to list in the US, often via SPAC business combinations,” adds Davis Polk’s Lee Hochbaum, M&A partner at Davis Polk in New York. In addition to Taboola, the vibrant ad-tech sector includes unicorns - AppsFlyer, SimilarWeb and ironSource, which just announced a merger with U.S. games developer Unity, with a joint value of USD 13 billion. Pharmaceutical, life science and healthcare service companies continue to attract investors, fueled by innovations in biotechnology and patient services and ongoing digitization. Israel has a high-quality public healthcare system, - with the nation’s medical records stored in The US-Israel Legal Review 2022 17 A leading provider of legal intelligence Do you want to receive a tailored legal newsfeed relevant to your work area and jurisdiction? Sign up for free at Lexology is a fully customisable daily newsfeed of law firm client alerts, articles and blogs delivered to the desktops of senior business lawyers worldwide on a daily basis. Lexology delivers the most comprehensive source of international legal updates, analysis and insights. We publish in excess of 450 articles every day from over 900 leading law firms and service providers worldwide across over 50 work areas in 25 languages. Our searchable archive now contains more than 1,000,000 articles. If you’d like to find out more about CLICK HERE or SUBSCRIBE HERE TIMELY QUALITY RELEVANT INTUITIVE “I love the service. It’s a terrific time saver, very practical, very relevant, and very up-to-date. The best new legal resource I’ve come across in a long time. And free to boot! Please keep providing it.” Monique Boutet Senior Corporate Lawyer Canon Australia Pty Ltd 18 The US-Israel Legal Review 2022 EDITORIAL: ISRAEL MARKET a centralized database. Within this, medical devices is key. “This industry is still hot and Israel is at the forefront. The medical device industry will continue to witness the integration of AI and that is another area where Israeli companies excel,” explains Guy Ben Ami, who leads Carter Ledyard & Milburn’s Israeli crossborder practice. FOOD-TECH AND AG-TECH CATCH THE EYE An increasing number of food-tech and ag-tech companies are indeed catching the investor eye. The U.S.-based research firm, Start-up Genome ranked Tel Aviv and Jerusalem fourth for ag-tech globally, trailing Silicon Valley, New York City and London in first place. Benyayer of EBN agrees: “We have witnessed a surge in interest in the Food-Tech industry, with skyrocketing fundraising. We represented S2G Ventures and Manta Ray Ventures in the impressive USD 347 million Series B financing round in Future Meat Technologies Ltd., which developed a technology to produce lab grown meat products, making it the largest single investment round in the cultivated meat industry.” Also, the success of Beyond Meat and Impossible Foods shows that there is consumer demand for plant-based meat alternatives. There was also a USD 105 million investment in cultivated meat start-up Aleph Farms and MeaTech. Israeli food tech start-up Redefine Meat announced plans to commercially launch its plant-based alternative meat products abroad. “Food and ag-tech are definitely getting interest from devoted VCs as well as government funding, motivated by public interest,” agrees Kobi Ben-Chitrit, while Dr. Ziv Preis, head of Tech, Corporate and M&A at Lipa Meir, adds “I expect to see the continuation of certain sectors, which have been strong in the last 2-3 years, including ag-tech, food-tech, telehealth and intense use of applied artificial intelligence.” REMOTE WORKING DEMANDING NEW TECH Preis adds: “In the future, I expect to see focus on technology that supports the shift to hybrid work model (for example, facilitating remote on the job training). As DLA’s Jeremy Lustman adds: “Tech investment generally is still moving at a strong pace; some specific areas that seem to be on an upswing are HR-tech, which makes sense to me given the dramatic overhaul of the workforce in the wake of Covid.” GROWING INTEREST FOR CLEAN ENERGY AND CLIMATE-TECH Dr. Kfir Luzzatto agrees: “Several fields are hot right now, particularly in food-tech and ag-tech, and we would also expect to see a growth in femtech, (technology supporting women’s health), climate-tech and other environmental technologies.” “The general public and governments in the Western world are increasingly motivated to support clean energy and sustainability tech initiatives, and the private investment world is picking this up,” adds David Roness, Corporate partner at Yigal Arnon Tadmor Levy. Israel is indeed home to more than 500 companies that deal with clean technology and specialize in sustainable agricultural technologies, clean energy concepts and electric vehicles. Israeli climate-tech companies raised USD 2.2 billion in 2021, 57% higher than the previous 2020 record, according to a comprehensive report, “Israel’s State of Climate Tech 2021 by the Israel Innovation Authority and non-profit PLANETech. Israeli exports of goods and services are projected to reach a record high of USD 165 billion in 2022, up 15% from 2021’s USD 143 billion in exports, itself a record, according to a July 2022 report by the Ministry of Economy and Industry - and technology lies at the heart of this. Israel’s tech firms saw exits jump an astonishing 520 percent in 2021 to an unprecedented USD 81.2 billion in value, shattering all previous funding records, according to an annual report by consultants PwC Israel. Although 2022 is experiencing rising inflation, interest rates and economic uncertainty for all, the Israeli experience is that if the technology is unique, the team exceptional, and the solution helps to address a real-world problem, the sky remains the limit. n [email protected] T. + 972-72-338-7595 WWW.LEGALMARKETING.CO.IL BRINGING YOUR GLOBAL FIRM TO ISRAEL Israel is a hotbed for innovation. Over 130 international law firms with an Israel desk are competing for clients in a country the size of New Jersey. We know the market and we know how to make you succeed. We work with you closely to drill down to your specific objectives, draft and implement a strategy that produces results, in order to build a long-term strategic plan that positions you prominently in the eyes of buyers of legal services. SERVICES TO INTERNATIONAL FIRMS LOOKING TO INCREASE THEIR PRESENCE AND BRAND AWARENESS IN ISRAEL: Strategy and Business Development On the ground marketing Highly targeted round tables Road Show Planning Event Planning Increase Brand Awareness Email Marketing PR and Media Hebrew Content Writing GLOBAL LEGAL MARKETING ISRAEL DESKS LEAGUE TABLES 2022 Legally Israel IsraelDesks League Tables 2022 100 Presented by The US-Israel Legal Review 2022 21 A Word from Israel Desks: Overview We are pleased to bring you the 4th Israel Desks League Tables, showcasing those law firms that are not only involved in Israeli deals and with Israeli clients, but also with a deep understanding of market trends, of their clients’ opportunities, and the challenges to overcome. There are an estimated 130 law firms with an Israel Desk, a striking 20% increase on the number of firms back in 2019. With more Israeli companies going global and a record-breaking 2021 in terms of transactions, investments, and capital raising, it is no surprise to see more global law firms involved for clients. This year, over 45 International law firms, with an Israel Desk submitted to Legally Israel 100 and we have 85 partners nominated for the various leading individual rankings. Compared to the previous year, we can see more matters and transactions across more practices and more sectors - a testament to the amount of work carried out by international law firms involved in Israel-related matters. As always, close to the market here, we remain agile and flexible and have added a new table for Tax, as well as a Value table for Capital Markets to sit alongside the many other categories. This is to reflect both those law firms that handle a large volume of general capital markets work, as well as those who are involved for issuers and underwriters in high-value equity and debt offerings. We reviewed the firms’ submissions, collected feedback and votes from the highest profile lawyers in Israel, and looked at factors including visits to Israel, local representatives, and relationships with domestic firms. This allowed us to identify those Leading, Prominent Recognized, and Notable practitioners abroad, who take a proactive, instrumental and handson role with respect to Israel. Law firms are ranked in order or volume or value but we have also introduced the new “Elite” rankings to showcase those who particularly stood out with the largest number of matters and those with the highest value matters in what is becoming a much more competitive and vibrant market. ISRAEL DESKS LEAGUE TABLES 2022 22 The US-Israel Legal Review 2022 Table of Contents Legally Israel 100 IsraelDesks League Tables » League Tables M&A volume........................................5 M&A value.......................................... 6 Tax.................................................... 6 Real Estate........................................ 7 IP....................................................... 8 Patents............................................... 8 Litigation............................................. 9 Capital Markets volume.......................10 Capital Markets value........................... 11 Employment..................................... 12 Banking & Finance............................. 13 Energy & Infrastructure...................... 13 Hi-Tech.............................................. 14 » Individual Rankings » Editorial 24 25 25 26 27 27 28 29 30 31 32 32 33 The US-Israel Legal Review 2022 23 League Tables 24 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 5 M&A Volume 1 DLA Piper 29 2 White & Case 13 3 Greenberg Traurig 11 4 Bryan Cave Leighton Paisner 10 4 CMS 10 4 Freshfields 10 5 McDermott Will & Emery 9 6 Davis Polk 8 6 Sullivan Worcester 8 7 Allen & Overy 7 7 Pearl Cohen USA 7 7 Gowling 7 8 Skadden 5 9 Clifford Chance 4 9 Dechert 4 9 Goodwin 4 10 Taylor Wessing 3 Position Law Firm M&A Elite The US-Israel Legal Review 2022 25 6 M&A Value 1 Skadden 5 24,300 2 Davis Polk 8 20,722 3 Allen & Overy 7 10,300 4 White & Case 13 8,593 5 Freshfields 10 6,375 6 Bryan Cave Leighton Paisner 10 4,661 7 DLA Piper 29 3,278 8 Dechert 4 2,320 9 Greenberg Traurig 4 1,298 10 Taylor Wessing 3 1,000 Position Law Firm Value ($M) Volume TAX 1 DLA Piper 20 2 Pearl Cohen USA 12 3 Herrick 6 4 Fox Rothschild 2 5 CMS 1 Position Law Firm Volume Elite 26 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 7 Real Estate 1 DLA Piper 20 2 Asserson 17 2 Herrick 17 3 Howard Kennedy 12 4 Phillips Nizer 11 5 Chapman 6 6 Memery Crystal 3 7 Allen & Overy 2 7 Bryan Cave Leighton Paisner 2 7 Dechert 2 7 ZEK 2 Position Law Firm Volume Elite The US-Israel Legal Review 2022 27 8 IP 1 DLA Piper 32 2 Greenberg Traurig 17 3 CMS 13 4 Shelowitz Law Group 12 5 Freshfields 9 6 Gowling 4 7 A&O 3 7 Goodwin 3 7 Taylor Wessing 3 Position Law Firm Volume Elite 28 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 9 Litigation 1 Asserson 57 2 Freshfields 33 3 Sullivan Worcester 20 4 Kobre & Kim 15 5 DACBeachcroft 13 5 Taylor Wessing 13 6 DLA Piper 11 7 Greenberg Traurig 8 7 ZEK 8 8 Bryan Cave Leighton Paisner 7 8 Charish Law Group 7 8 McDermott Will & Emery 7 9 CMS 6 10 Fox Rothschild 5 11 Cleary Gottlieb 4 12 Allen & Overy 3 12 Shelowitz Law Group 3 Position Law Firm Volume Elite The US-Israel Legal Review 2022 29 10 Capital Markets Volume 1 McDermott Will & Emery 41 1 Sullivan Worcester 41 2 Latham & Watkins 26 3 Davis Polk 13 4 Skadden 11 5 White & Case 10 5 Gowling 10 6 Freshfields 9 7 DLA Piper 7 8 Allen & Overy 6 8 Chapman 6 8 Greenberg Traurig 6 8 Memery Crystal 6 9 Bryan Cave Leighton Paisner 5 9 Goodwin 5 10 Carter Ledyard & Milburn 4 11 Cleary Gottlieb 3 11 CMS 3 11 Phillips Nizer 3 11 Taylor Wessing 3 Position Law Firm Volume Elite 30 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 11 Capital Markets Value 1 Latham & Watkins 13,179 2 White & Case 7,374 3 Freshfields 6,762 4 Davis Polk 5,873 5 Sullivan Worcester 4,400 6 Skadden 3,583 7 Chapman 2,879 8 Bryan Cave Leighton Paisner 1,209 9 McDermott Will & Emery 976 10 Cleary Gottlieb 750 Position Law Firm Value Elite The US-Israel Legal Review 2022 31 12 Employment 1 Greenberg Traurig 115 2 DLA Piper 63 3 Asserson 50 4 Squire Patton Boggs 19 5 Shelowitz Law Group 13 6 Fox Rothschild 10 7 CMS 8 8 McDermott Will & Emery 5 9 Allen & Overy 2 9 Bryan Cave Leighton Paisner 2 9 ZEK 2 Position Law Firm Volume Elite 32 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 13 Banking & Finance 1 Freshfields 15 2 DLA Piper 12 3 CMS 10 4 Allen & Overy 6 5 Clifford Chance 5 6 Asserson 3 6 Greenberg Traurig 3 7 Cleary Gottlieb 2 7 Taylor Wessing 2 Position Law Firm Volume Energy & Infrastructure 1 Freshfields 24 2 Allen & Overy 7 3 Clifford Chance 4 4 CMS 3 5 Fox Rothschild 2 6 Bryan Cave Leighton Paisner 1 6 McDermott Will & Emery 1 6 Ashurst 1 Position Law Firm Elite The US-Israel Legal Review 2022 33 14 Hi-Tech 1 Greenberg Traurig 159 2 DLA Piper 127 3 McDermott Will & Emery 75 4 Goodwin 32 5 Taylor Wessing 29 6 Sullivan & Worcester 25 7 Fox Rothschild 23 8 Shelowitz Law Group 22 9 Freshfields 18 10 Squire Patton Boggs 16 11 Bryan Cave Leighton Paisner 13 12 Allen & Overy 12 13 CMS 8 13 ZEK 8 14 Dechert 5 15 Walkers 4 15 Ashurst 4 Position Law Firm Volume Elite 34 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 15 The US-Israel Legal Review 2022 35 16 Individual Rankings 36 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 17 Prominent Mark Selinger McDermott Will & Emery Michael Kaplan Davis Polk Nathan Krapivensky Taylor Wessing Yossi Vebman Skadden Lee Noyek Allen & Overy Daniel Turgel White & Case Name Leading Jeremy Lustman DLA Piper Adir Waldman Freshfields Joshua Kiernan Latham & Watkins Joey Shabot Greenberg Traurig Ben Strauss McDermott Will & Emery Jonathan Morris BCLP Louis Glass CMS Name Law Firm Law Firm The US-Israel Legal Review 2022 37 18 Recognized Miriam Lampert Squire Patton Boggs Staurt Kurlander Latham & Watkins Daniel Ilan Cleary Gottlieb Colin Diamond White & Case Lawrence Sternthal Greenberg Traurig Jason Saltzman Gowling Name Law Firm 38 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 19 Notable Adam Fleisher Cleary Gottlieb Michael Sweet Fox Rothschild Odia Kagan Fox Rothschild Chaim Seligman Freshfields Richard Scharlat Fox Rothschild Trevor Asserson Asserson Susannah Fink Gowling Tali Sealman White & Case Yariv Ben-Ari Herrick Gary Emmanuel McDermott Will & Emery Bill Schnoor Goodwin Adam Snukal Greenberg Traurig Louis Tuchman Herrick Guy Ben-Ami Carter Ledyard & Milburn Daniel Rubel ZEK Michael Sabin Clifford Chance Josef Fuss Taylor Wessing Daniel Tunkel Memery Crystal Meira Ferziger Greenberg Traurig Name Law Firm The US-Israel Legal Review 2022 39 20 Editorial 40 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 21 Having been active in the Israeli market for well over two decades, Allen & Overy (“A&O”) has one of the most formidable Israeli practices, which thrives under the leadership of Lee Noyek, A&O’s presence on the ground in Tel Aviv, bringing significant experience of corporate finance, strategic M&A, divestments, joint ventures, public takeovers, refinancings and IPOs. This year, the firm commanded respect for its roles in striking M&A deals in the market. Highlights included advising DoorDash on the USD 8 billion acquisition of Wolt Enterprises, a Helsinki-based international technology company offering services in the food delivery, grocery and retail sectors in over 22 jurisdictions worldwide, including Israel. The team also represented NASDAQ-listed Peloton Interactive, Inc. on its acquisition of Precor, one of the largest global commercial fitness equipment providers, in a transaction valued at USD 420 million, with the firm’s co-head of technology for EMEA, London-based William Samengo-Turner advising. A pillar of the firm’s Israeli offering is its deep experience advising across the energy and infrastructure sector. In 2021 the firm saw Ed Moser represent the lenders to the successful bidder for Israel’s largest desalination plant – the Sorek B desalination plant. The firm also showcased its strength in capital markets with a Luxembourg team – led by partners Jacques Graas and Paul Péporté acted for NeoGames S.A. on its USD 82 million IPO. With a deep understanding of the Israeli market, Ashurst’s Israel Group has worked on numerous transactions involving Israeli clients reaching outside of Israel and non-Israeli clients transacting in Israel. Heading the Israel Desk is Etay Katz, well-known for advising the largest Israeli banks, institutional investors and fintech firms. Katz has represented the State of Israel in significant European capital market issuances and financial transactions and the Bank of Israel on transactions and regulatory matters. The Group also comprises Jake Green, co-head of the firm’s Finance Regulatory group and primary adviser for leading Israeli global fintechs, eToro and Plus500, as well as corporate partner Jonathan Cohen, who brings a particular focus on the Tech M&A space. Allen & Overy Ashurst The US-Israel Legal Review 2022 41 22 UK-headquartered law firm Asserson continues to enjoy a strong presence in the Israeli market, with its largest office in Tel Aviv and a team comprising UK, U.S. and Israel qualified lawyers. Under the leadership of the well-known shining light, Tel Aviv-based Trevor Asserson, the team provides UK legal services to Israeli clients, taking pole position in litigation and flying high in real estate and employment law, a growing body of work under the guise of Howard Rubenstein, head of the Business Law group, which includes the prolific Rachel Shaw, Oliver Harris and Hadie Cohen, who counsel Israeli companies on a raft of employment agreements and ongoing advice. Jointly heading the Dispute Resolution practice is Baruch Baigel, whose track record includes several high profile and high value claims in the UK High Court, three of which have been listed by the Lawyer among the top 20 UK cases for the year, each of those cases for Israeli citizens, or people based in Israel. The team earns widespread recognition for its involvement in commercial, real estate and construction-related litigation. In real estate, David Prais leads the Israeli Real Estate team which advises on acquisitions and disposals, including the acquisitions of apartments in the Wembley Towers project, while Robert Gross has represented major Israeli banks in providing secured facilities to Israeli owned businesses in the UK. Visit: IsraelDesks page With over 30 years’ experience in the Israeli market, Bryan Cave Leighton Paisner (“BCLP”) has one of the longest standing and most extensive practices, with over 50 lawyers offering a raft of services to 200 plus Israeli financial institutions and corporates, including established public and private companies and start-ups in technology, infrastructure, real estate, manufacturing, finance, pharmaceuticals, energy and venture capital. The April 2018 merger between Bryan Cave of the U.S. and Berwin Leighton Paisner of the UK enhanced its offering to Israeli clients. London-based Jonathan Morris and Tel Aviv-based Paul Miller serve as Co-Chairs of the firm's Israel Desk, alongside Ken Henderson in the New York office. Partner in the firm’s M&A and Corporate Finance team in London, Jonathan Morris advised ironSource on its acquisition of Luna Labs, while in capital markets, he advised Amiad Water Systems on its listing of its shares on the TASE and the cancellation of a listing of the shares London’s AIM Market. Paul Miller, with more than 25 years international experience, is a consultant in BCLP's Tel Aviv representative office. As well as flying high in M&A – the team advised Kape Technologies on its agreement to acquire premium consumer VPN business ExpressVPN – the Asserson Bryan Cave Leighton Paisner 42 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 23 Carter Ledyard & Milburn firm is also prominent in litigation involving Israeli clients, with Oran Gelb and George Burn key figures in a team that has lately been supporting Israeli tech companies on a raft of disputes. Built on the foundation of 160 years of legal service, one of New York’s oldest law firms, Carter Ledyard Milburn (CLM) has been representing Israel-based companies for over 20 years in corporate, securities, M&A, as well as litigation, intellectual property, employment, real estate and more. The Israel practice group includes key figures Steven Glusband, who also chairs the firm’s Corporate department and Securities practice group, and Israel-born Guy Ben-Ami, a leader of the firm’s Israeli Cross-Border practice. Both are regularly involved in a raft of commercial matters for clients, notably, over the past year, in the M&A and capital markets space. The team advised Israel headquartered Mer Telemanagement Solutions Ltd. as it merged with SharpLink, Inc. and also offered strategic advice in relation to a number of offerings, such as for global defense technology company, Netanya-based RADA Electronic Industries Ltd., in its public offering on the NASDAQ. Visit: IsraelDesks page Chapman makes an appearance in this year’s rankings, recognized for its role as a platform for Israeli financial institutions and investors making investments in the U.S. Heading Chapman’s Israel practice is partner Michael Friedman, who served as U.S. counsel in several capital markets transactions, including representing Reznik Paz Nevo Trusts Ltd. in connection with the issuance by Bank Hapoalim of USD 1 billion of green CoCo bonds, the first international issuance of green contingent convertible (CoCo) notes by an Israeli bank in accordance with the Green Bond Principles. As head of the firm’s Bankruptcy and Restructuring Group, he is also retained to act as U.S. counsel to Mishmeret Trust Company Ltd. in connection with the restructuring of approximately USD 750 million of bonds issued by All Year Holdings Ltd., as well as acting for the trustee/bondholders in restructurings for several other TASE-traded bond default matters including Brookland Upreal Limited, Medley Capital, and Starwood West Ltd. Visit: IsraelDesks page Chapman Cutler The US-Israel Legal Review 2022 43 24 If you are an International Law Firm with an Israel focus, IsraelDesks is your first destination Inform Israeli law firms about your events, clients updates and firm news Join IsraelDesks group on LinkedIn to expand your network LEGAL MARKETING by SETTING THE BENCHMARK WWW.LEGALMARKETING.CO.IL [email protected] TEL: + 972-72-338-7595 FOLLOW US: 44 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 25 U.S. boutique law firm Charish Law Group specializes in representing Israeli and U.S. companies and individuals as lead counsel in complex business litigation, international arbitration, and defense of white-collar and regulatory matters. The team thrives under the first-rate experience of its founder –Michael Charish, in Jerusalem, who has spent 20 years handling complex litigations and investigations for clients ranging from individuals to Fortune 100 companies. With affiliates in New York and Israel, the team is a prime choice for the full gamut of complex civil and white-collar-criminal matters, as well as particular expertise in disputes relating to contracts and business torts. He acted for publicly traded Israeli real estate company in New York Supreme Court litigation and appeal over contract and corporate governance issues, as well as an Israeli tech company in patent infringement litigation. Headquartered in New York, international firm Cleary Gottlieb (“Cleary”) is acknowledged for its solid track record in M&A, capital markets and litigation over the past, year, notably securing the approval of International Flavors & Fragrances’ merger agreement with DuPont for the merger of IFF and DuPont's Nutrition & Biosciences business in a Reverse Morris Trust transaction. The firm’s Israel Group comprises the prominent capital markets lawyers, such as Adam Fleisher, who has represented numerous Israeli clients in the industrial, defense and tech sectors, as well as David Gottlieb, whose roster has included Bank Hapoalim, Bank Leumi and Israel Chemicals. Israeli clients also benefit from Daniel Lian, a member of the Israel Bar, who focuses on intellectual property law, cybersecurity and privacy. A hugely active participant in the Israeli market for many years, Clifford Chance successfully harnesses its global reach to help Israeli clients reach international markets, and international clients access Israel. David Metzger, Michael Sabin, and Sam Clinton-Davis are big-hitters in an Israel group, which works across many practice areas to offer clients immediate access to one of the widest international professional networks around. Co-head of Clifford Chance's US Funds & Investment Management Group, Hebrew-speaking Michael Sabin has an active Israel practice, advising Israelbased sponsors and investors on their fundraising and global investment activities. David Metzger, global head of Clifford Chance's Construction Clifford Chance Cleary Gottlieb Charish Law Group The US-Israel Legal Review 2022 45 26 Group, has been advising bidders and lenders on light rail projects in recent years. With strong relationships with the world's banks and financial institutions, the team is renowned for M&A, banking and finance work, energy and infrastructure. In one notable M&A transaction, the team advised GECAS on its joint venture with Israel Aerospace to convert Boeing 777 planes into freighter aircraft in a deal worth USD 400 million. CMS is one of the few major European-focused law firms with senior equity partners on the ground in Israel and has been instrumental for Israeli clients looking to invest or grow abroad, as well as those businesses and investors looking to enhance their business in Israel. Within the Israel group, Andrew Besser and Louis Glass are key figures in a team of 60 involved in Israel-related work. In 2021, the firm was especially active in corporate and employment advice for flagship clients, as well as IP, litigation and banking. Clients also benefit from the firm’s fluent Hebrew speakers and key relationships with Israeli banks and corporates, prominent start-ups, and well-known lawyers and accountants for more than two decades. Israel is an important region for DAC Beachcroft, with the Group advising clients across practice areas and sectors from Aim listings to major arbitrations to advising London Market insurers on claims in Israel. The compact team features the experience of London-based Clarissa Coleman, Ilana Gilbert, Chris Wilkes and Duncan Strachan and is particularly recognized for its expertise in healthcare, insurance, tech and real estate and has been especially prominent in relation to litigation. Within this field, International Chamber of Commerce and LCIA arbitration stands out. Hot on the heels of its “Law Firm of the Year” at the American Lawyer’s 2021 Industry Awards, Davis Polk is flying high in the IsraelDesks rankings, taking a prominent role in some of the country’s flagship and highest value transactions in 2021. Co-Heads of Davis Polk Israel Practice are Lee Hochbaum, co-head of the SPAC practice, and Michael Kaplan, who heads the Corporate department. With a team of Hebrew speakers and graduates from Israeli law schools, the group has shone in M&A and Capital Markets in the past year. CMS DAC Beachcroft Davis Polk 46 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 27 Hochbaum, Kaplan and Yasin Keshvargar advised GT Gettaxi on its USD 1 billion business combination with Rosecliff Acquisition Corp. Hochbaum also led Payoneer on the USD 3.3 billion combination with FTAC Olympus Acquisition Corp., a SPAC, as well as Taboola on its USD 800 million acquisition of Connexity, together with Kaplan and Darren Schweiger. In Capital Markets, the team advised ZIM Integrated Shipping Services Ltd. on its USD 217.5 million IPO on the New York Stock Exchange, with Kaplan and Pedro Bermeo advising. Visit: IsraelDesks page This Philadelphia-born firm Dechert has been involved in Israel-related matters for more than 40 years and offers a 24-strong team led by Adam Levin, who also co-heads Dechert’s Corporate group in London. In an extensive roster of international corporates, private equity groups and high net worth individuals, he advises on corporate structuring, governance, private equity and transactional matters. Fellow London partner, Douglas L. Getter brings experience in U.S. and cross-border M&A transactions in a diverse practice, and has, over the last 12 months, advised Slinger on its acquisition of Tel Aviv based PlaySight Interactive Ltd, an AI sports technology company in a merger valued at approximately USD 100 million. Visit: IsraelDesks page The global knowhow and resources of DLA ensure that it is regularly involved at the top end of the Israeli market. From the U.S. to Latin America, Europe to Asia, the firm’s Israel country group comprises lawyers who advise global clients on M&A and other transactions in Israel, and this year takes first place in M&A (volume), real estate, tax and IP, handling general privacy and data protection matters worldwide. Jeremy Lustman leads the Israel group that takes the quadruple crown and flies high in banking and high-tech. During 2021, DLA represented Are Robotics Ltd. in its USD 722 million business combination with SPAC company, Industrial Tech Acquisitions, Inc., New York partner Jon Venick, working alongside Lustman. London partner Paul Jayson led the acquisition for Israel’s Azrieli Group in its acquisition of Norway based company, Green Mountain Data Center while San Diego partner, Matt Schwartz is another star on the Israeli landscape in the past 12 months, advising Silicon Valley Bank on a string of investments in Israeli highDLA Piper Dechert The US-Israel Legal Review 2022 47 28 tech companies. Among a raft of employment matters, the firm advised JFrog on the UK and German employment issues related to the USD 300 million acquisition of Israeli start-up Vdoo, as well as the employment due diligence in the acquisitions of Tapjoy and Bidalgo. Visit: IsraelDesks page A bridge between Israel and the U.S., Fox Rothschild 's 31-strong nationwide Israel practice group is a key destination for Israeli clients launching or expanding into U.S. markets. The group’s work is driven by Michael Sweet, Odia Kagan and Sarah Biser in the San Francisco, Philadelphia and New York offices respectively, with technology and innovation at the heart of the firm’s extensive client roster. The firm’s transactional and regulatory expertise stands out, especially with regards to compliance work. Philadelphia-based partner Odia Kagan, the Chair of GDPR Compliance & International Privacy group, has been advising Israeli clients from the agriculture, healthcare and software sectors, among others, on such key issues over the past year. Clients also tapped into the Group’s depth of expertise relating to employment, with Sweet and Labor & Employment partner, Richard Scharlat, a Hebrew speaker based in Tel Aviv, who brings over 20 years’ experience in defending management from U.S.