The European, Middle Eastern and African Antitrust Review 2018

Israel: Overview

Fischer Behar Chen Well Orion & Co

The Restrictive Trade Practices Law, 5748-1988 (the Law) is the primary law dealing with antitrust issues in Israel and its objective is to prevent harm to competition or the public. The Law contains the substantive rules that apply to the various restrictive trade practices (restrictive arrangements; mergers; monopolies; concerted groups).

In addition, the Law encompasses rules concerning the structure and the powers of the Israeli Antitrust Authority (the IAA), the director general of the IAA (the director general) and the Antitrust Tribunal (the Tribunal), as well as procedural rules that apply to cases brought before each of them.

Recent years have been characterised by a trend for strengthening the position of the IAA; increasing administrative enforcement as well as the focus of the IAA on its advisory capacity within the government; and increasing civil ‘follow-on' class actions against international cartels.

Restrictive arrangements control regime

Definition

Section 2(a) of the Law defines a restrictive arrangement as an arrangement, between persons (including legal entities) conducting business, according to which at least one of the parties restricts itself in such manner that might prevent or reduce competition between the person and the other parties to the arrangement, or any of them, or between the person and a third party. Section 2(b) of the Law also provides conclusive presumptions that an arrangement involving a restraint will be deemed to be a restrictive arrangement if it relates to:

  • the price to be demanded offered or paid;
  • the profit to be obtained;
  • market allocation; and
  • the quantity, quality or type of assets or services in the business.

With regard to the extraterritorial application of the restrictive arrangement control regime - the IAA applies the ‘effects doctrine' in order to acquire extraterritorial jurisdiction over restrictive arrangements, including cartels executed outside of Israel which harm competition in Israel.

In general, a restrictive arrangement is prohibited unless it is permitted in accordance with the Law. Section 4 of the Law establishes that the parties to a restrictive arrangement can receive an approval from the Tribunal in the case where the Tribunal finds that the arrangement is in the public interest; or it can be exempted by the director general upon the request of a party to a restrictive arrangement and following consultation of the director general with the Exemptions and Mergers Committee. The director general considers whether the restrictive arrangement considerably reduces competition or causes substantial harm to competition, whether the objective of the arrangement is to reduce or eliminate competition and whether the restraints in the arrangement are necessary to fulfil the objectives of the arrangement.

Statutory exemptions

A statutory exemption may also apply to certain arrangements, detailed within section 3 of the Law, inter alia, in cases of arrangements involving restraints, all of which are established by law; arrangements relating to specific business sectors (eg, agricultural, international air or sea transformation); arrangements involving restraints relating to intellectual property rights; etc.

Block exemptions

Section 15a of the Law grants the director general the power to establish block exemptions. By publishing block exemptions, the director general essentially exempts parties to a restrictive arrangement from seeking a specific exemption from the director general or the approval of the Tribunal, subject to the fulfilment of the terms of the various block exemptions. In recent years the IAA has published various block exemptions, including block exemptions for restrictive arrangements causing de minims harm to competition; joint ventures; research and development agreements; exclusive dealing; exclusive distribution or franchise; non-horizontal arrangements without price restrictions; joint ventures for the marketing and supply of security equipment in foreign countries; etc.

During September 2016, the IAA renewed and amended several block exemptions. Inter alia, the IAA established procedures for when market shares of parties to a restrictive arrangement increase and exceed the permitted levels under the relevant block exemption, during the exemption period.

In addition, in May 2017, the IAA published a draft block exemption for syndicated loans which enables several financial institutions to provide loans to commercial entities through a syndicate, subject to conditions set in the draft block exemption. Nonetheless, syndicated loans provided by large banks will meet the draft block exemption only in exceptional cases and under certain circumstances.

