Blog / Corporate
The crowdfunding model enables the general public investment opportunities that were previously reserved only for sophisticated or institutional investors. In this article we examine the Israeli and American models and why the Israeli legislators should find ways to make the crowdfunding channel more attractive, for both investors and companies seeking funding.
Eight Basic Terms Relating to Antitrust and Competition
March 13, 2019 / by Sagi Gross
March 13, 2019 / by Sagi Gross
When reaching business decisions, nearly every manager must consider issues relating to restrictive trade practices. Click to read basic terms that every business should know about the antitrust law.
Warranty & Indemnity (W&I) Insurance – It’s All in the Name
October 25, 2018 / by Ariella Dreyfuss
October 25, 2018 / by Ariella Dreyfuss
Sellers in an M&A transaction are required to make certain statements about the company they are selling. If these statements are not true, the buyer can claim against the seller for any damages it incurs as a result of the inaccuracies. W&I insurance can cover the cost (or part of the cost) of the buyer’s damages.
It is not common knowledge that officers of companies who customarily disseminate advertising messages in a manner that constitutes a violation of the Israeli Anti-Spam Law are personally exposed to lawsuits, even to class actions at millions of shekels.
Israel’s new Privacy Protection (Information Security) Regulations came into effect this past May. These regulations constitute a significant reform and turning point in the field of personal information security in Israel and in protecting the privacy of Israeli citizens.
Recently, the Ministry of Communications ordered Bezeq to begin implementing a “wholesale market” and selling its competitors access to telephony infrastructure at a regulated price. The objective of this directive is to expand competition in the fixed-line telephone market and to establish a separation between the infrastructure market and the communications services being purchased by consumers.
Despite the many internal and external challenges unique to Israel, the country has successfully transformed itself into a powerhouse of technological innovation. Israel has become an excellent destination for international business, boasting a strong local currency, an active local economy, and robust export industries.
Asset-Backed Digital Currencies: Advantages and Challenges
July 1, 2018 / by Zvi Gabbay
July 1, 2018 / by Zvi Gabbay
The race to develop a new, unique and reliable digital currency with low volatility has prompted entrepreneurs to scale the link of blockchain technology and mainstream investments, thus creating a new wave of cryptocurrencies backed by commodities or assets.
New article by Advs. Asaf Shalev and Daniel Kleinman on founding an Israeli non-profit organization (of the type included in the “third sector”).
GDPR – Why Should We Care about It?
May 28, 2018 / by Barnea
May 28, 2018 / by Barnea
The EU’s General Data Protection Regulation is designed to help individuals better control their personal data. As this regulation applies also to those that offer products or services in the EU, major websites have begun updating their privacy policies to comply. Doing so is important for a number of reasons.
On June 1, 2018, another central part of the regulatory reforms under the Control of Financial Services Law (Regulated Financial Services) will come in effect. This part addresses the activities of financial asset service providers.
It goes without saying that technological advancement has come with a slew of risks attached. This is particularly true where financial technology (fintech) is concerned. With large-scale data breaches occurring at regular intervals and with greater frequency, fintech and data privacy are being put to the test.
The First 48 Hours – How to Respond to a Data Breach
March 15, 2018 / by Yuval Lazi
March 15, 2018 / by Yuval Lazi
If you’ve discovered that your company has been hacked, the first 48 hours are absolutely critical. Knowing how to actively marginalize further harm and eliminate cybersecurity vulnerability can be dealt with in the first 48 hours with an incident response plan.
Fintech combines for the first time the worlds of financial services and technology, as banks and insurance companies serve as fintech’s main playing fields. As such, both sectors must become more efficient and acquire the technological solutions that will help them fulfill their roles. Fintech promises to bring innovation to existing players, but also threatens to disrupt conservative industries and replace them with new models and players. The connection between the two components of fintech has proved challenging, in light of the fundamental differences in the characters of these two components. Technological solutions are provided by startup companies that, by nature, are small organizations driven by the need to work quickly and efficiently, due to the short time-to-market and the requirement to sell and recruit capital. On the other hand, the MVPs in the financial services sector are large, hierarchic organizations characterized by sluggish bureaucracy that negates rapid decision-making and agility in implementing innovative solutions. Regulation and Fintech Fintech companies operate in a regulation-intensive environment, and this is the first main challenge, because regulations essentially define their ventures and their feasibility. On the other hand, in most of the technological fields that startup companies engage in, the challenges are innovation, competition, and the business model. Regulation is less of a challenge, if one at all. The dominant role of regulation in the fintech sector is unique. Therefore, gaining in-depth knowledge of the synergies between regulation and fintech is critical during any analysis of a fintech venture’s prospects. And the venture must know how to maintain compliance with the various regulations in order to succeed. By their very nature, financial services are subject to a wide range of meticulous regulations. The types of regulations that affect fintech include banking regulations, insurance regulations, and the prevention of money laundering, as well as privacy, consumer, and securities regulations. The various regulatory categories in the financial services sector follow and are adapted to the structure of the traditional market, with each sector being closely governed and controlled by its own set of regulations and regulatory authority. In many instances, fintech strives to resolve the problems created by existing regulations, but it also must keep in mind that its operations are subject to those same regulatory systems. Already at the stage of defining the product and service a fintech venture wishes to launch on the market, it must familiarize itself with the relevant regulations. It then must find solutions that comply with the regulatory conditions, as well as that enable it to obtain approval from the relevant regulatory authority. There are numerous dimensions to gaining familiarity with the regulations. First of all, similarly to every startup company, fintech ventures are also striving to go multinational and operate in a variety of countries. The problem is that regulations in one country are different and sometimes contradict the regulations in another country. The differences are in language, laws, and even approach. This means that the learning and compliance process is multi-dimensional and, in essence, an unending task. If this were not enough, another problem is that regulations are drafted based on the structure of the conservative market—banking regulations for banks, insurance regulations for insurance companies, and so forth. On the other hand, in many instances, fintech ventures disrupt the structure of the traditional market. This disruption, by its very nature, creates new connections and approaches. As a result, fintech companies find themselves in a minefield of differing, overlapping, and contradictory regulations. However, the regulatory challenge is not just difficult, but also a main foundation for creating value. Any fintech venture that has already become well-versed in the subject, and has adjusted its solution to the various regulations, creates a real advantage over existing and new competitors. The entry barrier to this sector is not only the development stage, but rather the strength of the regulatory solution. In essence, regulatory knowledge actually becomes intellectual property. For example, the banking sector is characterized as a regulation-intensive sector. The banking supervisor’s regulations relate to various aspects of banking corporations’ operations, including licensing, corporate governance, various regulations relating to capital adequacy and banks’ capacity to assume various risks, consumer regulations relating to banks’ relations with their customers, the prohibition of money laundering, and more. Any fintech venture seeking to interface with the banking system, to provide it services or replace some of the banks’ roles, must be well-versed in the relevant local regulations and ensure its compliance with them. Clearly, the greater the challenge, the greater the potential. Privacy and Fintech During the coming year, new and enhanced privacy-protection and information-security regulation systems are expected to come into effect throughout the world. These are headed by the European GDPR, which deals with privacy protection and will take effect in May 2018. As a result of these processes, the issues of privacy and database protection against cyber risks will have an impact and a presence on the technological agenda in the coming years. Fintech ventures create solutions that make use of sensitive personal information. As such, the ventures are engaging in fields that are exposed to privacy and database issues. Basically, all financial services involve the collection and saving of sensitive personal information. Electronic mail addresses, phone numbers, personal details, financial information, marital status, special identifying details, workplace, family members, and more are collected as part of the process of getting to know the customer in order to provide him with services, advice, and an identity. All this sensitive information has been collected, saved, stored, processed, and transferred within the companies' technological systems. But these systems are also exposed to attacks and challenges from all sides. The exposures, in instances of intrusions, are not limited to sanctions that may be imposed on a company by the regulatory authorities, but also include a potential mortal blow to the company’s reputation and civil suits being filed by individuals on the grounds of infringement of privacy. In light of this, the fintech sector must adopt high standards of privacy protection and security. Fintech companies are required to create privacy-protection and information-security regulations for the enormous volume of information they collect, at standards on par with the customary international practices. Source: barlaw.co.il
EU Privacy – Which Jurisdiction Applies?
