‘Trying to analyse retroactively the last 12 months is probably the most challenging assignment.’ So reflects Mike Rimon, corporate and securities partner at Meitar Law Offices. ‘Those 12 months consist of the second half of 2021 and the first half of 2022. The contradiction is as big and significant and meaningful as it can be.’

It’s no secret that events of the last few months have caused the global economic outlook to change dramatically from the buoyancy of last year. Despite the shadow of the Covid-19 pandemic lifting from many parts of the world, a fall in consumer confidence caused by Russia’s invasion of Ukraine, ongoing global supply chain issues and spiralling inflation rates mean that almost every jurisdiction is experiencing a slower 2022. Israel is no exception.

According to the Organisation for Economic Co-operation and Development (OECD), the Israeli economy shrank by 0.4% in the first quarter of 2022, a stark contrast to 2021, during which the country’s GDP grew by 7.9%. Inflation is also a concern, with the CPI rate standing at 4% in April, though well below the double-digit figures seen elsewhere, it is beyond the government’s target range of 1-3%.

On a more positive note, the country is building from a strong position in 2021. An effective pandemic strategy and a world-leading vaccination programme meant Israel was able to navigate the Covid crisis better than most other jurisdictions.

‘One thing the government did is make out-bound investment for Israeli investors who invest through partnerships a little bit more difficult from a tax perspective.’
Clifford Davis, S.Horowitz & Co

Moreover, the country was able to enjoy a short-lived period of governmental stability. March 2021 saw the fourth general election in two years, which resulted in a coalition government led by incoming prime minister Naftali Bennett, leader of the New Right party.

Though the stability was not destined to last (another election is scheduled for November 2022 after the coalition collapsed and Yair Lapid took over as prime minster on 1 July), even a year of political continuity is to be treasured in a country that has seen so much upheaval in recent years. Clifford Davis, co-chair of the international corporate group at S.Horowitz & Co, acknowledges: ‘The recent government did manage to pass one budget. That might not sound much, but it’s a big thing because the Israeli government hasn’t been able to pass a budget for a few years. One thing they did is make out-bound investment for Israeli investors who invest through partnerships a little bit more difficult from a tax perspective.’

Capital markets in freefall

For many years, the hi-tech and startup sectors have been at the core of the Israeli economy. Not possessing a wealth of natural resources, the country’s well-educated workforce, combined with a general appetite for innovation and entrepreneurship, has seen it outpace some of the world’s largest economies in developing successful companies.

Indeed, 2021 brought an unprecedented level of success in that respect. Throughout the year, 33 new companies achieved unicorn status. From January to December, companies raised an eye-catching $25bn in funding, according to stats from data provider Start-Up Nation Central.

Unicorns aside, last year also saw several high-profile listings on the international markets. Many of 2021’s most valuable IPOs, such as those of cloud-based software developer Monday.com, which listed on Nasdaq, advertising tech company ironSource and security company SentinelOne, which both listed on NYSE, took place in June.

The second half of the year also saw some notable listings, such as smart car company Arbe Robotics, which listed on Nasdaq at a valuation of $525m in October.

The M&A market was similarly bullish. Each year sees several promising startups absorbed by international acquirers, be it global tech companies or private equity houses. Highlights from 2021 include the purchase of cloud security provider Avanan for $300m by Check Point, and security company Vdoo, which was acquired by JFrog, also for roughly $300m.

The savviness of investors played a large part in the success, as Davis explains: ‘The hi-tech sector has been very adept at investing in parts that can be easily monetised. Foodtech is a very big thing and is going to get bigger. There is also fintech and biotech, which is always going to be a big thing.’

Early 2022 has been a different story. Rimon recounts how quickly the outlook changed: ‘When 2022 came in, it didn’t take a lot of time to see something was going on. There was a meltdown in the capital markets. It became clear that IPOs would be very challenging.

‘When 2022 came in, it didn’t take a lot of time to see something was going on. There was a meltdown in the capital markets.’
Mike Rimon, Meitar Law Offices

‘In the first half of 2022, despite the meltdown in the capital markets and the decreasing valuations of public companies, we’ve still been very busy, although somewhat less than in 2021. It’s still to be seen. I personally believe that there’s going to be very few IPOs this year. But I’m pretty optimistic that we’ll see a lot of M&A, one of the reasons being that the strategic buyers are expected to be more active.’

The market has also been hit by a global reduction in SPAC activity. Starting in the US, early 2021 saw an explosion of SPAC mergers globally, with Israel at the vanguard of the trend. They were seen as a quicker route to the public markets for developing companies. In the first half of 2021, the top three M&A transactions in the country were all SPAC mergers, as ironSource, REE Automotive and TWC Tech Holdings all took the SPAC route to US listings.

The flood of activity has not been maintained. Due to a combination of international and domestic regulatory clampdown, a general reduction in IPO activity, and a number of cautionary tales where companies that listed via a SPAC merger saw their valuations plummet, SPAC activity has dwindled into insignificance in Israel.

On the other hand, a recent uptick in M&A has been noted across the sector and could be seen as a response to funding drying up. Ella Tevet and Ayal Shenhav, head of IP and hi-tech respectively at Gross & Co, explain: ‘In the last three or four months there was a slowdown in the market. There is a decrease in the VC’s investments in Israeli companies.

‘We see more potential M&A transactions within the range of $15m-100m since the companies understand that the exit will take longer and need more funding.’

‘As the current recruiting marketplace is highly competitive, it is difficult to recruit and retain good and experienced lawyers.’
Ella Tevet and Ayal Shenhav (pictured L-R), Gross & Co

Though best known for its tech sector, there are other areas of the market that provide substantive work for lawyers. ‘Israel at the moment is like one big construction site,’ quips Davis. ‘There are huge amounts of construction and infrastructure projects taking place each year. And many of these projects are billion-dollar projects. They can put some of the M&A work, in terms of complexity, risk and investment, in the shade. It is difficult to find a major government construction tender for a project that is worth less than $300m.’

In October 2021, finance minister Avigdor Lieberman said that almost $35bn worth of infrastructure projects are set to be launched over the next decade. Headline developments include the Tel Aviv metro, set to start construction in 2025, and a cable car project to connect Hutzot HaMifratz to Haifa University, though there are plans for numerous projects ranging from airports and railways to power plants and water desalination facilities. Such infrastructure is fertile ground for mandates, with advice ranging in the lifecycle from the initial tendering process to the inevitable litigation and arbitration proceedings.

New player in town

International firms have never gained much of a foothold in Israel, and the market is instead home to a number of sophisticated, full-service, local firms that compete aggressively for market share and talent. Some sectors, such as litigation, white-collar crime and intellectual property are also populated by boutiques, which often house individuals with reputations as strong as anyone in the larger firms.

The top end of the legal market was shaken up this year by the recently-announced merger of Yigal Arnon and Tadmor Levy. Both solid firms in their own right, the new entity is set to become the third-largest firm in the country behind Meitar and Herzog Fox & Neeman, and will add a new dimension to a premium market that already sees a number of players jockeying for position.

Such competitiveness translates to the recruitment market. An unemployment rate of just 3.6% validates the common observation that talent is difficult to find. To make matters worse, law firms are finding it increasingly difficult to compete with a cash-rich, hi-tech sector that can offer bumper pay cheques and rapid development.

As Tevet and Shenhav note: ‘As the current recruiting marketplace is highly competitive, it is difficult to recruit and retain good and experienced lawyers.’

There are however suggestions that, as the tech market becomes tougher and less funding is available, it may be that a career at a traditional law firm becomes appealing once again.

Should that be the case, firms may have a decision to make on how they approach a recruitment market suddenly tipped in their favour. The routes particular firms will take remain to be seen, but some, particularly the most dominant players in the market, will inevitably be able to resist the temptation to welcome everyone in with open arms, and will instead focus on taking the cream of the crop. For the mid-tier firms that have suffered significantly in the recruitment market in recent times, a cautious approach will be needed to ensure that they do not take an ‘all you can eat’ approach that may cause issues in the long term.

Survival of the fittest

Even in times of hardship, some practice areas, and by extension well-hedged firms, continue to prosper. Yael Aridor Bar-Ilan, founder of litigation boutique Dr. Yael Aridor Bar-Ilan Law Offices explains: ‘Traditionally, in periods of slowdown or economic recession, the commercial dispute resolution field is active. Usually when businesses are facing adversity, disputes rise to the surface leading to more litigatory work.’

It is not all doom and gloom. Despite a tough first quarter, the OECD still predicts that the economy will grow by 4.8% across 2022, and a further 3.4% in 2023. Hardly banner years, but a far cry from the recession that a number of global economies will inevitably find themselves in.

Though it appears that economic shrinkage will be avoided, it is still set to be a difficult time for a hi-tech and startup market that has had it all its own way in recent years, and many companies will have to change tack or risk going under. As Rimon puts it: ‘We expect to see in 2022 and in 2023 more startup companies struggling to survive. The well-funded companies will be in a better situation.

‘Usually when businesses are facing adversity, disputes rise to the surface leading to more litigatory work.’
Yael Aridor Bar-Ilan, Dr. Yael Aridor Bar-Ilan Law Offices
Photo credit: Orel Cohen (Calcalist)

‘A number of hi-tech companies that are publicly trading have seen their stock price go down ridiculously,’ adds Davis. ‘I foresee that, if the markets continue to go down, you’re going to get a lot of public-to-private transactions, backed by private equity, with the idea of going public again in five years’ time.’

However difficult the last couple of months have been, there is a general agreement that it is but a temporary blip in the long-term prospects of the market. ‘There is still a lot of “dry powder” available for VCs which closed in 2021 or early 2022,’ affirm Tevet and Shenhav, ‘VC fund raising is very active. Many Limited Partners understand that 2022 will be a good VC vintage.’

Whatever trials the coming months bring, they are unlikely to dampen the indomitable spirit that has seen the Israeli market successfully weather the coronavirus storm and many years of political turmoil. Aridor Bar-Ilan concludes: ‘It is impossible for me to predict what other law firms will do, but our boutique law firm is focusing on getting the best possible result for our clients while taking into account relevant market changes that may affect their interests.’ LB

charles.avery@legalease.co.uk

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We may be looking at a major upheaval in the Israeli M&A market, as recent times have been quite a change compared to the last couple of years.

During 2020-21 the Israeli market, having recovered from the initial Covid-19 influence, has seen exceptionally high volumes of M&A deals. So much so that according to certain analysts, the year of 2021 reflected a 70% increase in overall M&A deal value, with both local and foreign entities acquiring Israeli companies and fuelling the market with cash.