Recent developments in the restrictive arrangements control regime

  •  A significant ruling of the Israeli Supreme Court regarding restrictive arrangement has been the Shufersal ruling. Israel's largest food chain (Shufersal) was convicted of breach of merger conditions and attempting to engage in a restrictive arrangement. The Shufersal ruling indicates a strict approach towards anti-competitive conduct and sets two important precedents: First, the imposition of stricter penalties for antitrust violations, as for the first time in Israel, imprisonment sentences (of the CEO and VP for marketing) were imposed for violating merger conditions and for attempting to set a vertical restrictive arrangement. Second is that, as a rule, vertical arrangements would not be presumed (per se) to constitute a restrictive arrangement; however, such arrangements would be examined primarily on the basis of their likelihood to harm competition, under the Law's definition of a ‘restrictive arrangement' (a rule of reason analysis).
  • Pursuant to the Shufersal ruling's implications on the analysis of vertical arrangements, in January 2017, the IAA published a draft guideline clarifying its policy regarding vertical resale price maintenance arrangements (RPM) - arrangements in which one link in the supply chain of goods dictates the price charged for the goods by the next link in the chain (ie, vertical arrangements between supplier and retailer or distributor). The IAA stated that, as a rule, RPM arrangements have no place in the retail sector, unless two cumulative conditions are met: that sufficient competition exists in the market; and that the arrangement is required for the purpose of gaining clear pro-competitive benefits.
  • In 2015 the District Court convicted several of Israel's largest bakeries in a price-fixing and market-allocation cartel in the bread market and imposed long prison sentences on their officers. Pursuant to a March 2017 appeal submitted by the defendants, the Supreme Court reduced the prison sentences of two of the bakeries' CEOs to three months of imprisonment and three months of community service.
  • In April 2017, several water meter companies and their executives were convicted of price fixing and fraud in a conspiracy extending from 2004 to 2009. The Court ruled that the companies had made false presentations to the municipalities and water corporations, maintaining a pretence of competing with each other while winning bids for tenders that were actually agreed on between them.
  • In February 2017, the IAA filed an indictment against five computer companies and 11 officers in those companies, in respect to violations of the Law and the Penal Law, 5737-1977. The indictment includes allegations of collusions in tenders and tender offers for the purchase of computer equipment, valued at over 17 million New Israeli shekels.
  • In February 2017, the IAA published a draft guideline regulating the sharing of data between competing entities for the purpose of confronting cyberattacks. The draft recognises the necessity of sharing security information due to the increase of cyberthreats in recent years and the realisation that information possessed by one entity is not always sufficient for revealing the full scope of cyberthreats against it. The draft proposes a ‘safe harbour', and establishes two conditions: that the type of information shared is ‘technical' and not related to the competitors' commercial activities; and that prevention of access to shared information systems, without reasonable justification, may constitute a prohibited restrictive arrangement.
  • In November 2016, the Tel-Aviv District Court imposed a fine and sentenced a lawyer to three months imprisonment for helping business owners disguise a bid-rigging scheme as a partnership termination agreement. The decision was the first time that an Israeli court imprisoned a lawyer for his role in a cartel.

Merger control regime

Definition

The Law defines the term ‘merger of companies' broadly by providing a non-exhaustive list that includes

the acquisition of a company's main assets by another company or the acquisition of shares in a company by another company by which the acquiring company is accorded more than a quarter of the nominal value of the issued share capital, or of the voting power, or the power to appoint more than a quarter of the directors, or participation in more than a quarter of the profits of such company; the acquisition may be direct or indirect or by way of rights accorded by contract.

Nevertheless, due to the broad definition of ‘merger' under the Law, even the acquisition of less than a quarter of any of the above-
mentioned rights may constitute a merger, under certain circumstances.