-based companies and international companies with U.S. employees in employment and class action litigation. The Group has also supported Israeli parties in filing patents and trademarks and has been involved in litigation involving Israeli parties. Visit: IsraelDesks page As one of the most impressive names in the Israeli market, Freshfields’ Israel Group is one of the pacesetters and emerges with two top spots – in banking and energy. In a 20-strong team, with 6 principals, Adir Waldman is on the ground in Israel, leading a multijurisdictional team of Freshfields lawyers dedicated to advising Israeli clients and businesses with interests in Israel. Among the team is New York partner Menachem (Mena) Kaplan, who is very active in the start-up scene and whose practice encompasses IP, licensing, joint ventures, and emerging technologies. Tel Aviv based Chaim Seligman also leads the Tel Aviv office’s tech initiative and brings clients a background of Private and Public International Law and acts for clients in cross-border transactions and dispute resolution. Fox Rothschild Freshfields Bruckhaus Deringer 48 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 29 In a prolific banking practice, the team advises on multiple firstrate matters and acted for Israel Discount Bank on an ongoing basis regarding data privacy compliance in the US and other jurisdictions and its readiness for cybersecurity breaches. Freshfields flies in high in M&A, acting for Access Global Ltd. in the sale of ExpressVPN to Israeli-British Kape Technologies PLC (where Teddy Sagi is the principal shareholder) for USD 936 million, while the Israel Group also helped to provide Israeli law and global M&A advice to Swedish telecommunications company Ericsson on its bid for Vonage, an American telecommunications company which employs more than 100 Israelis in its Tel Aviv development. The Israel Group also performs extremely well in the Litigation and Arbitration table, with a successful track record in some of the highestcaliber dispute resolution matters in the Israeli market. Among a raft of matters, the team is advising Sunflower and Israel’s Shikun & Binui Energy (“S&B”) following a successful claim, brought under the Energy Charter Treaty (ECT), against the Kingdom of Spain arising out of unilateral changes to its renewable energy regime. This high-profile matter is equally matched by the representation of TASE and NYSE- listed Kenon Holdings, and its subsidiary IC Power, in an ICSID arbitration with the Republic of Peru under the Singapore-Peru Free Trade Agreement. The dispute relates to Peru's unfair treatment of Kenon/IC Power’s investments in the power generation and transmission sectors in Peru. Attorneys in Goodwin’s Israel Practice have significant experience working with Israeli businesses as well as internationally-based investors in Israeli companies. In the past year, the firm’s Israel Group, led by the prominent Bill Schnoor, former co-chair of the firm’s Technology and Life Sciences groups, has advised five Israel-based or Israeli-founded technology and life sciences companies in raising over USD 400 million in funding. The team also represented the lead investors in the financing of two Israeli-founded technology companies in an aggregate amount of USD 90 million, and counseled the financial advisors on a de-SPAC transaction with an Israel-based target. With a successful track record in relation to emerging companies, Goodwin advised target companies, Jomu Mist Incorporated and CreativeLIVE as they were respectively acquired by property management platform, Guesty and freelancer platform, Fiverr. Goodwin also advised on a string of investment. Partner in the Private Equity Group, San Franciscobased Brian McPeake starred as Counsel to GS Capital Partners in its investment in the USD 543 million funding of Transmit Security and USD 230 million investment in 4G Clinical. Goodwin The US-Israel Legal Review 2022 49 30 Multinational law firm Gowling WLG performs notably well in the intellectual property area, respected by Israeli law and patent firms for its trademark and patent filing practice in Canada, Russia and elsewhere. The 42-strong Israel desk is co-led by London-based Susannah Fink and Toronto-based Jason Saltzman, who enjoys a diverse M&A and capital markets practice and recently advised Israel-based A.T.S. - Advanced Test Solutions Ltd., longstanding player in the semiconductor industry, on its proposed business combination with Canadian real estate investment firm, Moon River Capital. Ltd. He also advised on the listing of Israel’s Adcore on the Toronto Stock Exchange. Gowlings was formed from the merger of Canada-based Gowlings and UK-based Wragge Lawrence Graham & Co in February 2016, in the first multinational law firm merger co-led by a Canadian firm. With a multidisciplinary office in Tel Aviv, Greenberg Traurig’s 100- plus Israel Practice is one of the larger gateways for outward-looking Israeli businesses and entrepreneurs, as well as for non-Israeli clients looking to expand their presence in Israel. The Group took pole position in employment and high-tech this year, and was also extremely active in M&A, litigation and IP, thriving under the leadership of Joey Shabot, Managing Shareholder and head of the Corporate department in Israel. In one of the flagship transactions of the past year, Shabot advised NASDAQ-listed technology company Digital Turbine, Inc. on all aspects of its USD 600 million acquisition of Israeli-German ad-tech company Fyber, working closely with the firm’s teams in Germany, the U.S. and Netherlands. He also worked with Alan Annex, Co-Chair of the Global Corporate practice, and Ephraim Schmeidler to represent Goldman Sachs as lead underwriter and investment banker as part of a SPAC transaction which saw the going public of Ltd., one of Israel’s best known technology companies focusing on content discovery and digital advertising. The Israel Group is packed with instrumental figures, such as Tel Avivbased Lawrence Sternthal, who leads the International Real Estate department in Israel, as well as Meira Ferziger, who brings more than 28 years’ employment law experience as it relates to Israeli companies operating in the U.S., and Adam Snukal, who has worked with Israel's leading start-ups, representing them in issues surrounding IP, privacy, data security compliance obligations, such as GDPR, HIPAA, CCPA, PCI, and more. Visit: IsraelDesks page Gowling WLG Greenberg Traurig 50 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 31 New York-based law firm, Herrick boasts a vibrant Israel practice group that is an integral part of the firm’s broader global experience. Connected with major Israeli law and accounting firms, the 12-lawyer group is recognized by IsraelDesks rankings for a depth and diversity of experience in the real estate sector. Co-chairing the firm's Israel practice group is Real Estate partner Yariv Ben-Ari, who ats for real estate lenders, trustees, servicers, owners, operators, developers and contractors on a variety of sophisticated matters. An Israeli-American, he also helps foreign developers and investors in their U.S. real estate transactions, as well as U.S. clients seeking outbound investments in Israel. He and the team advised Migdal Insurance Company Ltd. in its potential USD 200 million investment in a joint venture to acquire multifamily complexes in specific strategic regions of the U.S. The team also represented Harel Insurance in the purchase of a portion of a USD 600 million construction loan made to SL Green and secured by a first mortgage on a prime Manhattan property, as well as the client’s participation in a USD 191 million construction loan to build two high-rise luxury multifamily towers in downtown Nashville, Tennessee. Israel Canada Hotels is also working with Herrick on establishing a hotel platform in the U.S. Visit: IsraelDesks page Howard Kennedy is recognized for its strong track record of advising Israeli clients, especially in relation to real estate. London-based and Hebrew-speaking Charles Maxwell heads the team and is supported by a network of strong connections. The firm’s Israeli clients are made up of high-net-worth individuals and families, entrepreneurs and corporates, and last year’s workload includes a string of high-profile real estate matters, especially for a flagship Israeli investor and property developer client. The firm also advises Ashdod-headquartered Nofar Energy, which is developing the UK's largest planned battery energy storage project, with construction costs estimated at more than GBP 214 million. Focused exclusively on disputes and investigations, Kobre & Kim enjoys a commanding reputation for representing Israeli clients in cross-border disputes involving Israel, the U.S., Europe, Asia and other jurisdictions. The team provides offensive and defensive strategies and crisis management strategies to ultra-high-net-worth individuals involved in complex international government investigations and other disputes Kobre & Kim Howard Kennedy Herrick Feinstein The US-Israel Legal Review 2022 51 32 to preserve their assets, liberty and reputation. Powered by a deep bench of former government lawyers and litigators around the world, including elsewhere in the region in Dubai, the firm also earns significant roles in sensitive and high-profile litigation. These include representing Israeli tech companies in a raft of commercial and intellectual property disputes, as well as helping Israeli start-ups through the launch of a litigation fund in partnership with litigation finance firm IMF Visit: IsraelDesks page With a towering presence in capital markets, Latham & Watkins’ (“Latham”) Israel Practice takes the top spot in the Capital Markets value table, leveraging its global reach to provide strategic advice to Israeli clients on some of the highest profile and highest value equity and debt capital markets transactions in the Israeli market. In 2021, few transactions, matched the headlines written by the USD 2.1 billion IPO of Playtika and the USD 724 million IPO of, both on Nasdaq, in which the Latham represented the issuer, as they did on the IPOs of WalkMe, Riskified and Kaltura, among many others. The Latham team also acted as underwriters’ counsel on the USD 1.4 billion IPO of SentinelOne on the NYSE and IPO of Nayax on the TASE. Joshua Kiernan and Stuart Kurlander in the London and Washington D.C. offices are instrumental figures in the team, which regularly advises on initial public, follow-on and secondary offerings, as well as a string of SPAC transactions. Having established its Israel team in 2011, Mathys and Squire, a hugely prominent European IP firm, enjoys a towering presence in the Patents and Trademarks category, working directly with and advising well-known Israeli clients, individuals and attorneys on filing patents and designs during the past year. The eight-strong team is headed up by London partner and UK & European Patent Attorney and UK Design Attorney, Dani Kramer, who acts for clients ranging from start-ups to large corporations across a variety of technology sectors. He works closely with Munich partner Andreas Wietzke and Anna Gregson, a partner in London. Mathys & Squire Latham & Watkins 52 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 33 Backed by the multidisciplinary resources of the firm’s 20 offices, McDermott Will & Emery (“McDermott”) is known for extensive transactional advice, particularly capital markets transactions, where it takes top spot in the volume table. In this category, the firm emerged at the head of the pack for regular day-to-day work involving Israeli clients across many cutting-edge sectors, especially technology, bio-tech and life science. McDermott also enjoyed a strong presence in high-tech, as well as M&A and litigation. The Israel Desk is co-led by partner Gary Emmanuel, who brings clients more than 20 years’ experience, especially in relation to capital raisings and IPOs. He recently advised blank-check companies, Cactus Acquisition 1 as it filed for a USD 100 million IPO, targeting tech-based healthcare, as well as Finnovate Acquisition Corp. on its USD 150 million IPO. New York partner Mark Selinger co-heads the Israel Desk and is another key figure in the team having represented Israeli companies doing business internationally since 1994 and represented Israel-headquartered INX as it closed its ethereum-based IPO, with USD 85 million in proceeds. The crypto exchange completed the first security token offering registered with the U.S. Securities and Exchange Commission. Delaware partner, Ben Strauss is another instrumental player and has advised as Delaware counsel on financing transactions. Founded over 40 years ago, London-based Memery Crystal is recognized as one of the UK’s leading law firms in its specialist areas. Memery Crystal’s Israel Desk helps Israeli businesses and entrepreneurs to the London markets, to raise capital and supports Israeli investors, especially in relation to real estate. Daniel Tunkel leads the team, with the coming-together of the former Memery Crystal and Rosenblatt practices increasing the spread of the firm’s offering, with the combined firm now offering support in relation to competition law and fraud/ financial crime to complement the existing practice areas, such as real estate and private wealth. Visit: IsraelDesks page Pearl Cohen’s teams in New York, Boston, Los Angeles and London comprise experienced lawyers who have enjoyed a strong year in M&A and tax related work. New York based Oz Halabi, Senior Partner & Chair of the U.S. Tax Group, engages mainly in US domestic and international tax matters arising in mergers and acquisitions, investment funds, securities offerings, financial products and bankruptcy. He works alongside Moshe Sister, who specializes in U.S. and Israeli taxation law, including taxation Pearl Cohen Memery Crystal McDermott Will & Emery The US-Israel Legal Review 2022 53 34 Skadden of individuals, corporations, and venture capital funds, as well as real estate taxation and indirect taxation. Partner in the Corporate Group is Boston-based Amir Sadeh, who acts for corporate clients on a variety of commercial, corporate and strategic matters. The team’s US based lawyers were involved in the representation of DeepCube, an Israeli start-up, in its acquisition by Nano Dimension. This mid-sized U.S. firm enters this year’s Israel Desks rankings with a compact Israel Practice Group led by Lisa Radetsky and Marc Landis. With offices in New York, New Jersey and Geneva, Switzerland, the team enjoyed a strong year in Israel-related real estate transactions, providing clients with advice on real estate development and investments, including commercial, office, multi-family and hospitality properties, as well as personal residential purchases. A roster of Israeli clients broadly includes real estate developers, as well as public and private companies, institutional and individual investors, fashion designers and retailers. The firm is also a member of the IsraelAmerica Chamber of Commerce in Tel Aviv and the America-Israel Chamber of Commerce and Industry in New York. The SLG Israel Desk has been busy in 2021 with a broad range of commercial work involving Israeli clients. Among this workload is a diverse raft of instructions in the IP field. Headed by the ever-present New York attorney Mitchell C. Shelowitz, former President/Founder of the Association Corporate Counsel Israel, he draws on more than 20 years’ experience representing Israeli companies and today provides commercial advice to clients spanning the mobile tech, cyber, green tech, robotics and other sectors. The firm also handles copyright registrations, trademark renewals and IP infringement for Israeli clients. Previously he founded the Israel desk at Nixon Peabody in New York City and led the Israel desk at Greenberg Traurig’s New York office. As one of the leading global law firms with an Israel focus, Skadden’s Israel Group is in the elite category of IsraelDesks in both M&A and Capital Markets, taking the crown in the M&A: Value table. For decades, the firm acts for Israeli companies doing business and raising capital outside Israel and advises non-Israeli companies and individuals doing business in Israel. Shelowitz Law Group (“SLG”) Phillips Nizer 54 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 35 With a track record that has seen the firm act in many landmark M&A and capital markets transactions, the firm recently advised Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC as lead underwriter in the USD 724 million IPO of on Nasdaq, as well as the lead underwriters in the USD 368 million IPO of Riskified Ltd. on the NYSE and in the USD 431 million IPO of Global-E Online Ltd. on Nasdaq. Having advised the underwriters on the largest-ever Israeli IPO in the U.S. by Mobileye, Yossi Vebman leads the Israel practice. With an unrelenting focus on M&A and financing, the Israel Group has, in the past year, advised eToro Group Ltd. in its merger with FinTech Acquisition Corp. V for an entity value of USD 10.4 billion, as well as Intel Corporation in its USD 5.4 billion acquisition of Tower Semiconductor Ltd., among other acquisitions. The spotlight shines brightly on the almost 40-strong Israel Desk at Squire Patton Boggs, which is widely recognized by Israeli clients for its comprehensive advice in the employment field, with work involving a significant advice on share options/benefits and data privacy. Fronted by London’s Miriam Lampert, who brings clients almost two decades’ experience of working in the Israeli market and an understanding of the UK ecosystem, with her role co-leading 1,6,00-member, Israeli Tech Parliament, one of the main networking groups for the Israeli tech community in London. Recognized for its expertise in the high-tech sector, the team advises high profile Israeli corporates, particularly in the tech and financial services sectors, and includes NICE, WalkMe, Viber and Caesarstone, many of whom we have advised for a number of years. We act for many companies operating in the cybersecurity, fin-tech, med-tech and smart mobility and automotive technology sectors, recently expanding its Israeli client base. Over the past year, other key team members include Paris Partner, Pauline Pierce. U.S. headquartered Sullivan’s capital markets expertise shines brightly through in 2021, as it shares the crown in the competitive Capital Markets: Volume table. Its Israel expertise comprises lawyers from the firm's New York, Boston, Washington D.C., and London offices. Sullivan acts as company counsel for publicly traded and pre-IPO companies and represents public companies and their directors, independent Squire Patton Boggs Sullivan & Worcester The US-Israel Legal Review 2022 55 36 committees, and officers with respect to a wide range of capital markets and securities matters. The firm is known for its work as underwriter’s counsel in public offerings of Israeli and U.S., and other foreign companies traded on TASE, NYSE or the Nasdaq, advising on a substantial portion of the offerings by Israeli companies that listed on Nasdaq for the first time since 2013. The firm also performs well in high-tech, litigation, class actions, and M&A, advising Nano Dimension on the acquisitions of Deepcube, Micro Mechanics and Essemtec. With more than 18 years’ experience, New York partner Oded Har-Even leads the global capital markets practice and has advised on many issues on Wall Street of Israeli private and public companies. In 2021, he advised on the IPOs of Inspira Technologies OXY B.H.N. Ltd. and G Medical and Eco Wave on Nasdaq. He spends a significant amount of time as Co-Managing Partner in Sullivan & Worcester Tel Aviv, alongside Reut Alfiah, while Boston partner Howard E. Berkenblit acted as Issuer's Counsel for Oramed Pharmaceuticals in two sizeable offerings, while Ron Ben-Bassat advised AGP (Village Farms International) on the issue of USD 135 million in a Registered Direct Offering of Common Shares on Nasdaq. The Israel Desk of international law firm Taylor Wessing continues to make an impact with its focus on dynamic sectors, including high-tech, life sciences and healthcare. The firm makes further inroads under the guidance and experience of London-based Josef Fuss, who co-leads the international Technology, Media & Communications sector group, and is recognized as one of the leading international venture capital lawyers in the European market. He co-heads the Israel Desk with Israel-based Nathan Krapivensky. The Israel Desk has taken a prominent role advising on a string of investments and venture capital transactions, with its corporate technology team acting for Israeli investors, companies, entrepreneurs and management teams on all aspects of venture capital, M&A and joint ventures. Fuss advised Israeli co-founded fintech company, Curve on its USD 95 million Series C fundraising round in anticipation of its US launch and further European growth. London-based Howard Palmer acted for Dawn Capital as investor in a USD 127 million investment in Israeli startup Firebolt, the developer of a cloud-native enterprise data analytics Taylor Wessing 56 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 37 platform. The team also acted for Israeli renewables project developer Solegreen in its USD 104 million investment in California-based solar installer Kuubix. While the firm is visible also in litigation, notably cryptocurrency disputes, there are also significant real estate matters, with the team advising Clal lnsurance on the acquisition of two London hotels, valued at over GBP 540 million and owned by the Amsterdam based hotel owner and operator, PPHE Hotel Group. Visit: IsraelDesks page Walkers’ London-led Israel Group provides Bermuda, British Virgin Islands (“BVI”), Cayman Islands, Guernsey, Irish and Jersey law services to clients in Israel. With an established track record of delivering “offshore” law advice to clients in Israel, the firm acts for Israeli home-grown and international companies, as well as law firms, accountancy firms, highnet worth individuals, asset management groups, investment funds, banks and other financial institutions. Head of Corporate department, Neil McDonald and Investment Funds partner Matt Bloomfield recently acted as Cayman Islands counsel on the launch of Silicon Valley-based Group 11's USD 200 million Fund V, the first VC fund to join trading on the TASE UP platform, an electronic trading platform, available to institutional and accredited Israeli investors, that allows high-tech companies, VC, credit, and real estate funds to trade on the TASE, while remaining private. Visit: IsraelDesks page One of the most preeminent firms with a commitment to Israel spanning several decades is White & Case, which is entrenched among the elite law firms in Israel related M&A and capital markets, both in volume and value. Through the depth of its expertise in the firm’s London and New York offices, the team is a go-to group for sophisticated and highquality instructions and is one of the go-to law firms in Israel related M&A. The team thrives under the leadership of New York-based Colin Diamond – one of the lead lawyers on U.S. IPOs by Israeli issuers - and London-based Daniel Turgel, committed to the Israeli market for more than a decade. White & Case Walkers The US-Israel Legal Review 2022 57 38 ZEK Together with Robert Chung and Jason Rocha, Diamond acted for ION Acquisition Corp 2 Ltd., a SPAC, in its USD 1.3 billion business combination with Israeli-headquartered Innovid, Inc., a global leader in connected TV ad delivery and measurement. Joel Rubinstein also worked with Diamond on advising ION Acquisition Corp 1 Ltd., another SPAC, on its USD 2.6 billion business combination with Ltd., an Israeli private company and a global leader in powering recommendations for the open web. In an active year, Turgel acted for SoftBank Vision Fund II as the lead investor in the Series E financing round of Claroty Ltd., an Israeli industrial cybersecurity company, while we also draw attention to Tali Sealman, who acted for Siemplify, an Israeli cybersecurity and security orchestration, automation and response ("SOAR") provider, on its sale to Google LLC at a cost of hundreds of millions of dollars. The wider team is regularly immersed in a broad range of industries in Israel, including high-tech, healthcare and medical devices, clean-tech, agriculture, real estate, energy and oil and gas, chemicals, consumer products and financial services. With deep roots also in capital markets, White & Case has been advising the State of Israel on its offering of USD 5 billion of Eurobonds. Visit: IsraelDesks page Based in Manhattan, the 42-year-old Zeichner Ellman & Krause LLP ("ZEK") law firm has more than 40 lawyers spread across its New York, New Jersey, Connecticut, Washington DC, as well as a foreign office in Tel Aviv. In fact, ZEK was the very first law firm to be certified as a foreign attorney’s office by the Israel Bar Association. Daniel Rubel heads the Israel Group, which has been representing Israeli clients on a wide variety of U.S. legal issues including corporate and securities matters, commercial litigation, bankruptcy, banking regulations, employment and commercial agreements. In the past year, Rubel acted for a number of Israeli companies which used to be affiliated with Eliezer Fishman. Fishman filed for bankruptcy in Israel. The trustee for the Israeli bankruptcy proceeding filed an application to obtain information from our clients which is currently housed in a US law firm based in New York. Together with Bruce Goodman, he co-represented an Israeli technology company, as plaintiff, regarding a defendant's breach of a services agreement in which the defendant failed to provide payment processing services. 58 The US-Israel Legal Review 2022 ISRAEL DESKS LEAGUE TABLES 2022 39 YOUR FIRST DESTINATION IN ISRAEL Israel Desks is the largest multimedia platform for international law firms to network with Israeli law firms and raise their profile in Israel’s legal market. LAW FIRM DIRECTORY Featuring international law firms with an Israel desk LEGALLY ISRAEL100 IsraelDesks league tables MEDIA CENTER News, Updates and Events LEGALLY ISRAEL Weekly news roundup from leading Israeli and international law firms IsraelDesks MAGAZINE Bi-monthly digital magazine LEGAL NETWORK Highly targeted distribution WEBINARS Hosting webinars through IsraelDesks platform The US-Israel Legal Review 2022 59 Join IsraelDesks group on LinkedIn to expand your network IsraelDesks WWW.LEGALMARKETING.CO.IL [email protected] TEL. +972-72-338-7595 FOLLOW US: Designed by by GLOBAL LEGAL MARKETING 60 The US-Israel Legal Review 2022 GENERAL COUNSEL INTERVIEW The US-Israel Legal Review: Sigal, you're the Chief Legal Officer and Company Secretary at Cyberbit, a cyber security skill development platform. Can you give us a brief overview of Cyberbit? Sigal Meged-Rosen: Cyberbit provides the world’s leading SaaS platform for training and skilling cyber security personnel. The platform simulates real live cyber-attacks within a virtual environment and enables cyber security teams to practice on how to defeat them. It also enables cyber security professionals to learn the building blocks required to mitigate each attack. Our platform includes many cyber security tools and networks, so that each organization can practice according to the tools and networks it ordinarily uses. It also provides an opportunity for cyber security teams to learn how to cooperate between themselves when they are under an attack, which is an essential skill. The platform includes many other features such as assessing the skills of candidates which the organization is considering to hire and conducting an executive crisis simulation in conjunction with a simulated cyber-attack. The Cyberbit platform serves over 500,000 exercises every year and is used by the world’s largest financial institutions, healthcare providers, global system integrators, government and military organizations, and higher education institutions. Cyberbit was founded in 2015 and employs approximately 150 employees worldwide. The US-Israel Legal Review: Could you outline for us the size and scope of your legal team. What are some of the key issues you are dealing with as we move into 2023? Sigal Meged-Rosen: My legal team is very small and includes one additional lawyer beside myself, and two paralegals, working on a part time basis. One of the paralegals is focused on legal operations and technology, and the other on compliance, partners, and customer on-boardings. As we are a small team, the contribution of every member of the department is critical for its performance. We are all based in Israel, where our headquarters are, but our company operates internationally. So we support our teams in multiple time zones, each of them with its own culture and language. Supporting our sales and marketing teams is our main focus, as they are the business drivers of the company. As we sell mainly to large and sophisticated companies (a lot of Fortune 500 companies), the legal process we go though can be challenging, and we constantly work on improving them internally and externally. Since we are a start-up company, I am always thinking about scaling up and preparing the company for the next stages. Our activity grows constantly, and we must adopt new and more efficient working methods to adapt ourselves to the rapid business growth of the company. I do this in collaboration with other departments, as processes in the company require the input of various departments. We have recently adopted a contract life management system, and we will continue to implement it and get more value out of it. In parallel, we will look for our next legal tech system. This is a very complex process as we perform an analysis of our needs, find and evaluate various systems and conduct thorough trials of such systems. We also keep improving our privacy General Counsel in the Spotlight Cyber attacks stood as the biggest corporate risk in 2022. Training and skilling cyber security personnel is thus essential for any business. Sigal Meged-Rosen, Israel-based GC for Cyberbit, explains her role in this vital industry. The US-Israel Legal Review 2022 61 compliance, as this is an everchanging field. The US-Israel Legal Review: And can you describe the role of the legal department in terms of the overall corporate growth strategy? Sigal Meged-Rosen: The main role of the legal department is to continue to be a business enabler, as the Company grows and evolves. This means supporting the legal and regulatory aspects of changes and evolvements in the product, supporting complex deals, supporting new marketing activities and entering into new territories. In all of these examples, the role of the legal department is to find a way to enable the company to achieve its goals. It also means, identifying and dealing with legal barriers ahead of time, so that they don’t jeopardize the company’s activities. These can be regulatory barriers that need to be analysed and dealt with, or various legal processes that should be performed ahead of time as to not create any business delays. How do you see the role of the in-house legal department developing over the next five years? I think that technology and the need to work efficiently will take an increasing part in the development of legal departments in the future. The number of legal documents required for doing business is increasing constantly. Legal budgets will not necessarily increase in the near future, and we may even be facing reduction in budgets. So, departments will find themselves having to do more with less. The way to achieve this, is by creating effective internal and external processes, and adding technology to complement them. This requires a close interaction between legal and all other departments which work with the legal in the company. It will also require creating more and more self-service processes, thus allowing other departments to receive guidance on how to act independently in certain areas, that don’t require direct involvement from legal. I have no doubt that Artificial Intelligence (AI) will have a significant impact on our work in the next five years. We already see in-house counsel starting to use ChatGPT and thinking how their organisations should use Generative AI. It’s difficult to predict exactly to what extent AI will influence our work, but there will be a major evolution in this field. Lawyers in general, and specifically legal departments will have to embrace this change, and find a way to be empowered by AI and to make it work for them. Lawyers are traditionally conservative, so this may require adopting a different mindset. This requires lawyers to realize that the “cheese has moved” and they should digest this and implement an action plan. The complexity of regulation, and increasing amount of regulation, will create more dependency of business on legal, so legal will have an increasing role in the business growth of the company. Privacy is a great example for that. Before the age of the GDPR, SIGAL MEGED-ROSEN CHIEF LEGAL OFFICER, CYBERBIT 62 The US-Israel Legal Review 2022 GENERAL COUNSEL INTERVIEW it did not take such a significant part in companies’ lives. Nowadays, there is almost no company that can do business without complying with the GDPR, and other privacy laws that have been enacted since 2018. So, both business and legal need to work together in order to enable the company to grow and achieve its strategy, but in a way which complies with this legislation. Privacy is just an example of course, and there are many other areas of regulation. I have no doubt that we will start seeing AI regulation and caselaw in the near future. In Cyberbit, for example, we take a very proactive approach regarding privacy and we have initiated recuring meetings with all the departments in the company to find out what’s new in the privacy aspects of their activity, and to update them on changes in regulation. Last but not least, legal departments will become more and more international, as their company’s business becomes more international. This entails many challenges. Managing a legal department with lawyers in many different locations, supporting the business in a growing number of locations, and being acquainted with many different legal systems. So legal departments will have to overcome knowledge gaps, culture gaps, time zone differences, employee management challenges, etc. The US-Israel Legal Review: In addition to your role at Cyberbit, you're head of the ACCI Legal Operations and Innovations Forum. Could you outline the mission behind your work there and what this brings to the Israeli in-house community? Sigal Meged-Rosen: I founded the ACCI Legal Operations and Innovations Forum over three years ago, at a time in which Legal Ops was not a concept known to most in-house counsel. I was always an Ops enthusiast, and it was important for me to spread the concept of working more efficiently, within the in-house community. I think that particularly in this field, we must learn from one another. It’s not a traditional legal field, where you can simply approach an outside counsel that will help you overcome a certain challenge. Even understanding that you need to change something, is not always obvious, and implementing a change within your organization can be very challenging. Creating awareness that you can work differently, implement processes and technology to save time and resources, create accuracy and clarity, are not concepts that were apparent within legal departments. Our forum brings this awareness and gets members thinking how they can do things differently. It also encourages members to take their first steps in this field, and that is the most challenging phase. Within the forum, we have various panels with members, that share their tips and insights so that others can learn from their experience. We also hold “peer discussions” on certain topics, which are more intimate meetings in which a certain topic is discussed between group members. We have a WhatsApp group with over 250 members, as a means of communication and asking questions. I believe Legal Ops will take a growing part in our professional lives, and since it’s a long and winding road, the mission for our forum is to get members on this road and begin their ride. The US-Israel Legal Review: Finally, you started out at a law firm before moving into in-house. What does the life of a CLO provide that tempted you across the aisle? Sigal Meged-Rosen: As CLO, you are a decision maker, and you don’t just consult someone else, as outside counsel does. Your intimate acquaintance with the organization, its strategy, its risk appetite, the industry it works in, its customers and supply chain, give you the tools to decide how to strategize the organization’s legal conduct, and some aspects of its commercial conduct. This puts a heavy burden on your shoulders. You have to be pro-active and come up with initiatives which you think are right for the organization – without necessarily being told to do so. You also have to be practical and pragmatic, so that the organization will want your advice and not try to bypass it. You have to be a team player and a very good business partner, and it is really up to you to create your status and meaning within the organization. So, there are so many aspects to being a CLO which are not part of your life as a lawyer in a law firm, and these really interested me, and still interest me today. n GLOBAL LEGAL MEDIA Helping Law Firms Grow Their Cross-Border Business l Custom publications l Social media programmes l Global meeting scheduling with prospective clients l Seminar and conference marketing l Lead generation l Legal marketing and media consultancy For more information, please visit: Contact: Danny Collins, Director [email protected] +44 (0) 7889 366340 64 The US-Israel Legal Review 2022 ISRAEL: CIVIL LITIGATION The State of Israel has an independent, adversarial legal system, modeled after the Common Law tradition. Disputants are free to define the scope of their dispute and the court will adjudicate only on the basis of their pleadings and the evidence they present. In determining the outcome, the court will apply the law which consists of primary legislation enacted by parliament, subsidiary legislation such as regulations and legal precedent. All judicial proceedings in Israel are bench trials as there is no right to trial by jury. Traditionally, Israeli civil procedure embraces written submissions and affidavits (subject to cross examination), rather than oral arguments and testimonies. However, the Civil Law Procedure Regulations, which have gone through an extensive revision which took force on January 1st, 2021 (“the Regulations”) now instate a clear preference of direct examination and oral summation. Many Judges have yet to adopt this new approach and prefer to rely on their discretion as established by the regulations. In recent years, certain influences of Continental Law principles can be identified in the Israeli legal system. These influences can be seen, for instance, in the revision of the Regulations which envisages a more active role for judges, as well as in the continuous effort by the Knesset (the Israeli Parliament) to codify substantive civil laws. Israel is a highly litigious state. It has the highest number of lawyers per capita, and an overwhelming number of claims filed each year, crowding its courts. According to the Courts Administrator, approx. 