This period of time has been the finest hour of sellers. Low interest rates alongside plenty of available funds and growing global interest in technology companies in the face of the Covid-19 crisis, led to increasingly high demand on the part of buyers, looking to take advantage of the inviting investing atmosphere in Israel and invest in Israeli companies. Naturally, a respective rise in the valuation of acquired companies followed, all leading to a very pro-seller market. Consequently, we have witnessed a significant portion of our clients, mainly foreign buyers looking for a toehold in the Israeli market, willing to pay considerable sums of money, as well as to compromise on some legal aspects of the deal, all in order to secure their desired transaction.

It seems, however, as though we are witnessing reality twisting in a different direction, as recent developments indicate. As seen across the globe, high inflation rates lead state treasures and national banks to respond by increasing interest rates. Israel is no exception to this tendency (albeit to a lesser extent), with local interest rates as of August 2022 increasing from 0.1% to 1.25% over the past three months. It appears that the end of the cheap money period may be approaching, with following sell-offs by investors and sharp downfalls in public companies’ values, which may mark the trend reversal. Although a full assessment of the consequences of the new market trend on M&A deals seems somewhat premature at this stage, it can be carefully said that we are starting to see a shift in the pro-seller paradigm that has dominated the market in recent years.

Nonetheless, we see that many of the relevant companies and investment funds still appear to have plenty of available cash for investment and an appetite for investing it.

In addition, the Israeli industry, which is based on strong innovation and tech sectors, is expected to continue to be an attractive target for foreign investors, as technology innovation continues to drive the world economy. This leads us to believe that while we may see a temporary pause in investments while players re-evaluate the changing market and their increased costs of capital, a stagnation is not expected. Rather, we expect to see a continuance of the previous investment trends albeit with potentially different market characteristics. These characteristics are likely to reflect a more buyer-oriented market in which buyers might find themselves, in contrast to the investment atmosphere of previous years, in a better position to shape the terms of the deal in their favour. Buyers are also likely to benefit from a decrease in company valuations, which we expect to trickle down from public companies to private ones. Indeed, among our clients, we still see companies receiving diverse investment proposals even though the proposed valuations may be lower than their initial expectations. Likewise, we continue to help local and foreign investors to take advantage of attractive deal prices through investments in Israeli companies.

We can already see the shifting market standards reflected in some of the recently published transactions. For example, the American private equity fund, Insight Partners, currently takes part in a US$35m equity financing of Bizzabo, an Israeli hi-tech company focused on innovative events and conferences organising solutions. This financing, which reportedly reflects a company value lower by 30% compared to the prior round in 2020, also includes a 3X liquidation preferences protection. This protection, which basically guarantees an investor a three-times return on its investment in case of a future exit, would have been difficult to imagine in similar investments that took place in the pro-seller investment atmosphere of the last couple of years.

Another trend that we are starting to see among our clients is an increase in the use of earn-out and similar mechanisms to determine a bigger portion of the deal consideration. This mechanism allows parties who disagree on the valuation of a company to make a portion of the consideration subject to the occurrence of future events, thus reducing the risk associated with the deal for the buyer, while allowing the seller to enjoy the future success of the business despite current market uncertainties.

Recently, we have even seen another type of M&A deal taking place, one almost unheard of in the local market: a hostile takeover attempt where Aviat Networks attempted to take over Ceragon Networks, following a 68% drop in its traded share price compared to its two-year record high. There are a few reasons why hostile takeovers in Israel are so rare, but of particular note is the structure of the Israeli capital market, which traditionally includes mostly public companies with a strong controlling shareholder, as well as a unique limitation under Israeli law which requires buyers that wish to acquire initial control in a public company to make their bid public through a ‘Special Tender Offer’. According to this procedure, the buyer’s offer must not only be addressed to the shareholders of the company in their entirety, but it also must be approved in a general meeting. This means that even if a buyer manages to find enough shareholders who are willing to sell their holdings, a majority of disagreeing shareholders could still frustrate the deal. However, the increase in IPO of tech companies without a strong controlling shareholder which we have seen in the last few years, particularly during the SPAC Spring of 2020-21, together with a sharp drop in share prices may make this type of deal more attractive in the near future, as evidenced by the on-going Ceragon Networks transaction.

Another deal of similar nature is the tender offer made by Panopto for its competitor, Israeli-founded video creation company Kaltura. It is the third tender offer Kaltura has received from Panopto in the last couple of months, which comes as no surprise as Kaltura’s shares have dropped by roughly 80% since its US$1.3bn IPO only last year.

Stock-for-stock mergers and acquisitions are also starting to gain more traction in Israel. In addition to the increase in the costs of funds, which makes cash investment more expensive, this trend may be attributed also to psychological reasons that arise from giving up equity under a low company value by investors who have not too long ago seen their stock going for much higher figures. In this sense, it is somewhat difficult to convince an investor whose stock was sold last December for US$100, to now sell it for a third the sum. But when an acquiring entity who also took a hit to its share price offers to acquire a company with a consideration consisting of shares of its own, the picture turns into a more comfortable transaction from the shareholders’ view who may consider the current situation in the capital markets to be temporary and expects the purchaser’s stock to increase in value, much like their own case.

A look on the recently-announced merger between Israel’s ironSource and Unity Software, the popular video game software developer, shows exactly this. The transaction took place early last month, after valuations of both companies dropped by roughly 80% in the preceding seven months. Reflecting a company valuation of US$4.4bn while being entirely stock-for-stock, this transaction may have been easier to swallow for both parties: ironSource’s shareholders were not required to liquidate their holdings for low figures, while Unity was not required to bear the rising costs of funds. Similarly, such transaction, in which employee stock options are usually rolled-over into the buyer’s stock instead of being cashed-out, obviates some of the concerns of this important group of constituencies.

Another practice, which may also become more common for companies seeking finance as the market transforms into a new phase, is debt financing. In light of current market conditions, companies that find themselves in financial hardships and in need of swift funds are not too eager to give up equity portions given their relatively low valuation at present. This mostly psychological effect is heightened by the fact that most investors receive anti-dilution protections as part of their investment, which guarantees at least partial protection from a dilution of an investment round which reflects a lower valuation than the one at which they have invested. This means that the dilution of ordinary shareholders in such ‘down round’ is usually higher than that of the investors, and, accordingly, the incentive of such ordinary shareholders (which typically include the management of the company) to agree to such investment is lower. In these situations, financing through debt becomes a more attractive solution, and together with the increase in the number of institutions that specialise in financing early-stage companies, we expect to see more debt financing as company valuations continue to decrease. Indeed, we are already witnessing several clients being involved in loan agreements, including investors that invest in transactions involving debt financing coupled with equity kickers, who find this type of investment appealing on their part because of the general increase in interest rates and their improved bargaining position.

All in all, the new market situation is still in its early stages and, as the saying goes, it is tough to make predictions, especially about the future, but it is not too far-fetched to draw an interim conclusion, according to which there are new rules to the game, and that they are here to stay, at least for the near future. But for all the shifts and changes, it does appear that the Israeli investment market is still very much alive and kicking, although not in exactly the same way as it was before. These shifts and changes, may mark a general shift towards a more pro-buyer atmosphere, as can already be seen in recently published M&A deals and in our clients’ on-going transactions. Now, it is for time to tell how things will unfold.

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Does the Israeli Consumer Protection Law 5741-1981, a mandatory law, apply to international online platforms, offering their services to Israeli consumers – even though their terms of use stipulate that disputes between the consumers and the platform shall be governed by foreign law and not the laws of the state of Israel?

This question, that greatly concerns the Israeli courts is awaiting a resolution. An initial indication for a resolution can be found in a new Supreme Court ruling which considered and provided guidelines to the circumstances in which foreign choice of law clauses will be honoured.

The answer to said question lies foremost in the legal framework, and the Israeli caselaw developments in recent years.

Many of the online platforms operating in Israel regulate their relationships with their consumers through a user agreement which, in most cases, meets the definition of a ‘standard contract’ under the Israeli law. A standard contract is a contract with a uniform formulation intended for many engagements. Generally, the contract is drafted in advance, by one party in order to be used in agreements with its consumers, while the counterparty, the consumer, can only accept the contract in full or reject it, and has little or no ability to negotiate and change the contract.

For the most part, international platforms set in their user agreements foreign choice of law clauses (as well as foreign jurisdiction clauses, which are outside this article’s scope).

The Israeli Standard 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 is found to be oppressive or provides an unfair advantage to the service provider, the court is empowered to invalidate it.

The Law includes a list of instances which are presumed to be disadvantageous, among them, in the current context, is a clause that denies or restricts the consumer’s right to argue certain arguments in court.

Therefore, a choice of law clause that restricts the consumer’s right to argue certain claims on the basis of Israeli law, can be considered, and has been interpreted, as detailed below, as oppressive and as meeting the presumptions set forth by the law.

Hence, in almost all civil claims filed against foreign corporations which include in their user agreement a choice of law clause, including lawsuits alleging a violation of the Consumer Protection Law – it is argued by the plaintiff, that such a clause is an oppressive clause in a standard contract and is therefore void.

CASELAW

Choice of law clauses were characterised by Israeli courts as carrying unique difficulties in relation to other terms of standard contracts because a consumer who does not have expertise, cannot fully understand the meaning or the implications of the choice of law clause, such as whether the clause will prevent him/her from raising certain arguments in court due to the applied foreign law. The courts held that understanding the implications of said clause is impractical given the resources it would take.

In view of these difficulties, for many years the courts’ prevailing approach was that a choice of law clause included in a user agreement, of international companies targeting Israeli consumers, is void. The courts provided indications as to which companies should be classified as those who target Israeli consumers, such as: the platform display is in Hebrew, enabling the transaction in NIS. The scope of the company’s activity in Israel was also examined.

The change in the approach occurred following the Supreme Court’s ruling in CA No. 5860/16 Facebook Inc v. Ben Hamo (published in Nevo, 31 May 2018) (the ‘first Facebook ruling’), in which the Court examined Facebook’s user agreement which included a clause that stated that any dispute between Facebook and its users will be governed by the laws of the State of California. Contrary to the former approach, the Supreme Court ruled that Facebook’s choice of law clause does not constitute an oppressive clause.

