Major Competition Law Reform in Israel

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Major Competition Law Reform in Israel

By Gil Rosenberg*

Background

On February 25, 2018, Israel Ministerial Committee for Legislation approved a major revision to the Israeli Restrictive Trade Practices Law–1988 (the “Law”). The reform is based on a memorandum of law published by the Israel Antitrust Authority (“IAA”) 4 months ago (the “Memorandum”).


The Memorandum proposes a broad revision of the Law with respect to merger control, restrictive arrangements and monopolies. The amendment also entails significant changes to the IAA's enforcement powers, including the ability to impose higher financial administrative sanctions. According to the IAA, the amendment aims, on the one hand, to decrease the existing regulatory burden that applies to legitimate and efficient practices and, on the other hand, to strengthen the IAA's enforcement against anti-competitive practices.


We review below the main proposed amendments to the Law, focusing on the substantive revisions rather than the procedural ones.


Main amendments to merger control regime

    • Raising the turnover threshold for merger notification to NIS 360 Million

Section 17(a) of the Law provides three alternative thresholds which establish a mandatory merger notification requirement, comprised of two market share thresholds and a turnover threshold. Parties to a merger transaction are required to notify the merger and await merger approval from the General Director of the IAA in each of the following instances: (i) as a result of the merger, the merging parties’ share in a relevant product market will exceed 50%; (ii) the combined sales turnover in Israel of the merging parties in the previous fiscal year exceeds NIS 150 million and the local turnover of at least two parties is no less than NIS 10 million; (iii) one of the parties is a monopoly.


The parties’ combined turnover threshold, set at NIS 150 million (approximately US $43 million or €35 million), was determined in 1999 and has not been updated since then, disregarding Israel’s economic growth. As a result of the low and outdated threshold for the combined turnover, the number of merger notifications received by the IAA compared to foreign competition authorities is relatively high (according to the findings of the OECD's study, the number of mergers filed in Israel per capita is exceptionally high compared to other OECD countries).


The Memorandum therefore proposes an updated combined turnover threshold of NIS 360 million (approximately US $104 million or €85 million).


The purposed turnover threshold will be subject to an adjustment mechanism according to the changes in the Consumer Price Index published by the Central Bureau of Statistics. The General Director of the IAA will publish the updated and adjusted turnover threshold on a yearly basis.

    • Expanding the merger control to foreign companies lacking a substantial Israeli presence

Another proposed amendment to the merger control regime is the abolishment of the nexus requirement regarding foreign companies and partnerships. At present, the merger control regime applies to foreign entities that are not registered in Israel based on their local footprint. The IAA's existing policy requires such a foreign entity to:

    • hold a significant shareholding in a local entity (generally more than 25%);
    • have a place of business in Israel; or
    • have the ability to influence a local representative's commercial decisions.

At present, direct sales to Israel are insufficient to subject a foreign entity to the merger control regime even if these sales exceed the turnover threshold that triggers merger filing for local entities.


According to the Memorandum, foreign entities may be required to file merger notifications even if they have no local footprint in Israel; the nexus requirement will be established by the mere fact that the foreign entity achieves sales that meet the turnover or the market share thresholds, as applied to Israeli entities. Thus, the amendment may have a significant effect on cross-border transactions. The amendment also proposes to subject non-profit associations to the merger control regime.


Main amendments to monopoly chapter


The monopoly chapter has also undergone a significant change under the Memorandum. At present, a firm that possesses more than a 50% market share is considered a monopoly under the Law.


The Memorandum proposes to change the definition of 'monopoly' so that in addition to the existing market share-based monopoly presumption, which is unique to Israeli law, a market power test will be introduced, similar to the customary test in other jurisdictions.


Under the proposed market power test, firms with a market share below 50% will be deemed monopolies if they hold significant market power which is not temporary in nature. The IAA explained that since the Law's monopoly chapter aims to tackle the phenomenon of market power, this amendment is required. This explanation is somewhat inconsistent with the fact that the existing market share definition remains unchanged under the amendment, although several entities that hold more than a 50% market share (which are therefore considered monopolies under this definition) do not possess significant market power.


The amendment will introduce uncertainty to the business conduct (e.g., pricing policy) of many firms which are not subject to the monopoly chapter of the Law (under the market share test).


Reform of restrictive arrangement analysis


The suggested reform of the analysis of restrictive arrangements reflects the ongoing trend in Israeli antitrust law of a substantive self-assessment regime. At present, only certain types of vertical arrangement are subject to substantive self-assessment (mainly certain types of vertical arrangements). Other arrangements are subject to block exemptions that are invalidated if a certain market share threshold is exceeded.


As part of the reform, the IAA published draft amendments to:

    • the block exemption for joint ventures;
    • the block exemption for research and development agreements; and
    • the block exemption for ancillary restraints in mergers.

The suggested amendments may enable parties to apply the block exemptions even if they exceed the relevant market share boundaries, provided that the following conditions are met:

    • the arrangement is not aimed at harming competition;
    • the restraints included in the arrangement are necessary for fulfilling the purposes of the arrangement; and
    • the arrangement will not result in a significant adverse effect on competition.


Broadening the self-assessment regime under the Law is a desirable development, as it will allow the IAA to focus its resources on arrangements which raise severe competition concerns, while decreasing to a certain extent the regulatory burden imposed on private parties at present.


Annulment of cap on financial penalties for corporations


The Law allows the IAA to impose a monetary penalty on corporations at a maximum of 8% of the violator's sales turnover, provided that the monetary penalty does not exceed NIS 24.5 million (approximately US $7 million or €5.7 million).


The Memorandum suggests cancelling the maximum limit, while retaining only the sales turnover percentage limit. The amendment aims to increase deterrence against large corporations, for which the present cap reflects a relatively small percentage of turnover.


This amendment will potentially have a dramatic effect on large corporations, as it paves the way for imposing significant financial penalties on such corporations. The Law provides the Commissioner with the power to impose such financial penalties by issuing an administrative decision (based on an administrative process, relying on administrative evidence and with limited rights to the relevant parties), while no objective third party is required to approve the Commissioner's decision before it is issued. Therefore, it is believed that this proposed amendment, which dramatically increases the IAA's enforcement powers without introducing appropriate checks and balances, requires a review of the process by which such penalties are imposed and the rules for calculating their amount.


 

* Gil Rosenberg is a partner at the Israeli firm Shibolet & Co. and heads its Antitrust and Competition practice. Mr. Rosenberg can be contacted at Gilr@shibolet.com or at +972-3-7778410.

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Tel Aviv,
Wednesday, April 25, 2018
Antitrust & Competition Law/Unfair Competition