CrowdFunding is Still Illegal In Israel Although the Recent Amendment of the Law -New Regulations Required

In a recent post we have updated that on 29.12.2015 the Israeli Knesset approved the Law for  the Promotion of Investments in High Tech Companies 2015 (hereinafter: the “Law”), authorizing privately held companies the offer the purchase of their securities, online, without the need  to file a prospectus. However, since the adoption of the Law, no regulations were enacted setting forth the procedure for approval “Proposals Mediators” and the maximal investment amounts per company and per investor.

In Administrative Petition case no. 18700-04-16 ExitValley v the Securities and Exchange Authority (in Hebrew) the Tel Aviv District Court discussed a petition made by a company operating a web site for crowd funding for entrepreneurs and corporations that are not publicly listed. The matter of the Petition was the decision of the Securities and Exchange Authority of 23.3.2016 which ordered the petitioner to stop its crowd funding activity, being contrary to law. The petitioner argued that this decision of the Authority will bring to the closure of its operations, the dismissal of employees and to the lost of all its investment. However, the Tel Aviv District Court  (Hon. Judge Ruth Ronen) upheld the decision of the Authority, and stipulated that the amendment of the Law relating to crowd funding lack any effect prior to the enactment of the necessary regulations.  

The Court held that the regulations are required for the procedure of approval and licensing of “Proposals Mediators” and the limit of the investment amount that can be obtained at the offerings per year and per investor: “These restrictions are not a formality, but they are the subject matter of the amended law”.

CrowdFunding is Still Illegal In Israel Although the Recent Amendment of the Law -New Regulations Required

In a recent post we have updated that on 29.12.2015 the Israeli Knesset approved the Law for  the Promotion of Investments in High Tech Companies 2015 (hereinafter: the “Law”), authorizing privately held companies the offer the purchase of their securities, online, without the need  to file a prospectus. However, since the adoption of the Law, no regulations were enacted setting forth the procedure for approval “Proposals Mediators” and the maximal investment amounts per company and per investor.

In Administrative Petition case no. 18700-04-16 ExitValley v the Securities and Exchange Authority (in Hebrew) the Tel Aviv District Court discussed a petition made by a company operating a web site for crowd funding for entrepreneurs and corporations that are not publicly listed. The matter of the Petition was the decision of the Securities and Exchange Authority of 23.3.2016 which ordered the petitioner to stop its crowd funding activity, being contrary to law. The petitioner argued that this decision of the Authority will bring to the closure of its operations, the dismissal of employees and to the lost of all its investment. However, the Tel Aviv District Court  (Hon. Judge Ruth Ronen) upheld the decision of the Authority, and stipulated that the amendment of the Law relating to crowd funding lack any effect prior to the enactment of the necessary regulations.  

The Court held that the regulations are required for the procedure of approval and licensing of “Proposals Mediators” and the limit of the investment amount that can be obtained at the offerings per year and per investor: “These restrictions are not a formality, but they are the subject matter of the amended law”.

Annual Vacation Law-Amendment No. 15- Additional Vacation Days for Israeli Employees

The 15th amendment to the Israeli Annual Vacation Law, 1951 came into effect on 1.7.2016.

According to the Amendment, commencing on 1.7.2016 Israeli employees with up to 4 working years of experience, will enjoy an additional vacation day (on a “gross” basis, including Saturdays), so that they will be entitled to 15 days off (gross) a year instead of 14, and commencing on 1.1.2017 this amendment shall apply also to employees with up to 5 years of experience who will be entitled to 16 vacation days (on a “gross” basis)  per year.

In conjunction with the provisions of the “General Expansion Order”, employees working six days per week will be entitled to 13 days off (on a “net” basis) or 15 days (on a “gross” basis) instead of 12 days and 14 days, respectively, and employees working 5 days per week will be entitled to 11 days “net” (instead of 10). As of January 2017 such employees will be eligible for 14 “net” vacation days and 13 “net” days, respectively.

The Supreme Court – the General Assembly of Shareholders in a private company may take away Board’s powers and authorities in case of a “deadlock”

In CA 6946/11 Jacob Sesbon et al. v. Ephraim Solomon et al., published by “Nevo”  the Supreme Court ruled in an appeal on the Tel Aviv District Court, which rejected appellants’ motion to declare that their “management shares” are entitled to appoint board members, and accepted respondents’ position that the general assembly of its shareholders rightfully took away the  powers and authorities of the board due to its failure to adopt resolutions in light of a deadlock situation.