Mergers involving foreign parties

The Law will apply to a merger involving a foreign party if each of the merging parties meets the conditions of the Nexus Test, set forth in the IAA's Merger Guidelines (the Guidelines):

  • If a foreign company is registered in Israel. In such circumstances the Law applies explicitly.
  • If a foreign company has a ‘merger affiliation' with an Israeli company. According to the Guidelines, a merger transaction between a foreign company (affiliated with an Israeli company) and an Israeli company creates an indirect merger between the two Israeli companies. The Guidelines provide that when a foreign company holds more than a quarter of any of the above-mentioned rights (ie, the nominal value of the issued share capital; or the voting power; or the power to appoint more than a quarter of the directors; or participation in more than a quarter of the profits) in an Israeli company, it will be viewed as a party to any merger transaction involving the foreign company.
  • If a foreign company maintains a place of business in Israel, ie, if it holds a significant influence over the conduct of a local representative.

Thresholds for filing

The Law requires all merging companies to file a merger notification with the IAA when (at least) one of the following thresholds set under the Law is met:

  • the combined sales turnover of the merging companies in Israel in the fiscal year preceding the merger exceeds 150 million New Israeli shekels and each of the merging companies' sales turnover exceeds 10 million New Israeli shekels;
  • as a result of the merger, the combined market share (in any market) of the merging companies in the total production, sales, marketing or acquisition of particular goods or similar goods, or the provision of a particular service or a similar service, exceeds 50% of the market; or
  • one of the parties has a ‘monopoly' (ie, holds more than 50% of the total supply or purchase in a certain market in Israel, which may be either a product or a service market, including markets not relevant to the transaction).

The market share and turnover calculations must take into consideration all of the entities controlling or controlled by each party.

The requirements set forth above, apply solely with respect to the company's turnover and market share in Israel.

Merger evaluation process

The Law provides that the director general is required to notify the merging companies of her decision with respect to the merger within 30 days from the date in which the completed notification forms were received from all the merging parties. Nonetheless, the director general may approach the parties or the Tribunal with a request to extend the deadline. If the director general does not render a decision within the 30-day notification period and no extension was granted, the merger is deemed approved.

As a practical matter, when cross-border merger transactions require approval in multiple jurisdictions, the IAA will sometimes take into account the decisions made by other authorities in different jurisdictions (primarily the US Federal Trade Commission, Department of Justice and the EU Commission), where there are no unique circumstances concerning the Israeli market. It is also possible that parties in such circumstances waive their right to confidentiality with respect to information provided to competition authorities, in order to enable the IAA to seek information from those authorities with respect to the merger. The director general is mandated to object to a merger of companies, or to stipulate conditions for the merger, if she finds that there is reasonable likelihood that, as a result of the merger, competition in the relevant sector would be significantly harmed or that the public would be harmed by:

  • the high price level of an asset or of a service;
  • the low quality of an asset or of a service; or
  • the available quantity of the asset, of the scope of the service supplied, or the constancy and conditions of supply.

Recent developments in the merger control regime

  • In February 2017, the IAA published a notice regarding a fast track for the approval of mergers that do not harm competition (the ultra-green mergers procedure). Decisions regarding ultra-green mergers are rendered in a significantly shorter time period than provided under the Law. According to the IAA, since the procedure's application the average ultra-green merger review period has been less than five days. The review of an ultra-green merger by the IAA is limited in scope and based, principally, on the submitted merger notices. Accordingly, to be classified as an ultra-green merger the parties are required to submit, inter alia, full merger notices that are signed by the CEO and internal legal adviser of the submitting party; to provide each party's holding structure; and to expand on relevant information.
  • In recent months, the IAA objected to several mergers it reviewed:
    • In October 2016, the IAA rejected a merger between envelope manufacturers Emka and Gevaram, after finding the merger transaction would severely affect competition in the Israeli envelopes market. The IAA's objection is also related to past antitrust violations conducted by the merging parties.
    • In April 2016, the IAA rejected the purchase of Electra-Bar by Mei Eden. Both are active in the water dispensers market. The IAA distinguished between branded water dispensers and non-branded water dispensers and established that they constitute two separate markets. The IAA decided that the non-branded water dispensers are not considered competitors of the branded water dispensers, and that the approval of the merger would have led to the loss of a competitor and was liable to result in higher prices. Pursuant to the IAA's decision, the parties to the merger appealed to the Tribunal; however, the appeal was rejected on 10 October 2016.
    • In April 2016, the IAA rejected the purchase of Click to Eat Ltd by Zap Group Ltd, operators of online services for restaurants and their customers. The IAA established that the parties to the merger have significant market shares in a non-competitive relevant market which has barriers to entry and expansion.