The main rationale underlying the ruling was that the Californian legal system has similar characteristics to the Israeli one and is considered advanced in the field of class actions. The laws of the State of California are in English, a language understood by many Israelis, and are accessible through the internet. It was further held, that the choice of law clause’s purpose is to protect the legitimate business interest of the international company, that depends on the company being subject to a single legal system in order to arrange its operation wisely, particularly given its vast number of users around the globe. Additionally, the Court held the assumption that a consumer who files a class action for significant financial relief – will not be deterred from filing his lawsuit based on a foreign law.

One important issue remained unsettled within the first Facebook ruling: whether a choice of law clause could circumvent a mandatory law. Since the case of Facebook dealt with an alleged privacy infringement, the issue regarding the status of an Israeli mandatory law, did not arise.

Though, an obiter opinion was expressed that choice of law clauses should not be used to circumvent Israeli mandatory laws, such as the Consumer Protection Law.

Following the first Facebook ruling, a series of decisions adopted its rationale and adhered to foreign choice of law clauses. However, the aforementioned obiter opinion has not yet been discussed broadly or adopted as a binding Supreme Court ruling.

DISTRICT COURT RULINGS

Recently, several District Court decisions have been published which adopted the obiter opinion in the first Facebook ruling. These decisions are not precedent-setting.

In these cases, the foreign companies argued that the platforms’ servers and employees are not within Israel’s borders, therefore they have no activity in Israel, and Israeli law should not apply to them – this argument was rejected. The courts held that the fact that the platforms target Israeli consumers, operate their display in Hebrew, and enable the transaction to carry out in NIS, allows for the foreign companies to be considered as companies operating in Israel, and enables the application of the Consumer Protection Law in a non-extra-territorial manner.

Thus, mandatory provisions of the Consumer Protection Law cannot be conditioned, not even indirectly, by setting a foreign choice of law clause. The parties’ consent to apply a foreign law should not be complied in every case, regardless of mandatory law, as this may encourage foreign companies to set oppressive choice of law clauses in their user agreements, while leaving Israeli consumers without protection. These rulings, in practice, narrowed the first Facebook ruling.

Unlike the above-mentioned District Court’s decisions, there has been a District Court decision that expressed the view that the question regarding the status of the Consumer Protection Law on foreign companies was yet to be decided. In this case, the Court approved a settlement agreement in a class action that alleged the violation of the Consumer Protection Law by a foreign company. The Court emphasised that the legal standpoint was still unclear and acknowledged that the settlement contradicts the Consumer Protection Law. Nevertheless, the Court approved the settlement, holding that the settlement fulfils the purpose of the Class Action Law by allowing the parties to manage their risks related to the proceeding, including the risk that it may be determined that a choice of law clause can circumvent mandatory legislation. This ruling joined a number of other previous District Court decisions which expressed a similar position.

SUPREME COURT INVOLVEMENT?

A possible indication of how the matter will be decided may be found in a new Supreme Court ruling, in another matter concerning Facebook. The new ruling somewhat reverts to the prevailing approach prior to the first Facebook ruling. The Court called to narrow the precedent set by the first ruling, which honoured Facebook’s choice of law clause – to cases of class actions and other significant lawsuits (in opposition to individuals’ smaller lawsuits). The opinion that the first ruling should be interpreted as applying only to issues concerning aspects of Facebook’s privacy policy that were discussed within that ruling, was also expressed.

The new ruling accentuates the confusion regarding this matter as this ruling may lead to a situation in which a class action will be governed by foreign law, whereas an individual lawsuit brought on the same cause of action will be governed by the laws of the state of Israel.

Although the new ruling does not directly address the status of an Israeli mandatory law when a choice of law clause is deemed valid, the Court addressed the importance of mandatory consumer protection legislation, and even referred to the fact that per the choice of law rules adopted in the EU and the USA, consumer contracts which refer to foreign law do not have the power to circumvent mandatory legislation.

Due to the decreased willingness to acknowledge choice of law clauses, there will also be fewer cases where the question of the applicability of a mandatory law will arise, since the choice of law clause will generally be deemed invalid.

To conclude, there are currently contradictory rulings on the question of whether the Consumer Protection Law applies, in circumstances where the choice of law clause was determined valid. This question, which has the potential to significantly affect foreign companies’ activities in Israel, remains unanswered and currently awaits a Supreme Court decision, or a resolution from the legislator, who was called by the Court in the new Facebook ruling to resolve this issue.

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It is evident that the year 2021 was a remarkable one for the Israeli tech industry. Multiple companies turned into unicorns and many already coined unicorns either went public or merged with Special Purpose Acquisition Companies (SPACs) on various stock exchanges worldwide. Still today, nearing the final quarter of 2022, Israeli-based companies continue to be a point of attraction and focus for domestic and foreign investors and strategic and financial acquirers alike, even amidst what some would consider a borderline-recession and during declines in the stock markets globally. Through this whirlwind, some of the desirable sectors we have seen continue to grow and entice interest from investors are data centre services, cyber security, artificial intelligence (AI) based technologies, online shopping and delivery services, agriculture technology and the food-tech industry.

Covid-19 led to a significant surge in demand for data centre services capable of hosting and channelling the enormous volume of cloud-based data and services being created. With social distancing mandates in force, countless employees, students, and consumers were required, or chose, to work, study and shop from the comfort and safety of their homes. The natural effect of this was the further shift of physical interactions to the online realm, resulting in companies and governmental agencies and organisations grappling to maintain operations despite use overload, or adapt to a practically virtual-only world. Data centres came into play as a solution for internet traffic, providing organisations with backup components and infrastructure for power supply, data communication connections, environmental controls, and various security matters. A recent significant transaction in this sector was the sale of 49% of Med-One Ltd’s share capital from the Livnat family (represented by our firm) to the prominent American private equity firm Berkshire Partners and the van Rooyen Group, for a consideration reflecting a company valuation of approximately NIS1.5bn, and we expect to see continued growth in all that is related to data centres and solutions.

Throughout the various worldly events and different trends, cyber security has remained a steadfast sector, always proving to be of relevance. The sectors and industries who all witnessed a growing demand for adaptation to virtual services, also faced the need to further protect their critical systems and sensitive information from fraud, theft and damage. The cyber solutions developed in the Israeli market are advanced and extensive and the companies doing business in this field have achieved a distinguished reputation worldwide, making them desirable investment prospects. As one example, in the summer of 2021, Rapid7, a NASDAQ company which is a leading provider of security analytics and automation services, acquired Israeli-based IntSights Cyber Intelligence Ltd, which specialises in contextualised external threat intelligence and proactive threat remediation, for $335m (paid in a combination of cash and equity), just months following its $30m Series D investment round.

The increasing move from in-person interactions to the online realm also triggered a greater curiosity in AI, and the ways it can be applied to enhance the quality of many services. With the growing use of AI, there has a been a surge in demand for synthetic data – ie, information which is artificially manufactured, rather than generated by real-world events or models. Synthetic data is created algorithmically, for the purpose of being used as test datasets of production or operational data, to validate mathematical models, and to train machine learning models. The benefits of using synthetic data include reducing constraints when using sensitive data such as adhering to privacy protection regulations, tailoring the data needs to certain conditions and avoiding bias among race, gender and age. As the metaverse is starting to take shape, and the scope of use of virtual reality and augmented reality to create a 3D virtual world is greater than ever, synthetic data will most certainly play a pivotal role in its development, by enabling interaction with virtual objects, optimisation of rendering and introducing photorealistic user avatar representations. A good example of a company which achieved outstanding results using AI to form synthetic data is our client Datagen Technologies Ltd, which recently closed a successful $50m Series B financing round, led by incoming investor Scale Ventures, and backed by existing investors Viola Ventures and TLV Partners. Datagen Technologies is a leader in synthetic images and video for computer vision use cases and has launched a self-serve SaaS platform which enables its customers to generate photorealistic labelled datasets based on specific criteria and distributions for the purposes of training machine learning models more efficiently.

The recent events in the world have also inevitably led to a drastic increase in the use of online food delivery services and to the flourish of the e-commerce culture, with restaurants and malls which were forced to close their doors to dine-in guests and shoppers for extended periods of time. This resulted in skyrocketing valuations to companies operating delivery platforms for food and merchandise, and which have managed to control increasing consumer demands by offering contactless delivery and electronic payments solutions. We acted as Israeli counsel for DoorDash, a NYSE-traded company which operates an online food ordering and food delivery platform having the largest market share in the United States, which made headlines in the field of e-commerce when it announced its plan to acquire 100% of the shares of Helsinki-based technology company Wolt Enterprises Oy, including its dominant Israeli-based subsidiary, in a share-swap transaction, reflecting a valuation of $8.1bn of Wolt.

Lastly, the sectors of agriculture technology, or agtech as it is commonly referred to, and the food-tech industry, have both seen increased attention as recent events, including Covid-19 which caused a surge in demand for supplies and services, and the turmoil in Eastern Europe, have led to a nearly-unprecedented shortage in energy resources and basic food products. Startups in these fields are working towards turning the agriculture and food industries into more modern and efficient sectors in all their stages, by improving yield and profitability, with the interest of feeding the world in ways that are more sustainable, and with less harm to the environment and animals. This also ties in with the last years’ trend regarding ESG (environmental, social, and corporate governance), sending investors to apply multiple non-financial factors in the course of their analysis process to identify material risks and growth opportunities. A food-tech company which has seen great attention recently is Future Meat Technologies Ltd, which uses animal cells and technology to produce lab grown meat products and which secured an impressive $347m Series B investment from, among others, S2G Ventures (represented by our firm).

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For many years, most (practically almost all) of the publicly traded companies in Israel have been controlled by a single shareholder (or by a group of shareholders, acting in concert) – not unlike many other jurisdictions in the world (with the substantial exceptions of the US, Canada, Australia, and the UK)¹.

Therefore, for decades the Israeli legislator has been focused on agency costs in general² and more specifically on horizontal agency costs.³ Among other things, publicly traded companies were required to appoint at least two external directors (who have no linkage to the company and/or to its controlling shareholder/s, whose tenure is limited, whose compensation is subject to statutory caps and whose appointment is to be approved by: (i) a simple majority of all of the shareholders and by (ii) a simple majority of the non-interested shareholders, or with the objection of non-interested shareholders who hold less than 2% of the company’s voting rights – hereinafter a ‘Special Majority’⁴ and ‘External Directors’). Also – the approval of interested-party transactions involving or related to directors or officers is conditioned upon the approval of any or all (depending on the type and scope of the transaction and the seniority of the office holder in question) of the following organs: the board of directors (the ‘Board’), the Compensation Committee of the Board (in case of approval of terms of employment), or the Audit Committee and the shareholders (and where the interested party is a controlling shareholder – the approval of the Special Majority)⁵.