840,000 new claims and appeals were filed in 2021 – roughly 1 claim for every 11 citizens. This exceptional popularity of litigation ultimately leads to a tendency to default to legal proceedings (both in the court system and alternative dispute resolution forums such as arbitration) as the go-to option for solving disputes. THE STRUCTURE OF THE ISRAELI LEGAL SYSTEM The Israeli judiciary is comprised of a general court system alongside specialized tribunals. The general court system includes the Supreme Court, 6 District Courts (one in each judicial district) and 30 magistrate courts located throughout the different districts. Permanent specialized tribunals operate alongside the general court system, with limited subject matter or personal jurisdiction. These tribunals include, inter alia, labor courts, administrative courts, military courts, religious courts, family courts, the Antitrust Tribunal and the Standard Form Contracts Tribunal. The magistrate courts serve as the trial court of first instance for most civil disputes, having subject matter jurisdiction over claims for relief valued under ILS 2.5 million. The magistrate courts are usually presided over by one judge. District courts have appellate jurisdiction over the magistrate courts, and they serve as a residual Civil Litigation in Israel in Theory and Practice Those acquainted with Common Law will recognize many of the foundational principles of the Israeli legal system, alongside other formal and unwritten rules unique to Israel. The US-Israel Legal Review 2022 65 trial court of first instance when the magistrate courts and specialized tribunals lack jurisdiction. The district courts are usually presided over by one judge in their capacity as trial courts, and three judges in their capacity as appellate courts. The Tel Aviv and Haifa District Courts each have a specialized economic division. These economic courts are granted exclusive subject matter jurisdiction within the court over economic claims (such as shareholder disputes or derivative actions). Judges with the relevant knowledge and experience preside over each of these division. The Supreme Court is the highest court in Israel. It serves both as an appellate court for the district courts (by right of appeal for first instance cases, and by certiorari for appellate cases) and as a High Court of Justice with powers of judicial review. Fifteen justices are members of the Supreme Court, the senior of which is named President of the Supreme Court. Most cases are presided over by one or three justices, and five or more justices can preside over matters deemed especially significant. The decisions of the Supreme Court are final and are not subject to appeal, yet under extremely rare and unique circumstances a supreme court verdict can be subject to a re-hearing. As the High Court of Justice, the Supreme Court has material jurisdiction over petitions for judicial review of legislative and administrative action, including limited review of decisions of the specialized tribunals. While in some of these cases the High Court of Justice is in fact the court of first instance, it is not a trial court and it applies administrative rules of evidence, rather than the civil law rules of evidence. Appropriately, the High Court of Justice also has unique procedural regulations. Since many cases are granted right to the Supreme Court, either by appeal or as first instance petitions, the Supreme Court is extremely active – with almost 9,000 cases opened in 2021. According to the Courts Administrator, the average length of regular civil proceedings in the magistrate courts is 11.4 months (including claims that are dismissed before final judgment). The average length of regular civil proceedings initiated in the district courts is 20.2 months (including claims that are dismissed before final judgment), and 17.3 months for civil appeals in the Supreme Court. JURISDICTION AND EXTRATERRITORIAL SERVICE OF PROCESS Service of process is what allows an Israeli court to acquire jurisdiction over a foreign defendant. The Regulations establish that a prospective plaintiff can serve a foreign prospective defendant – if there are grounds for extraterritorial service – without requesting leave. The plaintiff is still required to motion the court requesting orders for executing the service. Such a motion must be accompanied by an affidavit supporting the cause of action of the perspective suit, as well as the existence of grounds for extraterritorial service, and must include the defendants address abroad to which process is intended to be served. SIVAN WULKAN AVIKA FUND The authors of this article, Sivan Wulkan Avisar (Partner) and Akiva Fund (Associate) are part of the Firm’s Litigation and Dispute Resolution practice and deal extensively with complex litigation cases including class actions and cases involving large international corporations. 66 The US-Israel Legal Review 2022 ISRAEL: CIVIL LITIGATION The Regulations include a comprehensive list of grounds for extraterritorial service, such as that the claim concerns a property located in Israel, or the claim concerns a contract subject to the laws of Israel. All the grounds require some connection between the claim and the State of Israel which justifies the court assuming jurisdiction over the claim. The Regulations establish an especially broad scope of grounds for service of process concerning torts. According to these, damages incurred by the plaintiff in Israel from a product, service or conduct of the defendant, are sufficient grounds for extraterritorial service - provided that the defendant could have anticipated that the damages could be caused in Israel, and that the defendant, or a person affiliated with him/her, is significantly engaged in international commerce or services. This clause came into force in December 2018 and applies prospectively to claims initiated thereafter. The court has the discretion to deny the perspective plaintiff’s motion for orders for execution of service, and rule that under the given circumstances process will not be served extraterritorially. If the court does not deny the motion, and process was served accordingly, the defendant may move to quash the extraterritorial service arguing that the Israeli court lacks jurisdiction or is not the appropriate forum for adjudication of the dispute (forum non convenience). CLASS ACTIONS Class action lawsuits have become a prevalent phenomenon in Israel in recent years, including against foreign international corporations. The legal framework for filing and adjudicating class actions in Israel is outlined in the Class Action Law, 5766-2006 and the Class Action Regulations, 5770-2010. The Class Action Law limits the causes of action that can be certified as a class action. In practice, class actions may be certified for a series of civil causes of action derived from contracts law (e.g. breach of contract) or torts law (e.g. breach of a statutory duty). Another approved cause of action relates to claims based on the Consumer Protection Law, such as misleading consumers regarding material aspects of a transaction (e.g. the nature of the asset or service); the date of delivery or provision of goods or services; the usual or customary price of the good or service; transaction cancellation terms, etc. This cause of action includes claims against a dealer concerning matters between the dealer and the consumer, whether they have engaged in a transaction or not. A “dealer” is defined broadly in the Consumer Protection Law, and includes any seller, supplier, manufacturer, importer or marketer that sells goods or provides a service in their regular course of business. While the definition of “Consumer” in the Consumer Protection Law excludes a person (or entity) who acquired the goods or services mainly for commercial uses, the Supreme Court has recently ruled that under some circumstances certain commercial entities can be defined as “Consumers” when examining the applicability of the Consumer Protection Law. In recent years, there has been a significant increase in “private enforcement” of the Antitrust Law through the filing of class actions. Thus, increasing numbers of class actions that raise claims regarding the Antitrust Law, such as alleged damages caused in Israel by international price fixing conspiracies (cartels) and general cases regarding allegations of excessive pricing, are being heard before courts in Israel. A declaration of a breach of the Antitrust Law by the Israeli Antitrust Commissioner serves as prima facie evidence in all legal proceedings, and thus facilitates the submission of class actions regarding the subject of the declaration. Other prominent causes of action stem from the Law of Unjust Enrichment, and the Standard Form Contracts Law which will be detailed later. An additional popular cause of action in recent years is unlawful invasion of privacy, especially in cases where information regarding customers is collected and stored. Under Israeli law, a class action is adjudicated in two stages: The US-Israel Legal Review 2022 67 • The certification stage – where the court decides whether to allow the class plaintiff to lead a class action on behalf of the class they claim to represent. • The adjudication of the action itself – which is similar to the adjudication of any other civil claim in Israel. The certification stage begins with the plaintiff filing a motion to certify the class action. The motion to certify must demonstrate that the claim meets the cumulative conditions required for the court to certify the motion: • The plaintiff must have a personal cause of action concerning the subject of the motion, and their cause of action must have a reasonable chance of success. • The class action raises material questions of law or fact that are common to all the members of the represented class. • There is a reasonable chance that said mutual questions will be decided in favor of the represented class in the adjudication of the claim. • A class action is the fair and effective mechanism for resolving the dispute. • There is a reasonable basis to assume that the class plaintiff will duly and properly represent the interests of the represented class. • There is reasonable basis to assume that the interests of all class members will be represented and managed in good faith. The respondents are entitled to respond to the motion to certify, and the class plaintiff is then entitled to reply to the respondents’ response. Following the parties’ submissions, the court will usually set a preliminary hearing, for the purpose of simplifying and expediting the adjudication of the motion to certify, or to explore the option of amicably resolving dispute. At times, the court might propose that the parties turn to mediation. Should mediations or the preliminary hearing fail to bear fruit, the court will usually schedule evidentiary hearings, wherein the affiants on behalf of both parties are subjected to crossexamination (unless the parties agree to forgo cross-examinations). The evidentiary hearings are typically followed by written summations, following which the court decides whether to certify the class action. If the motion to certify is granted, the court will include in its decision the legal questions that will be adjudicated and the definition of the class to be represented by the class plaintiff. The decision to certify a class action can be challenged by leave of appeal filed to the relevant court of appeal. A decision to deny the motion to certify, on the other hand, can be appealed by right. However, the court’s decision in the claim itself (following the granting of the motion to certify) can be appealed by right to the relevant court of appeal. The Class Action Law sets out a unique procedure for the approval of settlements, which are subject to the court’s approval. The parties must publicize a notice to the public with the terms of the proposed settlement. Furthermore, a copy of the proposed settlement must be sent to the Attorney General, the Courts Administrator and the relevant regulator (such as the Custodian of Consumer Protection). These officials, as well as any member of the represented class, and any entity or government body that operates to further public goals in fields relevant to the motion, may file objections to the proposed settlement. Additionally, the court should receive an opinion from an expert in the fields relevant to the motion to certify, analyzing the advantages and disadvantages of the settlement. The court will only approve the settlement if it finds that the settlement is fair, reasonable and proper, considering the interests of the represented class. In the event that the settlement is reached during the certification stage, the court must also find that the prerequisites for certifying the motion are fulfilled. NOTEWORTHY PROCEDURES AND PRINCIPLES IN ISRAELI LAW GOOD FAITH A great emphasis is placed on the principle of “Good Faith” under Israeli law. The duty of a party 68 The US-Israel Legal Review 2022 ISRAEL: CIVIL LITIGATION to act in good faith is often sufficient to establish liability (or rights), and sometimes even to create duties towards a party harmed by conduct in bad faith – even if said obligations are not expressly included in the original agreement between the parties. In practice, the courts consider themselves authorized to provide broad interpretations of the language of the contract and enforce contractual obligations that are not expressly (or even implicitly) set out in the agreement between the parties. The duty to act in good faith was set in the Israeli Law of Contracts and applies to all the contractual stages – negotiations, the execution of the agreement and termination thereof. Over the years, the application of the principle was extended beyond the Law of Contracts. In accordance with well-established and binding Israeli case law, the principle of good faith now applies to all areas of private law. UNJUST ENRICHMENT Unjust Enrichment is a recognized and wellestablished cause of action under Israeli law. It is often used by the injured party in situations where there is difficulty proving damages (or where it is impossible to do so), but where the injured party can show that there is enrichment resulting from a breach of contract. Under such circumstances, a party might be required to reimburse the other party for its enrichment. Under Israeli law, a plaintiff must prove 3 cumulative elements in an unjust enrichment claim: (1) The existence of enrichment; (2) the enrichment is at the expense of the plaintiff; and (3) the enrichment is unlawful. STANDARD FORM CONTRACTS A standard form contract is a contract with a uniform formulation intended for many engagements. Generally, the contract is drafted by one party, or at its request, in order to be used in agreements with its customers and is usually presented to the customer as a finished product that cannot be negotiated (“take it or leave it”). The Standard Form Contracts Law, 5743- 1982 was enacted to protect consumers party to a standard contract. The law stipulates that in circumstances where – considering the entirety of the contract’s provisions and the context of the engagement – a specific clause of a standard form contract is found to be exploitative or provides an unfair advantage to a service provider, the court is empowered to invalidate it. The Law also includes a list of instances which are presumed to be exploitative. Numerous claims are filed under this cause of action, alleging that the provisions set out in agreements dictated by service providers are exploitative and therefore, not binding. Many class actions are based on claims alleging the exploitatively of clauses in standard form contracts - such as user agreements of international online platforms. n ABOUT ARNON, TADMOR-LEVY Arnon, Tadmor-Levy is a preeminent Israeli law firm. With approximately 450 lawyers and interns, including 140 partners, the law firm of Arnon, Tadmor-Levy is a leader in its areas of practice. The firm offers diverse legal services and a proven track record of success to its clients, which include many of Israel’s largest companies, government and public entities, premier investment funds, and leading multinational corporations. The firm’s Litigation and Dispute Resolution practice group is among the largest and most leading in Israel. Our partners and associates are profoundly experienced in all forms of civil and commercial litigation, class actions and administrative proceedings, and provides comprehensive legal services to a broad and well-established clientele – both domestic and international. The practice is consistently highly ranked and recommended by international and domestic legal publications and directories, including Legal 500 and Chambers and Partners. The firm has a reputation for excellence and precision and provides its clients with tailormade solutions accompanied by unwavering service. The US-Israel Legal Review 2022 69 Preeminent Israeli law firm 132 Begin Road, Azrieli Center, Tel Aviv 6702101 | Tel: +972-3-6087777 | Fax: +972-3-6087724 31 Hillel Street Jerusalem, 9458131 | Tel: +972-2-6239239 | Fax: +972-2-6239233 70 The US-Israel Legal Review 2022 US DISTRESSED INVESTING WHY INVEST IN DISTRESSED ASSETS? The nature of a distressed asset is one whose intrinsic value is depressed because of either operational or financial distress. Distressed assets offer investors an opportunity to buy cheaply, with the potential for significant upside as the assets regain their value. Admittedly, investing in distressed assets requires a certain appetite for risk, which means that the pool of potential investors is usually smaller than for healthy investments. Potential pitfalls include (i) investors’ general inexperience or lack of understanding in handling distressed assets, (ii) a different business or risk profile of the assets (and potential attendant regulatory pressure), and (iii) political or reputational risk of certain distressed investments. However, as a result of these risks, distressed investments present unique potential for opportunity for investors willing to accept certain levels of risk and create value. Put another way, investing in distressed assets can have significant upside for investors who are willing to take some risks on assets that require more active management or oversight than the average healthy investment. ACTIVE VERSUS PASSIVE INVESTMENTS Within the broad category of distressed investments lie investment options and asset classes catering to different types of investors with diverse capabilities and willingness to become involved in the management of the investment. At one end of the spectrum investors are looking to be minimally involved in the management of the investment and are primarily interested in the return. These investors will generally rely on other parties in the capital stack to actively manage the asset or restructuring. For example, investors can buy distressed syndicated loans that need little to no active management of the underlying company but merely require the investor to determine when to buy and/or sell and have a high enough risk tolerance for the investment asset at issue. At the other end of the spectrum are active investors whose goal is to purchase or take control of the underlying company or assets and either work with existing management or seek to replace existing management, in an effort to increase the performance of those assets and their return on investment. Thus, some investors employ a “loan to own” strategy, which involves buying up the debt of a company in order to effect remedies and ultimately convert their debt into a controlling ownership stake in the underlying company. TYPES OF DISTRESSED INVESTMENTS – REAL ESTATE There are various types of distressed investments available in the US, and in the current market, investors may soon have even more opportunities and options. In particular, there appear to be unique opportunities in the real estate sector, to either purchase existing non-performing loans including mortgage loans or mezzanine loans or to extend rescue financing to borrowers that are no longer able to obtain more traditional financing. Within the category of rescue financing, investors in the current market can opt for the following: (i) refinancing maturing loans in the current uncertain market (often at higher interest rates), (ii) financing new construction projects, US Distressed Investing: A Guide Distressed US assets present unique investment opportunities for those willing to accept certain levels of risk and create value. The US-Israel Legal Review 2022 71 (iii) financing strategic purchases of real estate parcels or existing buildings or (iv) financing the conversion of commercial office buildings to residential or mixed-use projects. As a result of the recent market turmoil and increase in interest rates, there has been a marked increase in defaulting loans in the commercial real estate market. As governmental COVID assistance programs expire and tenants renegotiate commercial leases for better terms, less space or both, landlords will find themselves with fewer sources of funds with which to service their mortgage debt. According to a recent Fitch report1 , older office space at risk of obsolescence with upcoming tenant rollover is at high risk of mortgage default. In addition, buildings in this class will have more difficulty finding new tenants, who are migrating to newer, higher quality space. As a result, those borrowers will have difficulty in servicing their mortgage debt. Approximately 75% of commercial mortgage debt is held by banks, government-sponsored enterprises (“GSEs”) and as commercial mortgagebacked securities. As loans go into default, those lenders will either (i) foreclose on their mortgages and sell the underlying property (often at below-market prices) or (ii) sell the mortgages themselves as distressed assets. This will likely result in distressed investment opportunities. In the case of buying distressed real estate assets at a foreclosure sale, investors have the opportunity to acquire those underperforming assets from lenders whose priority is recouping the amounts owed on their mortgages. This presents a potential cost savings on an asset that might otherwise sell at a higher price outside of the foreclosure context, leaving a purchaser with significant potential upside. Investors looking to purchase distressed mortgages as financial instruments have the chance to step into the shoes of mortgage lenders and foreclose on the property following default or negotiate a consensual transfer of the underlying assets in exchange for a release of the debt. As the holder of the mortgage loan, the investor could either (i) “credit bid” (i.e., offer an extinguishment of all or part of its debt rather than cash) on the property to become its owner without an additional outlay of funds or (ii) sell the underlying assets for a price higher than the investor paid for the mortgage loan, thereby securing a more immediate return on investment. The current market also presents an opportunity for rescue financing from lenders willing to take a risk, who can, as a result of the tenuous position of these borrowers, extract more investor-friendly provisions when making loans. Such provisions include (i) higher interest rates, (ii) prohibitions or penalties on prepayment (to preserve the steady flow of interest for a guaranteed period), (iii) additional payment-inkind (“PIK”) interest, (whereby borrowers can defer interest payments, which can be paid via the issuance of more securities rather than with cash), and (iv) preferred equity “kickers” from borrowers in exchange for investments. Additional opportunities are also increasing in conversion of commercial office buildings to MICHAEL FRIEDMAN PARTNER, PRACTICE GROUP LEADER - SPECIAL SITUATIONS AND RESTRUCTURING GROUP, HEAD OF ISRAEL PRACTICE HELENA HONIG ASSOCIATE, SPECIAL SITUATIONS AND RESTRUCTURING GROUP 72 The US-Israel Legal Review 2022 US DISTRESSED INVESTING multifamily housing. There are two notable trends in the current market: a shortage of multifamily housing and a surplus of commercial office space. The housing market is experiencing some of the highest rents in recent memory, while companies are rethinking their physical footprints with the advent of remote work accelerated by the COVID-19 pandemic. The result? Not enough housing, but vast amounts of downtown office space across American cities. According to Jones Lang LaSalle (“JLL”), more than three-quarters of the office space in New York, San Francisco and Chicago is more than 30 years old, while office occupancy rates remain low in major cities. As more and more companies are institutionalizing remote work as part of corporate work policy, they are also downsizing office footprints and cutting their real estate costs. Accordingly, space that was previously allocated to commercial use may be a prime candidate for conversion into residential and multi-use space, i.e., adaptive reuse projects. In addition, leases for approximately 243 million square feet of office space will have expired by the end of 2022. This represents roughly 11% of office space in the United States. Further, the volume of lease expirations is projected to exceed 200 million square feet for each of the next three years (2023- 2025)2. As businesses reconsider how much office space to occupy, at least a portion of this square footage will remain vacant. As vacancy levels rise, the profitability of office buildings with increasing amounts of unleased space will decline. This presents a unique opportunity to repurpose that commercial space for a use that is in high demand, and to turn commercial space into residential space. According to a report in RentCafe, adapting existing buildings into apartments, rather than building new multifamily housing, can be extremely cost-effective, with renovations that can cost up to 40% less than new construction for the same number of units. Adaptive reuse projects can help transform assets with declining value (i.e., old office space) into assets for which there is a high demand (i.e., centrally located housing in dense urban areas) at a lower cost than starting from scratch. Together, all of these factors make a compelling case for repurposing existing buildings for new types of use3. TYPES OF DISTRESSED INVESTMENTS – FINANCIAL INSTRUMENTS Another avenue of distressed investing is the purchase of distressed financial instruments. These instruments can be cheap relative to their intrinsic value – fewer buyers (and better prices) for debt that is the subject of a forbearance or restructuring, the result of which is a larger upside than investing in healthy debt. Further, debt that is distressed may be misunderstood, but still have some value (e.g., debt issued by a declining company or business). There can be significant advantages to investing in distressed debt. First, an investor may be able to influence the outcome of a company’s equity without the burden of the regulation that comes with being an equity investor. This can be the case when a company’s equity holders are “out of the money,” obligating the company to work with its debt holders to come to an arrangement on how to move forward. In addition, there may be unseen benefits to buying a company’s distressed debt, such as intellectual property assets or valuable litigation claims, that an investor can monetize. Owning distressed debt may also be an efficient way to end up as the equity owner of a company, either by extending new financing or cancelling indebtedness for a percentage of the ownership. Lastly, investing in distressed debt allows an investor to “try before you buy” – investors have the option of changing their minds and offloading the debt prior to a reorganization. Distressed debt can be secured or unsecured. Examples of secured debt include: first lien loans, second lien loans, third lien loans, unitranche debt (which combines senior and subordinated debt), revolving loans, letters of credit, term loans and secured bonds. Examples of unsecured debt include vendor/trade payables, borrowed money (with no collateral) and bankruptcy rejection claims (the amount a debtor must pay a contract counterparty when rejecting a contract in bankruptcy). There are certain considerations for investors looking at distressed debt. First, unsecured or under-secured obligations that are in default The US-Israel Legal Review 2022 73 generally accrue no interest – instead, they accrue a negative internal rate of return (“IRR”) while the default exists. Second, recovery on distressed debt is capped at the full value of the financial instrument (i.e., at par), whereas there may be an unlimited upside for other types of investments. Lastly, distressed debt is usually issued by a company experiencing problems. Investors who make a bad bet on a company that cannot pay back what it owes face the possibility of a complete wipeout of their investments. UNDERSTANDING RULES OF PRIORITY Both in and out of bankruptcy, parties with monetary claims against a company must be paid back in a certain order. Outside of bankruptcy, this is determined by the contractual terms of a company’s debt, with secured lenders holding the option to foreclose on their collateral in case of a default. In addition, lenders can contract among themselves to determine who gets paid first, using either an intercreditor or subordination agreement. Once a company has filed for bankruptcy protection in the US, creditors must be paid according to the “Absolute Priority Rule”. Also referred to a liquidation preference, this governs the order of payment among creditors and other financial stakeholders in the following order of priority: • Administrative Expenses These include certain taxes, wages, professional fees incurred during the bankruptcy proceeding, and claims of creditors for goods supplied within 20 days prior to the bankruptcy. • Secured Creditors • Junior Lien Creditors These include second (or third) lien lenders. • General Unsecured Creditors These include creditors with no form of collateral, such as general suppliers. • Subordinated Creditors These include creditors that have agreed to be contractually subordinated to other creditors • Equity Holders The holders of a company’s equity are the last to be paid the value of their shares in the company and are often wiped out in a bankruptcy. DISTRESSED FINANCIAL INSTRUMENTS INVESTMENTS – TRADING BASICS The most common instruments traded in the market are loans, bonds and credit default swaps. Other investments include trade claims (purchasing