Monopoly control regime

Definition

According to section 26(a) of the Law, the concentration of more than half of the total supply or acquisition of an asset, or more than half of the total provision or acquisition of a service, in the hands of one person shall be deemed a monopoly.

Under the current regime, the declaration of a monopoly by the director general is of declaratory validity only, meaning that a monopoly is a matter of ‘status'. Therefore, the obligations and limitations applied to a monopoly owner exist regardless of the director general's declaration or lack thereof.

Limitations

In general, a status of monopoly is not prohibited. Nonetheless, monopolists must abide by several strict standards of conduct:

  • a monopoly owner may not unreasonably refuse to deal (supply or purchase) goods or services in a market in which it holds a monopolistic market share; and
  • a monopoly owner may not act in a manner that constitutes abuse of its dominant position in the market, in a manner likely to reduce competition in business or to harm the public. An abuse of a dominant position by a monopoly owner includes, inter alia:
  • charging unfair prices for products or services;
  • reducing or increasing quantity of products or services that the monopoly owner offers, not in the framework of a fair competitive action;
  • applying dissimilar contractual conditions to similar transactions, which might grant certain customers and suppliers an unfair advantage over their competitors; and
  • subjecting a transaction with regard to an asset or service of the monopoly to conditions which are unrelated to the subject matter of the transaction (tying).

The Law also states that any harm relating to one of the following shall be deemed to be harmful to competition or to the public: price of asset or service; quality of asset or service, quantity of asset or service; terms of supply and the regularity and conditions of such supply; and a barrier to entry to the market or to a switching barrier within the market.

In this regard, the director general has the authority to supervise and instruct the monopolist in its business activities, to ensure that its behaviour, or that the mere existence of a monopoly, does not harm competition in the market or the public.

The Tribunal may, upon application by the director general, instruct the monopolist to sell an asset in its possession if it has found that this may prevent harm or the risk of significant harm to competition or to the public.

Recent developments in the monopoly control regime

  • In March 2017, the IAA announced its intention to impose financial sanctions of 62 million New Israeli shekels on the Central Bottling Company (Coca Cola Israel) for abusing its monopolistic status in the cola soft-drink market; violation of provisions; breach of a Consent Decree; and breach of merger terms. The IAA is also considering imposing a fine of 340,000 New Israeli shekels on a senior officer of the Company.
  • In March 2017, the IAA imposed financial sanctions of 13 million New Israeli shekels on Israel Electric Corporation for abusing its monopoly position by denying services to large business customers who purchased electricity from independent power producers. The IAA also imposed personal sanctions on senior officers in the corporation in unprecedented amounts, ranging from 110,000 to 165,000 New Israeli shekels.
  • In recent years the IAA has considered ceasing its active stand-alone declaration of monopolies and extending the application of the monopoly regime to entities based on market power, rather than solely on market share. The IAA stated in the past that the active stand-alone declaration of monopolies greatly consumes the IAA's resources, while such efforts contribute minimally to competition. Further, in its most recent publication in this regard, the IAA stated that competition regimes are converging toward the notion that single firm conduct provisions should be applied only to firms that have ‘substantial market power'.
  • Following a formal re-evaluation of the IAA's policy regarding the prohibition on excessive pricing by monopolies, in February 2017, the IAA published its final public statement regarding its considerations in the enforcement of the prohibition on charging unfair high prices. The IAA established that enforcement will be made where there is no competitive alternative and there is no designated regulator engaged directly in price; also, the IAA repealed the ‘safe harbour' defence, whereby no enforcement action will be taken against the monopoly holder if the difference between the price of the product and the cost of its production is less than 20%.
  • For the first time in Israel, in April 2016, a settlement agreement was reached in a motion to certify as class action alleging, inter alia, excessive pricing. The motion to certify alleged that Israel Chemicals Ltd abused its monopolistic position in the manufacturing of potash by charging excessive pricing.