November 5, 2017 / by Barnea
November 5, 2017 / by Barnea
In an opinion issued to the European Court of Justice, the Advocate General of the Court stated that according to current legislation, any data protection authority in the European Union can take action against a breach of the privacy legislation enforced by that authority, even if the entity alleged to have contravened the legislation is located in another Member State. The opinion was given in connection with a dispute about Facebook's alleged breach of German privacy legislation. Facebook argued that since its headquarters in Ireland are responsible for its data processing activities in the European Union, Germany's privacy authorities lack jurisdiction over its actions and only the Irish data protection authorities have the power to review its activities. While the opinions of the General Counsel are not binding on the European Court of Justice, the Court tends to follow them in the majority of cases. This opinion, if indeed followed by the European Court of Justice, is of significant importance, as it could lead to a barrage of enforcement measures against Facebook and similar structured internet multinationals. However, it should be noted, Europe's new General Data Protection Regulation (GDPR) has instituted the concept of the lead supervisory authority in the jurisdiction of the data controller or data processor's main establishment, in an attempt to limit the need to deal with such a multitude of data protection authorities across the European Union; although it should be noted that the GDPR does not block entirely the other authorities. Source: barlaw.co.il
September 19, 2017 / by Daniel Israeli
September 19, 2017 / by Daniel Israeli
It is nearly impossible to keep track of the developments in the cryptocurrency and ICO arena, with new digital currencies being launched and new ICOs records frequently being broken. Recently, the record was broken once again, when Filecoin’s ICO raised about USD 200 million in one hour (!), after having raised about USD 52 million from investment funds and private investors in the presale ahead of the ICO. So what is an ICO? ICO is the abbreviation of Initial Coin Offering, a term inspired by the capital market term IPO (Initial Public Offering). This is when a company recruits debt or capital by publishing a prospectus offering of its securities to the public for the first time. A prospectus is a profound legal and accounting document that furnishes information about the company, its management, its businesses, and its financial position. Once a company’s securities are held by the public, it becomes a public company. In an ICO, companies that are developing a technology or an innovative venture, which, for the most part, is based on blockchain technology, recruit capital through the issuing of digital coins. The hope is that the coins' value will appreciate when the venture succeeds and will maximize profits for the coin buyers in the ICO. To date, digital coins and ICOs are unregulated in most countries. However, the US Securities Exchange Commission (SEC), the Central Bank of Singapore (MAS), the Canadian Securities Authority (CSA), and the Israel Securities Authority (ISA) have all already announced they are considering applying in some cases the existing securities regulations also to digital coins and ICOs (such regulations include restrictions in public offerings, prospectus and reporting requirements, etc.) Despite the lack of regulation, as well as the lack of uniformity with regard to the quality of the information being disclosed, the practice is that when launching a new token or actual digital coin and an ICO, the company publishes a document on the ICO’s website that furnishes information about the venture or the technology, pertinent financial data, and information about the offering itself. This document is called a ‘Whitepaper’. It is reasonable to assume that once leading countries enact regulations for digital currencies, including a binding standard for whitepapers, this market will become more regulated. Following are some helpful tips for new ventures still in the pre-ICO stage and who want to make their whitepapers accessible to potential investors. Mode of presentation of the information When an investor considers whether it is worthwhile to participate in an ICO, he wants to know why purchasing coins in the ICO will be a golden opportunity for him and what his resulting profit will be. Unfortunately, companies tend to focus on presenting the technology or the venture in their whitepapers, and they do not attribute enough importance to presenting the financial-economic data. But such data are equally important to potential investors, especially since financial data demonstrate the venture’s potential market value. It may will add value if the whitepaper will include financial data about the company, information about the new coin (or token) to be issued, and information about the technology. Such information should be substantiated by data from reliable sources. It is also advisable and helpful to use infographics—graphs, simulations, and comparative data—that encapsulate the highlights of the ICO clearly and succinctly. Structure of an ICO An ICO whitepaper should explain how and when investors can participate in the ICO, and in which currencies the investor can purchase the company’s new token (if only through digital coins, so which digital coins; and whether it is also possible to use FIAT money. Notwithstanding the regulatory uncertainty surrounding digital currencies, nearly every developed country imposes anti-money-laundering laws and KYC (know your client) provisions. Therefore, the whitepaper should also inform investors about the identification processes they will have to undergo during the ICO and the required mode of payment. Legal aspects As stated, most countries have not yet enacted digital currencies regulations that also regulate the mode of performance of an ICO. Consequently, purchasing digital coins and participating in an ICO are still highly risky and thus are not suitable for everyone. Therefore, it is critical to ensure the whitepaper accurately presents the venture and the structure of the ICO. It is recommended that the whitepaper disclose the risk factors unique to the market in which the company operates (in addition to the risks inherent in the digital currencies arena, the lack of regulations, and the absence of any promise that the venture’s success will lead to a rise in the value of the issued coin). In light of the above, and bearing in mind today’s regulatory uncertainty, ventures considering fundraising through digital currencies should act with all due care so that they do not find themselves in violation of securities laws in countries where the ICO is being launched. The applicable law in the territories relevant to the ICO should be meticulously examined. Source: barlaw.co.il
“How did the board approve this?” Headlines like this pop up each time it is announced the Israel Securities Authority is investigating a public company’s transactions with its controlling shareholder, such as the latest allegations of deals between Bezeq and its controlling shareholder. But the real question that should be asked is, "Was the board given the right tools to perform its work?" A Board's Authorities The Companies Law elaborates extensively on the authorities of a board of directors. These authorities may be divided into supervisory authorities and business development authorities. Supervisory authorities empower the board to oversee the general manager and his actions. Some examples are the examination of the company’s financial position and the preparation of financial statements, the approval of the distribution of dividends, and the approval of transactions with related parties. Business development authorities are delegated to the board of directors in order for it to forge a strategy for the company and to guide its policies. Such authorities include defining action plans for the company, appointing and dismissing the general manager, formulating a remuneration policy, and issuing bonds and allotting securities. A Board’s Work In addition to a board of director's authorities, the Companies Law prescribes procedural rules governing the work of a board of directors, which include, inter alia, provisions regarding the chairman of the board, the convening and conducting of board meetings, voting by the board, and the procedure for approving material transactions. As stated, the Companies Law provides the board with technical