the right of a vendor to receive payment for goods or services) and vendor puts (issuing a contractual instrument that allow vendors to assign their rights to receive payment to the put seller upon a customer’s bankruptcy in exchange for a premium to the put issuer). In each of these scenarios, the obligation being sold is a right to receive payment, whether on a loan, a bond, or a simple supplier arrangement. As a company’s likelihood of payment decreases due to its distress, many creditors want to cut their losses and recoup the highest amount possible in the short term, rather than waiting to see how much their claims might be worth in bankruptcy. This is why distressed and discounted paper is quoted at “cents on the dollar,” i.e., a percentage of their face value. VALUATION METHODS The most important consideration for an investor looking into distressed markets is the valuation of the company whose debt the investor might buy. As previously discussed, a creditor who owns a defaulted obligation is limited to recovery of the face value of the instrument. Accordingly, valuation is essential to determining the possible upside of an investment relative to how much the investor paid for it. Investors use a variety of methods to determine valuation, which are as follows: • Trading multiples of comparable instruments. A comparable trading multiple is a relative valuation used to assess a company’s worth. This process involves finding a collection of similar / peer companies and deriving multiples based on their financials and market values to 74 The US-Israel Legal Review 2022 US DISTRESSED INVESTING assess how a potential investment measures up against other similar options in the market. • Transaction comparisons. This involves looking at recent transactions (last five years, depending on market conditions) for similar assets in similar markets to establish whether the deal terms fall within a range of reasonableness. This method is most often employed in real estate transactions and is rare in the corporate world. • Sum of the parts of a business. This method is used when businesses have different multiples, often while divesting a company of certain under-performing aspects of its business. This method is intended to show value that a more holistic approach might overlook by evaluating the component parts of a company separately. • Discounted cash flow. This valuation method estimates the value of an investment using its expected future cash flows. If the present value of future cash flows exceeds the current price of an investment, then it is unlikely an investor will make money on that investment. This method is better suited to long-term investments. • Liquidation value. This method is used to estimate downside and should yield a number that is lower than the methods described above. A liquidation analysis models the distribution of a company’s assets according to the order of priority of its creditors to see how much a particular class of obligation would receive in a liquidation of the company. KEY RULES FOR DISTRESSED INVESTING Know Your Downside Risk. Do a liquidation analysis of the target company you want to invest in. The best distressed investments are based on a strong liquidation value. If the liquidation value of the investment is not at least equal to the purchase price, you are more likely to lose money. Due Diligence is Key. Due diligence considerations include (i) whether the company is over-leveraged, (ii) whether the company has bad management, (iii) whether there are commodity issues, (iv) whether the company is currently involved in litigation, and (v) what liabilities you would want to avoid as an investor. Evaluating these factors, and a company’s prospects generally, are the keys to deciding whether there is enough likelihood that the value of the investment will increase over time. Recognize that You May Need Help. When investing in a new type of asset or extending financing to a company in an unfamiliar industry, investors should be mindful of their own inexperience. Consider seeking out an advisor with expertise in the investment you are making, who can evaluate the diligence you receive during the investment process. Understand the Mechanics. Most importantly, know what your obligations are, and be familiar with what happens in a worst-case scenario. Being prepared is the best way to monitor and protect your investment. CONCLUSION Distressed investments are not for everyone but present unique opportunities for investors willing to accept higher levels of risk in order to generate value and higher returns. We believe that the current market will generate significant opportunities to invest in distressed and stressed companies. Of course, as with any investment but, particularly with distressed investments, legal and financial diligence and structure are key. Chapman invites inquiries and questions on this topic and stands ready to advise on the legal aspects of distressed investing in the US. n ACKNOWLEDGEMENT The authors would like to thank Harold Bordwin from Keen Summit Capital Partners for providing background summarized in the real estate portion of this article. 1 Fitch Ratings, November 29, 2022 (https://www. 2 Source: TheRealDeal April 12, 2022. 3 February 17, 2022. The US-Israel Legal Review 2022 75 Chapman and Cutler llp • • Attorney Advertising Material. Charlotte • Chicago • New York • Salt Lake City • San Francisco • Washington, DC 76 The US-Israel Legal Review 2022 US: CAPITAL MARKETS The “traditional” IPO model continues to be the “gold standard” for Israeli companies going public in the United States, but the IPO market has been effectively shut down for almost a year. For a while, Israeli companies looked to SPAC mergers as an alternative, but that market has also been effectively shut down. One option that companies can also consider is a “direct listing,” where a company is listed on an exchange without a capital raising transaction, and instead files a registration statement to facilitate a listing and permit existing shareholders to sell into the market without a formal offering. For an Israeli company, direct listings can take two distinct forms: (i) an initial listing by a private company, which is focused on discovering a market price for the company’s securities and creating liquidity for the company’s shareholders, and which we refer to as a “Direct Listing IPO” and (ii) a second U.S. listing by a company that is listed outside the United States, such as on the TASE, which is focused on creating a U.S. market for the company to facilitate future capital raises and increase liquidity, which we refer to as a “Secondary Direct Listing.” Each of these types of direct listings has its own distinct process as well as advantages and disadvantages, but they provide Israeli companies with valuable optionality to provide their shareholders with more liquidity, particularly in tough equity markets. The key drawback to both of these options has been that they do not provide the opportunity for a primary capital raise in connection with the listing, but recent rulemaking developments have begun to address issues that may result in the ability to raise primary proceeds in a Direct Listing IPO. DIRECT LISTING IPO A Direct Listing IPO can be distinguished from a traditional IPO in that there is no “underwritten offering” – that is to say, the traditional marketing process of a company or its shareholders selling a block of securities to institutional investors through one or more investment banks that act as underwriters at a price determined through a book-building process run through the underwriters, is absent. Instead, the company’s outstanding shares are listed on one of the stock exchanges and existing shareholders are then free to sell shares at market prices determined by the exchange. Because this is normal trading activity, it can be accomplished even when the IPO market is shut down. While there is no need for the participation of underwriters in a Direct Listing IPO, investment banks are still needed to advise the company. A Direct Listing IPO provides certain important advantages to private companies aiming to go public. Some of the key advantages include: Market-driven Price Discovery – In a Direct Listing IPO, the opening price for the stock on the day of listing is determined based on the buy and sell orders submitted through the facilities of the exchange. This is in contrast to the traditional IPO where underwriters collect orders from their institutional investor clients, Direct Listings: A Viable Alternative to Traditional IPOs With the IPO and SPAC markets effectively shut down, Israeli companies seeking a U.S. listing may want to consider the direct listing route The US-Israel Legal Review 2022 77 which then form the basis of the sale price. The entire block of shares are then sold to those institutional investors at that price and those investors turn around and sell some or all of the shares they purchased once the stock opens on the stock exchange; and it is these sales by the institutional investors, and not the sales by the company’s existing shareholders that provide the supply of shares in the stock exchange. As you might expect, this suggests that the price that the existing shareholders receive is set at a discount from what the institutional investors expect to be able to receive when they resell the shares on the exchange. By contrast, in a secondary Direct Listing IPO, the company’s existing shareholders can sell at any time after the stock opens on the exchange at the then current market price. The flexibility of order sizes and the broader potential market of buyers suggest that the price at which shares are sold in a Direct Listing IPO should, at least theoretically, be a more accurate market price than in a traditional IPO, and should also avoid the “IPO discount” found in a traditional IPO. More Liquidity for Existing Shareholders – In a traditional IPO, the institutional investors that purchase the shares sold in the offering often expect that safeguards will be put in place such that there will not be a competing supply of shares when they turn around to resell the shares on the stock exchange. As a result, lockup agreements are typically signed between the company and existing shareholders and the underwriters whereby the company and the existing shareholders are restricted from making additional sales for a period of 180 days postIPO. In a Direct Listing IPO, lockups are not required and, therefore, existing shareholders are free to sell their shares as soon as the stock is listed, subject only to restrictions placed by the company. Lower Fees – Because there are no underwriters in a Direct Listing IPO, the selling shareholders do not bear the cost of an “underwriting discount” – the difference in the price at which shares are sold to the underwriters and the price at which the underwriters resell the shares to the institutional investor purchasers. As noted above, this does not mean that investment banks are not involved in Direct Listing IPOs, and the company will bear the cost of paying for the services of those investment banks, which act as financial advisors to the company. That being said, the number of investment banks that typically advise on a Direct Listing Direct listings provide Israeli companies with valuable optionality to provide their shareholders with more liquidity, particularly in tough equity markets PEDRO J. BERMEO PARTNER, CAPITAL MARKETS, DAVIS POLK MICHAEL KAPLAN HEAD OF CORPORATE PRACTICE, CO-HEAD OF ISRAEL PRACTICE, DAVIS POLK 78 The US-Israel Legal Review 2022 US: CAPITAL MARKETS IPO is smaller than the number of underwriters involved in a typical traditional IPO and, therefore, total costs of the process tend to be lower. There are, however, some important considerations that mitigate some of the perceived advantages of a Direct Listing IPO. These include: No Primary Capital Raise – All of the Direct Listing IPOs that have been completed to date have been secondary offerings where the supply of shares in the market is provided by existing shareholders of the company and not by the company itself. This is because of regulatory limitations, and while there has been some positive movement lately in the regulatory framework, it still remains unclear how feasible primary capital raises will be in Direct Listing IPOs. Potential Volatility and Illiquidity in the Stock – In order to meet minimum listing requirements and, more importantly, in order to ensure there is sufficient liquidity in the stock, a company considering a Direct Listing IPO must have a wide pre-IPO shareholder base with sufficient desire for liquidity. In particular, companies going public must have several hundred holders of round lots of stock (although this can be solved by gifting stock to employees to achieve this level). A lack of sell-side supply can act as an anchor for the market price of a public company’s stock. Similarly, a successful Direct Listing IPO company should have sufficient buy-side demand following listing. This could be challenging if the company is a lesser known name, particularly if research analysts do not pick up coverage once the company is listed. It is important to note that one of the key advantages of a traditional IPO is that the entire underwriting syndicate, which, as discussed, is broader than the financial advisor group in a Direct Listing IPO, participates in investor education through the IPO process and then provides research coverage following the IPO. A company with a smaller following that pursues a Direct Listing IPO may not have the benefit of that research coverage or investor education support, which may aggravate any demand issues. Additionally, traditional IPOs have built-in mechanics that are intended to reduce volatility – namely the 15% overallotment option that allows underwriters to provide support for the stock if it trades down after opening and the lockup agreements that help manage post-listing supply – both of which are absent in a Direct Listing IPO. Regular IPO Documentation - One might think that because there is no underwritten offering in a Direct Listing IPO the documentation requirements would be less burdensome. Unfortunately, that is not the case. Regulatory requirements mandate the filing of a registration statement under the Securities Act of 1933 with the SEC in connection with a Direct Listing IPO. As a result, the public disclosure that a company prepares for a Direct Listing IPO will be the same as what it would be required to prepare for a traditional IPO. Additionally, the existence of Securities Act liability (the contours of which will be litigated in the U.S. Supreme Court this term) and the question about whether any such liability extends to the financial advisors in a Direct Listing IPO means that, practically speaking, financial advisors will require the same customary due diligence process as in a traditional IPO, including comfort letters and legal opinions. These considerations make clear that a Direct Listing IPO may not be the right choice for every private company. However, we have seen Direct Listing IPOs be a valuable alternative to companies that are well suited – namely, companies We have seen Direct Listing IPOs be a valuable alternative to companies that are well suited— namely, companies with a larger following and widely held preIPO equity The US-Israel Legal Review 2022 79 with a larger following and widely held pre-IPO equity. For example, the Spotify Direct Listing IPO, which is one of the Direct Listing IPOs in which Davis Polk was involved, saw lower volatility and higher trading volume on listing day than many comparable traditional IPOs of the last decade. SECONDARY DIRECT LISTING The second type of direct listing that an Israeli company may consider is a secondary listing in the United States once the company already has a listing outside the United States, such as on the TASE. The process for this form of direct listing is much simpler and involves lower costs than a Direct Listing IPO. However, like a “traditional” Direct Listing IPO, a Secondary Direct Listing does not include a primary capital raising transaction. Rather, the key advantage of a Secondary Direct Listing is that it gives existing shareholders the benefit of the liquidity provided by the U.S. capital markets and sets up the company to be in a position to take advantage of the U.S. capital markets for future primary raises. In a Secondary Direct Listing, a company that is already listed on another exchange applies to list its stock on one of the U.S. stock exchanges. Additionally, the company must file a registration statement under the Securities Exchange Act of 1934 with the SEC. This registration statement includes factual information about the company’s business and operations and includes financial statements prepared under IFRS, as issued by the IASB, or U.S. GAAP. In general, a TASE-listed company can modify its Israeli prospectus or annual report into a U.S. registration statement relatively easily. While the registration statement would be subject to securities law liability, importantly, and unlike in a Direct Listing IPO, there is no Securities Act registration statement that could form the basis for Securities Act liability for an investment bank, and often companies that pursue Secondary Direct Listings are not advised by investment banks, which means that there is no need for a costly IPO-style due diligence process involving comfort letters and legal opinions. Once the registration statement is declared effective and the listing application is approved, the stock will open for trading on the relevant exchange, and its opening price will be based on the price of the stock on its primary exchange. Following the listing, the company becomes an SEC registrant and will be required to file annual reports, which look very similar to the registration statement filed in connection with the Secondary Direct Listing, but only cover the most recent year, and also current reports on Form 6-K when required to make public disclosures pursuant to the law of the home country or stock exchange rules. In addition, market practice is for U.S. public companies, including Israeli companies, to report interim results every quarter and file unaudited financial statements with the SEC. Importantly, as a U.S. public company, a company that undertakes a Secondary Direct Listing would be able to more easily access the U.S. capital markets in the future. The company’s reporting history with the SEC and its U.S. listing is likely to increase the company’s profile with U.S. investors and, one year following the listing, the company would be eligible to use the “shelf registration process,” which is a process available to seasoned issuers under SEC rules that allows them to access the capital markets in a faster and more cost-efficient manner by avoiding regulatory preapproval at the time of the transaction. Additionally, the The key advantage of a Secondary Direct Listing is that it gives existing shareholders the benefit of the liquidity provided by the U.S. capital markets and sets up the company to be in a position to take advantage of the U.S. capital markets for future primary raises 80 The US-Israel Legal Review 2022 US: CAPITAL MARKETS added liquidity provided by the U.S. listing may be helpful to existing shareholders and lead to a more efficient market price for the stock. Secondary Direct Listings, however, are not free from challenges. The main issue, similar to what Direct Listing IPOs face, is a potential lack of familiarity with the company in the U.S. market at the time of listing. A company that faces this issue could find itself without sufficient research analyst coverage, which can exacerbate the problem. Without a sufficient following, the stock could face low volumes in the relevant U.S. exchange, at least initially, which could make sales in the U.S. more difficult and could lead to volatility in the stock. We have found that Israeli listed companies, including Israeli companies, are able to find benefits in a Secondary Direct Listing. This includes recent examples, such as the Secondary Direct Listing of Nayax on which Davis Polk advised the company. PRIMARY DIRECT LISTING IPOS As noted above, one of the key disadvantages of Direct Listing IPOs to date has been that due to regulatory limitations, Direct Listing IPOs have not included primary capital raises. Recently, the New York Stock Exchange and the Nasdaq have adopted rules intended to facilitate primary Direct Listing IPOs. However, regulatory hurdles that reduce the desirability of primary Direct Listing IPOs remain. The basic framework for how primary Direct Listings are intended to work is that the company must identify in its registration statement the number of shares that it wants to sell and a price range in which it expects to sell such shares. Under the modified stock exchange rules, the opening auction must (i) include all of the shares that are offered on the registration statement and (ii) clear a price up to 20% below or 80% above the disclosed price range in registration statement. Unfortunately, the current rules do not provide flexibility to change the number of shares being offered or to have larger deviations from the price range included in the registration statement without filing an amendment to the registration statement with the SEC, which is subject to SEC review, and effectively means the stock cannot open for trading on the intended date. This can create issues when there is not sufficient demand for the number of shares being offered at a permissible clearing price and reduces flexibility for the company when the demand is higher than what the company originally offered, and the company would have liked to take advantage of such demand. The framework also reduces some of the advantages found in secondary Direct Listing IPOs as it requires that all of the shares being sold by the company be sold at the same price. Additionally, the modified rules do not solve all of the regulatory obstacles to primary Direct Listing IPOs, including the absence of noaction relief under Regulation M to permit Direct Listing IPOs with both a primary and secondary component. This means that until the SEC provides such relief, primary Direct Listing IPOs could only be conducted without a secondary component, which eliminates many of the advantages of Direct Listing IPOs for existing shareholders. n Pedro J. Bermeo is a partner in Davis Polk’s Capital Markets practice. He advises U.S. and nonU.S. issuers and underwriters on capital markets transactions, including IPOs and other equity offerings, and public and private high-yield, investment-grade and convertible debt offerings. Pedro’s work in Israel includes advising on capital markets transactions and ongoing reporting for companies such as ZIM Integrated Shipping and Amdocs. In 2022, Law360 named Pedro a Rising Star in Capital Markets. Michael Kaplan is head of Davis Polk’s Corporate Department and co-head of the firm’s Israel practice. He advises issuers and underwriters on a wide range of U.S. and international capital markets and leveraged finance transactions, including IPOs, other equity offerings, and convertible and high-yield debt issuance. He has advised clients including American Well (Amwell), Max Stock, Nayax, Perion, Taboola and Valens on a variety of transactions. Michael is ranked as one of only two “Star Individuals” in capital markets by Chambers USA and is recognized as a leading lawyer in the Legally Israel 100 Israel Desks league tables. The US-Israel Legal Review 2022 81 ©2023 Davis Polk & Wardwell llp ATTORNEY ADVERTISING. Prior results do not guarantee similar outcome. Israeli companies and those doing business in Israel rely on us for their most critical transactions and legal matters. Prominent Israeli corporations look to Davis Polk for advice on M&A, capital markets, tax, litigation, finance, restructuring, private equity and intellectual property matters. Over the past three years, our market share of U.S. IPOs by Israeli companies is approximately 41%. With a 25% market share in Israeli M&A, our team advised on deals valued at approximately $40 billion over the past five years. Our Hebrew-speaking team includes lawyers with Israeli law school degrees and career experience at Israel’s most prestigious law firms. 82 The US-Israel Legal Review 2022 ISRAEL: MERGERS & ACQUISITIONS ISRAELI M&A ACTIVITY - MARKET TRENDS TOWARDS 2023 After two prosperous years in the Israeli M&A market, which can be generally categorized as having been a “pro-seller” market, it appears that the tide is changing into a “pro-buyer” market. This shift can be attributed in great part due to global and macro-economic changes, and is, naturally, affecting the terms and conditions and deal structure of the transactions today. We are starting to see fewer (successful) bids, longer negotiation and due diligence periods (including in connection with the company valuations), and a more frequent occurrence of asset-based transactions. As investment and private equity funds still have significant ‘dry powder’ to invest, and there are many investment opportunities at more modest (and perhaps “realistic”) valuations, we foresee that towards the second half of 2023, investors will get back into the ring just as companies will be in need of financing, with their “Corona era” funds coming to an end. We anticipate that the Israeli M&A market, at least in the short term, will continue being a pro-buyer market, with one of its characteristics being a growing number of asset-purchase deals. ESSENTIAL CONSIDERATIONS FOR CHOOSING AN ASSET PURCHASE TRANSACTION When buying or selling a business, owners and investors may choose to structure the transaction as a sale and purchase of assets, or a sale and purchase of shares, depending on a variety of considerations and factors. Share purchase deals, by their very nature, result in the transfer of ownership of the entire business entity itself. When an asset transaction is contemplated, several factors come into play, as the sale of specific assets and the assumption of specific liabilities are at the heart of the transaction. Here is a brief review of various aspects that may affect the decision of the parties to pursue an asset-based transaction or a share-based transaction. • ‘Cherry-picking’ of Assets and Liabilities Choosing the assets and the assumed liabilities is probably the most significant advantage of asset purchase transactions over a share purchase deal. This modular transaction allows the buyer to limit the potential liability that it will be exposed to as a result of the transaction, exclude un-necessary assets and liabilities which it is not interested to purchase, and use a ‘cut-off’ date at closing, allowing for a clear date on which the assignment of the assets and liabilities occur. The foregoing is contrary to share purchase transactions, where the buyer acquires a company with all of its liabilities and exposures (however subject to limited indemnification from the seller). • ‘Double’ tax layer for Sellers When a company sells its assets, the capital gain from the sale will be added to its revenues for that Israeli M&A – Asset Purchase Transactions In a shifting Israeli M&A market, EBN & Co. partners review the various aspects when deciding to pursue an asset-based or a sharebased transaction. The US-Israel Legal Review 2022 83 tax year, and the company will then be charged with corporate tax (currently at the rate of 23%). The remaining amount of gain will be directed to the company’s retained earnings, so if shareholders wish to withdraw the retained earnings attributed to the transaction, they will have to declare the distribution of dividends, which will then be subject to tax dividend (currently at the rate of 25%, or 33% for a controlling shareholder, including 3% suretax). As such, the effective tax rate for shareholders of the company may be higher than that if they had sold their shares. • Expiration of Permits and Approvals Specific permits, approvals, tenders, or existing licenses may expire upon transfer of the assets, and buyer would therefore need to re-apply for such permits and approvals in its name. This must be identified and be considered by buyer prior to the transaction as it may be fundamental to the company’s business and operations. Furthermore, the buyer should take into consideration that regulators (both at the governmental and municipal level) may take advantage of this opportunity to enforce or impose new terms and conditions or restrictions. • Complex Closing The process of acquiring a company’s assets may be more complicated as a result of the specific treatment required for each acquired asset. Seller may find it difficult to separate the sold activity in order to classify assets, P&Ls, and liabilities, which may require additional preparations on its behalf. On buyer’s side, buyer may come across obstacles in possessing the assets in the purchased activity, such as operational difficulties to move assets and processes from one location to another, transfer of employees and contractors, assignment of contracts with clients or vendors, obtaining permits and licenses, obtaining third party consents from lenders and lessors, and so forth. • Assignment of Contracts Absent specific assignment provisions in the contract, generally an assignment of a contract would require the consent of the other party, unless the assignment is of rights, in which case the assignment may be effected upon notice. This requires the buyer to identify the key contracts with suppliers and customers and verify what can be assigned to the buyer at closing. Assignment of key contracts may be a burden on the completion of a transaction, particularly if a third party’s consent is required in order to amend the contract’s terms and conditions, or in cases where the assignment of the contract can trigger the termination of the contract. • Approval Mechanism An asset deal would customarily require only the approval of the board of directors of the company, LIOR ETGAR PARTNER, LEADS THE DATA PROTECTION AND PRIVACY PRACTICE SHAY DAYAN PARTNER, CORPORATE AND M&A DEPARTMENT 84 The US-Israel Legal Review 2022 ISRAEL: MERGERS & ACQUISITIONS which avoids having to approach the shareholders of the company and untimely dealings with multiple sellers, minority shareholders, and the like. • Shorter Due Diligence Asset purchase transactions require a relatively short due diligence process as opposed to a share purchase transaction, since less emphasis is placed on the potential liabilities and exposures of the target company as a whole, and the advisors can rather focus on the acquired activity. This simplified due diligence process reduces transaction expenses for the buyer. GENERAL STRUCTURE OF ASSET PURCHASE AGREEMENTS The basic structure of an asset purchase agreement will include the following provisions: Purchased Assets and Excluded Assets. The parties should ideally specify (most conveniently in scheduled lists), which assets are acquired by, and which assets are not being acquired, and therefore remain with the seller. The excluded assets will remain in the sole ownership and responsibility of the selling company. Assumed Liabilities and Excluded Liabilities. The parties should specify which liabilities are assumed and which liabilities are excluded by the buyer, and therefore remain with the seller. The exclusion of certain liabilities is important for protecting buyer from known and unknown exposures, e.g., obligations of the seller towards its customers; expenses incurred by the seller in the development or procurement of the purchased assets; obligations to employees and service providers for the pre-closing period; accounts payable; liability arising from the seller’s failure to perform agreements; and the like. Purchase Price Allocation. It is advisable for the parties to agree on the allocation of the purchase price between the various acquired assets and assumed liabilities, so that there is alignment in the reporting to the tax authorities, and the correct calculation of the tax (where value added tax or purchase tax is involved). Accounting considerations should also be considered here (inter alia with respect to depreciation and amortization) and planning the “exit” taxes (in terms of the original purchase price). SPECIFIC ISRAELI ISSUES IN AN ASSETBASED TRANSACTIONS: Transfer of employees Specific attention should be given to the method of transfer of employees of the company, which can either take the form of ‘fire and (re)hire’ or ‘employee transfer in continuity’. In addition, where an employee union is involved, the transfer may likely involve negotiation and the execution of a new or amended collective bargaining agreement, which should be taken into consideration in connection with costs as well as delays in the transaction time. The ‘fire and (re)hire’ method is comprised of the employment relationship between the transferred employees and the seller being terminated and pursuant to which the seller (being the employing company) must pay the transferred employees all payments they are entitled to upon such termination, and the transferred employees are thereafter rehired by the buyer. Employee transfer in continuity is essentially where the buyer hires the transferred employees but assumes the continuity of the employment of the transferred employees and all the entitlements, obligations, and exposures in connection with their employment with the seller. The ‘fire and (re)hire’ method is typically preferred by buyers, as buyers avoid certain exposures with respect to the pre-closing employment period. This does not mean that buyer should be indifferent to the rights of the transferred employees, and it is in its interest