The technology M&A market in Israel has generally been aligned with US and global M&A trends in the past 12 months, with deal activity directly influenced by the downtrends and uncertainty in US and global markets. Total M&A deal count and size in 2022 declined compared to a record-breaking 2021, and IPOs and de-SPAC transactions involving Israeli technology companies also considerably declined compared to 2021.

Key Trends

The Israeli technology M&A market continued to be significantly influenced by US private and public markets. Financing rounds, valuations and most other financing metrics significantly declined in 2022 from a record 2021. Mega-rounds and follow-on investments in particular have declined sharply, and IPO activity plummeted in 2022 after a very active 2021.

Technology companies that became “unicorns” in 2020–2021 proved to be the most sensitive to the downtrend in public markets, and mid- and late-stage financing rounds were also adversely impacted. Pre-seed and seed rounds were less impacted and generally remained strong during 2022.

The amounts raised by Israeli companies in 2020–2021 through IPOs, deSPAC transactions and financings based on high valuations provided them with significant cash to acquire smaller companies and to “acqui-hire” teams both locally and abroad in 2021–2022. With public liquidity options having become less attractive in 2022, private M&A is expected to continue to be the principal exit strategy for Israeli companies in the near term.

New companies typically incorporate in Israel as private limited companies, while some entrepreneurs choose to incorporate in Delaware as LLCs or c-corporations. An Israeli company can be formed within two to five business days, and there is no minimal capital requirement for incorporation.

A private limited company is the most common type of legal entity for new technology companies.

Seed financing is typically provided by early-stage Israeli venture capital firms, foreign venture capital firms, angel investors and family offices. The principal documentation in early-stage financings includes the share purchase agreement and the articles of association. Simple Agreements for Future Equity (SAFEs) and other convertible instruments are also common.

There is a very active ecosystem that is dominated by venture capital firms but also includes corporate venture capital, angel investors and family offices. Foreign venture capital firms, and US-based venture capital firms in particular, dominate in terms of total amounts invested. Israeli venture capital firms tend to be more dominant in earlier rounds.

Government-sponsored funds were instrumental in the 1990s but since then government funding has mostly been provided by the Israel Innovation Authority (IIA) through non-equity financing under various R&D and commercialisation programmes. Recipients of IIA grants are subject to royalties and certain restrictions on the use and transfer of the IIA-funded know-how and intellectual property, including restrictions on the transfer of IP outside of Israel.

There is no uniform set of venture capital documentation, although Israeli variations of National Venture Capital Association model documents are often used and market standards are fairly well developed and recognised.

Start-ups generally stay in the same corporate form and jurisdiction, although some initially incorporate in Israel and later, often in connection with a financing round, effect a flip from an Israeli company to a Delaware c-corporation, resulting in the Israeli company becoming a wholly owned subsidiary of the Delaware corporation.

Private sales are the most common exit route, with IPOs being more susceptible to market conditions and trends. Companies tend to choose between IPO and private sale at the outset or relatively early in the process of considering exit routes, rather than running a dual-track process.

NASDAQ and the NYSE attract larger technology IPOs and are the most desired exchanges for technology companies. In addition, some companies list on the Tel Aviv Stock Exchange (TASE) as the TASE entry thresholds and the local listing and compliance costs are substantially lower.

A foreign listing would generally not affect the feasibility of a future sale. The Israeli Companies Law would continue to apply to Israeli companies regardless of the choice of listing.

A sale is typically run in a bilateral negotiation; auctions are conducted, but less frequently.

A sale may be structured as either a share purchase, an asset purchase or a statutory merger. For privately held companies, a share purchase of the entire share capital is the most common structure. Venture capital funds do not typically continue as shareholders, exiting upon the liquidity event.

Cash is the most common consideration but there may be an equity component as well, especially for founders and other key individuals. Pure stock-for-stock transactions are not common.

Typically, all sellers, founders and venture capital investors are expected to stand behind representations and warranties through an indemnification mechanism. Sellers may also be required to provide specific indemnities to the buyer. A portion of the consideration may be placed in escrow or held back to secure the sellers’ indemnification obligations. Representations typically have limited survival periods, and liability is typically capped. Venture capital investors generally require clean exits and seek to limit liability and escrow/holdback arrangements. Representations and warranties insurance is increasingly used in private M&A transactions in Israel (especially in larger deals where deal size justifies the premium).

Although spin-offs may be utilised in private M&A transactions involving Israeli companies, they are much more common at large, listed multinational technology companies. Tax, accounting, operational and regulatory aspects are some key considerations.