The appellants, the Sesbon family, and the respondents, the Solomon family, are all shareholders of a company named “Solomon $ Sesbon Packaging Industries 1989 Ltd.” (hereinafter “the company”). The respective shareholdings in the company are: 30% to Sesbon, and 70% to Solomon. Solomon family shares are divided among three brothers: Ofer (25%), Avni (25%) and Orly (20%). In addition to the ordinary shares held by the parties, there were 2 “management shares” issued: one to Sesbon and one to Solomon. The main question discussed in the appeal was the entitlement of the management share to appoint board members, 50% each.

Another questions brought to the decision of the Supreme Court was the ability of the general assembly of the shareholders to take away powers and authorities from the board: after several attempts to resolve the dispute between the parties, which failed, in 2008, the shareholders meeting (consisting of 70% Solomon and 30% Sesbon) resolved to take away the powers and authorities of the board of directors.

The District Court decided that there was nothing wrong with taking the authority by the general assembly. The appellants contended that there were no grounds to the application of Section  52(1) of the Companies Law,-1999, allowing the general assembly to take the powers of the board due to its “incapacity”. They contended that in order to take away the powers of the board, the board must be distributed into two equal parties of conflicting opinions and interests, who are unable to reach an agreement. In this context, the appellants argued that an internal conflict between the appellants themselves was the cause of the general assembly’s decision to take away the power of the board. Another argument raised by the appellants was that such resolution made by the general assembly was a “depriving act”. They claimed that, in a company managed as a partnership, there is a legitimate expectation of the parties for the joint management of the company, and the general assembly’s resolution terminated such joint management and may serve as a basis for a claim of a “depriving act”.

The Supreme Court ruled that in order to seize the powers of the board, Section 52 of the Companies Law requires that three conditions will be met:

  • Firstly, the existence of “incapacity” of the board. The “incapacity” may be physical, such as accidental death. But it can also be a normative incapacity, such as unsolvable disagreements.
  • Secondly, the general assembly’s authority to seize such powers of the board should be necessary “for the proper management of the company”.
  • Thirdly, that the general assembly must determine that the board is incapable of managing the company properly.

The main dispute in the appeal was the determination of the board’s “incapacity”. The Supreme Court ruled that, when the board is divided into two equal forces of opposite interests, incapable of agreeing on managerial decisions, the “incapacity” condition is met. therefore,, the general assembly rightfully seized its authorities.

The Knesset Approved a Crowd Funding Law for Israeli Companies

On December 29, 2015 the Israeli Knesset approved (voted for second and third hearings) the Law for Encouragement of Investments in Hi Tech Companies – 2015, mainly allowing public offerings  via crowd funding online, without the need to file a prospectus. 

  1. The law allows an offer of securities of a corporation incorporated in Israel, without the need to become a “Reporting Corporation” (i.e., a corporation the files a prospectus and is obligated to file reports to the Israeli Securities Authority and the Stock Exchange), subject to the following conditions:
    • The offer is carried out by “A Proposal Coordinator”- a company registered under the “Proposal Coordinators Registry” that promotes the offer for sale of securities by a website.
    • The offer shall no exceed an amount determined by the Minister of Finance (the amount has not yet been determined).
    • The respective investment amount of each investor may not exceed the amount determined by the Minister of Finance (to be determined also).
    • Furthermore, each investor may not exceed an aggregate investment amount for additional involvements. 
  2. The Securities Authority shall maintain a “Proposal Coordinators” registry. 
  3. Each Proposal Coordinator must submit an annual report and on going reports regarding the proposals made via its web site.
  4. The Finance Minister may require additional report obligations.

Grant of Phantom Based Options and Benefits to Employees/Service Providers

Grant of Phantom Based Options and Benefits to Employees/Service Providers 

Phantom options are options that are granted pursuant to an agreement between a company and an employee/consultant/service provider, entitling the grantee to a monetary payment at a certain time in the future , reflecting the increase in the market/share value of the company, while it is not accompanied by granting any equity or rights to shares (and/or other securities) of the company.

The consideration is determined based on the market value of the company’s share. For example, if the employee was awarded 100 phantom options while the share price was US$10, then, if the share price will increase to US$20, the employee will be entitled to US$1000 = 100 * (20-10).

In such manner a company may award an employee or a service provider a consideration derived directly from an increase in the share price and market value of the company, without entitling them to any voting rights, right to appointing directors and other rights underlying the ownership of share s or options of the company.

In private start-ups, in which the valuation of the company is usually determined in connection with financing rounds, the grant of phantom option will depend mostly upon an “external” Exit. such as an IPO or M&A with a third party, in which the valuation is closer to the market value (the price determined by two unrelated parties). However, in privately held start-ups, the valuation of the company is the result of an agreement between the two sides reflecting the expectations of weach party rather then the true market value; in such companies,  the application of a phantom based benefit plan may be difficult or unfair. it is also important to note, that the reward is paid in cash money and the company is required to allocate financial resources for such purpose, while in stock oriented benefit plans the cash flow of the company is not affected.