operating rules, but it does not provide the board with high-quality, fundamental rules to guide it in the exercise of its power. This omission becomes even more glaring when at issue are complex matters, such as controlling shareholder transactions and the distribution of dividends. Over the years, this void has been filled by court rulings and guidelines, as well as via position statements issued by the Israel Securities Authority. Both constitute normative sources of guidance to boards of directors on fundamental issues pertaining to how the board’s work should be performed. While the instructions from the courts and the ISA are many and diverse, one material rule, which recently received official recognition by the Supreme Court, and which encompasses a number of material rules for exercising authority, overshadows the rest—the Business Judgment Rule. The Business Judgment Rule The Business Judgment Rule prescribes when the court is not to intervene in business decisions made by a board of directors. Namely, the court is not to intervene in board resolutions passed with bona fides, without any conflicts of interest, and in an informed way. According to the principles of this rule, when the board exercises its powers, it must examine and consider, inter alia, these issues: Conflicts of interest – Does the approval of a particular transaction affect, or is highly likely to affect, the board or any of its members? The board must ascertain whether the transaction promotes solely the company’s best interests or if it benefits other interested parties in the company. In-depth deliberation – The board must hold a fundamental and practical deliberation of the proposed resolution on the agenda. It must perform a thorough examination of the transaction, ask questions, act as devil’s advocate, propose revisions to the terms of the transaction or a competitive proceeding, and examine other alternatives. Sufficient background material – In order to hold an in-depth deliberation, the board must make sure it has been provided with the full factual foundation as well as with all the relevant background documents and data it needs, such as valuations and economic forecasts. Documentation – Minutes of board meetings must be recorded. The objective of the minutes is not to constitute a full transcript of what was said during the board meeting, but rather to document the key statements made and to show readers that an in-depth deliberation indeed took place. In summary, the work of a board of directors entails risks. The Companies Law prescribes procedural rules for the work of a board of directors, but only by integrating the material rules prescribed outside the Companies Law does the board possess the complete set of rules it needs to cope with the risks posed by its work. Source: barlaw.co.il
Insolvency proceedings are an integral part of business-commercial activities, in circumstances whereby a person or corporation might need to institute proceedings to rehabilitate its business activities or even to liquidate the company. Insolvency reflects a factual situation in which a debtor (person or corporation) encounters economic and cash flow difficulties to the extent that the debtor is incapable of paying its debts to creditors on time. Insolvency proceedings seek to implement a fair and proper distribution of the remaining resources of the debtor (person or corporation) among the various creditors; during insolvency proceedings, the court considers the creditors’ different interests, including maximizing the disposition of the debtor’s resources; ensuring proper employment of the business’ employees; minimizing the burden on the public taxpayers; taking care of the business’ customers; taking care of suppliers that are dependent upon the business (particularly in the instance of rehabilitation and recovery); and providing assistance to shareholders in small and medium-sized businesses. During insolvency proceedings, a differentiation is made between debtors who are private individuals and debtors that are corporations (including companies). When at issue is a private individual, the court considers critical issues, such as whether lawsuits have been filed against the debtor (including execution proceedings) and whether additional debts exist beyond the debts that are the subject of the legal proceedings. Thus for example: in the instance whereby a number of execution proceedings have been filed against a debtor, the debtor may arrive at an arrangement whereby the cases are consolidated and his debt repayments are scheduled in installments but, naturally, the debt scheduling does not take into account any debts not covered by the execution proceedings. Therefore, when at issue is a debtor who is a private individual desiring to arrange all of his debts, he must conduct negotiations with his creditors and, subsequently, he must file a motion with the court petitioning for approval of a compromise or settlement proposal with his creditors according to the provisions prescribed in the Bankruptcy Ordinance [New Version], 5740 – 1980. When at issue is a company that is facing insolvency due to economic and cash flow difficulties, it has two options: Stay of proceedings pending the filing disposition of a motion and rehabilitation proceedings A company that faces insolvency may petition the court to enable it to institute rehabilitation and recovery proceedings by way of preparing a recovery plan and debt rescheduling (in the manner prescribed in section 350 of the Companies Law, 5759 – 1999). A motion for business rehabilitation also depends upon a motion for a stay of proceedings, the purpose of which is to prevent creditors from filing lawsuits against the company and to freeze any legal proceeding filed against the company until the motion filing date, which gives the company time to implement its rehabilitation plan. The court will issue a stay of proceedings order only if it is convinced that there is a reasonable chance that implementing the rehabilitation plan will lead to the financial recovery of the company; a stay of proceedings order is usually limited to a timeframe ranging between a few weeks and nine months. The court also has the power to appoint a trustee or special administrator to oversee the implementation of the company’s recovery plan during the period of the stay of proceedings. The trustee’s powers are defined by the court, depending upon the circumstances that led to the company’s insolvency .Such powers often include management of the company during the period of the stay of proceedings, the waiving of onerous contracts, if necessary, and the conducting of an investigation of the circumstances that led to the company’s insolvency. Liquidation of the company There are instances whereby a company is facing insolvency, but any rehabilitation or recovery plan would be fruitless, or, alternatively, if there is no longer any economic justification for continuing its operation. In instances whereby at issue is an insolvent company for which there is no justification or plausible way to lead to its recovery, interested parties, including creditors and shareholders, may file motions for liquidation proceedings against the company. A liquidation proceeding is a legal proceeding that basically dissolves the existence of the legal entity of the company, first, by emptying the company of all of its economic content, and later, dissolving its existence as a legal entity. The Companies Law recognizes three types of liquidation proceedings: voluntary liquidation, voluntary liquidation under court supervision and compulsory liquidation by the court. Any funds obtained as a result of the disposal of the company’s assets will first be used to repay the company’s debts to its creditors according to the disposition rules prescribed by law (e.g the rights of secured creditors), and according to lawsuits filed by creditors. Insofar as any money remains after all creditors have been repaid, the surplus is distributed among the shareholders and equity investors of the company. Source: barlaw.co.il