A spin-off would generally be classified as a taxable event to the extent that it includes a transfer of assets and/or liabilities to another company. However, a distribution of shares owned by a company in another company to the shareholders of the first-mentioned company, which are companies themselves, may qualify as a tax-free transaction at the corporate level and, under certain conditions, also at the shareholders' level, in accordance with Section 104C of the Israeli Tax Ordinance and subject to certain conditions, including the following:

• the subsidiary’s shares are distributed pro rata to the holdings in the distributing company;
• a tax ruling was obtained prior to the transfer;
• no consideration was given in respect of the transferred shares;
• the distributed shares will be held by the receiving shareholders for at least two years, during which period the aggregate holdings of the shareholders in the distributing company will not be less than 25% of all of the rights in the company;
• court approval was granted, if required; and
• the distribution was made for business and economic substance, and improper tax avoidance or tax reduction were not among the main purposes of the transfer.

If a company cannot comply with one or more of these conditions, the required tax ruling will not be issued, unless otherwise approved by the Israeli Tax Authority (ITA), which may impose additional conditions.

The provisions of Section 104C of the Israeli Tax Ordinance as detailed in 5.2 Tax Consequences, including the minimal holding period and minimal holding requirements, may prohibit or restrict a business combination immediately following a tax-free spin-off.

It is necessary to obtain a ruling from the ITA prior to completing a spin-off. Such ruling will only be issued if all of the statutory requirements are met. Obtaining a tax ruling currently takes between six and nine months, depending on the complexity of the transaction, among other factors.

Acquiring a stake in a public company prior to making an offer to purchase a substantial stake is customary. Public disclosure of the acquisition is required no later than one trading day following the achievement of the 5% threshold. A statement regarding the plans or intentions of the buyer with respect to the company is not required at this stage. The buyer is not required to make a proposal, nor to state that it will not be making a proposal within a specified period (such a requirement only applies upon the execution of a tender offer).

An entity is only allowed to hold 25% or more of the share capital of a public company (provided that no other entity holds more than 25%) by executing a tender offer. The same tender offer requirement applies for exceeding the 45% share capital threshold (provided that no other entity holds more than 45%). Purchasing more than 90% of the share capital of a company requires conducting a full tender offer.

Most public acquisitions are structured as reverse triangular mergers, as this structure requires a lower threshold of approval from the company’s shareholders. Other public transactions, particularly go-private transactions by controlling shareholders, are executed through full tender offers.

Public company acquisitions in the technology industry are typically structured as cash transactions. There is no statutory minimum price requirement, but the following applies:

• with respect to tender offers – bidders are required to establish fair value for their offer in advance because offerees may petition the court to determine that the transaction consideration does not represent fair value; and
• with respect to mergers – the directors of the merging company are required to maximise the merger consideration as part of satisfying their fiduciary duties to the merging company.

Common conditions in tender offers include the purchase price, the offer period and one or more of the following conditions, which are the only conditions that may be included in a tender offer that is generally otherwise irrevocable:

• that the offer may be cancelled if a regulatory approval or licence required for completing the offer has not been obtained;
• that the offer is conditioned upon a minimal acceptance threshold; and
• that the offer may be cancelled if circumstances occurred of which the offeror was not aware and could not have been aware and should not have anticipated, and the terms of the offer under such circumstances have become materially different from the terms that a reasonable offeror would have offered had it been aware of such circumstances on the date of the tender offer.

Transaction agreements are common in merger transactions, but not in tender offers. Merger agreements include customary covenants as well as representations and warranties by the public company, which are generally aligned with its public disclosures. Customary closing conditions in merger agreements include the approval of the transaction by the public company’s shareholders’ meeting and obtaining third party consents, if required.

In a tender offer required for exceeding the 25% or 45% thresholds, the minimum acceptance threshold is 5% of the issued share capital. In addition, the offer must be accepted by a majority of the shareholders who accepted or declined the offer.

In a full tender offer required for exceeding the 90% threshold, the minimum acceptance threshold is 5% of the issued share capital, and in addition the offer must be accepted by a majority of the shareholders who have no personal interest in the offer or declined by holders of less than 2% of the issued share capital.

Once a full tender offer is accepted, the offeror is required to purchase the shares of the shareholders who did not accept the offer at the same price and on the same date as applicable to the offerees who had accepted the offer.

The buyer itself is making the offer, not the financing parties. Financing must be secured in advance as a tender offer cannot be conditioned on obtaining financing.

There are no statutory limitations on deal protection measures. However, when negotiating with a potential buyer, the directors of the target company must act in accordance with their fiduciary duties. Accordingly, it would be difficult for a target company to agree to unreasonable or uncustomary protections as this may risk not obtaining the approval of the shareholders’ meeting and expose the directors to claims from shareholders.