Changes in the Israeli Business Ecosystem

However, since 1996, and even more so since 2013, with the enactment of the Law for Promoting Competition and Minimisation of Centralisation, 5774-2013 and with the ongoing privatisation of governmental companies⁶, the number of publicly traded companies without a controlling shareholder/s has considerably increased (since 2010 – by 50%), and even more so – their respective market capitalisation⁷ has increased by 200% since 2010.

With such gradual shift, and given the rather limited scope of shareholder activism in Israel so far⁸ and the relatively minimal involvement of international institutional investors (let alone international activists, hedge funds, etc.)⁹, the Israeli legislator has decided to expand and bolster the corporate governance mechanisms intended to address vertical agency costs, ‘insider control’ and management rent seeking¹⁰, which may be expressed, among others, by soft budget¹¹,control of the board¹², and earnings management¹³.

The Bill

In June 2022 the government has submitted the Companies Law (Amendment No. 36) (Corporate Governance in Public Companies without a Controlling Shareholder) Bill, 2022 (the ‘Bill’).

One of the more significant amendments proposed by the Bill is the enhancement of the term ‘control’ (as defined in the Israeli Securities Law, 1968 and applied to the Companies Law) – basically defining a presumption of ‘minority control’ under certain circumstances (and thus shifting the onus from minority shareholders, who were to prove ‘de facto control’ to the holders of 25% or more of the voting power in a company (where no other shareholder holds at least 50% of such company’s voting rights) – to show lack or effective control notwithstanding such holdings).

Also, according to the Bill, in a company without a controlling shareholder(s):

• The majority of the members of the Board should be independent directors¹⁴ who have a professional capacity or an accounting and financial expertise, and at least one of them shall possess accounting and financial expertise¹⁵.
• A director may serve for terms of up to three years each.
• The majority of the directors must retire no later than the time of the second annual meeting held after their appointment.
• The Board should form a policy with regard to the composition of the Board and the required qualifications of its members (the ‘Nomination Policy’).
• The Audit Committee shall be composed of at least three directors, it shall be chaired by an independent director (as such term is defined in the Companies Law), most of its members shall be independent directors and at least one of them shall possess accounting and financial expertise.
• The Compensation Committee shall be composed of at least three directors, most of its members shall be independent directors, at least one of them shall possess accounting and financial expertise, and the rest of its members shall be directors whose compensation is determined by law. Such committee shall also be chaired by an independent director.
• The Board shall establish a Nominating Committee, chaired by an independent director and composed of at least three directors, most of its members shall be independent directors (the Audit Committee may also serve as the Nominating Committee). The Nominating Committee shall advise the Board on the Nomination Policy (and if authorised by the Board – shall form the Nomination Policy) and shall recommend to the Board (or – if authorised by the Board – to the shareholders) on Board candidates.
• Any transaction of a company with a shareholder who holds at least 10% of the voting rights in such company, as well as any transaction in which such shareholder has an interest shall be subject to the approval of the Audit Committee and the Board (but a shareholders’ approval, neither by a simple majority, nor by a special majority – as is the case with regard to transactions with a controlling shareholder(s), shall not be required).
• As per the first addendum to the Companies Law (best practices), where the same person assumes both positions of the chairperson of the Board and of the chief executive officer (or where both are related), it is advisable to appoint a lead independent director, with powers which are overlapping those of the chairperson.
• Is not required to appoint external directors.

Commentary

While it is evident that the proposed statutory amendments are necessary and are in line with common global practices, it is believed that further measures may and should be taken in order to stimulate and facilitate shareholder activism in Israel – especially by institutional investors: institutional investors should be more involved in the governance of publicly traded companies, at least in the appointment of directors in publicly traded companies in general and in publicly traded companies without a controlling shareholder(s) in particular. Our experience shows that, even with the establishment of an independent nominating committee, boards of directors are inclined to perpetuate their effective control by picking ‘more of the same’ candidate directors who are more likely to preserve the company’s current conduct. On the other hand, external candidates proposed by institutional directors may contribute to more diversity and more pluralism in the Board. We thus propose that such institutional directors should be allowed, and even encouraged, to do so, and that, to the extent necessary, co-operation among such institutional investors, in this regard only, should not be deemed as infringing any applicable antitrust/competition laws. It is further proposed that, in doing so, such institutional investors should not be considered as ‘holding together’ the shares of the company in question, for the purpose of definition of ‘Control’ under the Companies Law.

We should also note that while the Bill pays lip service to diversity (by providing that, where all independent directors are of the same gender, the newly appointed independent director should be from the other gender), ESG compliance (or at least the ‘ES’ part) is yet to be more properly, addressed by Israeli laws.

In closing, we should note that, given the rather volatile political situation in Israel (with five elections being held between April 2019 and November 2022) it will be presumptuous to estimate when (and if) the Bill will be passed (and in any case, as per the Bill, its provisions shall become effective on the first anniversary of the enactment of the amendment to the Companies Law based on the bill. Therefore, it is safe to assume that the Bill will not become effective before 2024.

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The past two years have brought many Covid-19 related challenges in almost every aspect, but as far as intellectual property (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 IP 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 and proceedings, improving regulations, and providing online services, there have been some interesting developments in various areas of IP that are reviewed below.

Continuous Development of International Co-operation

Israel is a member of many multilateral international treaties, such as the Patent Co-operation 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 co-operation agreements with Bahrain, Sudan, and Morocco. Recently, they also brought about a small step forward with Saudi Arabia, which now allows Israeli aeroplanes 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 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 20 May 2019).

Why Israel’s IP is different

When looking at Israel from the point of view of IP and the legal activity associated with it, one may note an anomaly. The population of Israel in 2022 is a little less than nine 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 to large, multinational corporations, but rather to myriad companies, large and tiny, which operate in virtually every field of research. Some areas are those in which Israel leads, such as in cyber, 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 specialise 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. However, in a small country like Israel, a boutique firm that wishes to specialise 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 high-level 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 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 IP is concerned. It also played a role in moulding 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 attorney-client relationship. It starts with one or two entrepreneurs seeking legal advice to establish a company and safeguard their IP; 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 sombre 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.

About The Luzzatto Group

The Luzzatto Group is the leading IP group in Israel, celebrating 153 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 specialises 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 personalised approach with a global outlook that helps clients protect their IP and commercialise research, inventions, and products.

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As the world faces economic uncertainty, rising costs, and inflation, the tech scene in Israel offers optimism and relief. Lee Saunders of Nishlis Legal Marketing comments

Ancient Greeks and Romans once described unicorns as extremely quick and light on their feet, with a horn that was highly prized by merchants and investors. It is a characterisation to be applied to today’s ‘unicorn’ companies – start-ups worth over US$1bn. A disproportionate number of unicorns grow in Israel and have helped the country to weather recent storms.

Tel Aviv: seventh best start-up ecosystem

This February, Bloomberg reported over 1,000 unicorns globally, and Israel – with just 0.1% of the global population – accounts for some 8%. Tel Aviv was ranked seventh in an annual survey of the world’s most attractive ecosystems for start-ups by US research firm Startup Genome. In 2021, Tel Aviv’s start-up ecosystem was valued at US$120bn, and scored three US$1bn exits. According to Forbes, 2021 saw 42 new Israeli unicorn companies registered, more than double the number in 2020, and the trend continues.

‘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.’
Yair Geva, Herzog Fox & Neeman

The number of unicorns is rapidly heading towards the 100 mark, with a total value of over US$250bn. Also, the city’s average time for a company to exit was seven years, quicker than the global average of 9.4 years. Funding for seed rounds, Series A rounds and total venture capital were all far higher than the global average.

Israeli technology companies raised all-time high of US$26.6bn in 2021, over twice that of 2020

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. The US$25.6bn 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 (HFN).

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.

‘Deals are driven by the potential technological edge, though investors are expected to be now more cautious.’
Amit Steinman, S. Horowitz & Co

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. There are students taking computer science and cyber-security courses at school with a view to being drafted to Israel’s elite technological military units.

Leading multinationals, growth and early-stage 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 non-profit in the technology sector, the 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 start-ups in 2021, up from just three in 2020. Foreign VC funds make up four of the top ten 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 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.’

Global law firms are noticing this impact. ‘There are approximately 160 international law firms active in Israel-related work, with 100 of these firms having an official Israel practice and 22 with presence on the ground,’ said Idan Nishlis, chief executive of Nishlis Legal Marketing.

‘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 capitalise when the markets reopen.’

Douglas Getter, head of Dechert’s US 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.’

‘Deals are driven both by groundbreaking technologies and by the ability to acquire high-level solutions that meet company needs faster and more economically.’
Dr. Kfir Luzzatto, The Luzzatto Group

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 capitalised 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 hi-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 revolutionise what and how we eat, and multinationals and VCs remain very interested.

‘We have witnessed a surge in interest in the food-tech industry, with skyrocketing fundraising.’
Yael Benyayer, EBN

‘Deals are driven both by groundbreaking technologies and by the ability to acquire high-level 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 US$5.4bn and Israeli computing tech start-up Granulate for about US$650m. Google also bought Israeli threat detection firm Siemplify for US$500m, 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 US$350m.

The enormous amount of cash flowing into Israeli ‘Silicon Valley’ has rocketed, and continues to pour into various segments of the hi-tech sector, among them enterprise IT and data infrastructure, fin-tech, cyber security, 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 US$220m for its fourth Seed fund, to invest in young companies in the fields of cyber security, enterprise software and developer tools.

Global law firms in Israel-related M&A transactions, 2021 (by value)

Source: Legally Israel 100 – IsraelDesks League Tables

Global law firms in Israel-related M&A transactions, 2021 (by volume)

Source: Legally Israel 100 – IsraelDesks League Tables

Cyber out in front

Israel’s unicorns span a range of verticals, among the most vibrant – cyber security.

‘As Covid-19 has further advanced the shift from in-person interactions to the online-realm, Israeli cyber security enterprises, which offer tools and technologies for safeguarding organisations and their critical systems and sensitive information, continue to be a centre of attraction and focus for various local and global investors, including VC and private equity funds,’ adds EBN’s Benyayer. In December 2021, Japanese investment giant SoftBank co-led a US$400m investment in Israeli cyber security firm Claroty. Cyber security company SentinelOne completed its NYSE offering in June 2021 at a value of US$9bn, 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 Zolty. In fintech, there is also a large presence of unicorns: eToro is the Israeli-founded insurance company that had a valuation of US$10.4bn 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 fintech.