to confirm that the hired employees are fully paid by the seller for all their pre-closing entitlements. It is important for the buyer to note however, that even under ‘fire and (re)hire’, Israeli law provides for the continuity of certain of the rights of the re-hired employees with their new employer (the buyer), such as acknowledging the transferred employees’ seniority and service credit, considering their employment period with their former employer. For example, Section 30)a( of the Wage Protection Law, 5718-1958 provides that a new employer The US-Israel Legal Review 2022 85 may remain liable for wages, salary and provident fund payments (a liability which could be mitigated under certain circumstances); and Section 18 of the Collective Agreements Law, 5717-1957 provides that the new employer will take on the liability in connection with any obligations under a collective agreement. In addition, there are other laws and regulations which focus on the “workplace” rather than on the identity of the “employer” in order to determine the entitlement to certain rights, such as sick days, entitlement to annual leave, qualification period for pregnancy protection rights, etc. By choosing the ‘fire and (re)hire’ method, the pension funds (which include all or part of the severance pay as well) are, in general, released to the employee, and the buyer will become the new employer and responsible for the contribution of pension and severance payments starting from the closing date. Also, in ‘fire and (re)hire’, employees are entitled to their severance pay, all or portion of which was accumulated in the pension funds (as described below), redemption of accrued and unused vacation days and accrued convalescence pay. Lastly, according to Israeli labor laws, an employer cannot transfer its employee to another employer without his or her consent. This means that even in the ‘employee transfer in continuity’ method the employee needs to agree to be employed by the buyer. Also, it should be noted that no funds will be released to the employee, including severance pay, as all the funds will be transferred to the buyer as the new employer. The buyer will be responsible for the pre-closing employment period and therefore it should verify that funds and contributions were properly and timely made by the seller. The transfer of the employees’ pension funds requires specific notice to the tax authorities which should be provided prior to the closing. Transfer of Knowledge The transfer of intellectual property rights is generally realized through the asset purchase agreement itself. With the exception of registered intellectual property such as patents and trademarks which are administered by the Israeli Registrar of Patents and the Registrar of Trademarks, all other intellectual property rights, including copyrights, are not required to be registered in Israel. This means that in terms of the transfer of intellectual property assets in technology-based companies, much more attention should be given in the due diligence phase, to identify the following risks and exposures: • analyzing all intellectual property provisions relating to strategic alliances, services, manufacturing, supply and distribution, settlements, and intellectual property licensing; • review and analysis of the target company’s agreements with employees and consultants involved in the R&D and the undertakings thereunder regarding the assignment of intellectual property rights to the company; • reviewing the company’s use and application of open-source codes and compliance with their license terms; and • confirming whether there was any governmental funding provided to the target company relating to funding of R&D activities, and specifically funding from the IIA – Israel Innovation Authority. With respect to the last point, in many transactions involving technology companies, one may encounter the IIA (or in its former name, Office of the Chief Scientist), which provides funding to technology companies through various R&D grant programs, which grants are generally repaid from revenues from sales of products. Many Israeli early-stage HiTech companies obtain these grants, which have attractive terms, and as such, become subject to the rules and regulations of the IIA. These rules and regulations include several obligations, processes, obtainment of approvals, or sometimes even fees, when the funded intellectual property is to be transferred. Israeli Tax issues A non-Israeli tax resident who sells shares in an Israeli company may be exempt from capital gains tax if several conditions are met. This exemption, however, does not apply to the sale of assets, so in most cases where non-Israeli shareholders are involved, the sale of shares is preferred by the sell-side. In general, selling assets by an Israeli company 86 The US-Israel Legal Review 2022 ISRAEL: MERGERS & ACQUISITIONS is a transaction which is subject to value added tax in Israel (currently at the rate of 17%) on certain types of assets. If the buyer is not an Israeli company or a non-Israeli company registered for VAT purposes in Israel, one of the parties to the transaction will have to bear the value added tax without the possibility of offsetting the tax. Selling shares of Israeli companies, however, is generally not subject to VAT. In Israel there are very broad withholding obligations. Accordingly, it is market standard for a buyer of assets or shares to require seller to present a certificate issued by the Israel Tax Authority that seller is exempt from Israeli withholding. Without such a certificate the buyer will have to withhold Israeli tax at the applicable tax rate. Transfer of real estate When one of the acquired assets is real estate, the buyer should examine the specific risks and associated real estate taxes (including purchase tax), and consider the resulting mechanics, such as the use of escrow, the release of (and registration of new) mortgages, payment of municipal taxes and the receipt of the necessary approvals for the transfer of the real estate with the Registrar of Real Estate. Where the real estate is owned by the State of Israel (which is the case in most transactions) its consent is required (mostly, but not all, through the Israel Land Authority). Transfer of Personal Information and Databases The Israeli Privacy Protection Law, 5741-1981 and the regulations promulgated thereunder regulates the collection and use of personal data, pursuant to which a collection of personal data processed by an entity should be administered as a “database” which may be subject to a registration requirement with the Registrar of Databases at the Israeli Privacy Protection Authority. This Authority oversees compliance with the privacy laws in Israel any transfer of a registered database should be pursuant to guidance issued in this regard and maintaining the data subject rights. The main risk at hand here is the sharing of personal data collected by the seller for certain purposes with buyer, which may give rise to the need in providing disclosure to the data subjects, and in some cases, even obtaining their consent, whether opt-out or on an opt-in basis. In some asset-purchase deals, the purchased assets do not contain an entire database but rather only certain parts of it, and this requires special attention to data mapping, listing the information systems, and analyzing the privacy risks involved therewith. In other deals, the buyer may need the seller to keep processing the purchased information for a designated period following closing, due to operational or regulatory need. In all of the foregoing scenarios, the parties will need to identify the databases and categories of personal data involved, to define the lawful basis for sharing the data, and to determine the relations of the parties until closing or thereafter in terms of controller-processor relations (or in Israel, a database manager – holder relations). Public Registrars When purchasing assets that are registered in a public registry, it is important to complete the process by updating the applicable registry. It should be noted that in some cases the registry is constitutive as to the rights of the registered owner. Common registries include the Registrar of Real Estate, the Licensing Registry of the Ministry of Transport and Road Safety, the Patent Registrar, the Trademarks Registrar and the Registrar of Databases. Buyer should also check with the public registers administering pledges and charges which may be imposed on the purchased assets. SUMMARY Asset purchase transactions are generally more complex for both the sell-side and buy-side, but have their advantages, mainly for the buy-side, and so they are likely to be more popular in a “pro-buyer” market, as currently seen in the Israeli M&A market. In light of the complexity and special characteristic of asset-based transactions, it is recommended to involve local counsel from the early stage of the transaction structuring, in order to make the process as efficient and short as possible, as well as to address the various factors set out above, which are for the most part, Israel specific. n The US-Israel Legal Review 2022 87 From high-tech to energy and infrastructure, real estate to telecoms and media, “they are very business-oriented, provide full attention and care regardless of the size of the deal” (Legal 500) and “won't just fight for you as a client, they will predict where future issues may lie and help you get through them by planning in advance” (Chambers Global). Distinguished by the pedigree of our lawyers, EBN & Co. with Hamburger Evron clients benefit from departments of top-notch corporate lawyers involved in major domestic and cross-border M&A transactions, as well as those with an impressive track record of involvement in the market's most valuable, most sensitive, and landmark commercial disputes. T:+972.3.7770111 • F:+972.3.7770101 • [email protected] • As one of Israel’s most experienced, innovative and dynamic law firms, with a strong cross-border practice and a national reputation as one of the elite firms in real estate projects that are transforming the landscape, Erdinast, Ben Nathan, Toledano & Co. with Hamburger Evron is fully immersed in all sectors of the economy and well versed in all the issues affecting you. 88 The US-Israel Legal Review 2022 US: ARBITRATION We review four major decisions relating to U.S. arbitration that have been decided by the U.S. Court of Appeals, the U.S. Supreme Court or have been granted certiorari. First, in the Coinbase, Inc. cases, the Supreme Court agreed to decide a recurring arbitration related issue that has divided the federal appeals courts - whether an appeal of a district court’s denial of a motion to compel arbitration automatically stays the case while the appeal is pending. In the second case, Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 34 F.4th 1290 (11th Cir. 2022), the U.S. Court of Appeals for the 11th Circuit is poised to overturn existing precedent in that Circuit concerning the grounds available to vacate international arbitration awards when the seat of the arbitration is in the U.S. or U.S. law provides the decisional law for the dispute. In the third case, Badgerow v. Walters, 142 S.Ct. 1310 (2022), the Supreme Court ruled that, unlike petitions to compel arbitration, petitions to confirm or vacate an arbitration award cannot be brought in federal court simply because the underlying dispute involves a federal question. In the fourth case, ZF Automotive US, Inc. v. Luxshare, 142 S. Ct. 2078 (2022), the Supreme Court resolved an issue regarding international arbitrations by ruling that, contrary to what at least two appellate courts had previously ruled, a U.S. statute (Section 1782 (a)) that authorizes federal courts to order discovery “for use in a proceeding in a foreign or international tribunal” does not apply to proceedings in foreign and international arbitrations before private adjudicatory bodies. DOES AN APPEAL OF A DISTRICT COURT’S DENIAL OF A MOTION TO COMPEL ARBITRATION AUTOMATICALLY STAY THE CASE? The court of appeals for the 3rd, 4th, 7th, 10th, 11th, and D.C. Circuits have ruled that a non-frivolous appeal of a district’s court’s denial of a motion to compel arbitration divests a district court of jurisdiction over the case while the appeal is pending, meaning the case is stayed. The 2nd, 5th, and 9th Circuits, however, have ruled that district courts retain discretion to proceed with the litigation while such an appeal is pending. The issue has been raised in a pair of cases involving the cryptocurrency company Coinbase, Inc. on appeal from decisions in the 9th Circuit. Both cases arise from consumer suits against Coinbase filed in federal court in which Coinbase moved to compel arbitration of the dispute based on the arbitration provision in Coinbase’s user agreement. In Coinbase, Inc. v. Bielski, the district court denied Coinbase’s motion to compel arbitration, ruling that, in the circumstances of the case, the arbitration provision was unconscionable. In Coinbase, Inc. v. Suski, the district court denied Coinbase’s motion to compel arbitration on the ground that another agreement purportedly superseded the user agreement. Under § 16(a) of the Federal Arbitration Act (FAA), when a district court denies a motion to compel arbitration, the party seeking arbitration may file an immediate interlocutory appeal, which Coinbase did in the Bielski and Suski cases. Coinbase also filed motions to stay the cases pending appeal. In both cases, the district court declined to issue a stay pending appeal. Coinbase then moved for a stay in the 9th Circuit, which also declined to stay the A Review of Leading Developments in U.S. Courts That Impact International Arbitration The US-Israel Legal Review 2022 89 litigations based on an earlier 9th Circuit decision — Britton v. Co-op Banking Grp., 916 F.2d 1405 (9th Cir. 1990) In Briton, the court of appeals held that an appeal of the denial of a motion to compel arbitration does not automatically divest the district court of jurisdiction to continue the litigation. The 9th Circuit adopted this rule in part based on the belief that automatic jurisdictional ouster would allow a defendant to stall a trial simply by bringing a frivolous motion to compel arbitration. Subsequent to Britton, the 2th and 5th Circuits have similarly ruled that a district court has discretion to deny a stay pending appeal of a decision denying a motion to compel arbitration. The 3rd, 4th, 7th, 10th, 11th, and D.C. Circuits, however, have disagreed, ruling that such an appeal automatically divests the district court of jurisdiction to proceed with the case pending the appeal. In Bradford-Scott Data Corp. v. Physician Comput. Network, Inc., 128 F.3d 504 (7th Cir. 1997), for example, the court ruled that, when a party appeals arbitrability, the court of appeals must decide whether the litigation may go forward in the district court, and continuation of the litigation pending appeal would largely defeat the point of the appeal. Coinbase filed a petition for certiorari in the Bielski and Suski cases, asking the Supreme Court to resolve the circuit split in favor of the majority rule adopted by the 3rd , 4th, 7th, 10th, 11th, and D.C. Circuits. The Supreme Court granted certiorari on December 9, 2022, case number 22-105 CAN AN INTERNATIONAL ARBITRATION AWARD BE VACATED WHEN THE SEAT OF ARBITRATION IS THE US OR US LAW IS THE SUBSTANTIVE LAW? Under existing precedent in the 11th Circuit, which includes Florida, federal courts cannot overturn international arbitration awards on the ground that the arbitrators “exceeded their powers,” a frequently invoked ground for overturning domestic arbitrations. But, in Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 34 F.4th 1290 (11th Cir. 2022), a three-judge panel of the 11th Circuit ruled that the existing precedent is incorrect and conflicts with Supreme Court precedent and casesin other Circuits. While the panel was required to apply existing precedent to decide the appeal in Corporacion AIC, the panel took the unusual step of explaining why existing precedent was wrong and called upon the full court to rehear the appeal en banc so that the existing precedent could be overturned. The court granted rehearing and scheduled oral argument on the issue in February 2023. Corporacion AIC involves a dispute between two companies arising out of the construction of a hydroelectric power plant in Guatemala. Pursuant to the parties’ contract, the dispute was arbitrated in the International Court of Arbitration, before a three-member arbitration panel in Miami, Florida. Dissatisfied with the panel’s decision, Corporacion AIC, initiated a case in the U.S. District Court for the Southern District of Florida to vacate the award on the basis that the panel exceeded its powers. The District Court denied the petition, ruling that 11th Circuit precedent foreclosed a party to a New York Convention international arbitration from challenging an arbitration panel’s award on the “exceeding powers” ground that is available under the FAA for domestic arbitrations, citing Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte International GmbH, 921 F3d 1291 (11th Cir. 2019) SARAH B BISER PARTNER, FOX ROTHSCHILD CRAIG TRACTENBERG PARTNER, FOX ROTHSCHILD 90 The US-Israel Legal Review 2022 US: ARBITRATION and Industrial Risk Insurers v. M.A.N. Guterhoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998). On appeal, a three-member 11th Circuit panel agreed that those cases barred an “exceeding powers” challenge, but concluded that the cases had been wrongly decided. The panel believed that the cases did not properly distinguish between an international arbitration case in which a U.S. court has primary jurisdiction — when the seat of the arbitration is in the U.S. or U.S. law is the decisional law — and where the court has only secondary jurisdiction (when the U.S. court is asked to enforce an award decided outside the U.S. involving foreign law). The panel concluded that existing precedent is at odds with decisions in the 2nd, 3rd, and 10th Circuits, as well as with the U.S. Supreme Court’s opinion in BG Group, PLC v. Republic of Argentina, 572 U.S. 25 (2014). Only the 11th Circuit sitting en banc can overturn the Court’s prior precedent, which it now appears poised to do. PETITIONS TO CONFIRM OR VACATE ARBITRATION AWARDS CANNOT BE BROUGHT IN FEDERAL COURT SIMPLY BECAUSE THE UNDERLYING DISPUTE INVOLVES A FEDERAL QUESTION. The Supreme Court’s 8-1 decision in Badgerow v. Walters, 2022 WL 959675 (U.S. March 31, 2022), resolves an issue over which the federal courts of appeals were split. This means motions to confirm or vacate arbitration awards will now be able to be brought in federal court rather than in state court, only if there is diversity of citizenship between the parties or the application itself (as opposed to the underlying dispute) involves a federal question. The decision marks a triumph of the “textualist” approach to statutory interpretation, even among members of the Court’s so-called “liberal” wing, as opposed to a more policy-oriented approach. The Supreme Court addressed the issue of federal jurisdiction over motions to compel arbitration under Section 4 of the FAA over a decade ago in Vaden v. Discover Bank, 556 U.S. 49 (2009). In Vaden, the Court rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction, under which courts would look to the face of the federal court petition for a basis for federal jurisdiction. Instead, the Court adopted the so-called “look through” approach. Under this approach, “[a] federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.” Id. at 62. Whereas the well-pleaded complaint rule would require that the Section 4 motion to compel itself evinces a federal cause of action, under Vaden, courts examine the underlying dispute potentially subject to arbitration to determine whether that dispute presents a federal question. In reaching this result in Vaden, the Court relied in part on the language of Section 4, which states that a proponent of arbitration may seek an order compelling arbitration in “any U.S. district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” (Emphasis added.) The Court also held that the look-through approach was consistent with basic jurisdictional tenets and practical considerations, because failure to look through to the arbitration proceeding’s subject matter “would permit a federal court to entertain a § 4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.” Id. at 65. Such an “approach would not accommodate a § 4 petitioner who could file a federal-question suit in (or remove such a suit to) federal court, but who has not done so.” Id. Subsequent to Vaden, the federal courts of appeals have been split over whether to apply the same “look through” approach to applications to confirm or vacate an arbitration award pursuant to Sections 9 and 10 of the FAA. The 1st, 2nd, 4th, and 5th Circuits ruled that federal courts can apply the “look through” approach to such applications, while the 3rd and 7th Circuits ruled that the “look through” approach does not apply to such applications, and that there must instead be a basis for federal jurisdiction—such as diversity of citizenship—on the face of the complaint. See Goldman v. Citigroup Global Markets, Inc., 834 F.3d 242 (3d Cir. 2016); Magruder v. Fid. Brokerage Services LLC, 818 F.3d 285 (7th Cir. 2016). The US-Israel Legal Review 2022 91 The issue arose in Badgerow because, in the underlying dispute, the plaintiff, Denise Badgerow, brought employment-related claims against her employer under state and federal law. The arbitrator sided with the employer, dismissing Badgerow’s claims. Badgerow then sued the employer in Louisiana state court to vacate the arbitral decision based on alleged fraud. The employer responded by removing the case to the federal district court in Louisiana and, once there, applied to confirm the award. Badgerow moved to remand the case to state court, arguing that the federal court lacked jurisdiction over the case. The district court assessed its jurisdiction under the “look through” approach of Vaden and found that it did have jurisdiction under that approach, and then confirmed, denying Badgerow’s application to vacate, the arbitral award. The 5th Circuit affirmed the district court’s finding of jurisdiction, relying on Quezada, which it had just issued. The Supreme Court reversed and rejected the “look through” approach that the 1st, 2nd, 4th, and 5th Circuits had applied in connection with applications for confirm or vacate awards under Section 9 and 10 of the FAA, ruling that this approach was contrary to the statutory text. The Court noted, under Section 4 of the FAA— which governs application to compel arbitration— that statute provides a party to an arbitration agreement may petition for an order to compel arbitration in a “U.S. district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties.” The Court quoted Vaden as saying it was that text that “drives our conclusion that a federal court should determine its jurisdiction by ‘looking through’ a §4 petition to the underlying substantive controversy”—to see, for example, if that dispute “‘arises under’ federal law.” 556 U. S., at 62. In contrast, the Court noted, Sections 8 and 9 of the FAA—the provisions concerning petitions to confirm or vacate awards—“contain none of the statutory language on which Vaden relied. Those provisions do not have Section 4’s ‘save for’ clause. They do not instruct a court to imagine a world without an arbitration agreement, and to ask whether it would then have jurisdiction over the parties’ dispute. Sections 9 and 10 do not mention the court’s subject-matter jurisdiction at all.” 2022 WL 959675, at *2. The Court ruled, “under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply . . . We have no warrant to redline the FAA, importing Section 4’s consequential language into provisions containing nothing like it. Congress could have replicated Section 4’s look through instruction in Sections 9 and 10. Or for that matter, it could have drafted a global look-through provision, applying the approach throughout the FAA. But Congress did neither. And its decision governs.” Id. at *5. As a practical matter, the Court’s decision means applications to confirm or vacate arbitration awards can be brought in federal — rather than state — court only when there is diversity of citizenship between the parties — i.e., the plaintiff and defendant are residents of different states — or there is some other basis for federal jurisdiction on the face of the complaint, such as admiralty. The mere fact the underlying dispute in the arbitration involves a federal claim or question will not be sufficient to establish federal jurisdiction. It is unclear whether state courts will be more willing to vacate arbitration awards than federal courts are in the wake of Badgerow. THE SUPREME COURT SAYS NO TO USING FEDERAL COURTS TO OBTAIN DISCOVERY FOR FOREIGN AND INTERNATIONAL ARBITRATIONS BEFORE PRIVATE, NON-GOVERNMENTAL ADJUDICATORY BODIES. In its unanimous decision in ZF Automotive US, Inc. v. Luxshare, Ltd., Case No. 21-401, the Court ruled that the statute, 28 U.S.C. § 1782(a), applies only to proceedings before foreign governmental or intergovernmental adjudicative bodies. By narrowing the application of Section 1782(a) in federal courts, the Court reduced the potential tension between Section 1782(a) and the FAA, which governs domestic arbitration, because Section 1782(a) provides for broader discovery than the FAA allows. The Court’s ruling dealt with an arbitration proceeding before the German Institution of Arbitration e.V. (DIS), a private dispute resolution organization in Berlin, and an ad hoc arbitration con- 92 The US-Israel Legal Review 2022 US: ARBITRATION ducted in accordance with arbitration rules of the United Nations Commission on International Trade Law, finding that neither of those arbitral bodies is the type of governmental or intergovernmental adjudicatory body that falls within the scope of Section 1782. Recent decisions in New York District Courts held that a tribunal in an ICSID arbitration lacked governmental authority and did not qualify as a foreign or international tribunal under Section 1782. In re Webuild S.P.A., 2022 WL 17807321 (Dec. 19, 2022), In re Alpene, Ltd., 2022 WL 15497008 (Oct. 27, 2022). The Court’s ruling involved appeals in two consolidated cases. One case involved an arbitration between Luxshare, Ltd., a Hong Kong-based company that alleged fraud in a sales transaction with ZF Automotive US, Inc., a Michigan-based automotive parts manufacturer and subsidiary of a German corporation, before the German Institution of Arbitration. Luxshare sought discovery in federal court in the U.S. pursuant to Section 1782, and the U.S. Court of Appeals for the 6th Circuit denied ZF’s motion to stay the discovery, ruling that the German arbitration panel was a “foreign or international tribunal” under Section 1782. The other case involved an arbitration between AB bankas SNORAS, a failed Lithuanian bank that had been nationalized by Lithuanian authorities, and a Russian corporation that had been assigned the rights of Russian investors in the bank. Under a bilateral investment treaty between Lithuania and Russia, the parties had four options for dispute resolution, and they chose an ad hoc arbitration under the Arbitration Rules of the United National Commission on International Trade. The Russian corporation sought discovery in a federal court in the U.S. from a temporary administrator of the bank and Alix Partners, LLP, a New York-based consulting firm where the administrator worked. AlixPartners sought to block the discovery, arguing that the ad hoc panel was not a “foreign or international tribunal” under Section 1782, the district court rejected that argument and the U.S. Court of Appeals for the 2nd Circuit affirmed. The Supreme Court finally resolved a disagreement among the circuit courts regarding the ability to obtain discovery in the U.S. where an arbitration is pending in a foreign country. The federal law, 28 U. S. C. §1782(a), is a provision authorizing a district court to order the production of evidence “for use in a proceeding in a foreign or international tribunal.” If the provision was interpreted to allow private arbitrations merely held in foreign country to have a federal discovery mechanism, the provision creates significant tension with the FAA, which governs domestic arbitration, because section 1782(a) provides broader discovery than the FAA allows. In a unanimous opinion authored by Justice Amy Coney Barrett, the Supreme Court reversed the lower court rulings in both cases. The Court concluded Section 1782 was intended to increase cooperation between the U.S. and foreign countries, and not merely with private arbitral tribunals located in foreign countries. Quoting an earlier ruling by the U.S. Court of Appeals for the 7th Circuit, the Court noted “it’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the U.S. while precluding such discovery assistance for litigants in domestic arbitrations.” The Court ruled that applying its interpretation of Section 1782 to the Luxshare/ZF arbitration was straightforward: the German arbitral body there does not qualify as a governmental body and therefore does not fall within the ambit of Section 1782. The Court found that, while the treaty provided the parties an option of arbitrating before a preexisting governmental body, the parties chose to arbitrate before an ad hoc arbitral panel that was not cloaked with governmental authority and did not fall within the ambit of Section 1782. The Court noted: “None of this forecloses the possibility that sovereigns might imbue an ad hoc arbitration panel with official authority. Governmental and intergovernmental bodies may take many forms, and we do not attempt to prescribe how they should be structured. The point is only that a body does not possess governmental authority just because nations agree in a treaty to submit to arbitration before it. The relevant question is whether the nations intended that the ad hoc panel exercise governmental authority. And here, all indications are that they did not. n The US-Israel Legal Review 2022 93 94 The US-Israel Legal Review 2022 ISRAEL: INSOLVENCY LAW Cross-border insolvency proceedings are proceedings where the insolvent debtor has assets in a number of countries, or where some of the creditors are not citizens of the country where the insolvency proceeding is being conducted. As Israel has steadily become part of the global economy, the need to regulate crossborder insolvency proceedings in Israeli law has increased over the years. Israel’s lacking regulation over cross-border insolvency proceedings has raised many difficulties in rehabilitating international businesses experiencing financial hardship, both due to the absence of tools to distribute the debtor’s assets effectively and fairly among the creditors and as a result of the impaired ability to maximize the value of such assets. An additional and increasingly widespread problem is debtors transferring assets to foreign countries in order to conceal them and defraud creditors. The modern economy facilitates such action and increases the temptation to commit such acts. THE MODEL LAW In September 2019, Israel passed the Insolvency and Economic Rehabilitation Law (the “Insolvency Law”). Article IX of the Insolvency Law, titled “Cross-Border Insolvency Proceedings,” is to a large extent based on the work done by the United Nations Commission on International Trade Law (UNCITRAL), which Israel is a member of and which resulted in the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”). As of today, the Model Law has been adopted by over 50 countries. Article IX of the Insolvency Law is the Israeli equivalent of Chapter 15 of the U.S. Bankruptcy Code, which was enacted in the US in 2005, and which is entirely dedicated to cross-border insolvency. Similar to Chapter 15 of the U.S. Bankruptcy Code, Part IX is designed to implement the basic principles of the Model Law, promote crossborder cooperation in the field of insolvency, increase efficiency in dealing with cross-border insolvency proceedings, incentivize cooperation between the competent authorities in Israel and their equivalents across the globe and find effective tools to combat debtors transferring assets to foreign countries to conceal them and defraud creditors. In addition, the law mandates that Israeli courts must cooperate to the fullest extent possible with foreign courts and functionaries in cross-border insolvency proceedings (section 308 of the Insolvency Law), similar to the system in the US (paragraphs 1525-1527 of the U.S. Bankruptcy Code). The Insolvency Law adopted the Model Law and the (moderate) universal approach, including the principle of collectivity, ensuring equality between all of the debtor’s creditors, whether domestic or foreign, and maximizing the debtor’s assets in order to maximize distribution to creditors. Cross-Border Insolvency Proceedings in Israel Adv. Lior Dagan reviews the development of insolvency law in Israel in view of Article IX of Israel’s Insolvency Law The US-Israel Legal Review 2022 95 • For example, section 298 of the Insolvency Law, concerning “the status of foreign creditors in insolvency proceedings,” sets forth that the status and rights of foreign creditors to initiate and participate in insolvency proceedings is identical to the status and rights of creditors from Israel; this provision aims to preserve equal status between creditors – which is a kind of “international public policy” – whereby creditors from foreign countries are not discriminated against in insolvency proceedings as opposed to creditors from Israel. Section 