Distributors, agents, resellers and OEM partners all share the same commercial function of selling goods to end users. Thus, although there are significant differences between the legal statuses of each of these players, this article below treats all of them collectively as "distributors". Appointing a distributor involves significant inherent risks. The drafting of the distribution agreement may help in mitigating these risks and realizing the potential benefit of your relationship. While formulating distribution agreements you should pay special attention to the following key issues: Choose an Effective Distributor:Choosing the right entity as the distributor of your products or services is the most important point. You may appoint a distributor you happened to come across, or that appears impressive. However, you have to remember that you made the appointment so that your products will be distributed and sold. The concern is that the distributor will not act upon the appointment, and the agreement that you signed will remain “on the shelf". These situations get complicated when the distributor is granted with long term exclusivity over a territory. In such event, the concern is not only that the distributor will do nothing, but that you will not be able to appoint other, better, distributor for the same territory. Specify the Distributed Products: a distributor may be excellent for the distribution a certain product, but unsuitable to distribute other products. Therefore, it is advisable that you define the subject matter of the agreement carefully and provide an explicit reference to issues such as upgraded or updated products. For example, when you designate certain software as the products to be sold under the agreement, one could consider newer versions of the software as being covered by the exclusive rights of the distributor and another may consider them as being beyond the scope of the exclusivity (and there is no doubt as to who is the one and who is the other). Consider the Territorial Coverage: the territorial scope of your distribution agreement is not just a question of geography. For example, if exclusive rights are given for distribution of a certain product in the East Coast of the USA, it should be made clear that such rights are not infringed if the same product may enter the territory through an OEM partner, embedded in another product. You should specify precisely all the possible channels through which the product may penetrate the market and thus protect yourself from future disputes with your distributor. Include the Distributor’s Commitments: suppose that you and your distributor have set sales targets or even established minimum purchase quantities, failing which you are entitled to terminate the exclusivity or the entire agreement. In the real world, you do not get to impose these sanctions so quickly. They are often subject to long grace periods, to further conditions or to both, so that basically, they give you no real guarantee. With that being said, it is very important that you perform a due diligence on your distributor and receive a detailed business plan. Such business plan should include, at least, commitments regarding marketing expenditure and details of the human resources to be assigned to the distribution. If you add to this a proper incentive for meeting sales targets, you will acquire some confidence that you have a suitable, capable and motivated distributor in place. Beware of Exclusivity: exclusivity can be unilateral, that is, the distributor is your sole distribution channel in the market, but he may sell competing products. Similarly, you may supply your product to others, but the distributor may not sell competitors’ products. In reality, these one-sided arrangements usually do not work so that it is more advisable to conclude bilateral arrangements. In this regard, it is important to note that in many countries, exclusivity arrangements are considered anti-competitive and thus, in some cases, unlawful. Thus, it is highly advisable that you consult with an anti-trust specialist lawyer to make sure that the arrangement that you are about to enter into is not illegal. Set the Term of the Agreement: flexibility regarding termination of the distribution agreement is crucial. Take for example a case where your company is facing an acquisition and the acquirer conditions the purchase on the termination of the distribution agreement. In such event your exit is dependent on your distributor's consent to release you from the agreement. This issue also arises where "change-of-control" provisions are included, whereby your distributor may terminate the agreement upon a change of control in your entity. Thus, if your buyer's proposal depends on the continuation of your relationship with the distributor, you are at his mercy. Therefore, set definitive and short initial periods that can be extended repeatedly by mutual consent. In this way, you may not be free to end the relationship whenever you want to, but you will always be able to do so within a specified period of time. Deal with the Post-Termination Period: questions of no less importance can arise in relation to the post-termination period. Among the things you must consider are return or buy-back of remaining products, non-competition and confidentiality undertakings, commissions for transactions that are close to being concluded, continued support for the supplied products and more. Opt for Home-court Governing Law: in some cases, well defined “choice of law” provisions may impact upon the probability of disputes between the parties leading to actual litigation. In many cases, when you have a local jurisdiction clause in your agreement with a foreign distributor, your distributor will be hesitant to initiate proceedings against you. Another way to avoid proceedings is to set an expensive arbitration arrangement as the sole and exclusive procedure for settlement of disputes. In this way, the party with the greater economic strength sometimes assures for himself a sound and peaceful relationship. Remember your Intellectual Property: when you appoint a distributor, you also grant a license to use your intellectual property for purposes of the distribution. You are basically giving him access to your most sensitive assets. He is authorized to use your domain name, your logo and your trademarks. If these issues are not specifically addressed in the agreement, this may lead to situations where your distributor takes possession of your intellectual property and actually blocks you from the territory. Limit Liability: in most jurisdictions, the liability for damages caused by the use of the products lies with the manufacturer. Some agreements attempt to shift this liability to the distributor, but when tested by the courts they will probably not hold. Therefore, the correct way to address the risk of liability is to formulate an effective indemnification mechanism that will limit the scope of your liability. Such mechanism should limit your liability both in terms of amount and time and be backed up by adequate insurance coverage. Originally published on the "ChannelSmart website”
The purpose of the Israeli Restrictive Trade Practices Law is to encourage and maintain competition in the country. The law does not explicitly relate to foreign corporations and businessmen and, therefore, its ex-territorial application is becoming more and more critical. The Israeli Antitrust Commissioner has issued a number of rulings stating that the law should also apply to operations that are not entirely implemented within Israel, but whose outcomes adversely affect competition in Israel; for example, a restrictive arrangement organized between a foreign company and an Israeli company that is liable to adversely affect competition in the relevant local market. This means that the fact that one of the parties to a restrictive arrangement is a foreign company, does not, per se, allow it to evade application of the Israeli law. Therefore, a restrictive arrangement organized between an Israeli corporation and a foreign corporation, which results in significant harm to the competition in the Israeli market, is subject to the Israeli Restrictive Trade Practices Law. Israel is not a pioneer in this regard. The customary position in international law regarding the ex-territorial application of antitrust law is that these laws may be imposed on a business being conducted outside of a country’s borders only when there is clear evidence of linkage between that business and that country’s local market. And indeed, many countries around the world are enforcing the local law against international violations of competition laws, primarily cartel violations. Today, most cross-border transactions contain a spectrum of stipulations, such as: exclusivity, noncompetition, most favored nation (MFN), geographic market allocations, goal discounts, minimum quantities, price coordination, retail price maintenance (RPM) and more. In many instances, stipulations of this kind are legitimate for the purpose of ensuring stable business