‘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 HFN’s Geva.

‘Big data continues to be a hot commercial field, with aspects of how to collect, verify and utilise the data coming into play,’ agrees Kobi Ben-Chitrit, M&A and hi-tech 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 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 US games developer Unity, with a joint value of US$13bn.

‘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.’ Ben-Chitrit, Yigal Arnon – Tadmor Levy

Pharmaceutical, life science and healthcare service companies continue to attract investors, fuelled by innovations in biotechnology and patient services and ongoing digitisation. Israel has a high-quality public healthcare system – with the nation’s medical records stored in a centralised 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 cross-border 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 US-based research firm, Startup 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 US$347m 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 US$105m 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.

‘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).’ Dr. Ziv Preis, Lipa Meir & Co

‘Food and ag-tech are definitely getting interest from devoted VCs as well as government funding, motivated by public interest,’ agrees Ben-Chitrit, while Dr. Ziv Preis, head of tech, corporate and M&A at Lipa Meir & Co, adds: ‘I expect to see the continuation of certain sectors, which have been strong in the last two to three 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 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. 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, M&A and hi-tech partner at Yigal Arnon-Tadmor Levy.

Israel is indeed home to more than 500 companies that deal with clean technology and specialise in sustainable agricultural technologies, clean energy concepts and electric vehicles. Israeli climate-tech companies raised US$2.2bn 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 US$165bn in 2022, up 15% from 2021’s US$143bn 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% in 2021 to an unprecedented US$81.2bn 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.

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Few, if any, national economies escaped 2020 with a clean bill of health, and Israel was no exception. As per the Central Bureau of Statistics, the country’s economy contracted by 2.4% across the year, the most severe decline since the state was established in 1948. It is a testament to the unprecedented nature of the past year that Israel’s performance can be considered a relative success story – the average across the OECD countries was a 5.5% decline.

Though economically speaking Israel has fared comparatively well, more generally the region’s handling of the Covid-19 pandemic is a mixed story. When the first wave of the pandemic hit, Israel was still being overseen by a caretaker government following the inconclusive result of the legislative election in March 2020. A state of emergency was declared and legally enforceable restrictions were introduced, preventing citizens from leaving their homes except for a short list of specified reasons. To ease the economic strain, the government introduced a $22bn economic rescue package to bolster the healthcare system, assist the unemployed and support struggling businesses. These restrictions proved largely effective and by the end of May most restrictions had been lifted, allowing most Israelis to enjoy a relatively free early summer.

Despite this early success, the country’s handling of the pandemic in the second half of the year was problematic and roundly met with criticism. Following a rise in infections over summer 2020, the government reintroduced some restrictions on business and social gatherings. Some of these were removed following criticism from some business owners, and the regime proved insufficient to stop the spread. By 10 September, Israel had the highest recorded rate of Covid-19 infections per capita in the world, prompting a second full lockdown to be introduced. These restrictions were then gradually eased over late October and November, however a sudden surge in infections, primarily driven by the UK variant, prompted a third lockdown in late December, which was not substantially eased until March 2021.

Where the country has had undoubted success is in the roll out of its vaccination programme. It has received plaudits internationally for the proactivity of its procurement and speed of its roll out. Six weeks after its introduction on 19 December 2020, approximately 64% of the population had received at least one dose of the Pfizer vaccine. A number of factors can be considered to have contributed to this success, including the country’s relatively small land mass, young population and centralised healthcare system.

‘Private equity funds are attracted because they want to capitalise on the cutting-edge developments in the field of technology in Israel.’
Clifford Davis, S.Horowitz & Co

Rather than attributing the economic resilience to governmental strategy, much of Israel’s prosperity can be tied to the sectors that are most important to the economy. Not particularly rich in natural resources, in recent decades Israel has established itself as one of the global leaders in the technology sector. The importance of this sector to the economy can be seen in its R&D spending; OECD figures suggest that in 2019, almost 5% of the country’s gross domestic spending was on R&D, the highest percentage of any country in the world.

Globally, the technology sector has been one of the industries to prove robust to the pandemic. Though issues have been felt in disruption to supply chains, these have been offset to a large extent by the increased importance of software and tech solutions initiated by the movement towards home working. This has meant that, after a brief period at the start of the pandemic when the industry took time to consider all options, the technology market has continued to attract investors. As Clifford Davis, co-chair of the international corporate group at large domestic firm S.Horowitz & Co, notes: ‘Private equity funds are attracted because they want to capitalise on the cutting-edge developments in the field of technology in Israel.’ These innovations have continued through the pandemic, allowing Israel’s economy to subsist better than other countries that are reliant on more vulnerable sectors.

Strength in numbers

From the perspective of prominent law firms in Israel, the pandemic had a negligible effect on commercial opportunities. As a result of the country’s leading position in the hi-tech sector, coupled with its ideal climate for investment in renewable energy and the state’s firm commitment to large infrastructure projects, even during a period of political upheaval, many lawyers in the market have reported record growth over 2020/21. The fact that some areas have been extremely busy, while others ground to a halt for much of the year, means that diversity of specialism has been of paramount importance, something which suits the larger firms. As Mike Rimon, a partner in the corporate and securities department at Meitar Law Offices notes: ‘The ability of the large firms to flourish through the pandemic period due to versatility may be another sign to the consolidation of small and mid-size firms with the large firms.’

It is certainly the case that some practice areas have been busier than others and some smaller firms have struggled to realign their resources to cope with the change in circumstances. Sectors such as corporate have remain largely busy, while real estate, though quiet during the initial lockdown, has been extremely active so far in 2021. On the other hand, work relating to sectors such as hospitality and tourism has understandably dried up. All this is not to say there is no room for specialist boutique firms, as certain areas of practice continue to be ruled by small independent practices. White-collar and financial crime are excellent examples; boutiques such as Hadad Roth & Co and Kosteliz & Co retain prominent positions in the market and continue to be instructed on all of the significant cases of political corruption currently before the courts.

‘The ability of the large firms to flourish through the pandemic period due to versatility may be another sign to the consolidation of small and mid-size firms with the large firms.’
Mike Rimon, Meitar Law Offices

The country’s growing reputation for innovation, driven by the rapid growth of numerous former start-ups over recent years, only incentivises further foreign and domestic investment, creating a buzz in the market and a widespread ‘fear of missing out’ among PE firms and private investors. In the words of Doni Toledano, head of the M&A and banking and finance departments of Erdinast, Ben Nathan, Toledano & Co: ‘On the global front, Israel is perceived as a country with numerous investment opportunities, due to its innovative nature and the countless start-up companies developing cutting-edge technologies. It appears that this is due in part to the developing nature of the country, which encourages creativity and entrepreneurship combined with modern western infrastructure and technology.’ This is borne out in the data: according to the Israeli Tech Review, companies in the sector were able to secure $9.93bn of investment in 2020, up 27% compared to the year before, across 578 transactions.

Ultimately, the purpose of growing these startups is generally to profit from strong exit transactions, either through IPOs or M&A deals. Perhaps surprisingly, these two areas saw markedly different trends in 2020. According to data from the IVC Research Center and Meitar Law Offices, M&A revenue fell from $14.2bn and 143 deals in 2019 to just $7.8bn and 93 deals in 2020. The Covid-19 pandemic is inevitably considered the primary reason for this, and Rimon agrees: ‘M&A declined a little during 2020. This was primarily because strategic buyers took a step back in order to assess the Covid situation and also due to the high valuations given to tech companies in the public markets, but we started to see more movement in M&A in the last few months.’

This upturn throughout the year has been seen across the market, as David Tadmor, managing partner of Tadmor Levy & Co, confirms: ‘In the first half of the year we saw less M&A yet continued investment work; later on mergers started to catch up.’ Although 2020 was not a banner year for mergers overall, that is not to say that there were no significant transactions in the immediate period following the outbreak of the pandemic. Perhaps the standout acquisition occurred in May 2020, when journey planner app developer Moovit was acquired by Intel for $900m.

When it comes to IPOs, the list of success stories since summer 2020 has been impressive, and it is not a trend that has shown any signs of slowing down in the first half of 2021. This is not necessarily a surprise; Israel has punched above its weight in this area for many years. Despite having the 31st largest economy in the world according to the latest figures published by the World Bank, Israel ranks third for the number of companies it has listed on Nasdaq. This relationship with the US capital markets, and its importance in the latter half of 2020, is summarised by Rimon: ‘Since the last quarter of 2020 we saw the capital markets open up, primarily in the US, and they became more receptive to tech companies. Since then, we have seen more Israeli IPOs in the US, and more companies that became unicorns than ever before.’

‘In the first half of the year we saw less M&A yet continued investment work; later on mergers started to catch up.’
David Tadmor, Tadmor Levy & Co

Software developer JFrog is a prime example of this trend, having raised a total of $428m on its Nasdaq debut, which valued the company at $3.9bn. Most recently, in June 2021 software company Monday.com raised $574m following its debut on Nasdaq, giving the company a market value of $7.5bn. Impressive exits are not limited to Nasdaq; last July saw insurance tech company Lemonade achieve what was at the time the most successful debut of 2020, following its listing on the New York Stock Exchange. Such exits are vital to the continued prosperity of the sector, as Meitar corporate partner Clifford Felig notes: ‘Every time a hi-tech company goes public, it draws in more seed capital for the new companies. This lifecycle is critical [to the economy in Israel].’

Toledano also notes the positive impact these successful exits have had on the general economy as ‘Israel has seen tremendous attention from financial investors after a number of mega exit transactions yielded significant IRR ratios to investors.’

A significant component of this prosperity, as Felig identifies, is that, during the second half of 2020, the special-purpose acquisition company (SPAC) phenomenon started to spread across Israel like wildfire, driven in large part by the expedited timeline for going public that this route offers companies compared to IPOs, and in part by the attractive ‘redemption offer’ that investors receive, whereby they can redeem their investment after two years if the SPAC they choose to support fails to acquire or merge with a target company.

Unsurprisingly, hi-tech companies are at the heart of this surge in SPAC-related activity. In February 2021, Otonomo (a Herzliya-based company that makes a cloud-based platform which allows car companies, service providers and apps to share and integrate data generated by vehicles) merged with Software Acquisition Group, a Nasdaq-listed SPAC, entering the stock exchange with a $1.4bn valuation. Two months later, Innoviz Technologies (the Israeli provider of solid-state LiDAR sensors and perception software) successfully merged with Texas-based SPAC Collective Growth Corporation, also securing a $1.4bn valuation. More recently, Taboola (a major advertising platform) announced that it plans to go public via a SPAC with a $2.6bn valuation in the second quarter of 2021; and the fintech firm Payoneer is poised to merge with the US SPAC FTAC Olympus Acquisition Corp any day now, which will result in a total post-money valuation of $3.375bn.