298 of the Law is specifically based on Article 13 of the Model Law. • For an additional example, section 315(a) of the Insolvency Law sets forth that a certain creditor cannot be repaid an amount higher than the debt compared to other creditors of the same order of priority, whether they are Israeli or foreign creditors. Section 315 is based on the provisions of Article 32 in the Model Law. At the core of Article IX of the Insolvency Law is the provision allowing a foreign representative to approach an Israeli court and motion for recognizing a foreign insolvency proceeding (similar to paragraph 1509 in Chapter 15 of the U.S. Bankruptcy Code). A foreign representative must prove that a judicial or administrative proceeding is being conducted in a foreign country, pursuant to a law concerning insolvency, the purpose of which is the economic rehabilitation of the debtor or its liquidation, and the debtor’s assets are subject to the foreign court’s supervision. The motion for recognition should be accompanied by documentation that confirms the existence of a foreign proceeding and the apA foreign representative must prove that a judicial or administrative proceeding is being conducted in a foreign country, pursuant to a law concerning insolvency, the purpose of which is the economic rehabilitation of the debtor or its liquidation LIOR DAGAN PARTNER, FWMK 96 The US-Israel Legal Review 2022 ISRAEL: INSOLVENCY LAW pointment of a foreign representative; should the court find that the motion was filed in accordance with the rules, and subject to there being no harm done to public policy (section 316 of the Insolvency Law), the court in Israel shall recognize the foreign proceeding. The significance of recognizing a foreign proceeding is, for example, that the foreign representative is appointed trustee over the debtor’s assets in Israel, is entitled to any assistance it requires from the local court and can be authorized to realize all or part of the debtor’s assets located in Israel, and distribute them should it be convinced that this does not impact the debtor’s creditors in Israel. The Insolvency Law makes a distinction between a “primary foreign proceeding” and a “secondary foreign proceeding.” A primary foreign proceeding is one conducted in a foreign country where the debtor’s “center of affairs” is located. The center of affairs of a corporation is the place of its incorporation, and the center of affairs of an individual is its place of residence. A secondary foreign proceeding is one that is not a primary proceeding, i.e., one that is conducted in a place that is not the debtor’s center of affairs, but the debtor is required to have economic activity that is permanent as opposed to only temporary in such country, and provided it employs manpower in that country. THE FOREIGN REPRESENTATIVE’S POWERS Since Article IX of the Insolvency Law took effect, there have been major developments with respect to international insolvency laws. Israeli courts have established rules whereby it is possible to bestow upon a foreign representative all the powers granted to a local trustee pursuant to the provisions of the Insolvency Law, while also imposing on such representative the duties imposed on an Israeli trustee who serves as the “long arm of the court” (where the foreign representative must be represented by Israeli attorneys specializing in Israeli insolvency law). This determination has far-reaching implications with respect to the powers and “operational space” of foreign representatives in Israel. Below are examples of tools and powers that may be granted to a foreign representative (as expressed in various rulings by insolvency courts): • Granting investigative powers and the authority to demand information and documents, including the possibility of depose various entities in person that have in their possession relevant information or documents pertaining to a debtor, its business, assets, or its obligations. • Powers to depose third parties with respect to funds or assets transferred to them from the debtor or anyone on its behalf, including temporary redress with respect to those assets that are “suspect.” • Powers to conduct searches in various databases, including email accounts containing information pertaining to a debtor or its busiThe significance of recognizing a foreign proceeding is, for example, that the foreign representative is appointed trustee over the debtor’s assets in Israel, is entitled to any assistance it requires from the local court and can be authorized to realize all or part of the debtor’s assets located in Israel, and distribute them should it be convinced that this does not impact the debtor’s creditors in Israel The US-Israel Legal Review 2022 97 ness, pursuant and subject to the Israeli search rules (privacy, etc.). • Powers to request a temporary freeze or temporary relief with respect to assets or funds of the debtor, whether the debtor holds them directly or through others. AVOIDANCE CLAIMS According to established case law of the Israeli Supreme Court, the insolvency court has broad discretion in applying Israeli insolvency law – both procedural and substantive – on motions filed by a foreign representative, with this being even more relevant with respect to substantive motions filed for cancelling actions such as Preference of creditors, granting actions (transferring assets for no compensation) or concealing assets. Debtor insolvency generally predates the formal insolvency proceedings initiation. This time discrepancy allows the debtor to transfer assets when already insolvent to certain creditors or other people it favors; in doing so the debtor is able to grant preference to certain creditors over others or conceal its assets from the creditors. In order to prevent this, sections 219-221 of the Insolvency Law enable the cancellation of transactions executed in the period before the insolvency proceedings that remove assets from the creditors’ pool. These provisions ‘claw back’ the commencement of insolvency proceedings to a point in time when the debtor became financially insolvent or when the debtor showed intent to transfer assets to third parties. Section 219 of the Law allows the cancellation of actions that constitute creditor preference in the threemonth period preceding the motion for insolvency; section 220 of the Insolvency Law allows for the cancellation of actions granting assets that were transferred for no compensation two-tofour years prior. Section 221 of the Insolvency Law allows the cancellation of an action removing an asset from the creditors’ pool, which was done with the purpose of concealing the asset from the creditors, even if on the date the action was taken the debtor was not insolvent, provided the date the action was taken was during the period starting seven years before the initiation of the insolvency proceedings. Under Israeli law, a foreign representative is also permitted to file appropriate motions in Israel pursuant to sections 219 to 221 of the Insolvency Law such that Israeli law applies to them, subject to proper forum rules as set forth by precedent with respect to cross-border insolvency proceedings. BADGES OF FRAUD A foreign representative may also file a claim to the insolvency court by virtue of the badges of fraud doctrine. For example, if a debtor transferred funds to Israel and with them purchased land in Israel, and the rights were registered under relatives or associates of the debtor, a foreign representative has the option to file a proper claim to an insolvency court based on the badges of fraud doctrine as a basis for establishing presumptions-of-fact that this is a fraudulent transfer of assets; when badges of fraud are evident in the conduct of an insolvent defendant, factual assumptions on the matter are formed in practice, and should these remain unanswered on the part of the defendant, they point to a fraudulent action. Examples of such badges of fraud are a relationship between the transferor and the transferee, the transferor retaining benefit and possession, secrecy in financial activity, deviation from the usual course of business, etc. When (all or part of) these badges are fulfilled, this could shift the burden to the defendant, who Debtor insolvency generally predates the formal insolvency proceedings initiation. This time discrepancy allows the debtor to transfer assets when already insolvent to certain creditors or other people it favors 98 The US-Israel Legal Review 2022 ISRAEL: INSOLVENCY LAW must demonstrate that the transactions were executed in good faith or provide a satisfactory explanation for their execution. CONCLUSION As we can see, the mechanisms available to a foreign representative seeking to operate in Israel with respect to debtor assets or vis-à-vis potential defendants who possess information, documents, property or assets of the debtor, is exceedingly broad. These tools include the ability to collect information, documents and evidence, the ability to conduct in-person depositions and the ability to file claims in Israel in accordance with the domestic law. n ABOUT THE AUTHOR Adv. Lior Dagan is the Head of FWMK’s Insolvency and Restructurings Department. Lior has extensive experience of more than 20 years in complex litigation and insolvency cases, both as an officer in the procedure, taking the role of liquidator, trustee, receiver or special manager, and also as a lawyer representing creditors in insolvency proceedings in Israel and worldwide (‘Cross Border Insolvency’). Lior led and managed two of the largest international cross-border insolvency cases which have been handled in Israel, and regularly lectures on the topic of cross-border insolvency in respected forums. Lior specializes in finding professional and optimal solutions for challenging procedures and complex situations, while implementing creative and innovative strategies at the legal and commercial level and with a broad business vision. In addition, Lior has gained extensive experience in the planning, approval and management of complex creditors settlements in public companies. Among other roles, Lior has served as temporary liquidator and special manager for sports associations, and in private and public High-Tech and startup companies. He has also represented creditors in a few of the largest debt settlements ever executed in Israel. Prior to joining the firm in 2012, Lior founded and managed his own independent law firm. ABOUT THE FIRM FWMK, based in Tel Aviv, is one of Israel’s most respected law firms with a reputation for quality and creativity, and a personal approach. FWMK advises an extensive roster of clients, comprising leading Israeli and foreign companies, such as publicly traded companies, high-tech companies, start-ups, technological incubators, private and institutional investors and entrepreneurs in a range of sectors. Clients of FWMK benefit from our long and successful track record in managing complex cases, our excellence in strategic understanding, as well as our ability to overcome numerous legal and corporate obstacles that require innovation, expertise and professionalism. In addition, our clients benefit greatly from the close personal attention of our partners, our dedication to providing the most comprehensive, professional and attentive service, as well as from the interaction and collaboration between our various departments. Our departments – including high-tech, mergers and acquisitions, commercial litigation, real estate, insolvency and labor– bring together a combined understanding that looks at all issues from all possible angles. FWMK has, at all times, an unwavering commitment to the needs, objectives and success of our clients. FWMK is consistently ranked highly in the Legal 500 among Israel’s leading law firms, where our lawyers have been called out for their creativity, problem solving, and legal expertise. The mechanisms available to a foreign representative seeking to operate in Israel with respect to debtor assets or visà-vis potential defendants who possess information, documents, property or assets of the debtor, is exceedingly broad The US-Israel Legal Review 2022 99 | [email protected] | +972-3-6070800 LEGAL EXPERTISE. BUSINESS FOCUS. Critical Thinking with a Side of Creativity In today’s fast-paced business world, the demand for first-rate legal advice and representation is at an all-time high. The right professional guidance has become a key differentiator for organizations to drive their business forward. Your business strategy and success is our top priority at FWMK law firm, and we’re known for maintaining professional excellence alongside the personal touch. The Legal 500 calls us "Knowledgeable, personal, creative and practical". But our favorite review is yours. 100 The US-Israel Legal Review 2022 ISRAEL: TAX I srael – the holy start up nation – is an important technology hub. Many innovative start-ups and initiatives attract substantial capital investments from all over the world. Multinational companies acquire Israeli companies at various stages, in a rapid pace - almost on a weekly basis. Following such acquisition, the acquired Israeli company is usually transformed into an R&D center, often compensated on a cost-plus basis. Sometimes, the legacy IP of the acquired company remains under the ownership of the Israeli entity, while new IP developed under the R&D service agreement is owned by the foreign multinational. Sometimes the existing IP is sold to a foreign entity which is part of the group (since many multinational corporations prefer to concentrate the group’s entire IP under one ownership). In addition, the Israeli entity is likely to provide additional services to the foreign group, such as, marketing, manufacturing, etc. In recent years, the Israeli Tax Authority (ITA) developed a theory, according to which such post acquisitions inter-company transactions/ engagements, constitute a taxable “business model change”. Namely, the ITA argues that the Israeli company underwent a “business restructuring”, from a business venture that owns its own intellectual property and may benefit from materializing its potential, to a “risk-free” company that operates as an R&D center developing intellectual property in favor of related foreign companies, limiting its profits to the mere profit set in the cost-plus engagement. Therefore, the ITA argues that the Israeli target company should be considered as an “empty corporate shell” that “emptied out” its Functions, Assets and Risk (“FAR”) in favor of the group’s Business Model Change Tax Assessments – Recent Court Update In recent years, the Israeli Tax Authority (ITA) developed a theory, according to which, post acquisitions inter-company transactions/ engagements constitute a taxable “business model change”. In recent years, the Israeli Tax Authority has argued that the Israeli company underwent a “business restructuring”, from a business venture that owns its own IP and may benefit from materializing its potential, to a “risk-free” company The US-Israel Legal Review 2022 101 members. Hence, the ITA reclassifies such postacquisition transactions as a deemed taxable sale of the company’s FAR. Commonly, in order to evaluate the FAR, the ITA uses the price paid for the shares, and applies few minor computational adjustments. Moreover, during past years, the ITA added another layer to the assessment and argued that as there was a deemed sale of the FAR, and no consideration was actually paid for it by the foreign multinational, the unpaid compensation assessed by the ITA is an “imputed inter-company debt”, which should carry arm’s length interest. This assessment by the ITA is referred to as a “Secondary Adjustment”, since the ITA’s claim in this regard depends on the initial adjustment of the deemed FAR sale. Thus, in most cases the ITA charges the Israeli company for the taxes that should have been paid according to the ITA’s position in respect of the deemed FAR sale (the initial adjustment) and also for deemed “imputed interest” (the secondary adjustment). For a few years already, the ITA has issued numerous tax assessments based on the “business model change” theory, claiming for a sale of the Israeli company’s FAR to the multinational corporate group that has purchased its shares. Many cases were settled; however, four cases reached the stage of a court judgment. The first case was the Gteko – Microsoft case, published in 2017. In that case, Microsoft Inc. purchased an Israeli start up called Gteko for approximately 90 million USD. Thereafter the Israeli company transferred all its employees to Microsoft Israel and sold its IP to Microsoft Inc. for approximately 26.5 million USD. The court accepted the ITA’s assessment and ruled that the company was indeed emptied and all its FAR was sold out. The ITA added another layer to the assessment and argued that as there was a deemed sale of the FAR, and no consideration was actually paid for it by the foreign multinational, the unpaid compensation assessed by the ITA is an “imputed inter-company debt”, which should carry arm’s length interest DANIEL PASERMAN ADV. (CPA), TEP, HEAD OF TAX, GORNITZKY GNY SHLOMO AVIAD ZIDER PARTNER, GORNITZKY GNY ADI HAYA RABAN PARTNER, GORNITZKY GNY SHIRIN GABBAYMETZGER PARTNER, GORNITZKY GNY 102 The US-Israel Legal Review 2022 ISRAEL: TAX The Gteko ruling astonished the hi-tech industry, and real fear rose among companies and investors that Gteko’s outcome will jeopardize the attractiveness of purchasing Israeli target companies. After the Gteko case, however, additional three cases were brought to the Israeli court after the ITA issued FAR assessments, accompanied by “secondary adjustment” assessments. Our firm represented the taxpayers in all three cases, while in two the court ruled in favor of the taxpayer, but the third case was ruled in favor of the ITA and an appeal is currently being considered. The first case was the Dune – Broadcom case, published in 2019. In that case, Broadcom purchased an Israeli target company named Dune Semiconductor Ltd., for a value of approximately 200 million USD. Following the acquisition of its shares, Dune engaged in three intercompany agreements with few companies within Broadcom: a license agreement for Dune’s existing IP in exchange for royalties; an R&D services agreement for consideration calculated on a “cost plus” basis, while the IP developed as part of those services belongs to Broadcom; a marketing and support agreement for products development as part of the R&D services. According to the ITA, after the acquisition, Dune underwent a change in its “business model”, from a business venture that owns profitable intellectual properties to a “risk-free” company that operates for the benefit of a foreign multinational and its revenues have been limited to the royalties and the “cost plus” based compensation. Under these circumstances, according to the ITA, Dune should have been considered as an “empty corporate shell” that “emptied out” its own assets in favor of the group’s members - as the ITA claimed in the Gteko case. Therefore, the ITA reclassified the transaction and determined a capital gain tax for the sale of Dune’s “FAR”. The ITA valued Dune’s allegedly sold FAR based on the price of the share purchase transaction, subject to a few minor adjustments. The court rejected the ITA’s thesis and accepted Dune’s appeal on the assessment - determining that the engagement in the inter-company agreements did not constitute a “sale of FAR”. This was an impressive precedential ruling, particularly given that the judge in this case was the same one who wrote the Gteko judgement where the ITA’s position was accepted. The ITA did not appeal to the Supreme Court. A few months ago, on May 8th 2022, the Medingo - Roche case judgement was published. Medingo Ltd. was established in 2005 and engaged in the development of the “Solo,” a wireless insulin pump for diabetes patients. In 2010, Medingo’s entire share capital was acquired by Roche, one of the world’s leading healthcare multinational corporations, for around 180 million USD. In line with the standard post-acquisition practice described above, after the share transaction, four agreements were signed between Medingo and Roche group: a license agreement for Roche’s use of Medingo’s IP in consideration of royalties payment; as well as three service agreements - R&D, manufacturing and marketing support and consultation - in consideration for fees calculated After the Gteko case, however, additional three cases were brought to the Israeli court after the ITA issued FAR assessments, accompanied by “secondary adjustment” assessments. Our firm represented the taxpayers in all three cases, while in two the court ruled in favor of the taxpayer, but the third case was ruled in favor of the ITA and an appeal is currently being considered The US-Israel Legal Review 2022 103 on a cost plus basis. As in the cases of Gteko and Dune, the ITA argued that the engagement in the agreements shortly after the transaction for the purchase of the shares should be viewed as “business restructuring”, as a consequence of which Medingo should be deemed to have sold its’ FAR to Roche, and be liable for capital gain tax. The ITA sought to derive the value of the sale of the FAR based on the shares transaction consideration and - in addition - imposed deemed interest income for the following years by virtue of a “secondary adjustment”. Medingo denied the ITA’s arguments and argued that not only had the company not been emptied out, but, rather, under the auspices of Roche, and with its encouragement, Medingo had achieved growth in all respects. The court adopted Medingo’s position in its entirety and ruled that the circumstances of the case should not be deemed as a sale of FAR and that even if the business model of Medingo had changed - such change is not taxable. As noted by the court, the Medingo judgment continues along the path paved in the Broadcom case, and it reiterated its determination that “business restructuring” is not “a magic word, where it is sufficient to merely utter it in order to bring about a change of the classification of the transaction that had been made between the parties”. There are a few key points laid down in the Medingo judgment, which are likely to have significant implications for cases involving “business restructuring”. Due to the limited scope of this article, we would shortly mention only a few principles: • The question of whether a transaction between related parties complies with the arm’slength principle should be examined according to two stages: At the first stage, the nature of the transaction should be examined (license, services, sale or other), also considering whether such transaction would also have been made between unrelated parties. In this regard, in accordance with the OECD Guidelines, there should be no interference in the nature of the transaction in contravention of the agreements, other than in exceptional circumstances, in which the agreements are fundamentally implausible or where they do not allow, in any manner whatsoever, the determination of a price in accordance with the arm’s-length principle. At the second stage, it should be examined whether the transaction’s consideration is consistent with the market conditions; however, the pricing of the transaction cannot indicate the nature of the transaction, but rather, at the very most, whether there is cause to increase the royalties or profit margin, or to modify specific terms set forth in the agreements. • An additional indication that a transaction between related parties is consistent with the arm’s-length principle is that prior to the intercompany engagement, none of the parties had any realistically available option viewed as preferable from a business point of view. In this context, the court clarified in its judgment that a “realistically available alternative” means solely an alternative whose preference was undoubtable at the time, without hindsight. In addition, the court emphasized that the examination of the available options should be done from the point of view of both parties to the transaction. • The ITA’s arguments with respect to The question of whether a transaction between related parties complies with the arm’s-length principle should be examined according to two stages: At the first stage, the nature of the transaction should be determined. At the second stage it should be examined whether the transaction’s consideration is consistent with the market conditions 104 The US-Israel Legal Review 2022 ISRAEL: TAX the “removal” of functions from Israel in the framework of the intercompany agreements must be backed up by proven facts. The ITA’s reliance solely on the intercompany agreements is not sufficient in this context, and the ITA should not have made a petitio principii argument – that simply because the companies are related, then the matter involves a sale, and not license and R&D services (without examining the transaction on the merits and the parties’ subsequent conduct, as would have been the case, had the parties been unrelated). • A distinction should be made between “old IP” (which existed prior to the transaction) and “new IP” (to be developed), including the legal ownership thereof, and its formal registration. The ITA did not file an appeal to the Supreme Court. The last judgement was published on October 25th 2022 - the CA case. Memco, a startup established in the early 1990’s, was indirectly acquired by CA Inc. as part of a purchase of another multinational company in 1999. Memco’s name was then changed to CA Israel, and while it maintained its own (legacy) IP, it also provided R&D services to the parent company, as well as other intercompany services such as sales and marketing of CA Inc.’s products in Israel. A decade later, CA Israel sold its remaining legacy IP to CA Inc.. The ITA argued that CA Israel sold not only its IP but also all of its cyber-sector FAR, and valued the “deemed consideration” at five times higher than the price actually paid for the IP. The court determined that the classification of the transaction as sale of IP or FAR is immaterial, as in this case both parties determined the transaction’s value based on the DCF methodology. Therefore the core of the dispute was around the valuation and the judgement did not address the classification issue whatsoever. The court ruled in favor of the ITA, as it was not convinced that the expected income from the IP, estimated as part of the DCF valuation, was as limited as assumed by CA, despite the fact the court was also not comfortable with the high growth rates used in the “overly optimistic” estimation of the ITA. The court also confirmed the “secondary adjustment”; however, the court noted its dissatisfaction since it questioned the authority of the ITA to impose such secondary adjustment. The court mentioned that if it were not for a Supreme Court decision that previously maintained a secondary assessment (the Kontera case) - CA Israel’s appeal in this regard might have been accepted and thus called for the Supreme Court to re-examine the matter. The taxpayer is considering appealing to the Supreme Court nowadays, so perhaps we still have not heard the last word in this matter. It seems that the Medingo case had a highly cooling effect on the ‘business model change” theory, as developed and implemented by the ITA. Some assessments based on this theory are still pending in different stages, but in some cases the ITA already withdrew this claim and even canceled the assessment. However, further to the district court ruling in the CA case regarding the valuation of IP that was actually sold, the ITA might focus more on the pricing of inter-company transactions rather than on such transactions’ reclassification. Only time and judges will tell. n The court determined that the classification of the transaction as sale of IP or FAR is immaterial, as in this case both parties determined the transaction’s value based on the DCF methodology. Therefore the core of the dispute was around the valuation and the judgement did not address the classification issue whatsoever The US-Israel Legal Review 2022 105 106 The US-Israel Legal Review 2022 ISRAEL: DATA PRIVACY The European General Data Protection Regulation (“GDPR”) came into force 4.5 years ago, and introduced a new uniform and comprehensive data protection regime affecting companies all over the world. Absent a similar comprehensive US Federal legislation, the data protection in the United States was generally left in the various states legislators’ hands. Until recently, the only comprehensive consumer data protection law in the United States was the California Consumer Privacy Act (“CCPA”). However, a growing number of US state legislators have been adopting similar data protection regulatory regimes, many of which are coming into effect in 2023. The CPRA1 introduced a significant amendment to the California CCPA and it has come into effect on 1 January 2023. The VCDPA, the Virginia2 Consumer Data Protection Act, is also in force since the beginning of the year. New privacy laws in Colorado3 and Connecticut4 Privacy Act will come into effect on 1 July 2023, and additional new law was enacted in Utah5, and it will come into effect on 31 December 2023. The rise of various states’ data protection acts requires companies processing personal data on a global basis to change their regional regulatory approach (as many did with respect to their EU originated data) and adopt a more uniform approach to addressing their data protection regulatory obligations in the EU and the United States. This article provides a general comparison between the relevant concepts and requirements in the two US state data protection laws which have entered into force (i.e., in California and Virginia), and the GDPR, consequently assisting in generating a uniform data protection policy. SCOPE The US data protection laws, similar to the GDPR, apply to data controllers that are established within the respective territory or - even if not established there - are offering goods or services to the respective residents, and their processors, who collect or process personal data. The laws differ, however, in the definitions of “controller”, “processor”, and “data subjects” (or their equivalent terms); the scope of types of data subjects; the minimum thresholds for the material and jurisdictional applicability based on the number of respective consumers, the share of revenues derived from such consumer’s processing of data of the annual gross revenue, and the business total annual revenue. Detailed comparison between the relevant elements can be found in our playbook published here: the-complete-eu-us-data-protection-lawsplaybook/ Navigating Through the New Privacy Regimes Under EU and US Laws The rise of new data protection laws requires global companies to change their regional regulatory approach and adopt a more uniform approach The US-Israel Legal Review 2022 107 KEY DEFINITIONS Key definitions in data protection regulations affect the regulations’ applicability and obligations. The GDPR has, generally, a more extensive definition of personal data than the various US laws, extending its applicability. However, the various US laws include variable definitions for “selling”, imposing additional ARIEL YOSEFI HEAD OF HERZOG’S TECHNOLOGY & ECOMMERCE REGULATION DEPARTMENT GDPR CCPA (as amended by CPRA) VCDPA Erasure / Delete V V V Rectification / Correction V V - granted in the CPRA V Access / Disclosure V V - limited to PI collected in the past 12 months V Portability V V - granted in the CPRA V Object / Opt-Out 1. Object Processing that is based on public interest of the controller’s legitimate interest 2. Object Processing for direct marketing purposes 3. Object Processing for scientific or historical research or statistical purposes 4. Restrict Processing 5. Object automated decision-making, including profiling 1. Selling or Sharing of PI used for cross-context behavioral advertising (including “Do Not Sell or Share My Personal Information” box) 2. Automated decisionmaking technology 3. Limit the use of Sensitive PI (including “Limit the Use of my Sensitive Personal Information” box) Additional requirements: 1. Not to require Consumers to create an account 2. Not to require additional information Processing for the purposes of: 1. Targeted advertising 2. Sale of PI 3. Profiling No Discrimination X V V Figure 1 108 The US-Israel Legal Review 2022 ISRAEL: DATA PRIVACY GDPR CCPA (as amended by CPRA) VCDPA Monetary Penalties The GDPR imposes two penalty mechanisms, depending in the nature of the infringement: 1. $2,500 for each violation 2. $7,500 for each intentional violation 3. $7,500 for each violation involving PI of consumers under the age of 16 $7,500 for each violation Cure period N/A N/A (the CCPA cure period was eliminated in the CPRA) 30 days 30 days Supervisory Authority Established in each Member State California Privacy Protection Agency (“CPPA”) Virginia Attorney General Private Right of Action 1. lodging complaints with the supervisory authorities 2. direct claims for compensation 3. instructing representative bodies to bring class-action claims on their behalf Only in PI security breaches, in an amount between $100 to $750 per Consumer per incident or actual damage, whichever is greater N/A obligations for certain sharing for monetary consideration, which are not specifically addressed by the GDPR. The US laws also exclude from their applicability various types of data that are regulated by specific Federal or sectorial privacy laws, and in some cases treats business purpose and business data differently than under the GDPR. A more comprehensive and detailed comparison can be found in our playbook published here: en/news-and-insights/the-complete-eu-us-dataprotection-laws-playbook/ PRINCIPLES Article 5 of the GDPR outlines key principles for its data protection regime. The key principles are the heart of data protection best practices under the GDPR, and as such, they are fundamental for full compliance. While the US data protection laws do not include distinguished principles provisions, many have embedded similar principles through other provisions relating to the Controller’s obligations. DATA SUBJECTS RIGHTS Data Subjects’ rights mostly resemble in both GDPR and the US data protection law. However, the US data protection laws developed a new right for no discrimination against Consumers for exercising their rights. In addition, the US data protection laws limited the right to opt-out only from several types of processing, unlike the GDPR’s wider approach to opting-out of processing. CATEGORIES OF SENSITIVE DATA Data protection regulations imposes additional requirements for two types of data considered sensitive. The first is the “Special Categories” of data under the GDPR or “Sensitive Personal Information” under US data protection laws. Figure 2 The US-Israel Legal Review 2022 109 The laws differ in both the types of personal data included in the heightened protection and the special measures required to protect such sensitive data. The second type is children’s personal data, regarding which there are sometimes different age threshold, and various heightened measures to protect children’s data. CONTROLLER AND PROCESSOR OBLIGATIONS Under the GDPR and US data protection laws, every person or entity that collects or processes personal data, either as a controller or processor, is subject to specific obligations with respect to the processing. PRIVACY NOTICE The US data protection laws, similarly to the GDPR, require a disclosure through a privacy notice, that includes specific types of information stipulated in the respective laws. DATA PROCESSING ADDENDUM Both the GDPR and the various US data protection laws impose requirements concerning mandatory data processing agreements contracts governing data transfer between controllers and processors, subjecting the data receiving party to specified obligations. OTHER OBLIGATIONS In addition to the obligation of disclosure through a privacy notice and to put in place agreements with processors, the GDPR and the US data protection laws impose various obligations on controllers and processors, including in the areas of crossborder data transfers, records obligations, risk assessments, data breach notification, data protection officer and local representative. For a comprehensive and detailed comparison between the various requirements and the way they apply in each regulatory regime, see our playbook published here: en/news-and-insights/the-complete-eu-us-dataprotection-laws-playbook/ ENFORCEMENT Under both the GDPR and the US data protection laws, incompliance may result in monetary penalties. Jurisdictions defer in terms of the penalties’ amount, procedure, and supervisory authority. Generally, the GDPR imposes a stricter penalties mechanism, both in amount, the inexistence of cure period, and by granting a private right of action. CONCLUSION The GDPR has led to a revolution in EU residents’ data protection and privacy and required an extensive ongoing compliance process from various businesses. The various US data protection laws coming into effect extending the compliance requirements to businesses who process personal information of the receptive states’ residents. While the core elements of the various regulatory regimes are common, there are concrete differences that require an adaptation of a uniform approach throughout all processing activities of the business, while implementing the relevant obligations that apply to each type of data. We encourage businesses to review their data processing practices, map the applicable obligations that apply in each case of data source, and amend their data protection policies and procedures in order to adopt an up-to-date and harmonized approach. Such approach would assist with achieving both improved legal compliance Both the GDPR and the various US data protection laws impose requirements concerning mandatory data processing agreements contracts governing data transfer between controllers and processors 110 The US-Israel Legal Review 2022 ISRAEL: DATA PRIVACY and straight forward business processes. Our HERZOG privacy and data protection team has gained a unique worldwide specialization in data protection and privacy legal, regulatory, and other practical aspects. Our team is studying the upcoming US data protection laws since their initial drafting and is well-prepared for assisting our clients with the process ahead. n HERZOG TECHNOLOGY & ECOMMERCE REGULATION DEPARTMENT Herzog’s Technology & eCommerce Regulation Department6 is a recognized market leader in its field. The team is led by domain experts who possess a unique set of vital, interdisciplinary and global regulatory advisory skills, and are uniquely positioned to advise a range of clients, including leading multinational technology companies as well as start-ups and disruptive technologies vendors, on applicable regulatory and compliance considerations in numerous technological areas. We understand that the regulatory exposure and scope of required attention of almost any company operating in the digital and technological sphere are much wider than one specific jurisdiction or legal discipline. As our clients are often on the forefront of this ever-evolving landscape, we further understand the impact of industry trends and compliance demands on our clients’ businesses. Therefore, our team possesses in-depth knowledge of the increasing volume of regulations, enforcement actions, legislative and industry trends in a myriad of jurisdictions, digital platforms and leading self-regulatory guidelines. This enables our team to offer practical, holistic and comprehensive solutions for complex situations often presented by innovative technologies and disruptive business solutions, providing “hands-on” support to our clients on the strategic, corporate and operational aspects of their business, with the aim of mitigating our clients’ legal and business risks. Regulation of personal data has been dramatically expanding on a global basis. Companies processing data of hundreds of millions of data subjects as well as small start-ups - all are required to spend significant resources on understanding and implementing the constantly evolving legal challenges. Our Privacy & Data Protection team6 guides our clients on all matters relating to their data usage and assist them in navigating the numerous data protection regimes, in all the jurisdictions in which they operate. ABOUT THE AUTHOR Ariel Yosefi heads Herzog’s Technology & eCommerce Regulation Department. Ariel is highly-regarded for his prominent practice and experience in advising international clients on global regulatory considerations involving fintech, crypto and blockchain; AML, payments and online trading; social and realmoney gaming and gambling; privacy, data protection and cybersecurity; content, advertising and eMarketing; health and lifestyle technologies; artificial intelligence, computer and software protection; eCommerce and internet laws; mobile and other social media platforms compliance. Ariel has thorough knowledge and diverse experience with the increasing volume of regulations, enforcement actions and legislative trends in a myriad of jurisdictions, digital platforms and leading self-regulatory guidelines. This enables him and his team to offer unique, practical and comprehensive solutions for complex situations and to assist in the development, implementation and management of adequate procedures, thereby mitigating legal and business risks. Email: [email protected] 1 2 3 4 5 6 The US-Israel Legal Review 2022 111 112 The US-Israel Legal Review 2022 ISRAEL: HIGH-TECH Since the end of the 2008 financial crisis, the Israeli high-tech market has presented a tremendous growth. Israeli high-tech companies raised US$1.12 billion in 2009 and approximately US$27 billion in 2021. The number of multi-national corporations has grown from around 125 to 400. While the first Unicorn founded by Israelis emerged in 2014, today we have 98 Israeli funded unicorns (while the China has approximately 180 Unicorns, India more than 60, United Kingdom more than 40, Germany 26 and France 23 Unicorns). We have more Unicorns per capita than any other country. A true move from the Start-Up Nation to the ScaleUp Nation. It is a truly incredible achievement in a dozen years! Israeli high-tech had a powerful contribution to the Israeli economy. High-tech employees represent more than 10% of all employees and pay 25% of all income tax. High-tech’s share of Israeli export exceeds 50%. From 2009 until 2021, the Gross Domestic Product per capita of Israel has increased from US$27,780 to US$51,430, according to the World Bank Data (see chart 1 below), and it has passed the GDP per capita of Germany, HongKong, New Zealand, United Kingdom, France, Japan, Spain and many other countries (see chart 2 below). The Israeli Tech Review 2022, published by the IVC and LeumiTech this January, indicated the year of 2022 has marked a downtrend in most growth metrics of the Israeli high-tech sector we have witnessed in the last couple of years of a high-tech boom, including in overall capital raised; rates of investment transactions; aggregated number of pre-seed and seed rounds; unicorns capital raising; number of new unicorns announced; number of exit deals (M&As, buyouts or IPOs); and a slight drop in both Israeli-backed investments and foreign investments. Regardless, the report’s data unambiguously shows 2022 has maintained, in many criteria, better performances than 2018, 2019 and in some cases even 2020. The remarkable success of the Israeli tech companies indirectly dampened the desire of entrepreDesert Tech as the Next Investment Opportunity - and Israel’s High Tech Contribution Dr. Ziv Preis and Natalie Shva of Lipa Meir & Co. explore Desert Tech as the next opportunity. Chart 1: GDP per capita (current US$) - Israel 2000 2004 2008 2012 2016 2020 30,000 25,000 20,000 35,000 40,000 45,000 50,000 55,000 H2 2008 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher Chart 2: GDP per capita current US$ - Israel and other countries - 2021 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 USA Australia Israel Germany Hong Kong New Zealand UK France Japan Spain H2 2008 2009 2011 2013 2015 2017 20190 10 20 30 40 50 A B C D E and higher Source: World Bank National Accounts Data and OECD National Accounts data files. The US-Israel Legal Review 2022 113 neurs to establish new startups and made it difficult to establish and grow a new startup in Israel. Since 2014, the number of new Israeli start-ups has dropped dramatically (approximately 1,400 in 2014; 850 in 2019, 730 in 2020 and less than 300 in 2021). The 2021 Innovation Report of the Israeli Innovation Authority pointed out the following concerns for new startups: the declining number of new startups; stagnation of the number of funding rounds and average investment in seed stage startups since 2015 (only 4% of the total investment funding in 2021 (approximately US$1.1 billion) was invested in seed investment rounds); declining number of investors taking part in seed investments; and the rise in average salary in the hightech sector as a reason for preferring to work in managerial roles in established companies rather than taking a risk in the world of entrepreneurship. Below is chart 3 showing the investment amount in Israeli high-tech companies per year (in Billions of US Dollars) and per investment round and a chart (chart 4 on the right) showing the number of investors per year and per investment round: The last 12 months have brought a challenging time for the world in general and Israeli hightech in particular. Political instability and war in Ukraine; political debate in the State of Israel and potential legislation challenging the system of checks and balances of our political system; world inflation; high-interest rates; employee cutoffs; public companies’ valuations plummet; potential recession in the horizon, and some Israeli high-tech public companies saw their stock price declining by 60%-80% last year, just to name a ”few” challenges. As it has been clear, the economic and business focus has shifted from growth to profitability. Shifting to profitability for high-tech companies makes it harder for them to support their company valuation, to raise funds and to build sufficient financial cushion to support their R&D and on-going operations. John F. Kennedy noted that “When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.” Although it may be the incorrect interpretation of the Chinese characters, the wisdom is valuable. In our view, this DR. ZIV PREIS, PARTNER CO-HEAD OF THE TECHNOLOGY, CORPORATE AND M&A DEPARTMENT NATALIE SHVA ASSOCIATE Chart 3: Total investments in private hi-tech companies Source: Israeli Innovation Authority Report of 2021 Source: Israeli Innovation Authority Report of 2021 2013 2014 2015 2016 2017 2018 2019 2020* 12 ?????? 10 8 6 4 2 0 H2 2008 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 B C D E and higher Seed Round A Round B Round C Later rounds Chart 4: Number of investors per investment round 20102009 2011 20132012 2014 2015 2016 2017 2018 2019 2020 4,500 4,000 3,500 3,000 2,000 2,500 1,000 500 1,500 0 H2 2008 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 B C D E and higher Seed Round A Round B Round C Later rounds Billions of US$ 114 The US-Israel Legal Review 2022 ISRAEL: HIGH-TECH is the opportunity time for the Israeli start-ups. Why? Consider yourself as a young entrepreneur with excellent software programming skills or excellent engineering skills. During the amazing years of growth of the Israeli high-tech companies, you weigh the possibility of opening your own start-up company with no salary at the beginning and hope of a lucrative exit versus the possibility of joining one of the Israeli Unicorns or multinational corporations for a high salary, generous grant of options to shares of those amazing companies with high probability of cashing out on those options and cutting edge work. In addition, you weigh the difficulties of recruiting good employees, mainly as software developers or engineers, in light of the lucrative employment packages and cutting edge work offered by those unicorns or multinational corporations. You further consider the risk and reward in your start-up companies versus being in one of those unicorns or multinational corporations. It is not a surprise that the foregoing led to many potential entrepreneurs preferring the lucrative employment world of those unicorns and multinational corporations versus joining the “roller coaster ride” in the start-up amusement park with its internal risks and pressure. However, when the salaries and bonuses decreasing in the unicorns and multinational corporations, options being out of the money due to decline in valuations and layoff are a real fact or in the horizon, those potential entrepreneurs may reach a different result in weighing the pros and cons of establishing their own start-up company, and find it easier to fulfill their start-up dream and establish their startups as well as finding good talent to join them in their journey. As valuations are lower at the pre-seed and seed stages and many of the questions involving valuation are less relevant to those new start-ups, it is the time of investors to get back to focus on investing in new startups. The fear of missing out, which had driven some investors to make quick investments in dream companies at insane valuations, eroded during the last 12 months and investors now have the time to make sound investment decisions. This is the time to focus less on the Scale-Up Nation and revive the Start-Up Nation! The Israeli Tech Ecosystem 2022 Report by the Start-Up Nation Central (SNC) may support our call by reporting an increase of 22% in overall investments in new companies (climbing from US$ 1.3B to US$ 1.6B). As noted by the 2022 Innovation Report of the Israeli Innovation Authority, the investments in high tech companies are primarily in organization software (25.3%), FinTech (16.9%), Cyber (13.7%), E-Commerce (8.7%), communications (7.4%), advance manufacturing (6.3%), content and media (6.2%) and smart transportation (5%). In our view, this is the time to invest in DeserTech for the sake of our region and the progress of humanity; and indeed, there are huge opportunities in DeserTech. Desert-Tech, also referred to as DeserTech, is a mission undertaken by the Israeli DeserTech Climate Technologies Community, a joint initiative by the Merage Foundation Israel, the Israel Innovation Institute, the Ministry of Environmental Protection and Ben Gurion University, focusing on developing innovative solutions for the unique challenges imposed by desertification, which in popular media is knowns as the combination of droughts, decline in agricultural productivity and water availability and land degradation, but in fact embodies so much more: wildfires, sand storms, water contamination, soil salination, soil contamination and soil erosion; flash floods; vegetation loss; crop yield and food supply instabilities; all further effecting food systems, livelihoods, infrastructure, the value of land, human health and human safety. With over 2 billion people living in places defined as “dryland”, increasingly exposed to unfolding risks of desertification, desertification has become a major global cause. DeserTech comprises many verticals, including, among others, water, soil, heat and climate, energy, AgriTech and FoodTech. It is not relevant only to those who live in a desert, but it is relevant to the entire world in improving our agriculture, food, water, energy sources and uses, soil condemnation and productivity, and climate change. Let’s just take water as a matter to explore. Water stress occurs when the demand for water exceeds the available amount during a certain period or The US-Israel Legal Review 2022 115 when poor quality restricts its use. Map 1 opposite shows the water stress by country for 2040. Water stress shows the average exposure of water users in each country to baseline water stress, the ratio of total withdrawals to total renewable supply in a given area. A higher percentage means more water users are competing for limited water supplies. By 2040, many countries will be at a high level of water stress. Many countries will feel like living in a desert due to water unavailability and quality prospective. Albert Einstein said “Never think of the future. It will come soon enough”. In DeserTech and the length of developments in DeserTech, the future is now. Now, we are researching and developing the innovation of 2030 and 2040. Maps 2 and 3 above are the US Drought Monitor maps for February 1, 2022 and January 3, 2023 from the Annual 2022 Drought Report of the National Centers for Environmental Information. These maps demonstrate the importance of DeserTech to the world - and in only in one area. Some Israeli innovations that changed the world would have been classified as successful stories of DeserTech companies. One of them is Netafim (the Hebrew word for drops of water). Netafim has invented a desert-friendly irrigation system. It started in 1965, in the Negev desert in Israel, trying to grow crops in desert soil. Now, Netafim is present in 110 countries, irrigating over ten million hectares of land and producing over 150 billion drippers – for more than two million ambitious farmers. Their slogan is “Grow More with LessTM. Grow higher, better yields every season with precision irrigation – no matter your corp, climate, patterns, soil type or topography”. Another one is Watergen, which creates drinking water out of air, without needing a source of water such as a well, river, stream or ocean. Watergen products are being used in several countries. Israeli high-tech is increasing its interest in DeserTech. On the backdrop of a worrisome climate accompanying the end of 2022, the Israeli Tech Ecosystem 2022 Report by the Start-Up Nation Central (SNC) demonstrates a rise of the “Impact” verticals of Israeli high-tech, noting the Agri and Food-Tech to be the only sectors to show an increase in the number of funding rounds between 2021 and 2022, along the Climate-Tech, which was reported to still constitute an overall trend of growth since 2014 Map 2: US Drought Monitor (01/02/22) Map 3: US Drought Monitor (03/01/23) Map 1: Water Stress by Country - 2040 116 The US-Israel Legal Review 2022 ISRAEL: HIGH-TECH (apart from 2019). In addition, a report published mid-2022 by SNC, in cooperation with the DeserTech Climate Technologies Community, has highlighted a potential DeserTech ecosystem of 303 ventures in Israel, comprised of 66 Israeli DeserTech start-ups (defined as “Israeli companies focused on addressing desertification challenges as part of their core business”), and 237 Israeli “potential DeserTech startups” (defined as “companies with solutions that could be adapted to address desertification”). The SNC report has gathered these startups in a fascinating “Solution Map”, identifying over 39 solution areas of the local DeserTech ecosystem, including startups taking on the challenges of forecast of extreme weather events; water disinfection and fresh water generation; thermal comfort of construction materials; off grid solutions; smart irrigation; crop adaptation; labor shortage solutions and Agri-voltaic systems, just to name a few. Intriguingly, the SNC report has also detected which were the most “mature” solution areas (thermal comfort of construction materials; smart irrigation; water distribution systems management and maintenance; off-grid water and sanitation services; wastewater treatment and desalination); and the most “growing” and “growing fast” solution area (contamination rapid sensing and detection; crop adaptation; crop protection and nutrition), and the most “emerging” solution area (indoor farming). The SNC recounts that the DeserTech ecosystem raises capital in higher proportions compared to its share in the whole Israeli startup ecosystem. Who, then, invests in Israeli DeserTech? The SNC report amassed an approximate number of 290 investors in the DeserTech sector and compared their composition to that of the investors in the overall Israeli startup playground, concluding there were more VC, PE, multinational companies and corporate VC investors, and fewer angel investors (only 8% of investors in DeserTech – compared to about 17% of investors in Israeli startups overall) involved in DeserTech funding. Speaking of trends, the SNC report observed that through 2017-2022, total funding raised by the DeserTech “ecosystem” significantly increased, while the number of rounds decreased. Talking specifics, the SNC report provides some very insightful data of “actual” DeserTech funding: 22 of the 66 Israeli companies defined as particular “DeserTech startups” (excluding the “potential” DeserTech startups) have collectively raised a total of US$ 347M (from 2006 to mid-2022), with the median round size by vertical (from 2014 to 2022) being between US$ 1.5M and US$ 4M. A deeper dive into the SNC analysis of the achievements of those particular “DeserTech startups” reveals a growing interest specifically in the infrastructure DeserTech solutions, which raised US$ 108M in 13 rounds of only five companies (one of which, a construction materials startup developing Light Control Glass technology, has notably raised US$ 60M in a Round D in Q1/2022, alone). When reviewing broader data to include “potential” DeserTech startups, the SNC report realized those companies raised more than US$1.84B in funding from 2006 to 2022, with the energy and agriculture solutions’ companies leading with about 90% of those funds. Another interesting note of the SNC report is that the agriculture vertical raised US$ 583M from 2014-2022, which is actually more than the other three verticals, combined (the energy, water and infrastructure solutions, collectively raising US$ 420M in the same period). It’s time to conclude. While we represent investors and high-tech companies in various verticals of DeserTech, including, among others, FoodTech, AgriTech, Water, Energy and Climate Change, we have decided not to use this article to present our clients, their transactions or legal matters or developments in the area of DeserTech, as we believe that this article should be used to present the opportunity. Three main opportunities. First, to call for more entrepreneurs to establish their start-ups in the area of DeserTech. Second, for investors to invest in DeserTech with patience being a virtue in these type on investments. Third, an opportunity for all of us to take part in improving our world and overall wellbeing. n For further information, please contact: Dr. Ziv Preis, partner and co-head of the technology, corporate and M&A department, Lipa Meir & Co. Advocates Tel: +972 3 6070600 | [email protected] The US-Israel Legal Review 2022 117 118 The US-Israel Legal Review 2022 ISRAEL: INTELLECTUAL PROPERTY At the end of each year, we look back with satisfaction at what we managed to accomplish in the past 12 months, and often with trepidation at the challenges that potentially await us. This is true today too. The past two years have brought many COVID-19-related challenges in almost every aspect, but as far as IP in Israel is concerned, it also created opportunities. Israel was not unprepared; its extensive experience in dealing with crises, coupled with its top technological abilities, have proven themselves equal to coping with the pandemic. All the services of the Israeli Patent Office were provided almost as usual, thanks to the significant investment made in the past to develop online services, with the exception of certain legal proceedings which could not be conducted online. In general, COVID-19 did not significantly affect the submission of applications for registration of intellectual property rights in Israel; it may strangely even have had a positive effect since instead of slowing down, the IP activity level increased. Working from home apparently opened unexpected possibilities for inventors, creators, and entrepreneurs, who found more time to pursue projects previously set aside or delayed because of time and work constraints. So much so that we see now a reluctance to go back to work in the office as before the pandemic, although the general sentiment in Israel (true or not) is that COVID-19 is behind us. This is undoubtedly also due to the swift action of the Israeli government that secured COVID vaccines for the whole population at a very early stage. In addition to the changes introduced because of COVID-19, such as enabling online discussions How Was 2022 for Israel in Intellectual Property? The past two years have brought many COVID-19-related challenges in almost every aspect, but as far as IP in Israel is concerned, it also created opportunities. The past two years have brought many COVID-19-related challenges in almost every aspect, but as far as IP in Israel is concerned, it also created opportunities. Israel was not unprepared; its extensive experience in dealing with crises, coupled with its top technological abilities, have proven themselves equal to coping with the pandemic The US-Israel Legal Review 2022 119 and proceedings, improving regulations, and providing online services, there have been some interesting developments in various areas of intellectual property that are reviewed below. CONTINUOUS DEVELOPMENT OF INTERNATIONAL COOPERATION Israel is a member of the most important multilateral international treaties, such as the Patent Cooperation Treaty, The Paris Convention for the Protection of Industrial Property, the Madrid Protocol, The Berne Convention for the Protection of Literary and Artistic Works, and more. In 2020, Israel also joined The Hague Agreement Concerning the International Deposit of Industrial Designs. As expected, the number of design applications filed by Israeli applicants via the Hague Agreement continues to grow. “The Abraham Accords,” the peace agreement signed initially between Israel and the United Arab Emirates, is one of the most significant developments in this area in recent times. Briefly known as “the Accord,” it resulted in further peace and cooperation agreements with Bahrain, Sudan, and Morocco. Recently, they also brought about a small step forward with Saudi Arabia, which now allow Israeli airplanes to fly over its territory, which significantly shortens flying times to some destinations. These agreements have far-reaching positive implications for the region’s economic development, both for Israel and the Gulf states. This formal peace agreement is a natural evolution of the relationships that Israelis have maintained with Arab states “under the radar” for many years. As is natural because of their international orientation, IP firms were among the first to openly reach out to each other, and they found professional, warm, and eager business partners at the other end. It may seem incredible that strong relationships could develop spontaneously in a It may seem incredible that strong relationships could develop spontaneously in a matter of days after years of disconnect between the Arab world and Israel, but in truth the divide between people and businesses has never run as deep as the political situation would suggest DR. KFIR LUZZATTO PRESIDENT AND SENIOR PATENT ATTORNEY, THE LUZZATTO GROUP LILACH LUZZATTO SHUKRUN PARTNER AND SENIOR PATENT ATTORNEY, THE LUZZATTO GROUP 120 The US-Israel Legal Review 2022 ISRAEL: INTELLECTUAL PROPERTY matter of days after years of disconnect between the Arab world and Israel, but in truth the divide between people and businesses has never run as deep as the political situation would suggest. ALIGNING WITH INTERNATIONAL LEGISLATION The Ministry of Justice published a new draft bill to amend the Israeli Patents Law regarding Patent Term Extension (PTE). The purpose of this amendment is to allow drug manufacturing and stockpiling during the extension term, and to adapt the situation of Israeli companies to that of foreign companies in international markets. This new draft bill is motivated by the will to adjust the Israeli law in respect of the patent protection period to address changing market conditions, as these actions have been allowed in European law (Regulation (EU) 2019/933 of The European Parliament and of the Council of May 20, 2019). WHY ISRAEL’S IP IS DIFFERENT When looking at Israel from the point of view of intellectual property and the legal activity associated with it, one may note an anomaly. The population of Israel at the beginning of 2023 is a little less than 9 million, which is not different from countries like Switzerland, Austria, and Serbia. However, the level of legal activity in the IP field is disproportionately greater. Taking the number of patent applications filed in the United States, we can see that Israel and Switzerland are approximately the same (2,500 – 3,000 Applications) although Switzerland has a very strong pharmaceutical and chemical industry, which is very prolific in terms of patent protection, and as such, it would be expected to generate way more patents than Israel. Austria, on the other hand, only filed approximately 1,200 patent applications in the same period, and Serbia only 14. Israel, also known as the “start-up nation,” does not owe its activity in the IP field principally to large, multinational corporations, but rather to a myriad of companies, large and tiny, which operate in virtually every field of research. Some areas are those in which Israel leads, such as in Cybertech, medical devices, security, irrigation, and Desertech, but other flourishing fields include Foodtech, Biotech, and Agrotech, to mention but a few. This great variety presents challenges not only for the IP practitioner but also for the legal profession in general, which needs to assist those industries, specifically because of the country’s size. In a big country in which a large number of IP firms operate it is possible for a firm that wishes to specialize in a particular area to do so while maintaining a size that allows it to provide highlevel services to its clients throughout the whole range of activities they need. However, in a small country like Israel, a boutique firm that wishes to specialize in a given field cannot efficiently provide the whole spectrum of services that the industry needs. As a result, Israel only has a tiny number of large IP firms that can provide a full service. The upside of this situation is that the firms that were successful in developing a highlevel IP practice for decades have the ability to assist their clients in the most challenging situations, pretty much throughout the globe. The downside, of course, is that the choice of firms at that level is extremely limited and, because of In a big country in which a large number of IP firms operate it is possible for a firm that wishes to specialize in a particular area to do so while maintaining a size that allows it to provide high-level services to its clients throughout the whole range of activities they need The US-Israel Legal Review 2022 121 conflicts of interest, industries and individuals seeking legal assistance often have to make do with firms only capable of providing more limited services. This situation is inherent to a market that, on the one hand, is small, and on the other hand has a frenetic activity where the development of intellectual property is concerned. It also played a role in molding how Israeli enterprises think and operate. A small company with big ideas and a small market has no choice but to look at the rest of the world to develop its market, and hundreds of such enterprises are created every year. BECOMING FAMILY An interesting result of the environment in which IP practitioners operate in Israel is that often what develops is much more than an attorneyclient relationship. It starts with one or two entrepreneurs seeking legal advice to establish a company and safeguard their intellectual property; soon the project takes off, the number of employees skyrockets, and so does the need for legal assistance. Sometimes a patent attorney must spend a significant part of his time assisting this one company, which is not large enough to hire an inside counsel, but nevertheless needs continued assistance, particularly when its activity expands to other countries. This often leads to the development of a relationship that feels more like family than a business. Israel has also invested in the development of incubators from which interesting and often groundbreaking projects are born. There are several ways in which these incubators are fostered, both via government investments and by private enterprises. This review would not be complete, however, without a somber view of the current situation. The dramatic problems that plague the rest of the world, such as the supply chain and the various related and unrelated problems, reached Israel too. The slowing down of the R&D activity is already felt and is expected to worsen. Israel is affected by what happens abroad, particularly in the US and Europe, and therefore cannot be expected to remain immune from the damaging effects of international events. However, there are two sides to the fact that Israel is a small country: on the one hand, it cannot influence major economic developments that affect Europe or America; on the flip side, however, because of its small size, and because of the entrepreneurial character of its people, Israel is much more agile in making changes needed to confront adverse situations than bigger countries. Therefore, when looking at the future, particularly in the IP field that derives much of its activity from the imaginative nature of the Israeli entrepreneur, it is not improper to maintain a level of optimism; after all, Israel has done it all before, more than once. AND THEN EVERYTHING CHANGES The expression “never a dull moment” applies very well to Israel. Just as you have learned to operate in a new (and often less comfortable) environment, things change and you need to rethink pretty much everything. Take, for instance, the work environment. If asked just a few months ago, you would have said with certainty that the days of desk work were over and everything was now done efficiently by videoconference from the comfort of your home (and often stranger places where the meeting time caught you). In spite of Israel has also invested in the development of incubators from which interesting and often groundbreaking projects are born. There are several ways in which these incubators are fostered, both via government investments and by private enterprises. 