operations and constitute a precondition to the parties’ willingness to invest their money and efforts. However, in some instances, such stipulations may reach the point of being deemed a restrictive arrangement that violates provisions of the law. If an Israeli corporation and a foreign corporation organize a restrictive arrangement in violation of the law, this is liable to lead to grave ramifications. Even in instances when all of the parties to the restrictive arrangement are not Israelis, but the restrictive arrangement adversely affects the local competition, the parties are liable to find themselves exposed to Israeli sanctions on a number of levels: At the civil level – the Antitrust Commissioner has the power to rule that a particular activity constitutes a restrictive trade practice. A ruling from the Commissioner to this effect may be used for the purposes of private enforcement of the law through a class action lawsuit or any other tort claim. Furthermore, the organization of a restrictive arrangement is liable to result in the nullification of all or a portion of the agreement between the parties to the restrictive arrangement. Recently, the Israeli court ruled that in the instance whereby the restrictive trade stipulations cannot be isolated from the rest of the agreement, the entire agreement shall be nullified. At the administrative level – the Antitrust Commissioner is authorized to impose financial sanctions in respect of various violations of the provisions of the law. The Commissioner has the discretion to decide the precise sum of the financial sanction, while the law prescribes the maximum, coupled with an open-ended list of guidelines for imposing sanctions. At the criminal level – a restrictive arrangement organized outside of Israel’s borders that could prevent or constrain the competition within its borders, constitutes a local violation pursuant to the Israeli penal code and therefore, is subject to the authority of the court in Israel. A conviction for an unlawful restrictive arrangement is liable to result in a fine or even incarceration. Notwithstanding that stated, the Israeli Restrictive Trade Practices Law regulates various mechanisms designed to serve as escape routes in instances whereby the extent of the harm to the competition does not justify the imposition of criminal sanctions. However, the Israeli legislature preferred mechanisms for advance prevention over retroactively issued exemptions. Consequently, anyone who does not succeed in operating using the legal mechanisms still has an escape route, but must take into account that this route is rarely allowed. In light of the rising trend of imposing stiffer punishments for violations of the Restrictive Trade Practices Law, foreign businessmen are advised to plan their strategies well and to consult with attorneys specializing in Israeli antitrust laws, before they engage in a commercial agreement with an Israeli entity. Barnea & Co. provides legal advisory services to Israeli and foreign companies inter alia, in relation to restrictive trade practices, including restrictive arrangements, and represents clients before the Antitrust Commissioner, if requested. You are invited to contact us to obtain legal advice in this regard and in relation to other matters. Source: barlaw.co.il
Less Remuneration, More Responsibility
November 23, 2016 / by Refael Kriman
November 23, 2016 / by Refael Kriman
The issue of officers’ responsibility in general, and of directors in particular, is one of the key issues addressed in companies and securities laws in Israel. The subject has been deliberated, analyzed and gradually expanded over the years and, without doubt, onerous and extensive responsibility is imposed on directors in the current legal environment. Over the years, a clear trend has developed of legislators and courts expanding the responsibilities of corporate directors, which developed due to the abundance of legislation, regulatory bodies and activist court rulings. Directors in Israel have fiduciary duties, a duty of care and a duty of disclosure towards the corporation, but this is merely the minimum entry requirement for the formerly coveted role. Coupled with these obligations, we are seeing a substantial expansion of directors’ obligations relating to such issues as: exploiting business opportunities, responsibility over the company’s reports, the collective responsibility of the board of directors, responsibility for board decisions about distributions, and more. Opposite the expansion of these responsibilities, layers of protection for directors have been added since the inception of the Companies Law, which allow companies to release directors from liability, to indemnify and insure their incumbent directors. However, these protections are qualified by various conditions, provide only partial coverage, and the spectrum of circumstances that cannot be insured or for which directors may not be indemnified at all has been steadily growing. A salient point is that the law does not make it compulsory for companies to provide protection for their directors, but rather, only permits companies to grant protection. In other words, directors are obliged, in certain circumstances, to bear the liabilities, but are not guaranteed protection. Recently, an amendment to the Companies Regulations was enacted that slashes in half the sums of the minimum statutory remuneration being provided to outside directors for their participation in board meetings and in board committee meetings. The said reduction applies to corporations whose equity is up to NIS 275 million, the aim being to provide relief to such corporations. Reducing the financial burden imposed on public companies is welcome and necessary, but it is a mixed blessing. We do not believe that the expense item that should be targeted in order to provide relief to companies should, of all expense items, be the statutory remuneration being provided to companies’ directors. Considering the trend towards expanding the directors’ responsibilities we mentioned earlier, this anomaly becomes even more stark. Moreover, it appears that the 50% cut in directors’ remuneration is liable to deal a mortal blow to those corporations who are in desperate need of talented professionals to chart and navigate their business course. It is precisely in those same “small corporations,” where matters being submitted for deliberation and resolution by directors are particularly challenging, considering the company’s tenuous situation, when often a single erroneous business decision can lead to the company’s demise. It would be more logical if precisely these small corporations should be allowed to pay their directors a higher remuneration than other companies with higher equity or, at the very least, to equalize the sums being paid to directors in those companies. The financing in this regard could be in the form of a subsidy of the difference by the Israel Securities Authority or the TASE, similarly to what was done recently with Project Analysis. Such subsidy could help small companies retain high-calibre directors on the one hand, and constitute an additional temptation for new (or existing) small companies to raise money on the Tel Aviv Stock Exchange, which is earnestly seeking new companies. We also point out that, although the reduction of the remuneration relates to a cut in the remuneration to external directors only, the remuneration being paid to them (that is prescribed in the regulations), is customarily used as a benchmark for setting the remuneration for all other directors in the corporation, and it would not be unreasonable to assume that the said amendment will also have broad implications on the limit of the remuneration being paid to “regular” directors of the corporation, and not only to outside directors. Another possible solution, but which requires those involved to “switch gears” – is to grant equity remuneration to directors as an integral part of companies’ remuneration policies. Over the years, the subject of granting equity remuneration has been considered exclusively in connection to active directors (mainly, the chairman of the board). In a period when the legislature (coaxed by the regulatory authorities) is attempting to cut costs on the one hand, and to induce companies to grant remuneration based on long-range targets on the other hand, it appears that the time is ripe to grant equity remuneration to directors (including to outside directors) and not only to officers such as the CEO and subordinates to the CEO. In this way, everybody benefits from the upside if the company succeeds and, if the company fails, its cash flows are not affected. In an age when excessive conservativism is having a paralyzing affect, the granting of equity remuneration would encourage directors to approve “unconventional” transactions with the potential of adding considerable value to the company and to its shareholders, while taking into account the spectrum of considerations relevant to that transaction and maintaining a healthy business appetite. Source: barlaw.co.il