Building hope

Of course, the economy doesn’t depend entirely on hi-tech companies to fuel growth. Davis points out that ‘Tel Aviv… is an absolute magnet for infrastructure projects’. At the epicentre of this attractive asset class is the government-led Tel Aviv light rail project, divided into three stages: the red line, which is expected to be fully operational in November 2022; and the green and purple lines, both of which are due to be completed in 2026. NTA Metropolitan Mass Transit System (the government-owned company overseeing the project) spent over NIS16bn ($4.93bn) financing the construction of the red line and put out a NIS15bn ($4.62bn) tender in early autumn 2020 to build and operate the green and purple last year, which was won by a consortium of five international bidders.

‘Israel has seen tremendous attention from financial investors after a number of mega exit transactions yielded significant IRR ratios to investors.’
Doni Toledano, Erdinast, Ben Nathan, Toledano & Co

Not only are these projects generating significant and sustained activity for lawyers in Israel (across the spectrum of transport, infrastructure, banking and finance, and corporate and commercial law); but they also promise to have a profound impact on the fundamental nature of the economy in Israel. It is expected that more citizens will gain access to commercial opportunities in Tel Aviv (and indeed other areas of Israel with similar transport projects, such as Jerusalem) that they were previously alienated from geographically. It is also fair to assume that this new, interconnected transport system will lead to the gentrification of various suburbs: affluent citizens will have the freedom to live in more remote areas and commute to work, which will in turn lead to more vibrant local economies, supported by greater investment in infrastructure, retail and hospitality, with the likely drawback being an increase in house prices, which could become another obstacle standing in the way of economic prosperity and equality of opportunity for members of the country’s working class.

Israel is now in a position where it is able to look forward and beyond the global pandemic, in part due to its excellent vaccination programme, and so the question inevitably becomes whether the relative economic buoyancy enjoyed over the past year is sustainable. In a number of areas, the market shows no sign of slowing down, and many law firms are in rude health. As an example, Meitar, the largest firm in the country, enjoyed a busier Q1 2021 than any quarter since the beginning of the pandemic. The firm has also increased in size since then, from approximately 320 lawyers in March 2020, to around 370 in April 2021, and is actively looking to recruit further, particularly in the capital markets and corporate departments. As Felig puts it: ‘Israel has proved resilient both to the pandemic and the security situation. I don’t think anyone in the market is preparing for a downturn.’ Tadmor agrees and notes that the biggest law firms are well placed to capitalise: ‘I see the larger firms continuing to grow, I see stronger consolidation, definitely. I see no slowdown.’

‘Israel has proved resilient both to the pandemic and the security situation. I don’t think anyone in the market is preparing for a downturn.’
Clifford Felig, Meitar Law Offices

Data projections would suggest that this optimism is justified; the OECD predicts GDP in Israel to grow by 5% in 2021, followed by a 4.5% increase in 2022. There is also hope that a potential change in government will help boost economic prosperity in certain areas. Moreover, under the new coalition government led by ultranationalist Naftali Bennett, sworn in on 13 June 2021, there is at least the possibility of reform in key areas of public policy and further investment in ailing sectors of the economy, such as tourism and hospitality. Tadmor elaborates: ‘The formation of a new government in Israel will obviously make a change too. We have functioned for two years without any real government. I expect once a government is formed, you will see a new wave of activity.’

He predicts that a wave of legislation will be ‘unleashed’, which could benefit citizens whose economic interests were overlooked by Netanyahu’s government. Specifically, Tadmor notes that there is a ‘[policy] supply that will burst’ as ‘ministries [have been] working hard in all areas for ages but nothing has been implemented because parliament was not functioning’. Of course, it is hard to say exactly how this broad coalition – including politicians across the political spectrum – plans to support more vulnerable members of society until it produces an annual budget, but there is at least a reason to be cautiously optimistic about the prospect of change, given that Israel has its first functioning parliament in over two years.

Another source of economic optimism came in the form of the Abraham Accords, an agreement between the UAE and Israel normalising relations and paving the way for numerous commercial joint ventures. Lawyers and businesses in the transport sector have already benefited from this development, with direct commercial flights running between the two countries to support tourism and free trade. In addition, a $3bn regional development fund, formerly known as the Abraham Fund, was announced as part of the agreement. This fund exists to support private sector-led investment in initiatives established to ‘promote regional economic co-operation and prosperity in the Middle East and beyond’, with a predominant focus on infrastructure and renewable energy projects, given that both countries view these sectors as strategically important for sustainable growth.

It is hard to say exactly how this broad coalition plans to support more vulnerable members of society, but there is reason to be cautiously optimistic about the prospect of change, given that Israel has its first functioning parliament in over two years.

However, while there is certainly cause for positivity, there are potential issues on the horizon that it will not be plain sailing for the country moving forward. In the words of Davis: ‘Where there is a problem is not Covid, but the unknown effect on the US economy depending on what Biden will do with his budget. There is a risk of inflation, which will increase interest rates, which will have a knock on effect by reducing investment in Israel from the US.’

Some are wary of the possibility that the economic benefits of booming technology and infrastructure markets will not be felt by all, expressing concern that the wealth generated from hi-tech and construction has not trickled down to the people who suffered as a result of Covid, meaning that social costs could come into play. However, there is little evidence today of anything that is likely to dampen the spirit of a resilient economy and well prepared legal market. LB

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Thriving in the face of adversity as politics and security play an integral part in everyday life is a default position for Israel. The data backs this up: recent OECD reports describe Israel as stable with strong economic growth: annual GDP has consistently risen by three to four percent over recent years to reach nearly $400bn in 2019. This, despite a protracted leadership battle taking place with two general elections in six months bringing the nation no closer to a conclusive result.

Michael Barnea, managing partner of Barnea, Jaffa, Lande & Co, develops the point: ‘The environment is surprisingly robust considering the political instability that we’ve experienced for a considerable time. Investment, both from overseas into Israel and in the local market, is extremely strong and gives every appearance of being confident in the future.’

Despite international law firms being allowed to operate in Israel, they have invariably chosen not to. The legal market is therefore monopolised by domestic players, many of which have grown significantly and the main contributory factor has been a glut of mergers. According to David Tadmor, co-chairman and managing partner of Tadmor Levy, today the largest firm has close to 400 fee-earners, whereas in 2000 it was around 65 lawyers. Herzog Fox & Neeman (HFN) is Israel’s largest law firm, with 380 fee-earners, and at least 20 Israeli firms now have more than 100 lawyers. ‘What sets us apart is that we have grown organically rather than through mergers like some of our competitors,’ says HFN infrastructure partner Mark Phillips.

‘The environment is surprisingly robust. Investment is extremely strong and gives every appearance of being confident in the future.’
Michael Barnea, Barnea, Jaffa, Lande & Co

Yudi Levy, managing partner of Goldfarb Seligman & Co, notes there has been a strong trend of large law firms merging with other large firms, smaller firms and specialised boutiques, or even absorbing entire departments of mid-sized firms – a pattern that is expected to continue in 2020. Levy’s own firm was one of the first to begin the trend with the 2011 merger of Goldfarb, Levy, Eran, Meiri, Tzafrir and M. Seligman, and it recently acquired the real estate practice of Berkman Wechsler Bloom – meaning it lays claim to having the largest practice in Israel – alongside the opening of a new branch in Zurich focused on tax.

‘There is fierce competition in Israel over clients; we have a lot of lawyers,’ says Oded Oz, founding partner of Oz / Engel & Co. The Israel Bar Association now has over 80,000 members – twice the number of lawyers in Japan. Chargeout rates vary between $250 and $500 an hour at the top end, with an abundance of choice helping to keep fees down. ‘One of the challenges for professional services firms in Israel is fees. For us, audit fees are not at the level they need to be and it’s becoming the same for lawyers with legal fees,’ says Jonathan Lavender, head of markets at KPMG in Israel.

Tech nation

Last year, UK-based insurance specialist Kennedys entered an official alliance with insurance boutique Zelichov, Ben-Dan & Co – the first formal affiliation of its kind between an Israeli and an international firm. Meanwhile, Bird & Bird is among several international firms with a growing Israel practice. ‘The three main areas where we advise Israeli companies are IP/life sciences, tech and data privacy,’ says partner Howard Rubin, who heads the UK firm’s Israel steering group.

‘We’ve given them a lot of advice on GDPR and we help many Israeli IP-heavy companies,’ he adds. ‘Israel’s domestic market is small, so they very quickly go for international development. When any start-up company is growing in Israel, often the first thing is to look at the US market and then, in parallel or soon afterwards, to go to Europe.’

‘Israel is somewhere between a start-up nation and a country in which start-ups are becoming more industrialised.’
Dan Geva, Meitar

Lawyers play an integral part in Israel’s service-based economy, which is dominated by its highly-developed tech sector. Apart from China and the US, it also has more Nasdaq-listed companies (around 100) than any other country. ‘Israel is the Middle East equivalent of Silicon Valley, with similar ecosystems,’ says Ronald Lehmann, corporate partner at Fischer Behar Chen Well Orion & Co (FBC).

The story of Israel’s high-tech achievements is told in the best-selling book, Start-Up Nation, by Dan Senor and Saul Singer. One thesis in the book is that success stems from the Israeli mentality of challenging the status quo. Many successful tech entrepreneurs have come out of the Israeli army, which continues to select the best candidates for its most prestigious forces, such as Unit 8200 – the intelligence unit known for its cyber security and high-tech spying activities. Many key figures in the high-tech industry have served in those units. Says Lavender: ‘If you go into technology units, you need to do five years, so you have a few thousand people coming out of the army with very deep technology capabilities every year.’

Dan Geva, corporate and securities partner at Meitar Liquornik Geva Leshem Tal, suggests: ‘Israel is somewhere between a start-up nation and a country in which start-ups are becoming more industrialised.’ Phillips adds: ‘It’s a self-sustaining cycle: once you have some companies established, people break off, start their own business and do different things. Then the whole industry develops around it.’

At Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co (GKH), Richard Mann heads the firm’s M&A group. ‘We have more than 50 lawyers in our technology practice, many of whom work primarily with start-ups,’ he says. ‘The growth of start-ups and the valuation increase has become much more rapid. Today, there are tech start-ups raising money with valuations in excess of $1bn – something that was unheard of even two years ago.’

