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Israel: Law on Minimizing Market Centralization and Promoting Economic Competition

(Dec. 18, 2013) On December 9, 2013, the Knesset (Israel’s parliament) passed the Law for Promoting Competition and Minimization of Centralization, 5774-2013 (Text of the Law [in Hebrew], Knesset website). In introducing the draft of the Law, Knesset Finance Committee Chairman Nissan Slomiansky expressed his expectation that it would substantially improve the Israeli economy by dismantling centralization and, as a consequence, lowering prices. (Lilach Vaisman, The Knesset Approved the Centralization Law on Second and Third Reading: “The Celebration Based on [Using] Public’s Money Will Stop” [in Hebrew], GLOBES (Dec. 9, 2013).)

The Law introduces new requirements for taking into consideration market centralization and sectoral competitiveness in state licensing, in the allocation of contractual rights (e.g., in the areas of telecommunications, natural gas exploration, etc.), and in transferring significant amounts of governmental holdings to non-state entities (e.g., by privatization). (Summary of the Law, Knesset website (last visited Dec. 17, 2013) [scroll down to find Summary].)

The Law establishes a Committee for Minimization of Centralization (CMC), chaired by the Antitrust Commissioner. The Committee also includes the General Manager of the Finance Ministry (FM) or another person designated by the Minister of Finance, and the head of the government-appointed National Economic Committee] or his deputy appointed for membership in the CMC by the Prime Minister. (Text of the Law, § 40(a).)

The Law requires the CMC to publish a list of “centralization bodies” (CBs) in the official gazette and on the FM’s website. The list should include bodies recognized by the CMC as significant financial bodies, significant corporations; or influential bodies in the field of broadcasting or the printed press. The CB list also includes bodies affiliated with shareholder groups, as long as such groups include at least one of the above three enumerated categories. (Id. § 4(a)(1).)

The CMC is also authorized to include in the CB list bodies whose cumulative activities, either directly or through association with shareholder groups, exceed half of the total activities conducted in an essential area of Israel’s infrastructure. Additional bodies that may be included in the CB list are those that the CMC has determined owns rights in at least four essential areas of infrastructure, through at least ten licenses or contracts.(Id. § 4(a)(2-3).) The Law contains detailed procedures and guidelines for the CMC to follow in determining the bodies to include in the CB list.

The Law requires that due consideration be given to centralization in evaluating a CB’s eligibility for governmental concessions. Accordingly, any person, including a government minister or his/her designee, who is authorized by law to grant concessions, including by approving contracts in public tenders, may exclude a CB if, in his/her opinion, its exclusion is unlikely to cause real harm to the infrastructure in which the concession applies. (Id. §§ 2 & 5(a).) In addition to considering centralization in evaluating eligibility for government concessions, the Law requires that elements of sectoral competitiveness be taken into account. (Id. §§ 10-14.)

To increase market competitiveness, the Law introduces limitations on control by “Pyramidal Structure Corporations.” (Id. Ch. 5.) The Law defines control as the ability to direct the activities of a corporation and recognizes a presumption that a person who controls half of the shares or who enjoys half of the control in certain type of shares in a corporation is presumed to have control over the corporation. An additional control- based limitation applies to corporations that are subject to the Israeli stock market authority’s reporting requirements. (Id. §§ 20-27.) Implementation of the Law’s provisions on the dismantling of “Pyramidal Structure Corporations,” however, will reportedly “take place within four to six years at most, to allow the orderly sale of assets and large companies ‘without shaking the stability of the market and the economy.” (Vaisman , supra.)

A significant requirement introduced by the Law is that of separation between “significant” financial and non-financial corporations for the purpose of limitation on control. The Law requires the CMC to publish an additional list of financial bodies the total asset value of which exceed 40 billion New Shekels (approximately US$11.4 billion) or that engage in a wide range of credit card processing activities. (The Law, § 29.) The list will be compiled in accordance with specific requirements established by the Law. (Id. §§ 29-30.)