Concerted group control regime

Definition

According to the Law, the director general may determine that a limited group of persons conducting business and possessing a concentration of more than half of the total supply or acquisition of an asset or provision or acquisition of a service, constitutes a concerted group, if the director general determines that all of the following conditions are met:

  • there is limited competition or there are conditions for limited competition between the group's members or within the market in which they operate; and
  • instructions imposed by the director general are expected to prevent a significant harm or concern for harm to competition in the market or to the public, or may significantly strengthen competition or may create conditions for significant improvement of market competition.

In addition, the Law lists several barriers to entry to a market; a combination of two or more of such barriers shall be regarded as conditions for limited competition.

The determination of a concerted group by the director general has a constitutional validity.

Implications

The director general may order a concerted group to take steps that would prevent harm or concern for harm to competition or to the public or steps that are expected to significantly increase the competition between the members of the concerted group, or to create conditions for such increase.

In addition, the Tribunal, upon the request of the director general, may order the sale of holdings (entirely or partly) of members of the concerted group under certain circumstances.

Enforcement

Any violation of the Law has criminal, administrative and civil consequences.

Criminal enforcement

In general, all of the provisions of the Law are criminal offences, however, criminal sanctions are not often used and are reserved, mostly, for significant violations of the Law (eg, cartels; bid rigging). Notwithstanding, in the upcoming years, we expect to see increased criminal enforcement alongside greater sanctions owing to developments of the Law as well as an increase in the IAA's influence. With respect to criminal enforcement we note the following:

  • Responsibility of a corporation - the Law states that if an offence under the Law was committed by a corporation, then every person that was, at the time of the offence, an active director, a partner (except a limited partner) or a senior officer responsible for that field, shall also be charged with that offence, unless that person has proven that the offence was committed without his or her knowledge and that he or she took all reasonable measures to ensure compliance with the Law.
  • Maximum fine - the maximum fine against a person in a criminal procedure is 2.26 million New Israeli shekels for every violation of the Law and an additional fine of up to 14,000 (New Israeli shekels for each day the offence continues. In the case of a company, the fine or the additional fine is doubled.
  • Maximum punishment - the maximum punishment for an individual is three years imprisonment, and if the offence has been committed in aggravated circumstances, up to five years. Aggravating circumstances include factors that will likely harm competition. Currently, the record imprisonment was a term of one year in jail.
  •  Leniency programme - the IAA's leniency programme provides that every person, including a corporation, a director or an employee of a corporation, will be granted full immunity from criminal prosecution relating to a restrictive arrangement offence, if it is the first to come forward to the IAA and provide all information known to it, in connection with the restrictive arrangement to which it was party.

The IAA has repeatedly stated that it ascribes great importance to the programme and that it constitutes a major component of the Israeli enforcement regime for cartels. However, the leniency programme is not considered to be successful in Israel, with only a few applications since its initiation.

Administrative enforcement

The Law includes several administrative enforcement tools:

  • Administrative determination (decision) - the director general may issue an administrative determination declaring that a certain violation has occurred. The director general's determination serves as prima facie evidence in court.
  •  Administrative fines - for every violation of the Law, the director general may impose administrative fines of up to 8% of the sales turnover of a corporation's revenue in the year preceding the violation. The Law sets a maximum amount of approximately 24.49 million New Israeli shekels. For individuals or corporations that, in the year preceding the violation, had sales turnover of less than 10 million New Israeli shekels, the Law sets a maximum fine of approximately 1.02 million New Israeli shekels.

