On October 30 2017 the Antitrust Authority published a draft amendment to the Restrictive Trade Practices Law (5748/1988) for public comment. The amendment proposes a broad reform of the law as regards restrictive arrangements, monopolies and mergers. The amendment also entails significant changes to the authority's enforcement powers, including the ability to impose much higher financial penalties.
According to the authority, the amendment aims to decrease the existing regulatory burden that applies to legitimate and efficient practices and strengthen anti-competitive enforcement.
While it remains questionable whether the proposed reform will achieve its declared goals, it will certainly have significant implications for local and foreign entities. Namely, as elaborated below, the reform proposes:
- a notable change to the merger control regime applied to foreign entities; and
- much higher financial penalties.
Main amendments to merger control regime
One proposed amendment is the abolishment of the nexus requirement regarding foreign companies and partnerships. At present, the merger control regime applies to foreign entities that are not registered in Israel based on their local footprint. The Antitrust Authority's existing policy requires such a foreign entity to:
- hold a significant shareholding in a local entity (generally more than 25%);
- have a place of business in Israel; or
- have the ability to influence a local representative's commercial decisions.
At present, direct sales to Israel are insufficient to subject a foreign entity to the merger control regime even if these sales exceed the turnover threshold that triggers merger filing for local entities. According to the amendment, foreign entities may be required to file merger notifications even if they have no local footprint in Israel; the nexus requirement will be established by the mere fact that the foreign entity achieves sales that meet the turnover or the market share thresholds, as applied to Israeli entities. Thus, the amendment may have a significant effect on cross-border transactions. The amendment also proposes to subject non-profit associations to the merger control regime.
Another suggested amendment is to increase the turnover threshold that triggers merger control. At present, if the merging parties' turnover is above IS150 million (approximately $42 million or €36 million), the merger is subject to the commissioner's approval. The IS150 million turnover threshold was set in 1999 and has not been updated since, even though the Israeli economy has grown substantially since then. This threshold has burdened the merging parties to seek approval and the authority to examine a significant number of mergers, which essentially did not raise anti-competitive red flags. It is also consistent with the findings of an Organisation for Economic Cooperation and Development (OECD) study, according to which the number of mergers filed in Israel per capita is exceptionally high compared to other OECD countries. This proposed amendment is therefore much needed and will undoubtedly ease the burden imposed on businesses and the authority's resources.
The law includes two other filing thresholds based on market shares which have not been altered under the amendment:
- a merger that creates a market share exceeding 50%; and
- if one of the parties to the merger already holds more than a 50% share in a relevant market.
The amendment further provides the commissioner with powers to extend the merger review period from 30 to 150 days by a reasoned administrative decision. The commissioner must render a decision within 30 days, which can be extended only by a judicial decree or the consent of the parties. In practice, the commissioner usually seeks the merging parties' consent and only rarely seeks a judicial decree. The business sector has raised concerns that this amendment may result in an unjustified lengthening of the average merger review period.
Annulment of cap on financial penalties for corporations
The law allows the authority to impose a monetary penalty on corporations at a maximum of 8% of the violator's sales turnover, provided that the monetary penalty does not exceed IS24,490,070 (roughly $7 million). The amendment suggests cancelling the maximum limit, while retaining only the sales turnover percentage limit. The amendment aims to increase deterrence against large corporations, for which the present cap reflects a relatively small percentage of turnover.
This amendment will potentially have a dramatic effect on large corporations, as it paves the way for imposing significant financial penalties of hundreds of millions of shekels on such corporations. The law provides the commissioner with the power to impose such financial penalties by issuing an administrative decision (based on an administrative process, relying on administrative evidence and with limited rights to the relevant parties), while no objective third party is required to approve the commissioner's decision before it is issued. Therefore, it is believed that this proposed amendment, which dramatically increases the authority's enforcement powers without introducing appropriate checks and balances, requires a review of the process by which such penalties are imposed and the rules for calculating their amount.