Performing a Legal Due Diligence – Think before You Act
November 16, 2016 / by Ilan Blumenfeld
November 16, 2016 / by Ilan Blumenfeld
We have encountered numerous instances recently whereby investors were about to make an investment without performing a prior legal due diligence examination. There are various reasons put forward by investors for not performing a due diligence examination, such as: the contemplated investment is in a young company, insufficient budget, cost-benefit considerations, the volume of the investment, timetables, long-standing work relations between the investors and the corporation, and the like. As a rule, whenever we encountered a decision to not perform a legal due diligence before investing, the decision turned out to be wrong. Undeniably, every investment involves some risk, but the degree of risk may be mitigated by performing a comprehensive examination of the business being acquired. A legal due diligence process allows the investors to learn about the corporation in various aspects, including: the identities of the corporation’s shareholders; its relations with the banking system; the approvals required from third parties; the corporation’s pledged assets; the corporation’s licenses and the potential impact of the transaction on their validity; its workforce and their employment terms, including exposures relating to the company’s obligations to its employees, both by law and by virtue of the employment agreements with such employees; the corporation’s tax exposures; the structure of the agreements with the corporation’s suppliers, including the degree of risk involved in working with a few material suppliers; the corporation’s customer base and the terms of engagement with them; the corporation’s exposure to past lawsuits; necessary actions in order to protect the corporation’s intellectual property rights, including the registration of patents, trademarks and copyrights; and the like. The outcome of the due diligence examination should have a major impact on the nature of the contemplated transaction, inter alia: on the structure of the transaction (share purchase transaction or asset purchase transaction); on the transaction price; on the representations that will be required of the business being acquired and its owners, on the collateral to be provided to guarantee the investment; on the suspensive conditions to consummation of the transaction; indemnity clauses; the mechanism of the investment and, in the final analysis, on the very decision about whether or not to proceed with the transaction, considering the results of the due diligence examinations. In this context, we further advise that in 2014 the Israel Antitrust Authority ("IAA") published a public statement addressing information disclosures between competitors during the performance of due diligence examinations prior to executing a transaction. According to the IAA statement, the importance of a due diligence examination to the efficient operation of a business on the one hand, and the concern about competition being compromised as a result of a due diligence being performed between competitors, on the other hand, obliges competitors that are conducting due diligence examinations of each other, to carefully and meticulously consider their actions. The main discussion in the IAA’s foregoing statement targets the tension between the prohibition of becoming a party to an unlawful restrictive arrangement, and the need for an adequate factual foundation of knowledge for the purpose of forging a transaction between the competitors. Barnea & Co. has extensive experience performing due diligence examinations, including antitrust aspects. The performance of a legal due diligence examination is a critical component of the investment strategy and plays a decisive role in optimizing your bargaining power during negotiations. Source: barlaw.co.il
Doing Business in Israel: a Nation Friendly to Business Investment
November 7, 2016 / by Simon Jaffa
November 7, 2016 / by Simon Jaffa
Companies, countries, and individuals who are interested in doing business abroad are looking more and more towards Israel. This has not occurred by accident. Israel has devised and implemented national policies to make it a world leader in technology and innovation. The result is a nation friendly to business investment. With the right business and legal guidance, investors are discovering tremendous potential in this small but sophisticated country. Israel's Economic Performance In the last 10 years, Israel's economy has grown 100 percent - more than that of the United States or any other developed nation. This includes a remarkable 13 consecutive years of growth. Further, the International Monetary Fund predicts the country will grow another 3 percent on 2017. This does not mean that the economy in Israel cannot contract, but over time conditions have pointed consistently upward for economic development. Human Capital Similarly, Israel has fostered a workforce highly trained in technology. Compulsory service in the Israel Defense Force steers the brightest young scientific minds into tech training. The top intelligence units in the IDF are known as the best school for entrepreneurship, naturally driving the graduates to leverage their experience and establish successful startup and high-tech companies, upon finishing their military service. An Ecosystem of Innovation Despite its size, Israel ranks high on the list of the best countries for doing business. This ranking emerges particularly as a result of Israel's focus on innovation and start-up business growth. The infusion of venture capital funding has further built up its capabilities, with foreign investments rising about 30 percent per year. The result is a nation honed to push ahead of the pace the rest of the world sets for scientific development. Israel's Regulatory Environment Before you can do business in Israel, you need to take the time to understand the local culture and business environment. Recent changes have made Israel more complicated in areas like taxation and obtaining permits. In many ways, this is a natural by-product of its success; as national economies grow, it is necessary for regulation to become more sophisticated. Israel is experiencing and navigating growing pains, and while its government adapts, its regulatory environment for business will involve some flux. Barnea & Co. has the experience and expertise to guide you through the potential pitfalls to realize the potential Israel offers. Contact us today to learn how we can help you. Source: barlaw.co.il
How Brexit Might Affect the UK’s Environmental and Energy Law
September 13, 2016 / by Asaf Shalev
September 13, 2016 / by Asaf Shalev
The European Union (EU) has driven environmental policy across Europe since its inception in 1992. With the United Kingdom's (UK) referendum of withdrawal from the EU, though, how it responds in its energy and environmental legal and regulatory structure could affect not only the UK, but the European and even the global marketplace. The UK's Energy Needs The UK, under Article 50 of the Lisbon Treaty, has two years to negotiate the terms of its withdrawal. Initially, then, it will still operate under the treaties and laws in place with the EU. Imports accounted for 61% of the UK's overall energy consumption as of 2014, with 71% of its imported natural gas coming from the EU and Norway, in particular. The negotiations will thus need to take into account this current dependence and likely will include some adherence to the EU's standards currently in place. Options include a limited free trade agreement similar to the accord between Canada and the EU (known as the ‘Canadian model’); individual-sectorial, bilateral agreements with the EU (known as the ‘Swiss model’); or retaining membership as a non-member to the European Economic Area (known as the ‘Norwegian model’). Because the UK is one of the largest suppliers of natural gas in the EU, it retains some negotiating power as it seeks the agreement most advantageous to its own energy and economic needs. Impact on Climate and Environmental Concerns The UK has to this point been one of the more ambitious proponents of energy regulation and climate change. Brexit means the role it can play in seeking to regulate carbon emissions on the continent and in the world will diminish. The British approach to emissions testing could include establishing its own independent system, in which it negotiates a tie to the EU system, or some hybrid approach. While the result will not come out immediately, the decisions and treaties put into place could greatly impact the EU energy policies that emerge and, as a result, global environmental policies. The world's approach to environmental regulation currently faces a great deal of uncertainty. Political developments over the next two years will create ripples through the world's energy markets, in terms of costs of doing business and environmental impact the EU and UK create. Source: barlaw.co.il
