The Stare of Israel holds a 'golden share' in a range of companies including El Al Israel Airlines Ltd. (TASE:ELAL). Since the outbreak of the war, the Israeli national carrier has been harshly criticized for its high fares and not operating emergency flights on Saturdays and holidays, except at the start of the war.
Using a golden share to cut fares would be most irregular, and maybe not possible at all. What is a golden share, and when can it be used? "Globes" examines the matter.
What is a golden share?
In business and finance, a golden share is a type of share of stock that lets its owner outvote all other shareholders in certain circumstances. In the case of the state it is a regulatory tool allowing the state to make decisions in privatized companies in extreme situations in which strategic importance is seen in their activities. Thus, the state sells its shares to the public and gives up control of the company, but retains decision making capabilities in certain aspects of its activity (vital interests).
The Government Companies Authority Law defines several such vital interests (not all of which are applied to all companies): ensuring the continued existence of activities that are essential to the security of the state or its foreign relations, or ensuring the continuity of adequate provision of essential services to the public; maintaining the character of the company as an Israeli company whose business center and management is in Israel; supervision of the control of minerals or natural resources, their utilization and development; promoting competition or preventing centralization in the economy; preventing the formation of a position of influence on society, of hostile elements or of elements that may harm the security of the state; and preventing disclosure of confidential information, for reasons of state security or foreign relations.
In which companies does the State of Israel hold a golden share?
In Israel, as well as El Al, the state has a golden share in other companies that have been privatized including minerals production company ICL (TASE: ICL: NYSE: ICL), ZIM Integrated Shipping Services Ltd. (NYSE: ZIM), Haifa Oil Refinery, Ashdod Oil Refinery, Israel Postal Co., Bezeq Israel Telecommunications Company Ltd. (TASE:BZEQ and defense company Ashot Ashkelon Industries Ltd. (TASE:ASHO).
What would the state be allowed to do in the case of El Al?
When El Al was privatized in 2003, four clauses were written into El Al's golden share, which are detailed in the company's articles of incorporation. These clauses give the state four rights: keeping El Al as an Israeli company; ensuring operational and flying capacity of passengers and cargo (at the level of four cargo planes, three wide passenger planes and a number of narrow bodied planes); preventing hostile elements from owning the company; and complying with instructions and security arrangements. In accordance with the first section, the current controlling owner of El Al, Kenny Rosenberg and his son Eli (who bought control during the Covid pandemic) needed to first obtain the state's approval for the acquisition.
"What the Government Companies Authority was thinking about during the privatization was the airlift during the Yom Kippur War," a former senior official at the Government Companies Authority, who was also involved in the privatization process, explains to "Globes." The aim was to provide Israel with ammunition to conduct the war. "The concern was security and not economic. The state was not interested in fares in those days, but that the state would be able to operate El Al in times of emergency."
Do the clauses allow the state to cap El Al's fares?
At the start of the war, there was an attempt to petition the Supreme Court to force El Al to fly on Shabbat to bring home reserve soldiers. The petition was dismissed by the judges. El Al responded to the petition by saying, "The state's special share is not a magic wand that the state can wave to gain legal authority for any request or action".
"The short answer is that the state does not have the authority to intervene in El Al's fares," a senior official at the Ministry of Finance tells "Globes." "We undertook such a check at the start of the war. The goal of vital interests is to ensure that the company remains Israeli and that there is a minimal fleet of aircraft in case of emergency. The state has no authority to interfere in business considerations such as forcing El Al to fly on Shabbat, determining prices or to where the company decides to fly. Although everyone says activate the golden share, it's not something the state can do."
Another senior official explains, "The aim of the golden share is to ensure Israel's control in essential cases or even to take control in vital instances. The way to deal with fares is through the Competition Authority, not through the golden share." But it is not certain that the Competition Authority will be able to help either, since its powers are to enforce untamed price rises retrospectively, and not to stop price increases in advance.
The Competition Authority says, "In the exceptional case of a dramatic cut in supply, the test is to understand if there has been a cynical exploitation of the situation. An enforcement solution is never short-term. The examination is complex and subject to in-depth economic judicial review, which can also be appealed, and rightly so."