‘What characterises the M&A market is that the variety of acquirers exploring opportunities in Israel has never been greater.’
Richard Mann, GKH

Additional support from Israeli government incentive programmes and venture capital helps to perpetuate success. Levy concludes: ‘With hundreds of innovative start-ups and numerous R&D centres of the world’s largest corporations, Israel is at the forefront of global technological research and innovation, and an attractive destination for global capital investment.’

Deal watch

The corollary is deals aplenty. Israelis are very open to foreign investment; there are few regulatory restrictions beyond those limited to specific areas in the financial and telecoms sectors. As one of the country’s largest foreign investors, Intel announced plans this year for an $11bn Israeli production and research facility. In 2017, it bought Mobileye, an Israeli developer of sensors and artificial intelligence for autonomous driving, for $15.3bn – the largest-ever purchase of an Israeli tech company. Skadden, Arps, Slate, Meagher & Flom advised Intel while Morrison & Foerster advised Mobileye on the deal.

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At $25.7bn, last year saw the highest aggregate value for Israeli M&A since 2012; in volume, 132 deals involved Israeli companies. Around 40% of them were in the tech, pharma, medical and biotech sectors, including the $3.1bn acquisition of Orbotech by Nasdaq-listed KLA Corporation; Thoma Bravo’s purchase of Nasdaq-listed Imperva for $2.1bn; and Medtronic’s $1.64bn acquisition of Israel-based Mazor Robotics. Outside tech, Israeli industrial companies were predominant: International Flavors & Fragrances bought Frutarom for $6.9bn, while Pepsico acquired SodaStream for $3.2bn.

Meitar was involved in four of the top five deals in 2018, advising KLA Tencor, Thoma Bravo and Medtronic on the buy side and SodaStream on the sell side. Geva says: ‘These deals clearly demonstrate that international – mostly US – investors trust that in acquiring sophisticated Israeli companies – and in the way they develop their processes – they are relatively very advanced. Almost every large international group, especially in technology, admires Israeli innovation and the country’s work ethic. In the first half of 2019, we advised on around 100 investments in new technology companies.’

Of the top dozen deals by value in 2018, HFN (which advised Pepsico) and Tadmor were involved in two apiece. This included Tadmor advising Leumi Card – together with FBC – on its $685m acquisition by Warburg Pincus, which was advised by Goldfarb. According to Mergermarket, the five most active firms in M&A last year were: Meitar, HFN, Naschitz Brandes Amir, Yigal Arnon and Erdinast, Ben Nathan, Toledano & Co (EBN).

‘Our firm is working relentlessly to advance innovative technological initiatives within the firm and for the entire Israeli legal sector.’
Yudi Levy, Goldfarb Seligman & Co

‘When your practice focuses on the seller side in tech, it never slows down because Israelis will always have motivation to found new technology companies,’ says Nimrod Vromen, partner at Yigal Arnon. ‘I divide the tech industry work very distinctly into buyers and sellers – sellers being start-ups and tech companies, and buyers being investors and acquirers. At some point, start-ups also become buyers when they are big enough. The focus of what we do is to act as consigliere to an entrepreneur or tech founder from day one until well after the company floats.’

Doni Toledano, head of M&A and banking and finance at EBN, adds: ‘You see a lot of activity among life sciences, medical devices, digital health, communications and fintech. Even in industries that are less tech-oriented, for example, Netafim, which was sold last year for $1.9bn, it’s not a high-tech company per se; it’s a drip irrigation company, but it deploys technologies that allow it to elevate itself. So, even companies that are not traditionally high tech see the importance of technology.’ Skadden and EBN advised the previous owner of Netafim – private equity house Permira – while the acquirer, Mexichem, was advised by Covington & Burling.

In addition to advising Bank Leumi on its divestment of Leumi Card, FBC is currently representing two private equity funds – one US-UK and the other US-based – in their acquisition of Phoenix, one of Israel’s largest insurance companies. ‘A few years ago, we saw significant interest from China in a whole range of industries – everything from high tech to industrial – there was a tremendous spike of interest,’ says Lehmann. ‘But the Chinese profile has receded. We’re now seeing the increasing involvement of private equity funds from the US and Europe in large transactions.’

Tech has continued to dominate Israeli M&A in 2019, albeit in a quieter market: ten tech deals were announced in Q1 and a further 12 in Q2. By far the biggest so far is NVIDIA’s $6.9bn acquisition of Israeli big-data connectivity company Mellanox Technologies, which is being advised by HFN and Latham & Watkins. NVIDIA is being advised by Jones Day.

‘The legal profession is in the midst of a cataclysmic battle with technology and the ever-growing sophistication of clients.’
Nimrod Vromen, Yigal Arnon

Another firm to make the top ten advisers list by value is GKH, where Mann notes: ‘There’s no question that the M&A market is very strong. What characterises it more than any other factor is that the variety of different acquirers currently exploring opportunities in Israel has never been greater – particularly in terms of geography, but also in many different industries.’ Barnea agrees: ‘We’ve never been busier, we have about 30 M&A deals going on: some of them already signed, others in the process of being concluded. This has not been the case before. We see more companies coming from various jurisdictions expressing a desire to be involved in the Israeli economy.’

Mann notes that US companies have always been active investors in Israel. ‘But it’s a much more widely dispersed market than ever before, including significant representation from European entities, with the Asian practice quite fast growing,’ he says. ‘Asia means primarily China, but also includes Korea and Japan, and to a lesser extent India. The strongest sectors are cyber and IT, while there is also a lot of interest in automotive technology as a result of the Mobileye transaction.’ McKinsey analysts also expect Israeli companies to account for an increasing share of the global auto-tech market.

Low tech

But in a tech-driven nation, Israeli law firms represent something of an irony: few deploy tech as a central part of their client offering. ‘While the legal sector is notoriously conservative and slow to adopt technological advances, our firm is working relentlessly to advance innovative technological initiatives both within the firm and for the entire Israeli legal sector,’ says Levy. Goldfarb has introduced GS Lab, a new legal tech innovation programme, and touts an innovative client interface used in urban development projects.

But such initiatives are rare. ‘Israel is failing in adopting Israeli technology and it’s not just in the legal sector: Israeli companies are good at exporting these technologies but not very good at buying them,’ says Noory Bechor, chief executive of LawGeex, an Israeli company that provides automated legal review systems through artificial intelligence technology. Vromen also recognises the challenge: ‘The traditional legal profession is in the midst of a cataclysmic battle with technology and the ever-growing sophistication of clients,’ he says. ‘Their demand for simple, cheap and fast legal products is increasing and this is actually legitimate given our access to technology to generate those products.’

‘Israel is failing to adopt Israeli technology, not just in the legal sector. Companies are good at exporting these technologies but not very good at buying them.’
Noory Bechor, LawGeex

Toledano outlines the clear practical barriers to tech innovation in the legal sector. ‘The cost of development of these tools is quite significant and the Israeli market, being relatively small, needs to wait for them to be developed in English and then translated into Hebrew,’ he says. ‘It’s a bit too much to ask Israeli law firms, the largest of which are 300-400 lawyers, for us to bear this cost independently.’

There is also much more to Israel than M&A and tech start-ups. In developing the economy, energy and infrastructure play a key part. In a country where security is under constant threat, Israel is particularly vulnerable because its energy demand has historically been much higher than its production, making it heavily reliant on imports. But this is changing, not least because of significant discoveries of natural gas during the past decade in offshore fields combined with the shift to renewables. Government reforms have moved the market away from the Israel Electric Corporation monopoly in electricity generation and allowed the development of large-scale independent power producer projects, both conventional and renewable energy: solar wind and pump storage.

The gas discoveries led to development in the Mari-B and Tamar fields, followed by further discoveries in the Leviathan, Karish and Tanin fields. Between them, the natural gas delivered will eventually provide about 70% of Israel’s electricity needs with production from the facilities expected to commence next year. ‘As they are being developed, they need the infrastructure to get the gas onshore,’ says Phillips. ‘We have advised a lot of the upstream: financing for Tamar, Karish and Tanin. Downstream, we’ve advised on the financing of power plants running on natural gas.’

Anat Klein, head of the energy and infrastructure department at GKH, notes that renewables are being widely introduced, contributing over 20% to renewable electricity – mostly solar, some wind, as well as thermo-solar and bio-gas. She points to a new regulation relating to the construction of small-scale power plants in factories based on natural gas (up to 16MW).

‘We represent a large number of factories using this regulation to construct internal co-generation plants for the reduction of energy costs,’ she says. ‘This includes Tnuva, the largest Israeli manufacturer of dairy products, which constructed a 70MW power plant, as well as oil refineries that have two of these power plants on their premises, around 60/70MW each, based on a different regulation concerning large co-generation plants (above 16MW). We also represent Dalia, the largest private producer of electricity based on natural gas through a power station in Tzafit.’

To improve transport links, extensive railway and light rail lines are scheduled for construction over the next two decades. Once completed, Israel’s largest infrastructure project will comprise three metro lines, several light rail lines, and train lines connecting regions and cities. The total projected cost may exceed $100bn. And, perhaps inevitably in Israel, politics plays a part.

‘In the recent tender for the Green Line of the Jerusalem Light Rail, there were only two bidders,’ says Phillips. ‘The feeling in the industry was that international companies were not interested in bidding because that means a presence on the ground in Jerusalem, which is a political issue for them. By contrast, Tel Aviv Light Rail, which is happening now, will be more interesting for international players because it’s Tel Aviv.’

‘It is no coincidence that Israel is suddenly one of the global centres for cannabis, because Israelis identified this opportunity and started working on it much earlier than other places.’
Doni Toledano, EBN

Klein adds: ‘We represented a huge tender for the Green and Purple Lines in Jerusalem. There were only two bids and we represented one of them, but unfortunately, it was not awarded to our client. We’re now representing the Shikun & Binui and Egged group, together with Chinese companies, for the Green and Purple Lines of Tel Aviv – the largest tender ever published in Israel.’

As an interesting endnote, medicinal cannabis now features prominently among embryonic sectors of the Israeli economy. ‘For better or worse, Israel is not as strict and conformist as Germany, or even the UK or US,’ says Toledano. ‘People are more spontaneous, less rules-bound, which allows more creativity, ingenuity and adapting to changing circumstances. It is no coincidence that Israel is suddenly one of the global centres for cannabis. Why? Solely because Israelis identified this opportunity and started working on it much earlier than other places.’