A bidder that did not obtain more than 90% ownership in a public company as a result of failing to complete a tender offer is not entitled to any special rights beyond those rights that were available to it prior to the tender offer by virtue of its significant voting power. For example, it is very likely that such a bidder will be able to appoint a majority of the directors.

In some tender offers, the offeror receives irrevocable commitments from shareholders to tender their shares upon the launching of the tender offer. Such commitments are contractual obligations between the shareholders and the offeror, and are typically irrevocable and unconditional but have relatively short expiration dates.

There is no requirement to obtain approvals from the Israeli Securities Authority or the TASE prior to or following the launch of a tender offer. However, the Israeli Securities Authority is authorised to demand additions or corrections to the publicly filed disclosure related to the tender offer.

The tender offer timeline is established by regulation. Generally, the tender offer period may not exceed 60 days, unless another bidder submits a competing offer during such period, in which case the last acceptance date for the first tender offer may be postponed to the last date of acceptance set forth in the competing offer.

A tender offer may be extended for any reason, provided that it may not be extended beyond 60 days following the launch.

A tender offer may be conditioned on obtaining regulatory approvals. If such approvals are not obtained during the original tender offer period or, if extended, by the end of the 60-day period, the tender offer will be cancelled. In merger transactions, the parties may obtain regulatory approvals prior to obtaining the shareholders’ approval but this practice is less common before the launch of tender offers.

Setting up a new company is a relatively straightforward process, and there are no generally applicable regulations specific to technology companies. Like any other company, the nature of the company’s activities may require licences or approvals to be obtained from the relevant regulators, or certain registrations to be made with them.

The primary regulator of securities is the Israeli Securities Authority. In addition, the Capital Market, Insurance and Savings Authority is the primary regulator of companies providing regulated financial services, including services in financial assets such as virtual currencies.

There is no uniform foreign direct investment regime. Instead, foreign direct investment scrutiny is highly decentralised and restrictions are specific to sectors and/or asset classes. Defence, telecommunications, energy, utilities, banking, insurance and financial services companies are among the regulated sectors, in which regulators generally have substantial discretion to impose conditions, restrictions or approval requirements with respect to foreign investment.

In a relatively recent development, a governmental committee was formed in 2019 to advise certain regulators on foreign investment matters on an advisory basis, with the ultimate regulatory decisions and other powers remaining vested with each regulator.

There are restrictions on foreign ownership of real property rights in land owned by the State of Israel, the Development Authority or Keren Kayemet Le-Israel (which land comprises over 90% of all land in Israel), and the transfer of such rights to non-Israeli persons or persons who are not entitled to immigrate to Israel pursuant to the Law of Return 1950 (or any legal entities controlled by such persons) is subject to the approval of the Israeli Land Authority.

Please see 7.3 Restrictions on Foreign Investments regarding national security review of acquisitions.

The export control regime is administered by the Defence Export Control Agency under the Ministry of Defence and the Ministry of Economy. Encryption means are also subject to regulation by the Ministry of Defence, and licences for engagement in encryption means may include restrictions on the export or transfer of the underlying technology.

In addition, the Israeli Trade with the Enemy Ordinance of 1939 (“Ordinance”) prohibits Israeli persons from, among other things, having any commercial, financial or other affairs with countries that are in a state of war with Israel or with persons residing or incorporated or conducting business in such countries (which currently include Syria, Lebanon, Iran and Iraq, with Iraq being excluded from the Ordinance pursuant to a ministerial approval currently in effect through 31 December 2022).

The parties to a transaction constituting a “merger” under the Economic Competition Law 1988 would need to obtain the approval of the Israeli Competition Commissioner if one of the following conditions is met:

• each of the merging companies’ turnover from Israel exceeds NIS20 million and their combined turnover from Israel exceeds NIS367.93 million;
• one of the merging companies’ market share in any service or product in Israeli exceeds 50%; or
• as a result of the merger, the combined market share of the merging companies in any service or product in Israel would exceed 50%.

There are no regulations akin to the Transfer of Undertakings (Protection of Employment) Regulations, and no general requirement to consult or inform non-unionised employees of M&A transactions. Some employers may be bound by collective bargaining agreements that provide for notification, consultation and/or negotiation rights, although this is not common in technology companies.

Employees do not generally have specific rights in the context of M&A transactions beyond their statutory rights and contractual rights under their respective employment agreements. An employee may not be transferred, and the terms of their employment agreement may not be changed without such employee’s consent.

There is no currency control regulation. Approval by the Bank of Israel is not generally required for M&A transactions; however, certain reporting requirements may apply, including with respect to investments by foreign residents in Israeli entities or by Israeli residents in foreign entities in excess of certain threshold amounts. In addition, transactions involving the transfer of interests exceeding certain thresholds in financial services providers, including banking institutions or companies with holdings in banking institutions, may be subject to the approval of the Governor of the Bank of Israel.