The former senior official at the Government Companies Authority also sees no reason to intervene in El Al's fares. He says, "The state can even today oblige El Al to fly back reserve soldiers, at a discounted rate or even at its own expense. But why should the state oblige El Al to bring back people on vacation a few days earlier? What security need is there in that?"
The Ministry of Defense also stresses that there is currently no security need to bring home reservists from abroad. Another source familiar with the details tells Globes, "Today the situation is that there are only a few reservists a day, maybe five, who are stuck abroad and need to return to Israel, and other passengers are taken off flights for them. This also happened when there were senior officers in the IDF who had to return." He adds, "There have also been those who flew abroad for vacation and faked emergency call up orders to get a place on planes."
Was it a mistake not to put in a clause about fares during privatization?
Both senior officials believe that the state acted correctly when it did not include a fare intervention clause in the privatization. According to the senior Ministry of Finance official, "The purpose of privatization is to introduce business considerations and turn a government company into a business company for all intents and purposes. A clause that would have allowed the state to actually nationalize the company when it wanted is too aggressive and would have raised concerns on the part of investors. Only in recent years has Israel had both the Covid pandemic and the war. Such clause in an IPO would greatly reduce the value of El Al." The former senior official at the Government Companies Authority adds, "Such a clause would have deterred investors. They would not know when the state would suddenly go crazy and take over the company. They need certainty."
Who has the authority to activate the golden share?
Perhaps the real problem is something else? "Globes" has tried to understand who has the authority to activate the golden share but did not receive a very clear answer. The Ministry of Transport thinks that the authority lies with the Ministry of Defense but there they don't consider the current situation a time of emergency, and they certainly won't activate the clause to intervene in fares. The Ministry of Finance thinks that this is the authority of the Government Companies Authority, which claims, "The holder of the special state share is the State of Israel through its ministers".
But a market source says, "The instruction should come from the Ministry of Defense or Transport. In the event of a security need to fly reservists, the instruction should come from the Ministry of Defense. In cases where it did not make business sense to operate the planes, such as the Covid pandemic, the instruction should have come from the Ministry of Transport, to maintain functional continuity and airplanes in an emergency when a war breaks out immediately after the corona. Because aviation is not easy. After shutting down operations, it takes a month and a half to re-prepare each plane, its crew, pilots and flight attendants." This didn't happen by the way, perhaps because the Ministry of Transport did not understand they had the responsibility in this case.
What is currently happening?
In the last two months, El Al is fed up with public criticism and pressure from the government, and in practice El Al's prices are controlled and fixed. The company operates four hubs for flights to Israel (from Athens $150 one way in economy class, Larnaca for $99 one way, Dubai and Vienna for $349 one way) and elsewhere its fares are competitive and sometimes even cheaper than rivals.
But the result is that the demand for El Al flights has only jumped even more over the last two months, which means El Al's planes are completely full, and now those who want to book tickets are simply unable to. When someone needs to be flown to Israel urgently because of an army call-up, or a medical need, or a funeral, other passengers must be bumped off the flight. On the eve of Rosh Hashana, the company even issued an official announcement that there were no seats available - regardless of fares demand had far outstripped supply. El Al insists that in a healthy economy price restrictions are not beneficial to the public. A price limit does not solve the lack of supply, but turns tickets into a "first come, first serve" product.
Maybe the solution is for government ministries to stop fighting among themselves over who is responsible for limiting prices, and instead provide economic incentives for foreign airlines to resume flying to Israel, such as by cutting fees, or encouraging outbound tourism to those countries.
The Government Companies Authority said, "El Al's articles of association detail the purposes for which the special state share was issued. The state's essential interests in the company are specified there according to the government's decision (an Israeli company, the right to use essential assets during an emergency or for security purposes, preventing hostile parties from having an interest. Apart from these aims, the special state share is not intended for other purposes.
Published by Globes, Israel business news - en.globes.co.il - on October 8, 2024.
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