On March 17th Adv. Micky Barnea delivered a lecture for start-ups and entrepreneurs at the Azrieli College of Engineering, Jerusalem. The event was sponsored by Atobe Accelerator. The lecture dealt with the use of options as a tool to encourage employees and service providers of start-ups. Various issues were discussed, including the differences between shares and options and the differences in the expectations and perspectives of entrepreneurs, investors and employees of a start-up venture. During the lecture Micky explained the basic terms of options (vesting dates, exercise price etc.) and the benefits to the company of adopting a stock option plan. https://www.youtube.com/watch?v=c6vSY5NluhE&feature=youtu.be
"Funding your organization" - a lecture in Hebrew by Micky Barnea given to the program of the Executive U.S. Embassy Alumni. The lecture took place at the Tel Aviv-Yafo Municipality's Center for Young Adults, with the participation of William Grant, Deputy chief of Mission at the US Embassy. https://youtu.be/xosL4R7umnA
Trends In The TMT Industry
December 24, 2015 / by Isaac Hanania
December 24, 2015 / by Isaac Hanania
The Technology, Media & Telecommunications area is changing. We are now seeing new products, new services and innovation at a faster rate than ever before. The Israeli government identifies TMT as one of the most robust areas of the Israeli economy today and it encourages multinational companies to develop their IP within Israel. The government provides tax benefits, funds and grants to companies who develop their IP in Israel, under domestic and international programs, agreements, treaties and collaborations. Programs are directed and funded via the Office of the Chief Scientist (“OCS”). The applicable legislation is the Encouragement of Industrial Research and Development Law. However, there was one aspect of this Law which, in fact, had the effect of discouraging international companies from moving their IP research activities to Israel. The Law restricted the transfer of know-how developed by companies under the program in Israel outside its borders, by setting a redemption fee which was very often undefined, thereby alienating international buyers from a potential investment or M&A. Recent regulatory changes have reformed this contentious issue and it is now legally possible for know-how developed in Israel to be transferred outside of Israel, after receiving the approval of the OCS and the making of the payment of a predetermined transfer fee. Thus, more certainty has been introduced for interested parties. Further reforms were introduced on January 20, 2014, when the Israeli Parliament amended the Patents Act, revising the patent term extension, and in March of 2014, the U.S. Trade Representative's office removed Israel from the agency's watch list for IP violations, which originally had occurred following pressure from the research based international pharmaceutical industry which was competing on the global stage with the local generic drugs based pharmaceutical industry. The “cherry on the cake” in so far as reforms are concerned is that, as of 2014, under Israeli legislation, high-tech companies may pay as little as 9% tax instead of the current 26.5%. This constitutes a very attractive benefit for participating companies. Israel is known to be one of the leaders in the ever-popular and continuously growing 3D printing sector. A new 2015 initiative funded by the OCS aims at using 3D printers designed to print metal components such as titanium for the aerospace industry, dental implants, bone substitutes, and more. This may effectively place Israel at the leadership of a new coming revolution of "self-manufacturing". Legislators will need to quickly adapt to these technological innovations. The major legal issues related to 3D printing not only revolve around intellectual property, but also with safety, product liability and data protection issues. Digital blueprints will most likely be re-created and disseminated in order to print 3D replicas of protected products, or fabricate enhanced creations of existing designs and works of art. Law enforcement will also face new forms of crime involving the use of 3D printing of illegal, regulated or banned products. As for wearable tech, companies which will allow their employees to use such wearables will be faced with issues related to trade secrets, data security and corporate espionage. Strict internal policies and guidelines will need to be put in place. Many companies find themselves having to deal with patent and IP disputes, which of course can be damaging and costly for a company. So, proper planning should precede business activity. It is therefore critical for a company to decide whether to protect its IP with a patent, and if so, where to register the patent. Once it is approved, the patent allows the company to have an advantage in its field of business endeavour. Patent litigation can be very expensive and time consuming. Before filing a patent infringement lawsuit, it is advisable to try to amicably resolve the matter by mediation and reconciliation, no matter where it may be initiated. An experienced, expert lawyer should be retained to represent the aggrieved company. However, if it is not possible to amicably solve the dispute, the company should seek a jurisdiction which is most favourable to it. The jurisdiction is usually determined by the defendant’s domicile, or where the infringement activity takes place, or if the result of the infringement activity will have an effect on a specific territory. As regards Israeli companies, most of the sales and marketing efforts are typically focused in the USA, as would the protection of their IP. In the event of an infringement, it will most likely be litigated in the USA. Sometimes, the infringement may give rise to multi-jurisdictional litigation, thereby requiring claimants to seek favourable judgements capable of being enforced in other jurisdictions. The Israeli telecommunication industry has been a major player in the technology development global arena. WiMAX, VoIP and TDMoIP, are shining examples of Israeli innovation. Currently, the telecom market is rather concentrated and very competitive and opportunities are few. Any new joint venture, acquisition or merger will have to overcome the scrutiny of the Israeli Antitrust Authority and the Ministry of Communication. We should be expecting to see market convergence in the cellular sector with a drop to four operators in the coming years, as well as the continued dominance of the 2 existing TV operators despite the alternatives. As a result of regulatory changes, broadband reform, and intense competition in the market, Israeli companies must seek wider markets abroad. Israeli companies are highly technical, yet they lack international sales distribution channels and marketing capabilities. Successful partnerships with global vendors and service providers lead to better performance, which is the reason why many Israeli companies seek such partnerships outside its borders. Additionally, the rapid digitization of industries has led to the emergence of new telecoms services, such as cloud computing and mobile payment platforms. This has led to a significant change of focus by operators from vertically integrated business models to horizontally integrated business models. The objective is to create value by combining different segments and markets and replicating the features and capabilities of each market to the others. Further, operators will aim to digitize the core of their businesses thereby enhancing customer satisfaction, revenues and cost savings.