Public companies that want to avoid the complication of change of in the capital structure of the company, diluting existing shareholders and increase in the number of the shareholders, the phantom options mechanism is simply and easily applicable, and the advantages are clear.

The benefits of Phantom-based compensation plans are:

  • Flexibility, given that there is no need to issue stock options which require internal procedure s and a resolution of the Board.
  • Avoid diluting the holdings of the shareholders.
  • The compensation is in cash.
  • The reward is a deductible expense by the company.
  • It preserves all the advantages in allocating stock options or securities: reqarding the employee for the increase in market value of the company, making the bond between employer and employee stronger, and creating an incentive for the employee.service provider to continue its relationships with the company for a longer period of time.

The Disadvantages

  • Difficult to implement in private companies, and is conditioned on an “external” Exit event  such as public offering and a sale to a third party.
  • The company is required to pay a monetary payment, which affects its cash flow .
  • An employee may not benefit fro the reduced “capital gain” tax scheme under section 102 of the Israeli Tax Ordinance.

Hearing prior to Termination of Employment Under Israeli Law – Short Summary

Hearing Prior to Termination Under Israeli Law

To follow is a summary of recent Labor Court rulings regarding the process of hearing before termination.

1. The employer should notify the employee in writing about the intention to terminate him. The notice should be given few days in advance (usually 2-3 days in advance, although under specific circumstances the notice can be given one day in advance). While dealing with a senior employee, it is recommended that the notice shall be given, if possible, at least 3 days in advance.

2. The notice should specify the reasons for the proposed termination. The purpose of the notice is to give the employee the chance to prepare for the hearing and prepare his case and arguments against the termination.

3. The employee should have access to all supporting documentation and information underlying the proposed termination and hearing.

4. The employee may be accompanied/represented by a lawyer or another person in the hearing.

5. Detailed minutes of the hearing should be prepared and the employee should be provided with a copy thereof. The minutes should accurately reflect the hearing.

6. The most important rule: the hearing should be made “in good faith and with an “open mind”” (“Nefesh Hafetsa” in Hebrew). Employee’s arguments should be considered carefully and with open mind. The decisions should be based on professional and relevant considerations only.

7. The decision of termination should be given a day or two after the hearing, preferably in writing.

8. In some circumstances, failure to carry out the above could result in reinstatement of the employee and/or significant compensation payable to the employee (a recent court ruling granted a compensation in the amount of 12 monthly salaries to the employee).

General Principles of Israeli Labor Laws

General Principles of Israeli Labor Laws

By Yair Mintus, Adv.

1.               Preface

1.1.                 The purpose of this article is to provide the reader with a brief description and a general overview of Israeli labor laws and principles, which are quite often very different from the principles governing labor relationships in other westernized countries. Israeli labor laws are a unique mixture of social laws, religious laws and laws emanating from the continuous security problems facing Israel throughout the years. Israeli labor laws will govern the employment in Israel of an employee, whether the employer is an Israeli or foreign person or entity.

2.               Employer-employee relationships

2.1.                 In order to determine the applicability of the various labor laws to the relationship between two individuals (and/or corporations), one has to conclude that indeed ’employment relationship’ exist between them. A positive answer may provide the employee with the protection of the “protective labor laws” which will entitle him/her to various social rights stipulated by law and/or collective agreements.

2.2.                 A positive answer will also cause significant changes in other aspects of the relationship between the parties: it may impose on the employer a duty to provide the employee with sufficient protective means to perform the work, it may cause the employer to be held responsible for damages caused by and to the employee during the performance of the work (the legal principle of vicarious liability), it will require the employer to deduct Income Tax and National Security fees (“Bituach Leumi”) at source and it will cause copyrighted works and patents made by the employee to be assigned to the employer.

2.3.                 Israeli Labor Courts ruled that being an employee is a status which the parties can not stipulate against. The status is intended to serve a social goal by providing the employee with the protection of labor laws. During the years, Israeli Labor Courts identified several criteria for the existence of employment relationship:  the amount of control and authority the employer has, the level of integration between the work made by the employee and the employers’ business, the existence of personal commitment by both parties, the payment method, the way taxes are deducted, etc.

3.               Social Protective Laws

3.1.                 Minimum Wage Law, 1987. The purpose of this law is to enable the employee to live in dignity. The law provides that the salary of any employee shall not be lower than the minimum wage (which equals 47.5% of the average salary of all employees in Israel).