Main amendments to monopoly chapter
The monopoly chapter has also undergone a significant change under the amendment. At present, a firm that possesses more than a 50% market share is considered a monopoly under the law. The amendment proposes to change the definition of 'monopoly' so that in addition to the existing market share-based monopoly presumption, which is unique to Israeli law, a market power test will be introduced, similar to the customary test in other jurisdictions. Under the proposed market power test, firms with a market share below 50% will be deemed monopolies if they hold significant market power which is not temporary in nature. The authority explained that since the law's monopoly chapter aims to tackle the phenomenon of market power, this amendment is required. This explanation is somewhat inconsistent with the fact that the existing market share definition remains unchanged under the amendment, although several entities that hold more than a 50% market share (which are therefore considered monopolies under this definition) do not possess significant market power.
The amendment will introduce uncertainty to the business conduct of many firms which are not subject to the monopoly chapter of the antitrust law (under the market share test). It will also require many firms that have a significant market position to re-evaluate their business strategy – in particular, especially their pricing behaviour.
Reform of restrictive arrangement analysis
The suggested reform of the analysis of restrictive arrangements reflects the ongoing trend in local antitrust law of a substantive self-assessment regime. At present, only certain types of vertical arrangement are subject to substantive self-assessment (mainly certain types of vertical arrangement). Other arrangements are subject to block exemptions that are invalidated if a certain market share threshold is exceeded.
As part of the reform, on October 31 2017 the commissioner published draft amendments to:
- the block exemption for joint ventures;
- the block exemption for research and development agreements; and
- the block exemption for ancillary restraints in mergers.
The suggested amendments may enable parties to apply the block exemptions even if they exceed the relevant market share boundaries, provided that the following conditions are met:
- the arrangement is not aimed at harming competition;
- the restraints included in the arrangement are necessary for fulfilling the purposes of the arrangement; and
- the arrangement will not result in a significant adverse effect on competition.
Broadening the self-assessment regime under the law is a desirable development, as it will allow the authority to focus its resources on arrangements which raise severe competition concerns, while decreasing to a certain extent the regulatory burden imposed on private parties at present.
Another proposed amendment is changing the procedure set by the authority to determine whether a block exemption will not apply to a restrictive arrangement. At present, the authority can invalidate the application of a block exemption only by way of a formal decision, which is subject to appeal. The amendment proposes that the authority's decision will be subject only to administrative review, which is much narrower. This change is required, per the authority, in light of its intention to expand the block exemptions' reach.
The amendment further provides for expediting exemption decisions issued by the commissioner. At present, the authority has 90 days to decide applications for an exemption of a restrictive arrangement, which can be further extended by an additional 60 days for reasons to be noted. The amendment reduces the initial period to 30 days (as in merger decisions), granting the authority the power to extend the period to additional periods that do not jointly exceed 120 additional days. In practice, it is not expected that this change alone will result in a meaningful reduction in the review period.
Aggravating criminal penalties
At present, the maximum penalty for antitrust offences is three years' imprisonment or five years' imprisonment if there are aggravating circumstances. The amendment proposes to impose a maximum penalty of five years' imprisonment as the new standard for serious cartel behaviour. Other offences (eg, a breach of the commissioner's directives, the abuse of dominant position with intent to harm competition or merger control violations) will be subject to a maximum penalty of three years' imprisonment.
Broadening commissioner's investigative powers
The Restrictive Trade Practices Law may be interpreted as providing the authority with the power to investigate an obstruction offence only if the obstruction was made after the opening of an investigation. The amendment clarifies that such investigative power arises whether the obstruction was made before or after the investigation was opened.
The proposed amendment and the draft block exemptions are published for public comment until December 31 2017.
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For further information on this topic please contact Shai Bakal, Nava Karavany or Adi Krupsky at Tadmor & Co Yuval Levy & Co by telephone (+972 3 684 6000) or email ([email protected], [email protected] or [email protected]). The Tadmor & Co Yuval Levy & Co website can be accessed at www.tadmor.com.