122 The US-Israel Legal Review 2022 ISRAEL: INTELLECTUAL PROPERTY the many advantages of remote work, we have come to the realization that an efficient and cohesive work environment cannot exist forever without constant, direct human contact. Therefore, companies and firms started to back away from remote work and demand the physical presence of their employees at work. This requires a readjustment of a system that felt smug in the remote version, and has repercussions on the availability of the workforce in some cases. Then we killed the “sacred cow,” i.e., the hightech industry. In the last quarter of 2022, it became amply clear that the level of investment to which the high-tech industry was accustomed will not repeat itself. Start-ups, in particular, started to move away from the model idealized by companies such as Facebook, where the young programmer is king and has happy hours at work every day, with endless perks. First, some perks started to disappear, and then people started to be let go. The industry is downsizing and some start-ups will fold their tents, but in the end, it is expected that we will have a saner and stronger high-tech industry. Then we had general elections. It is no secret that in a country as small as Israel, the government has a critical impact on the economy. It has also not escaped anybody’s attention that the previous government, which lasted a measly year and a half, did virtually nothing to help the situation (and some would say did a lot to make it worse). The present government includes persons in key positions, who have a record of taking positive steps where the high-tech industry is concerned, and therefore we can be mildly optimistic that, inasmuch as possible, the expected challenges and those already here in respect of the economic situation, will be addressed. As far as the legislative situation is concerned, we believe that there will be very little if any attention given to IP issues in 2023, as the government is intent on dealing with much more immediate and complex issues surrounding the broad legal system. Although a few issues are on the table, such as the creation of an “Israeli provisional patent application,” there is no pressing agenda that has to be addressed for the system to go on working properly, if other matters of a more momentous nature take precedence. In conclusion, we look forward to 2023 with expectation and readiness to meet all its challenges, but with the faith that we will continue to grow, improve, and develop. n ABOUT THE LUZZATTO GROUP The Luzzatto Group is the leading IP group in Israel, celebrating 154 years of practice. The Group’s unwavering dedication to clients has carried it into its second century and fifth generation. The Group includes the patent law firm Luzzatto and Luzzatto and the Luzzatto Law Firm, which specializes in IP and commercial law, along with other business companies. Entrepreneurs, inventors, start-up companies, scientists, artists, and developers seek out The Group’s services to enjoy a personalized approach with a global outlook that helps clients protect their intellectual property and commercialize research, inventions, and products. Start-ups, in particular, started to move away from the model idealized by companies such as Facebook, where the young programmer is king and has happy hours at work every day, with endless perks The US-Israel Legal Review 2022 123 124 The US-Israel Legal Review 2022 VENTURE FINANCING This survey was produced in collaboration with Fenwick & West LLP., one of the leading Silicon Valley law firms. Our cooperation with Fenwick & West in producing this survey enables us to present an interesting comparison, using the same tools and terminology, between the terms commonly practiced in Israel and those commonly practiced in Silicon Valley, USA. SURVEY OVERVIEW The most interesting conclusion, the “surprise” in the survey, is that at least in the first half of 2022- the global financial crises did not (yet) result in any significant change in many of the legal terms used in VC investment. Specifically: 1. We observed an increase in the rate of earlystage investments (A Rounds) that occurred, on account of the rate of investments in companies at more advanced stages (C+ rounds) – of the rounds surveyed in the first half of 2022, 30% were A rounds, compared to 23% in 2021, and 26% in 2020, whereas only 16% of the rounds surveyed were C rounds compared to 25% in 2021 and 20% in 2020. 2. In comparison to 2021, where we witnessed a record rate of up-rounds – 96%. In the first half of 2022, we observed a decline in the rate of uprounds – 90% and an increase in the number of rounds of down-rounds – 9%; as expected – most of the down-rounds were C+ rounds. 3. We observed a continuing decline in the rate of the usage of the senior liquidation preference to the lowest rate we have surveyed to date – only 31%. 4. We observed a continuing decline in the rate of the usage of “participation rights” of preferred shares to the lowest rate we have surveyed thus far – only 5%. 5. Alongside the decline in the use of participation rights, a decline was also observed in the rate of the usage of caps on participation rights, so that only 57% of the few companies that did apply participation rights did not place any caps on the right, in comparison to 2021 where we observed a usage rate of 75%. The above results may be explained in several ways: Financing rounds generally take about two to three months from start to finish – a significant part of the terms of the financing rounds that closed during the first half of 2022 were already agreed upon by the end of 2021 or at the very beginning of 2022, prior to the onset of the decrease in the markets. Additionally, many of the companies in more advanced stages (round C+) raised significant funding in 2021, a year in which money was particularly available for investments in advanced stages, and as a result, such companies were either less in need of funding during the first half of 2022 or were not yet ready to compromise on valuation; while, of those companies that did require fundTrends in Legal Terms in Venture Financings in Israel: H1 2022 Survey We are pleased to present our survey results for the first half of 2022, which analyzes legal terms of venture capital (VC) investments in Israeli and “Israeli-related” hi-tech companies and compares these terms to those common in the Silicon Valley, United States. The US-Israel Legal Review 2022 125 LIOR AVIRAM MANAGING PARTNER, SHIBOLET LIMOR PELED PARTNER, SHIBOLET BARRY KRAMER PARTNER EMERITUS, FENWICK ing in 2022, some incurred a decrease in valuation. There was available money in the market for investments, and such funds were being directed more towards early-stage companies that require less funding. As of the first half of 2022 – investors did not use the market turmoil as a justification to tighten the terms of the preferred shares. In this sense, the Israeli Hi-tech industry continued to align itself to Silicon Valley – where the rates of the usage of protective terms that were observed were even lower – a rate of only 16% in use of senior liquidation preferences and a rate of only 2% only in the use of the “participation rights” of preferred shares. It is important to note that in light of the intensification of the currently ongoing market crises and adverse macro conditions as well as past experience in how the venture capital industry responded to like market conditions+, it is dubious as to whether the trends observed in the first half of 2022 will also be observed in the upcoming survey for the second half of 2022 and whether in fact, the legal terms for venture capital investments will undergo an “adjustment” in light of the unique times that we are in. We hope that you find this survey useful and interesting. BACKGROUND We have analyzed the terms of venture financings for Israeli and Israeli-related technology companies that reported raising money during the first half of 2022. Our survey does not include financing rounds of less than US $500,000. The tables below also show, for purposes of comparison, the results of our previously released surveys. FINANCING ROUND The financings closed in the first half of the year 2022, and the periods covered by our previous surveys may be broken down by types of rounds or series, as follows: PRICE CHANGE The financings closed in the first half of the year 2022, and the periods covered by our previous surveys may be broken down by the directions of the change in price as compared to each company’s respective previous round, as follows: FINANCING TRANSACTIONS The percentages of financing transactions that were down-rounds, broken down by series, were as follows: Percentage of financings (%) Change in price (%) H2 2008 H1 2022 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher H2 2008 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher H2 2008 H1 2022 2009 2011 2013 2015 2017 2019 2021 0 20 40 60 80 100 120 Down Flat Up H2 2008 54% 32% 14% 53% 30% 17% 54% 39% 7% 66% 25% 9% 73% 80% 68% 84% 90% 81% 89% 89% 84% 96% 90% 16% 15% 23% 8% 7% 11% 8% 9% 11% 4% 9% 11% 5% 9% 8% 3% 8% 3% 2% 5% 0% 1% 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher 126 The US-Israel Legal Review 2022 VENTURE FINANCING LIQUIDATION PREFERENCE Senior liquidation preferences were used in the following percentages of financings: The percentages of financing transactions with a senior liquidation preference, broken down by series, were as follows: MULTIPLE-BASED LIQUIDATION PREFERENCES The percentage of financing transactions with senior liquidation preferences that included multiple preferences was as follows: H2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20212020 H1 2022 H2 2008 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher 0 20 40 60 80 100 120 B C D E and higher H2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20212020 H1 2022 H2 2008 2009 2011 2013 2015 2017 20190 10 20 30 40 50 A B C D E and higher 0 20 40 60 80 100 120 B C D E and higher 0 20 40 60 80 100 H2 2008 2009 83% 81% 69% 76% 77% 75% 73% 63% 67% 73% 53% 51% 62% 41% 31% 2011 2013 2015 2017 2019 2021 0 10 20 30 40 50 A B C D E and higher H2 2008 H2 2022 2009 2011 2013 2015 2017 2019 2021 0 10 20 30 40 H2 2008 2009 10% 32% 8% 3% 16% 9% 22% 15%11% 6% 12% 4% 8% 6% 4% 2011 2013 2015 2017 20190 10 20 30 40 50 A B C D E and higher H2 2008 H2 2022 2009 2011 2013 2015 2017 2019 2021 Of the financings in which there were senior liquidation preferences based on multiples, the range of the multiples may be broken down as follows: Range of Multiples H2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 11x - 2x 50% 100% >2x - 3x 25% 0% >3x 25% 0% PARTICIPATION IN LIQUIDATION The percentage of transactions out of the total number of financing transactions, which included participation rights in liquidation, were as follows: The US-Israel Legal Review 2022 129 Israel Silicon Valley 5% 2% Out of those financing transactions the terms of which provided for participation, the percentages of those in which no cap was placed on the investors’ right to participation were as follows: Israel Silicon Valley 57% 60% CUMULATIVE DIVIDENDS / INTEREST ACCRUAL Cumulative dividends or interest accruals (which is an Israeli concept similar to cumulative dividends) constituted part of the liquidation preferences under the terms of the following percentages of financings: Israel Silicon Valley 12% 2% ANTI-DILUTION PROVISIONS The use of anti-dilution provisions in the financings was as follows: Type of Provision Israel Silicon Valley Full Ratchet 2% 0% Weighted Average 96% 100% None 2% 0% PAY-TO-PLAY PROVISIONS The use of pay-to-play provisions in the financings was as follows: Israel Silicon Valley 1% 2% REDEMPTION The percentages of financings providing for either mandatory redemption or redemption at the option of the venture capitalist were as follows: Israel Silicon Valley 2% 3% CORPORATE REORGANIZATIONS The percentages of post-Series A financings involving a corporate reorganization (conversion of senior securities) were as follows: Israel Silicon Valley 1% 6% FOR MORE INFORMATION, CONTACT: Lior Aviram at [email protected] or Limor Peled at [email protected], at Shibolet & Co., 972-3-7778333; or Barry Kramer at 650-335-7278; [email protected] at Fenwick & West. 130 The US-Israel Legal Review 2022 US: MERGERS & ACQUISITIONS While global M&A started 2022 on a relatively strong footing, growing macroeconomic challenges became impossible to ignore. Rising inflation, in particular, began to have a tangible impact on the global deal market, with many countries facing 40-year records. Inflation in the US and Eurozone climbed to over 8% by mid-2022, with this environment persisting throughout the remainder of the year. Higher interest rates, which were brought in by central banks to cool rising prices, meant costlier financing for deals. In an already challenging market, this has resulted in a cool down of buyers and made it harder for companies to get private investors. As a result, in the latter half of 2022 with the absence of financing alternatives, there was a push towards M&A, especially consolidations, a trend we expect to see continue into this year. US CONTINUES TO INVEST IN ISRAEL A lot has happened over the last year to test acquirers’ nerves. Inflation concerns had already begun to set in before the war in Ukraine started. The conflict added further unease in the capital markets and exacerbated supply chain troubles which contributed in part to inflationary pressures. The S&P 500 officially entered a bear market in midJune, and the Federal Reserve embarked on a monetary tightening program to bring prices under control, leading to an increase in financing costs. For the most part, the US M&A market has stood up impressively to everything that has been thrown at it, which alone is solid grounds for optimism. Despite technology stocks being sold off heavily in equity markets, the sector has once again outperformed on the M&A front as companies and PE sponsors, who remain heavily armed with dry powder in spite of the more challenging deal financing conditions, continue to be attracted to innovation. The fall in price-to-earnings ratios in the public markets and EBITDA multiples in private markets mean that, all else being equal, acquisitions are more attractive today than they were a year ago. Naturally, investors remain cautious as they closely watch how inflation plays out, the Fed response and the impact of those actions on underlying economic growth. Despite the economic outlooks, Israel M&A deal value and volumes continued in 2022 to remain above pre-2020 levels. The US accounted for 60% of inbound M&A activity in Israel Reality Check: Reviewing M&A Activity in 2022 Following on from two robust first quarters, global M&A activity succumbed to prolonged market uncertainty in Q3 that continued into Q4 2022. Israel was no exception to this trend, however, deal values and volumes remain strong and are still above levels seen before 2020. Q1 2012 Q1 2022 Q1 2020 Q1 2021 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 0 5 10 15 20 25 Israel Deal value (US$bn) M&A activity by value Q1 2012 - Q3 2022* * Source: White & Case’s M&A Explorer powered by Mergermarket The US-Israel Legal Review 2022 131 by the end of Q3 2022, with the total deal value from US bidders reaching over US$20 billion. Domestic deal value in Israel totaled US$13.3 billion during the same timeframe. SPACS ARE ADAPTING TO ADDRESS MULTIPLE CHALLENGES After a series of rollercoaster years for the SPAC market, investors and sponsors are finding ways to adapt to the current market in order to get deals across the finish line. SPACs are facing both a difficult market for new share issuances, which the traditional IPO market also is facing, as well as regulatory scrutiny from the U.S. Securities and Exchange Commission (SEC). In March 2022, the SEC issued proposed rules, which would subject underwriters and other participants in de-SPAC transactions to liability for the disclosure in SEC filings, as well as impose other burdens on SPAC transactions. Following this, many investments banks involved in SPAC transactions became concerned that they may be deemed underwriters in connection with the transaction and have liability for the SEC filings, which typically contained financial projections. As a result, many such banks stepped back from the SPAC market or became very discerning about the transactions in which they would be involved. In addition, when banks are involved, the level of due diligence they conduct is now generally equivalent to when they serve as underwriters of an IPO. SPACs have worked hard to address the banks’ concerns and, in particular, narrow the financial projections they provide. In addition to regulatory scrutiny, SPACs are facing a market where there is significantly less risk appetite for de-SPAC transactions. There have been high levels of redemptions from investors, and the PIPE market, which was white hot during 2020 and the beginning of 2021, has contracted significantly, so that the main investors generally are already affiliated with either the target or the SPAC sponsor. Part of this is a function of the wider COLIN DIAMOND PARTNER, WHITE & CASE TALI SEALMAN PARTNER, WHITE & CASE JOEL RUBINSTEIN PARTNER, WHITE & CASE DAN TURGEL PARTNER, WHITE & CASE 0.0 2.5 5 7.5 10.0 12.5 15.0 17.5 20.0 Transportation Pharma, medical and biotech Financial services Consumer Business services Construction Industrials and chemicals Real estate Energy, mining and utilities TMT Deal value (US$bn) * Source: White & Case’s M&A Explorer powered by Mergermarket M&A activity: top sectors by value Q1 2022 - Q3 2022* 0.0 2.5 5 7.5 10.0 12.5 15.0 17.5 20.0 Germany Italy Canada China Singapore Vietnam India United Kingdom Israel USA Deal value (US$bn) M&A activity: top bidders by value Q1 2022 - Q3 2022* * Source: White & Case’s M&A Explorer powered by Mergermarket 132 The US-Israel Legal Review 2022 US: MERGERS & ACQUISITIONS shift from high-growth risk assets with a distinct tech flavor, a favorite of SPACs, in favor of stable earners and commodities plays amid the economic slowdown and attendant bear market. Also, many high-profile SPAC deals have fallen far short of their projections, which is part of what prompted the SEC’s greater scrutiny. Bottoming out While the market remains difficult, the worst has possibly already passed for the SPAC market. Many SPACs that have not completed de-SPAC transactions have already reached their drop-dead dates and liquidated, and many more will do so by the end of Q1 2023. This means that a significant amount of capital is being returned to investors, who will seek to put it to use. In order to adapt to the current market, some SPACs have introduced innovative structures in their de-SPAC transactions. A case in point, in July 2022, FAST Acquisition Corp. II entered into an agreement to combine with Falcon’s Beyond, an entertainment development company specializing in intellectual property creation and expansion, in a de-SPAC transaction with a pro forma enterprise value of US$1 billion. The deal is noteworthy for introducing a unique structure whereby shareholders who do not redeem their shares will receive 50% of their shares as convertible preferred equity with a sizable 8% dividend and US$11 conversion price and 50% common stock. This is just one example of how investors and sponsors have an abundance of options to improve the integrity of deals and ensure that they cross the finish line. Once the stock market finds its bottom and when there is greater regulatory clarity from the SEC, SPAC IPOs and de-SPAC activity should be in line for a recovery. It is unlikely that the frenzy of Q1 2021 will be repeated, but there will be plenty of headroom for the US SPAC market’s growth as the interest rate cycle nears its end. CFIUS CONTINUES ITS WATCHFUL EYE ON FOREIGN INVESTMENT Under the Biden administration, CFIUS continues its rigorous assessment of security concerns across a wider range of sectors. Current state of play The Committee on Foreign Investment in the United States (CFIUS), the interagency committee authorized to review certain transactions involving foreign investment into the US, continued to ramp up its outreach in 2021. In its Annual Report to Congress for calendar year 2021, CFIUS reported a nearly 40% increase in overall CFIUS filings in 2021 from 2020. Notwithstanding this substantial increase in volume, the metrics indicate that CFIUS has mostly maintained, and in some cases slightly improved, its efficiency in dealing with filings. Moreover, there were not significant increases in the percentage of transactions requiring mitigation or abandoned based on CFIUS concerns, though some cases requiring mitigation took longer to resolve. CFIUS also identified more non-notified transactions compared to the prior year, but ultimately requested fewer total filings. Overall, while parties are notifying substantially more transactions, CFIUS continues to approve the vast majority of cases without mitigation. A broadened view on security A continuing trend under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) is the increase in formal internal processes and procedures used to review investments. Under the Biden administration, the committee remains steadfast in its comprehensive approach to deal reviews, with particular focus on a wide range of areas of interest, such as global supply chains, and an increased engagement with international allies. Under FIRRMA, CFIUS continues to broaden its involvement in certain sectors on the grounds of national security. One such example is real estate. The US accounted for 60% of inbound M&A activity in Israel by the end of Q3 2022, with the total deal value from the US reaching over US$20 billion. The US-Israel Legal Review 2022 133 FIRRMA’s implementing regulations include separate regulations for investment and real estate transactions, and a single transaction cannot fall under both sets of regulations. While fewer than 2% of the CFIUS filings made in 2021 were pursuant to the real estate regulations, those regulations are useful for investment transactions because they provide parameters for assessing whether a target’s US locations could raise national security concerns based on their proximity to sensitive US government facilities. This assessment is particularly important when a transaction involves investors from higher-threat countries. Outbound investment control? There remains some discussion surrounding the extent to which CFIUS should control outbound investments from the US, with interest in this area growing throughout 2022 This has been driven by interest in having more control over outbound technology transfers and investments, beyond what is already in place through export control regulations. In March of 2022, US Secretary of Commerce Gina Raimondo expressed support for a screening regime to review outbound investments. This followed on from similar moves by the White House earlier in the year, signaling that an outbound investment screening mechanism could be a possibility in the future. FUTURE PREDICTIONS AND TRENDS IN M&A As predicted in our previous M&A report, 2022 has not lived up to the runaway performance of 2021. As activity—still at impressive levels considering everything that has been thrown at the deal market—takes a breather, we consider five fundamental trends that may play out over the coming months. 1. Rates and financing costs to increase The increasing interest rate environment has made, and will inevitably continue to make deal financing more costly as spreads widen. Leveraged loans and high-yield bonds are at the riskier end of the curve, and PE firms rely heavily on this financing. It is likely that direct lenders will step in to pick up some of the slack left by more cautious capital markets. Either way, buyers dependent on acquisition financing will need to adjust for this accordingly—potentially, by using their cache of dry powder to write larger equity checks. 2. Acquirers will capitalize on attractive multiples It is reasonable to expect that M&A activity will continue with a more cautious tone, as it was headed toward the end of the second quarter. However, deals will continue. Companies that set their sights on assets and have a clear, well-articulated strategic rationale for pursuing those deals will press ahead with the support of their shareholder bases. PE has ample dry powder at its disposal and has proven adept at capitalizing on market dislocations in the past. Indeed, the markdown in EBITDA multiples will make many opportunities all the more compelling over the next six to 12 months, and acquisitions made during this period promise to deliver when valuations recover. It is reasonable to expect that M&A activity will continue with a more cautious tone, however, deals will continue. 3. Going deeper on due diligence There is no escaping the fact that risk sentiment has cooled. Acquirers are spending, and will continue to spend, more time on their due diligence processes, prepping on the regulatory side, forward planning for any potential issues that may arise and justifying their investment theses before bringing deals to their executive or investment committees for sign-off. Supply chain resilience will continue to be a focal point, and ESG will be further integrated into evaluations. Patient, steadAfter a series of rollercoaster years for the SPAC market, investors and sponsors are finding ways to adapt to the current market. 134 The US-Israel Legal Review 2022 US: MERGERS & ACQUISITIONS fast bidders with deeper insight into their prospective deal targets will be rewarded for these efforts. 4. Overseas opportunities to emerge After a year where the dollar was at its strongest in 20 years, other major currencies have not performed so well. While a strong dollar is slowing foreign revenues and profitability at US multinationals, buyers with lots of liquidity will be incentivized to look overseas for potential buy opportunities. Not only have valuations come down over the last 12 months, but US acquirers can benefit as their cash stretches that much further when shopping for assets than was the case a year ago. 5. Move towards consolidation Consolidation continues to increase across all sectors, with technology in particular witnessing this throughout the life cycle, with companies acquiring or merging with similar or complementary businesses. This is driven by several factors including a more challenging funding environment, the opportunity to shore up balance sheets, improve economies of scale and hasten the path to profitability. We expect to see more of these types of deals in 2023.n ABOUT THE AUTHORS Colin Diamond is a partner in White & Case’s Global Capital Markets Practice and the US-based Israel practice co-head. He is recognized among the leading US-based experts in Chambers Global: Capital Markets (Experts Based Abroad) – Israel. Diamond’s practice focuses on securities transactions, public mergers and general corporate matters. Email: [email protected] Mobile: +1-917-859-8754 Daniel Turgel is a partner in White & Case’s Global Mergers & Acquisitions Practice, as well as the UK co-head of the firm’s Israel Practice. He is a leading practitioner on Israel-related matters, having been ranked by Chambers Legal Directory for several years. He spends a significant portion of his time in Tel Aviv and has advised on some of the largest and most complex matters in the Israeli market. Email: [email protected] Mobile: +972-544-236896 Tali Sealman is a partner in White & Case’s Global Mergers & Acquisitions Practice. Sealman’s practice focuses on private and public M&A and general corporate representation of emerging technology and life sciences companies and venture capital investors. Sealman represents strategic and financial buyers and sellers in public and private acquisitions, and also represents companies at all stages of their lifecycle and across a broad range of industries, including software, enterprise, security, digital health, fintech, gaming and blockchain. Email: [email protected] Tel: +1 650 213 0315 Joel Rubinstein is a partner in White & Case’s Capital Markets Practice. Joel has particular expertise in advising issuers, underwriters and investors on the IPOs of special purpose acquisition companies (SPACs), as well as SPACs, target companies and investors in de-SPAC business combination transactions. He has been advising clients on SPAC transactions since 2005. Since 2020, Joel has represented clients in more than 100 SPAC IPOs, raising aggregate gross proceeds of more than US$35 billion, and in more than 30 business combination transactions with an aggregate enterprise value of more than US$60 billion. Joel also represents public companies in initial public offerings and followon offerings, as well as offerings of convertible notes and PIPEs, and in mergers and acquisitions. Email: [email protected] Tel: +1 212 819 7642 White & Case’s commitment to the Israel market spans several decades and is widely recognized as a stellar practice, ranked Band One in Chambers Global: Israel 2022. The firm offers a regular on-theground presence, advising on transactions across a broad range of industries, including high-tech, healthcare and medical devices, cleantech, agriculture, real estate, energy and oil and gas, chemicals, consumer products and financial services. White & Case has deep roots in M&A, capital markets and project finance and leverages this experience into other areas, notably litigation. The US-Israel Legal Review 2022 135 Tel. (USA) 732 432 0174 Tel. (Israel) 03 939 9194 [email protected] We are the leading legal translation team for Israel-related matters. For more than 30 years, we have been serving the largest and most prestigious law firms in Israel, the United States and Europe. We work hand-in-hand with top-tier attorneys, providing translation support that is critical to their litigation and transactions. Our language and legal expertise, along with our emphasis on confidentiality, make us highly valued translation partners. Contact us today: [email protected] | FIRST FAST FLUENT FOCUS THE LEGAL TRANSLATION EXPERTS Tel. (USA) 732 432 0174 Tel. (Israel) 03 939 9194 [email protected] We are the leading legal translation team for Israel-related matters. For more than 30 years, we have been serving the largest and most prestigious law firms in Israel, the United States and Europe. We work hand-in-hand with top-tier attorneys, providing translation support that is critical to their litigation and transactions. Our language and legal expertise, along with our emphasis on confidentiality, make us highly valued translation partners. 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