3.2.                 Salary Protection Law, 1958. The purpose of this law is to ensure the timely payment of the salary by employers. The law provides that late payment of a salary by the employer, i.e. delays of more than 9 days in payment, shall entitle the employee to be paid compensatory payment, calculated based on the number of days of delay. The law also includes other provisions dealing with salary payment arrangements, allowable deductions form the salary and restrictions on imposition of a lien thereon.

3.3.                 Work Hours and Rest Law, 1951.

3.3.1.                    This law limits the amount of working hours the employee should perform each working day and each week (8.75 hours per day and 43 hours per week – in accordance with the Collective Agreement that shortened the working week to 5 days and an Expansion Order (“Zav Harhava”) issued by the Minister of Work and Welfare dated 1.12.1996). “Working Hours” are defined as the number of hours in which the employee made himself/herself available for the employer, including breaks for rest. Although the law actually forbids working overtime, certain permits were issued by the Ministry of Work and Welfare allowing this to happen, subject to payment of overtime compensation by the employer.

3.3.2.                     The law entitles each employee for a weekly rest of at least 36 hours.

3.3.3.                     The law does not apply to certain types of employees, among them are police officers, sailors, pilots, employees in managerial positions, employees in a position requiring a high degree of ‘personal trust’  and employees whose nature of employment does not allow to track their working hours. Such employees can be employed under global salary, without the necessity to compensate them for overtime.

3.4.                 Annual Vacation Law, 1996.  The purpose of the law is to enable the employee to have an annual vacation in order to re-gather their physical and mental strength. The length of the annual vacation is determined based on the number of working years the employee accrued. In certain cases the employee may also accrue vacation days or request the redemption thereof by cash payment. Under the law each employee is entitled to 14 vacation days per year for the first four years of employment, 16 vacation days for the fifth year, 18 days for the sixth year, 21 days for the seventh year and 28 days for each year commencing on the eighth year of employment.

3.5.                 Severance Payment Law, 1963. Each employee working more than one year is entitled for severance compensation in case of termination of his/her employment by the employer, calculated by multiplying the last monthly salary of the employee by the number of working years, including fractional parts of the year (provided, of course, that employment exceeded one year).

3.5.1.                    The employee shall also be entitled to severance compensation in case of resignation from/termination of employment due to the following reasons: death or insolvency of the employer, death of the employee, disability of the employee, resignation following the birth of a child, resignation following relocation.

3.5.2.                     The employee shall also be entitled to severance payment in case of resignation due to “sever deterioration” in his/her working conditions made by the employer.

3.5.3.                    The parts of the salary which will be included in the calculation of the last salary for the purpose of severance payment are: basic salary, any increase made due to changes in the Cost-of-Living index, seniority increments, family increments, department or professional increments and any other part of the salary which is payable on a regular basis once a month and which is not conditioned upon the existence of any other condition.

3.5.4.                     Convalescence Allowance/ Replenishing Pay (“Dmei Havraha”).  In accordance with a General Collective Agreement, each employee is entitled to be paid a “Convalescence Allowance” which is calculated based on the seniority of the employee. Each employee is entitled to a Convalescence Allowance equal 5 “Convalescence Days” the first four year of employment, 6 “Convalescence Days” days for the second and third years, 7 “Convalescence Days” days for the fourth to the tenth year, 8 “Convalescence Days” days for the eleventh to the fifteenth year, 9 “Convalescence Days” days for the sixteenth year to the nineteenth year and 10 “Convalescence Days” days for each year commencing on the twentieth year of employment.

3.6.                 Sick Pay Law, 1976. The purpose of the law is to enable the employee to leave in dignity while he/she is unable to work due to illness or injury. The employee is not entitled to any payment for the first day of absence due to illness, but is entitled to 50% of his/her regular daily salary for the next two days and 100% of his/her regular daily salary for each day commencing on the fourth day.

3.6.1.                    Each employee is entitled to maximum 18 sick days per annum (1.5 sick days per month) and may accrue up to 90 days in the aggregate.

3.6.2.                     The Sick Pay Law (Absence Due to Illness of a Child), 1993 and the Sick Pay Law (Absence Due to Parent’s Illness), 1993 entitle the employee to be absent from work for a period of up to 6 days per year (out of his/her accrued sick days) in case of illness of his/her parents or children.

3.7.                 Women Employment Law, 1954. The purpose of this law is to regulate women’s employment. The law protects pregnant women from termination of their employment during their pregnancy and for 60 days thereafter and entitles them to a 14 weeks maternity leave (and an option to extend it for additional period without pay). The law also entitles women to be absent for an hour a day during a period of four months following the birth of their child. The law forbids the employment of pregnant women in overtime.