Levy also notes this recent development and how it has brought some considerable work for Israel’s firms: ‘The M&A scene in medicinal cannabis has been very active, with major transactions, investments and agreements carried out in Israel and abroad. This includes a series of investments in the BOL Group, one of our firm’s prominent clients in the field, amounting to tens of millions of dollars – an extraordinarily large amount for medicinal cannabis.’

This is an industry that in many ways exemplifies the Israeli market: entrepreneurship and a willingness to take a less conventional route. Again, this involves working with scores of shell companies in place that have big export plans for the future, opening up another sector in which the ingenuity of this start-up nation will, no doubt, provide work for its many lawyers over the coming decade. An unsettled market does not necessarily mean chaos and uncertainty provides opportunities to thrive. LB

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Every Thursday at 6pm, Yair Geva, co-head of Herzog Fox & Neeman (HFN)’s high-tech department, drinks a beer on the rooftop of a client’s office in central Tel Aviv. The weekly drink, which started seven years ago when he returned to Israel from New York, is a routine that is borne out of professional commitment and friendship. In the start-up and high-tech world, the two often go hand in hand.

‘We share a long journey with our clients and we are often with them from day one,’ Geva says. ‘The only way to keep in touch with this very vibrant dynamic ecosystem is to hang out with friends, clients and hear the news.’

Geva, like many of his peers in the Israeli legal community, enjoys the day-to-day adrenaline rush from taking a gamble in working with clients from such a fast-moving sector. The gamble is that start-ups and high-tech companies cannot afford typical legal fees, meaning firms have to wait for their payday. ‘When we bet on the right people, we usually do well,’ Geva says. Yet, often the investment of time and effort into a client comes to nothing.

For a profession that is notoriously risk averse, the start-up-driven Israeli economy naturally pushes local lawyers out of their comfort zone. Working with a whizz-kid, who happens to have a great idea and may or may not become one of the richest humans on the planet, is a different experience to advising established institutional clients.

Gambling big

Israeli law firms have had to develop a sophisticated investor mentality in the hope that they can back winners, but along the way there will be inevitable losses and time that is written off. Given the make-up of the Israeli economy, local firms have little choice but to take that gamble.

‘You have young kids with offers from the biggest law firms to advise them for free. I have to persuade some kid to retain me even if they are not going to pay me.’
Simon Jaffa, Barnea & Co

Israel is the second-most innovative nation in the world, according to the World Economic Forum’s Global Competitiveness Report 2016-2017. The drive for innovation is self-perpetuating, with frequent reports of entrepreneurs achieving billionaire status by selling their businesses to foreign investors or listing on global stock exchanges. It has created a nation of romantics.

David Schapiro, a partner at Yigal Arnon & Co, says: ‘Every single day of the week, you see a dramatic exit of one form or another. The average person opens the newspaper and they see that you can become a multi-millionaire. People feel the only way to realise that dream is to have a start-up.’ In 2016, Yigal Arnon advised a Chinese consortium on its $4.4bn acquisition of Israeli online gaming company Playtika (see box, ‘Selling out’, below).

But the risk-and-reward mentality is not one that sits well with the average law firm business model. Firms, in large part, are still wedded to the billable hour, enabling them to meet monthly and quarterly financial targets. Working with an early-stage tech company, means the client is likely to have very little capital to spend on legal advice.

Firms are then forced to offer very low fees, deferred fees or even work for free until the client has sufficient capital. Some firms are even willing to take equity in the client’s business in the hope that they will be rewarded once the company is sold or goes public (see box, ‘Big winnings’, below).

Simon Jaffa, a partner at Barnea & Co, says that all firms are chasing the same start-ups, despite these clients’ inability to pay typical legal fees. ‘You have these bizarre situations where you have young kids who already have offers from the biggest law firms to advise them for free and they ask whether you can do better than that,’ he notes. ‘I have to persuade some kid to retain me even if they are not going to pay me.’

Jaffa says that firms will often defer fees until a client reaches a certain milestone, such as a seed investment. They tend to agree a fixed period of time or a fixed number of hours the start-up will receive free or at heavily-discounted rates. At each round of funding, hourly rates gradually increase until they reach standard rates. In the end, the firm hopes to advise the client on a lucrative sale to a strategic or financial sponsor, or on its initial public offering, often on Nasdaq.

‘It’s a long-term investment,’ remarks Daniel Chinn, a partner at Tulchinsky Stern Marciano Cohen Levitski & Co, suggesting that working with young companies is akin to spending time at business and industry conferences. Sometimes it pays off, often it doesn’t.

However, Israel’s reputation for innovation encourages investors from all over the globe. In February this year, Apple acquired Israeli artificial intelligence (AI) facial recognition company RealFace. This followed its acquisition of other Israeli facial recognition AI companies PrimeSense and LinX over the last few years.

‘We can keep prices low in the expectation that the company will find an exit, or become a big company with substantial operations and many employees.’
Amit Steinman, S Horowitz & Co

Israeli companies are frequently snapped up, but Yigal Arnon partner Barry Levenfeld admits that identifying potentially lucrative clients can be a shot in the dark. ‘For every one of these successful exits, there are many that don’t succeed,’ he says.

Firms then have to find ways of mitigating the risk of chasing a client that never makes it. Many have created efficiencies, using standard documents and boilerplate terms in the early stages of a company’s lifecycle, and for the first rounds of financing. ‘We can do this efficiently and keep prices relatively low in the expectation that the company will find an exit or sale, or become a very big company with substantial operations and many employees,’ says Amit Steinman, a partner at S Horowitz & Co.

Firms are also adept at using younger partners and lawyers, often those that have a tech or sector background, to identify and nurture these clients in the initial stages. The problem, though, is that young entrepreneurs can be needier than a larger company that has its own general counsel.

Levenfeld says: ‘With freshness and idealism you get a lack of experience, and that requires a lot of hand holding. Israelis may have had great success in the army and be brilliant in the technology field, but they could struggle with daily business and legal issues.’

Many successful tech entrepreneurs have come out of the Israeli army, which continues to select the best candidates for its most prestigious forces such as Unit 8200 – the intelligence unit known for its cyber security and high-tech spying activities. Investments in Israel’s cyber security sector increased by 9% in 2016 according to PitchBook – the private equity and venture capital database – which said 365 Israeli cyber security companies raised $581m. This amounts to 15% of global investment in cyber security.

Chinn asserts that even the finest military minds require premier legal advice: ‘My view is that young companies require a level of senior advice that is inverse to their age and size. Young people are less experienced in running companies and do not know what to look out for.’

This presents a particular challenge to Israeli firms, given their relatively small size; HFN is the largest domestic practice with 300 lawyers. Firms need to guard against becoming overstretched by the demands of the start-up and growth company community, especially when it is not especially remunerative. Barnea’s Jaffa asks: ‘How many start-ups can we take on this year given our resources of 85 attorneys? We don’t want to be in a situation where we don’t have enough manpower to deal with a large and intensive acquisition.’

Picking winners

Chinn has had success in identifying early-stage businesses that have gone on to make an impact. He represents New York-based Lemonade Insurance Agency, a company driven by AI and behavioural economics. It uses algorithms to assess claims, and through this automation can claim to be faster and more transparent than the traditionally opaque world of insurance payouts. In December, only two months after its launch in New York, it announced a $34m funding round led by General Catalyst Partners. Chinn has known the company’s two founders Daniel Schreiber, a former Israeli attorney, and Shai Wininger for some years, and says he knew they would make an impact: ‘They are serial entrepreneurs with great backers doing fascinating work in an area crying out for innovation.’

‘Lemonade’s founders are serial entrepreneurs with great backers doing fascinating work in an area crying out for innovation.’
Daniel Chinn, Tulchinsky Stern Marciano Cohen Levitski & Co

Although Chinn spent time as a seed investor before returning to the law in 2010, few lawyers are professional investors, meaning they have a difficult task in assessing whether to invest their time in a client. ‘I’m not trying to assess whether a particular product is going to be in demand in X years’ time,’ comments Barnea’s Jaffa. ‘I’m not going to kid myself that I have that skill – plenty of lawyers believe they do – but I can look at young entrepreneurs and make a judgement call as to whether these guys are going to succeed.’

Geva says a law firm’s risk is not as great as that of a venture capital fund and that the key for firms is to believe that a client is going to reach the next stage of financing. When clients are funded, firms can at least recoup all or a significant proportion of outstanding fees. Geva believes a few well-placed conversations with venture capitalists and market participants can give him and the firm a good understanding of whether a client is going to succeed.

Chinn says that he and his contemporaries are now much more plugged into the start-up and high-tech ‘ecosystem’ than when he was first practising law. As an attorney at HFN back in the 1980s, he received a call from a partner, saying that Baker & McKenzie’s San Francisco office was asking for help with a stock option plan for Microsoft. The partner had heard neither of Microsoft nor a stock option plan.

For Chinn and others, the priority is to be part of the high-tech start-up environment. Many will sponsor or take a prominent role with start-up accelerators and incubators, getting to know the promising entrepreneurs and company founders. Lawyers also feel compelled to spend time overseas, most notably in Silicon Valley, where a high proportion of Israel’s most enthusiastic acquirers and investors come from.

Jaffa visited Silicon Valley six times in 2016, speaking to big tech companies and investors about what they were interested in. He is consistently surprised by Silicon Valley’s connection to and understanding of Israel: ‘I sat with a venture capital investor in California last year and he asked about fintech companies in Israel. I mentioned ten names and he knew every single one.’

Jaffa believes that his regular visits to the US and his connections there provide another reason for Israeli start-ups to work with him: ‘They might see the advantage of us making interesting introductions. We are not going to operate like an investment bank, but if we see an opportunity then we could try to add some value and make that connection.’

He also says that buy-side clients want to see that their lawyers are part of the high-tech and start-up scene: ‘Venture capital investors on the West Coast want to have a feel for what is going on.’

There may be a strong bond between Israel and Silicon Valley, further cemented by the now direct flight between Tel Aviv and San Francisco, but the start-up and high-tech ecosystem goes way beyond that. Berwin Leighton Paisner’s head of corporate, Jonathan Morris, says that London, as one of the world’s principal financial centres, has its sights set on Israel’s thriving fintech scene. And then there is China, a nation that now spends billions of dollars on Israeli companies and technology. In light of this, committing fully to the start-up and high-tech ecosystem requires a lot more than a bold partner and a couple of young associates. LB

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