The Broadcom (2019) and Medingo (2022) decisions are two recent key transfer pricing cases in which courts, siding with taxpayers, rejected the ITA's position regarding the taxation of changes of business model following acquisitions. In the last decade, the ITA has been taking the position that Israeli technology companies acquired by multinationals that, subsequent to their acquisition, enter into IP/services intercompany arrangements with their parent are deemed to have transferred their functions, assets and risks (FAR) by virtue of such arrangements. In accordance with this position, after classifying the intercompany arrangement as a deemed transfer, the ITA would impose a hefty capital gains tax assessment on such transfer, based on the purchase price of the original acquisition.

Although the ITA currently maintains this position, its maximalist approach has recently been undermined by two court decisions.

• In Broadcom, the court ruled that Dune Semiconductor's shift to a “cost-plus” model after being acquired by Broadcom may be justified by economic and business considerations, that a change in FAR should not necessarily be deemed as a transfer, and that any changes in the value of the FAR can be addressed through appropriate compensation, which should be determined based on transfer pricing principles.
• In Medingo, the court followed the Broadcom ruling and rejected the ITA's deemed transfer claims in respect of certain intercompany cost-plus and royalties arrangements entered into after Roche's acquisition of Medingo.

While the court in Broadcom and Medingo largely based its decisions on the specific circumstances of each case, these decisions provide important guidance on transaction structuring and post-closing integration planning, and inform taxpayers on tackling transfer pricing claims raised in ITA assessments.

There are no specific restrictions on the information that may be provided to a potential buyer as part of due diligence in excess of the requirements of generally applicable privacy laws, contractual confidentiality obligations to third parties and any antitrust-related restrictions on access.

There is no specific legal duty to provide the same information to all potential buyers; however, buyers usually do receive similar information. This goes back to the directors’ fiduciary duties to the company, which require them to maximise the deal price in the interest of the company and its shareholders. If directors withhold information from a particular potential buyer, they may be exposed to claims alleging that their lack of co-operation resulted in a lower price.

There are no specific rules relating to the level of technology due diligence that may be allowed by the board of directors, although directors have to satisfy their fiduciary duties to the company and may not allow technology due diligence that could be inconsistent with such duties.

There are no data privacy restrictions that specifically limit the due diligence of a technology company in excess of general data privacy rules under the Israeli privacy legislation and the guidelines of the Israeli Privacy Protection Authority.

With respect to an equity investment in the company, the duty to disclose is subject to a materiality threshold. To the extent that a company determines that the investment would constitute a material event to the company (whether due to the size of the investment, its impact on the company, the identity of the investor or for any other reason), then the company is required to immediately disclose the potential investment.

With respect to a tender offer, to the extent that the offer is made to all shareholders and is not addressed to any specific shareholder or involves negotiation with a limited group of shareholders then the bidder is required to follow the tender offer rules (which require the bid to be public). If a bidder approaches a specific shareholder, neither the company nor that shareholder are required to publicly disclose the offer.

Where the transaction consideration includes securities, a prospectus would generally be required in respect of such securities. The buyer/issuer of the securities does not have to be listed in a specific domestic or foreign exchange.

In an all-cash transaction, a bidder will not need to produce financial statements. Where the transaction consideration includes securities, the disclosure documents should also include the financial statements of the entity whose securities are being offered as consideration. Such financial statements generally need to be prepared in accordance with IFRS.

There is no requirement to file copies of the transaction documents, but the disclosure should describe the material provisions.

Directors are required to act in the interest of the company in connection with merger transactions and as part of satisfying their duties of care and trust to the company. On this basis, the directors are required to achieve the best terms possible, while only considering the interests of the company. The “interest of the company” is interpreted as the interest of the company itself and that of its shareholders, while considering factors relating to other stakeholders such as employees and creditors.

It is customary to establish independent board committees to negotiate merger transactions with controlling or substantial shareholders or transactions in which a controlling shareholder, director or senior officer has a personal interest (including where such transaction involves a conflict of interests).

The board is required to be actively involved in the negotiation of merger transactions. With respect to special tender offers (required to exceed the 25% or 45% thresholds), the board is required to disclose its position on the offer price.

Since most merger transactions are subject to the approval of a special majority of the shareholders, the decisions of the board in respect of such transactions are not often challenged. Any claims challenging a transaction would be less likely to succeed to the extent that a court establishes that the negotiation reflects due consideration and thorough process by the board and that the purchase price was fair.

In the context of merger transactions, it is customary to obtain a valuation or at least a fairness opinion from a reputable valuation firm that is independent of, and has no ties to, the target company or the buyer.