3.8.                 The Freed Soldiers (Return to Work) Law, 1949. Under this law an employer may not terminate the employment of an employee because of his army reserve duty, its extent or frequency. The employer can not terminate the employment because of an expected army reserve duty of its employee or due to the fact that his employee was summon for duty.

3.9.                 National Security Law (Integrated Version), 1995. An employer must deduct from the salaries of its employees and pay to the National Security Institute (“Bituach Leumi”) the National Security fees and Health Insurance fees protecting the employee and providing him/her with basic health insurance with one of the 4 sick funds in Israel, a salary during periods of unemployment, disability, pregnancy, army reserve duties, retirement payments and against cases of insolvency of employers.

3.10.               Advance Notice for Termination Law, 2001. Under this law, employers and employees must provide an advanced notice to the other party in case of termination of employment or resignation. The advance period is calculated as follows: 1 day for each of the first six months of employment, 2.5 days in advance for each of the seventh to twelfth months of employment and 30 days after expiration of the first year of employment. The employer may elect to pay the employee an amount equal to the salary in such period and relieve the employee from his/her duty to work during such period.

3.11.                Notice to the Employee Law (Employment Terms), 2002. under this law an employer must provide the employee, within 30 days from the commencement of employment, a written notice specifying the general terms of employment of the employee.

4.               Hearing Before Termination of Employment.

In accordance with Israeli Labor Courts’ rulings, before termination of employment of an employee, the employer must perform a hearing, under the following principles:

4.1.                 The employer should notify the employee in writing about the intention to terminate him/her.

4.2.                  The notice should be given few days in advance. The notice should specify the reasons for the proposed termination.

4.3.                 The purpose of the notice is to give the employee the chance to prepare for the hearing.

4.4.                 The employee should have access to all supporting documentation and information underlying the proposed termination and hearing.

4.5.                 The employee may be accompanied/represented by a lawyer or another person in the hearing.

4.6.                 Detailed minutes of the hearing should be prepared and the employee should be provided with a copy thereto.

4.7.                 The most important rule: the hearing should be made “in good faith and with an “open mind”” (“Nefesh Hafetsa” in Hebrew). Employee’s arguments should be considered carefully and with open mind. The decisions should be based on professional and relevant considerations. 

4.8.                 In some circumstances, failure to carry out the above could result in reinstatement and/or significant compensation payable to the employee.

5.               Collective Agreements: The parties to a Collective Agreement are employees’ union/organizations and employers’ organizations. Under the Collective Agreement Law, 1957, a Specific Collective Agreement is intended to regulate working conditions in a particular factory/employer and a General Collective Agreement regulates the working conditions for all employers and employees in a certain field of employment. A Collective Agreement is deemed to include terms and conditions which are supplementary to the rights of the employee set forth in the employment laws and can not derogate therefrom. Similar to the protective laws, employees can not waive their rights under a Collective Agreement. Whenever an Expansion Order (“Zav Harhava”) is issued by the Minister of Work and Welfare, with respect to a certain right or provision in a collective agreement, such right/provision governs the employment of all employees working for employers which are subject to the expansion order.

6.               Anti Competition Restrictions. This issue was raised and discussed in several Labor Court and Supreme Court rulings. The leading cases are Civil Appeal (Supreme Court Jerusalem) 6601/96 AES Systems Inc. v. Moshe Sa’ar and Labor Appeal 164/99 (National Labor Court) Dan Froomer and Checkpoint Technologies v. Rad-Guard Ltd. In both cases it was held that an anti-competition provision inserted in an employment agreement can be cancelled and annulled by a court in case it contradicts the public policy. An anti-competition provision will be enforced only if the limitation on employment is reasonable and only if there is a “legitimate interest” of the employer (commercial secrets, customers’ lists, business plans, etc.) that such provision aims to protect. Employers can not request the enforcement of an anti-competition provision if there is no such legitimate interest to protect and where the anti-competition restriction merely prevents the employee from utilizing his/her general working skills and expertise.

 

7.               Employment during Emergency Period/War. Israeli Labor Courts ruled that a war or an emergency period does cause the frustration of an employment agreement, unless otherwise stipulated in the employment agreement. Therefore, employers wishing to shutdown their business must continue and pay their employees’ salary during such period. However, if there is a situation where the Israeli governmental authorities order a shutdown of factories and working places, and request that employees will remain in their homes, the employment relationships/agreements are suspended and frustrated and there is no duty for the employer to continue the payment of the salaries of its employees.