A founders’ agreement is the first encounter between entrepreneurs who are embarking on a joint venture to establish a successful start-up company. A founders’ agreement reflects the relationship between the entrepreneurs inter se and between each of them and the joint venture. The importance of this agreement should not be underestimated. This comprehensive agreement, which is tailored to the nature, needs and aspirations of each of the entrepreneurs, and particularly those of the new venture, provides a strong foundation for a healthy and successful company. Frequently, the drafting of a founders’ agreement requires the parties to address topics that many founders fail to address, either due to a lack of experience, a desire to avoid friction, or simply because they are looking at the venture through rose-colored glasses. Meticulous, professional handling of these issues will provide creative solutions which, with the mutual agreement and commitment of the parties, will help navigate the venture along the optimal route to success. Barnea & Co. provides, inter alia, valuable assistance to entrepreneurs and start-up ventures and works with them to draft a founders’ agreement that prepares fertile ground from which the venture can grow and prosper. Micky Barnea is an expert in advising start-up entrepreneurs – watch Micky lecturing on the important issue of Founders’ Agreements:
Employee rights in Israel are regulated by a long list of laws, extension orders and collective bargaining agreements. The perception of labor law is that it is primarily protective of employees vis-à-vis employers, and indeed, a basic rule of law states that employee contracts cannot derogate from rights prescribed in laws, extension orders and collective bargaining agreements, but may only supplement them. In light of this stance and this rule of law, the importance of employee contracts has steadily diminished over the years and today, the sentiment among many employers is that an employee contract is not really meaningful and is merely a declarative document that employers should retain for the sake of good order. Many employers do not make employees customarily sign employment contracts at all, while others make use of an old outdated version of a contract. In fact, contrary to this attitude, an employment contract is exceedingly meaningful and important, if it is drawn up correctly. Employment contracts help employers comply with their statutory obligations The Notices to Employees and to Candidates for Employment Law (Employment Terms and Screening and Hiring Procedures) was enacted in 2002, which obliges every employer to issue written notice to every employee, specifying his or her principal employment terms, but does not require the employee to sign the notice, nor does it require the inclusion of the employee’s obligations. The law defines a list of compulsory details for inclusion in the notice or, alternatively, in the employment contract that constitutes a substitute for this notice. If an employer fails to issue a notice or issues a notice that fails to comply with the law, this constitutes a violation of the law, for which the employer can expect fines and the employee can also sue for compensation as a result. In this instance, a correctly drafted employment contract can help employers comply with their statutory obligations, by including in the contract all of the details required by law, as well as the employee’s warrants and covenants that are not included in the statutory notice. There are additional contract clauses that an employer can include in the contract in order to minimize its exposure, such as overtime clauses or clauses addressing deductions of an employee’s wage due to various debts (such as if an employee’s use of gasoline, telephone, etc., exceeds the defined limit). Employment contracts can be helpful in overcoming statutory restrictions. For example: employers are prohibited from requesting medical information from employees, due to the privacy protection law; however, a clause may be incorporated in the employment contracts in which the employees must warrant that there is no medical reason why they cannot perform their jobs according to the job description. Another example: employers are prohibited from demanding a ‘police certificate of no criminal record’; however, employment contracts enable employers to obtain warrants from their employees that they have not been convicted of particular offenses that relate to the positions for which they are candidates. Another example is the non-competition clause that many employers want to include in employment contracts. It is important to note that, even though the labor courts will not always enforce such a stipulation, if such a stipulation is not included in the employment contract, then the employer cannot file a motion to the labor court that relates to non-competition on the part of an employee. Another topic associated with competition is the issue of intellectual property, a topic that must be regulated in employment contracts, in clauses that define the proprietary rights to the intellectual property, that assure employees’ future cooperation and that regulate the matter of the consideration in respect of the intellectual property, etc. Employment contracts expressly regulate contractual rights Apart from the fact that employee contracts help employers comply with the statutory requirements, there are many employment rights that are purely contractual rights and are not anchored in laws, and therefore, the employment contract is the only possible instrument for regulating them. Therefore, the more explicit and detailed the employment contract is, the fewer are the uncertainties and the chances that disputes will arise over interpretation of these rights by the labor court. Examples of contractual rights not prescribed by law are bonuses, sales commissions, options, company car, telephone, etc. Commissions and bonuses are good examples of rights that labor courts are often petitioned to interpret as a result of the ambiguity of the arrangement or because they were not adequately defined in a contract. Consequently, it is important to regulate these rights clearly and unequivocally in an employment contract, including the eligibility criteria, the calculation methodology, the examination date, the payment date, etc. In Gimelstein vs. Yazamco Ltd., the national labor court (appellate level) was petitioned to deliberate a sales representative’s various bonuses (target-based bonuses and a profitability-based bonus), who also received sales commissions within the scope of his employment contract, and to rule whether or not they constituted a component of his wage. Employment contracts help to assimilate procedures and policies Employment contracts are also ideal tools for employers to define and assimilate procedures and policies on various issues, such as safety, the prevention of sexual harassment, attendance reports, protection of privacy, etc. Employment contracts constitute a convenient instrument for informing employees of the various work procedures without having to produce a thick procedure manual. This will not only add clarity to the work relations, but may also help employers to defend themselves during various legal proceedings, when the employer must prove that it took appropriate action to assimilate policies and took appropriate preventative measures. A prime example of this may be found in the ruling of the national labor court on the matter of an employer’s right to read its employees’ e-mail correspondence: in the Tali Iskof case, the national labor court ruled that in order for an employer to not be deemed as having infringed on its employees’ privacy, the employer must show that it had set a clear policy about the use of e-mails and had informed its employees about this policy. Employment contracts help to reduce employment costs Beyond the importance of an employment contract in terms of managing risks or minimizing legal exposures, it also constitutes an instrument for defining various arrangements that help regulate the cost of a position and reduce employment costs. Some arrangements can reduce the employment cost, provided that they have been expressly and accurately defined in the employment contract drafted by a professional. For example, the arrangement pursuant to Section 14 of the Severance Pay Law, whereby an employer will be exempt from paying supplementary severance pay in the event of a dismissal, will only be valid if it has been correctly worded and incorporated in the employment contract. A bonus will not be considered a wage component only if the bonus plan has been correctly structured, is defined as meritorious and as not constituting a guaranteed wage component. On the other hand, there are components that may be included in the wage, if they have been expressly defined as such in the employment contract, as was the ruling in the Orient Color Photography Industries (1986) Ltd. case on the matter of convalescence pay, travel expenses and holiday pay. In summation, employers benefit from recognizing the importance of employment contracts and their contribution to both the legal aspects of employment relations, and to their labor relations in general, since they provide both parties with certainty and clarity. Employment contracts help employers to assimilate policies and procedures, to enhance their image and reputation, to reduce employment costs without adversely affecting motivation, and also help employers to minimize exposures to civil suits lodged by their employees, as well as exposures to enforcement proceedings by the Ministry of Labor relating to criminal and administrative matters, including in relation to the liability of managers who might be found personally liable for offenses committed by the employer's corporation.