Reverse Triangular Mergers are Permitted under Israeli Law
In Naftali Shani v. Malam Systems Ltd., the District Court in Tel Aviv –Yaffo held that Israeli law permits companies to perform reverse triangular merger.
Petitioner, a minority shareholder in the respondent, petitioned the court for a temporary injunction, to prohibit the respondent, a publicly traded company, from entering into a reverse triangular merger and effectively becoming a privately held company. The transaction in question was a merger proposal whereby the respondent would be merged with a subsidiary of Tim Systems, while Tim was already the majority shareholder of the respondent.
The petitioner claimed, among other issues, that the respondent was using the merger as means to try and subvert the law. According to the petitioner, since this transaction resulted in the purchase of the respondent by Tim, Tim was first required to make a purchase offer to the minority shareholders, and the merger was structured to circumvent the purchase offer requirement. In addition, petitioner also claimed that although Israeli law does permit mergers, it does not permit a reverse triangular merger.
Hon. Judge Agmon-Gonen denied the request for the temporary injunction, holding that the respondent acted in accordance with the law and a reverse triangular merger is permitted under Israeli law.
The court held that generally, when a publicly traded company is going to be delisted to a M&A transaction, the minority shareholder must be made a purchase offer. The reasoning for the general rule is protecting the minority shareholder who will loose he advantage of holding publicly traded securities. However, the court noted, in this case, although the petitioner as well as the other minority shareholders were losing their shares in the respondent, they were receiving their pro-rata share in the Tim which is also publicly traded.
The court disagreed with petitioner’s contention that since the merger resulted in the respondent becoming wholly owned by Tim, the transaction was effectively a purchase and there should have been a purchase offer made to the minority shareholders. Contrary to the petitioner’s claim the requirement for a merger and a purchase offer are not cumulative. Israeli law permits several different and alternative methods by which companies may execute transactions and the court noted that many times, economical considerations will result in parties choosing one method over another even though the same result would have been achieved with one of the other methods. The court stated that the legislature provided mechanisms to protect the minority shareholders in merger transactions and there is no valid reason to add to those specific safeguards (generally speaking, the safeguards for mergers required by Israeli law are the approval of the board of directors, audit committee and the majority of the minority shareholders in both the target and the surviving entities). In the matter at hand, the respondent obtained all three of the approvals and the court specifically noted that the merger was approved by an overwhelming majority among the minority shareholders.
The court also denied appellant’s claim that a reverse triangular merger is not permitted under Israeli law. The court noted that Israeli law deals with mergers in general but not contain provisions for each possible type of mergers. After reviewing the justifications for mergers in general as well as the reasons for structuring transactions as reverse triangular mergers in particular, the court stated that there was nothing within law that would lead one to conclude that a reverse triangular merger would be prohibited if executed in accordance with the general merger provisions provided by Israeli law.
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