Competition Authority toughens merger disclosures

Adv. Michal Cohen  credit: Avigail Piperno-Beer
Adv. Michal Cohen credit: Avigail Piperno-Beer

The new merger application regulations are part of the plan to tackle excessive concentration in Israel's food market.

New regulations set by the Competition Authority, headed by Adv. Michal Cohen, put a greater reporting burden on companies seeking to merge. The Competition Authority will receive more detailed information on merging companies that is meant to enable it to fulfil one of its main aims, namely boosting competition in the food industry. The regulations are being published shortly after Minister of Finance Avigdor Liberman announced his program for greater competition in that market.

Companies applying to the Competition Authority for approval for a merger will have to provide much more extensive information than is currently required concerning connected parties, even more extensive that is required of public companies reporting to the stock exchange. On the other hand, the turnover threshold triggering the need to report a merger to the Competition Authority will be raised.

The Ministry of Finance's plan focused on curbing the excessive power of the large food manufacturers and importers. One of the measures that Liberman announced was restricting mergers of large food suppliers. The regulations that the Competition Authority has published set out how those restrictions will look.

The new regulations do not directly prevent mergers. They do provide the Competition Authority with information on the basis of which it can decide whether to approve a merger or not. It may also be that companies will think twice before agreeing on a merger, preferring to forego a deal rather than disclose the new and detailed information that the Authority is demanding. This could, however, mean that deals that represent organic growth for small and medium-size businesses will be forestalled if the parties involved fear bureaucratic entanglement.

At a press conference last month, Ministry of Finance Ram Belinkov, commenting on the consequences of mergers of large companies for the cost of living in Israel, said, "There have been mergers in recent years, and that has led to higher prices. We want to make mergers of major food suppliers more difficult, to the point of banning them."

Restricting mergers is the first of a series of measures that Liberman announced to combat the concentration in the food and toiletries market. Among the other measures: a ban on harming parallel imports, restricting distribution agreements of large food manufacturers, examination of restrictions on exclusive import concessions, and abolition of the exemption from cartel rules for agricultural produce.

The new reporting regulations have in fact been sitting in a Competition Authority drawer for three years, but made no progress because of the political instability in Israel. Last December, the Knesset Economic Affairs Committee discussed the regulations in combination with Liberman's agenda for combatting concentration in the food market.

It should be pointed out that the Competition Authority often asks companies on the fast approval track to provide more detailed information after the approval request has been filed, so that in effect the reporting stage is being brought forward.

While teams from the Ministry of Finance and the Competition Authority are planning changes in legislation to give the Authority more effective enforcement tools vis-a-vis companies, the new regulations are designed to give it more comprehensive information in connection with merger applications. In order to focus only on significant mergers, the annual turnover threshold requiring approval for a merger from the Competition Commissioner has been doubled. From now on, approval will be required only if the annual turnover of at least two of the merging companies is at least NIS 20 million, instead of NIS 10 million up to now. The threshold will be updated annually in line with the Consumer Price Index.

A company with a turnover of NIS 20 million is still a small company. Despite this, such companies will now have to meet the extended reporting requirement.

Israel's food and toiletries market is highly concentrated and is dominated by a small number of suppliers, some of which reported pre-tax profit margins in 2020 of up to 16%.

Nevertheless, despite the intention to make life more difficult for the big suppliers, the tightening of the conditions for mergers is actually liable to place obstacles in the paths of the small companies. While large corporations can afford the manpower and the accountants and lawyers to formulate a merger application in the best possible way under the new regulations, small companies are liable to suffer from the extra bureaucracy.

The Competition Authority believes that the new format will actually shorten the time taken to examine mergers and will save its resources, but the businesses themselves are doubtful about this and see the regulations making the process more cumbersome.

Who controls companies will be exposed

Companies exceeding the turnover threshold will, as mentioned, have to disclose and report considerably more information than currently required. For example, details will be required of all holders of rights with a direct or indirect stake of 10% or more in a merging company. In addition, details will be required of the ultimate owner of control in any entity that holds 20% or more of a merging company, and of the competitive relationship between each of those rights holders and any other party to the merger.

In addition, the new regulations define "markets with extra reporting obligations" and impose even greater reporting requirements on the parties to a merger in these markets. The regulations are not limited to this or that market. The applicability of the extra requirements will depend on the degree of concentration represented by the entities seeking to merge. In the case of a horizontal merger - that is, between competing companies - extra reporting obligations will apply in markets in which the aggregate share of the merging companies is 20% or more, in volume or monetary terms.

In the case of a vertical merger - that is, when a company acquires a supplier or distributor - the obligation will apply in markets in which one of the companies has a 30% share or more.

The extra reporting requirements cover information such as the entry and exit of competitors in the three years before notice of the merger is filed; barriers to entry and barriers to expansion; details of the synergies expected from the merger; and information on competition from imports.

The change in the reporting format includes the replacement of several forms required today with a single, consolidated form for reporting a merger. All companies seeking to merge will be obliged to file the new form, with its extended reporting requirements, from May 20, and there will no longer be a fast merger approval track.

Published by Globes, Israel business news - en.globes.co.il - on April 4, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Adv. Michal Cohen  credit: Avigail Piperno-Beer
Adv. Michal Cohen credit: Avigail Piperno-Beer
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