                The Law contains a non-exhaustive list of circumstances and considerations for the director general to weigh when determining the amount of the administrative fines to be imposed. Inter alia, the duration of the offence; the harm that the offence was liable to cause to competition or to the public; the offender's share in the offence, and its level of influence over its commission; the existence or absence of prior offences and the date of their commission; actions taken by the offender to prevent repetition of the offence or to terminate the offence, including reporting the offence on its own initiative, or actions taken to repair the effects of the offence.

                Regarding an offender who is an individual - his or her financial capacity, including income derived or accrued from the corporation related to the offence, and personal circumstances owing to which the offence was committed, including severe personal circumstances which justify not applying the full extent of the law against the offender. Regarding an offender who is a corporation - the existence of a significant risk that as a result of imposing the penalty, the offender will not be able to pay its debts and its activities will be terminated.

                Also, the IAA published guidelines in order to clarify when it will impose administrative fines as the primary enforcement measure (instead of seeking criminal sanctions). The guidelines list numerous offences which will typically be enforced through administrative fines, including non-horizontal restrictive arrangements, gun-jumping violations, information exchange of non-secret information, abuse of dominant position and failure to comply with data requests.

  • Consent Decree - the Law authorises the director general and third parties to agree to a Consent Decree that provides, inter alia, for an amount of money to be paid to the state treasury in lieu of other enforcement measures. In recent years the IAA increased its use of consent decrees and, inter alia, reached consent decrees with Israeli Airline El-Al regarding its arrangement with Ethiopian Airlines for cooperation in the marketing of flight tickets; with insurance agencies Harel and Madanes, in a decree establishing that exclusivity and non-competition provisions in the agreement are cancelled, and that Harel and Madanes will pay to the State treasury payments amounting to 6.4 million New Israeli shekels; and with supermarket chain Yenot Bitan, regarding its entering into merger transactions without the approval of the director general, in a decree establishing payment of 600,000 New Israeli shekels to the state treasury.

Private enforcement

Class actions

Any violation of the Law is deemed a tort under the Torts Ordinance (New Version), 5728-1968. The Israeli Class Action Law enables the submission of motion to certify class actions in antitrust cases. In recent years, an increasing number of motions to certify class actions based on alleged global cartels are being filed with the Israeli district courts. The typical petitioners in these cases are Israeli private consumers or private consumer organisations while the respondents are global companies that allegedly were parties to (alleged) global cartels.

Often, the trigger for private enforcement in the past was based on criminal or an administrative enforcement action taken by the IAA. However, the new trend expands the said trigger to be enforcement actions taken by foreign competition authorities worldwide. Other motions to certify class actions are based on claims against monopolists regarding excessive pricing.

Pro-competitive developments

As noted, the past couple of years has seen many significant and influential developments in Israeli competition law and in the enforcement authorities of the director general, inter alia, against the backdrop of unprecedented social protest against the increase in the cost of living.

The Food Law

The Food Law, enacted in 2014, deals primarily with vertical relations between food suppliers and retailers and regulates the commercial relations between them. The Food Law imposes criminal, administrative and civil liability on corporations and their officers. The Law also empowers the director general to instruct a large retailer that is selling the products of a large supplier regarding sale spaces, and to give instructions to a retailer that is selling private label products.

The Concentration Law

The purpose of the Law, enacted in 2013, is to reduce economy-wide market concentration, and to promote competition in various sectors of the Israeli economy. The Concentration Law poses limitations on: cross-holdings in a significant non-financial entity with a significant financial entity, and the control of public corporations through a pyramidal ownership structure. The Concentration Law also requires consulting with the director general, inter alia, regarding the advancement of competition in a specific sector.

The IAA's advisory capacity

In addition to its role as a regulator and enforcer, the IAA performs competitive market analysis of various sectors and advises other regulators. Inter alia, the IAA: published a draft report with recommendations for the promotion of competition in the liquefied petroleum gas market; is heard before the Knesset reforms committee regarding competition in the banking market; and published its recommendations to the Ministry of Transportation regarding the promotion of shared transportation in Israel.

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