Applicability of Exception to Tender Offer When Issuing Options
01/06/2014
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Dear clients and friends,

Section 328 of the Israeli Companies Law, 1999 (the “Companies Law”) requires any person wishing to purchase shares of a publicly traded company, that would cause such person’s holdings to cross certain thresholds, to issue a tender offer requesting all shareholders of the company to tender their shares.

The obligation to issue a tender offer has some exceptions. One of these exceptions is set forth in Section 328(b)(1) of the Companies Law, which provides for an exemption from the tender offer requirement for purchases of shares within the context of a private offering that is approved by the shareholders of the company.

The question brought before the District Court of Tel Aviv-Jaffa (the Hon. Hagai Brenner) in Liquidation Proceeding 23675-12-12 Hermetic Trust (1975) Ltd et al. v. Mayan Ventures Ltd et al., was whether the issuance of options that was duly approved by the shareholders of a company could be deemed a “private offering” and benefit from the exemption provided in Section 328(b)(1) of the Companies Law.

The options in this case were issued in the context of a settlement between Mayan Ventures Ltd. and its creditors in the equivalent of a “Chapter 11” proceeding. The options were issued to one of the major investors in the company, and had an exercise period of seven years. The issuance of options was duly approved by the board and the shareholders of the company.

Shortly following the approval of the settlement in court, the Israel Securities Authority (the “ISA”) filed a motion petitioning the court to clarify that the issuance of the options did not qualify as a “private offering” for the purposes of the exception in Section 328(b)(1), and therefore the exercise of such options would be subject to a tender offer in light of their holdings in the company.  The ISA argued that the exception in Section 328(b)(1) applies only to private offerings of shares, and not options or other securities.

The investor and the creditors’ trustee argued that once the issuance of options received the corporate approvals required by Section 328(b)(1), it was exempt from the tender offer requirement. The District Court accepted the ISA’s position and ruled that for the purpose of the exemption under Section 328(b)(1), the term “purchase of shares” refers to actual shares, and does not apply to other securities. The District Court based its decision solely on the literary reading of Section 328(b)(1), which uses the term “shares” (rather than the more general term “securities”). The District Court noted that there are valid substantive arguments in favor of applying the principle of Section 328(b)(1) to issuances of other securities, however it could not do so, as it is bound by the language of the statute.

The District Court also mentioned that in a previous case the ISA agreed to the issuance of options in a settlement with creditors, without the requirement to go through a tender offer, due to the relatively short exercise period of such options, which was set at two years. The District Court suggested that the parties discuss the possibility of reaching an agreement whereby the exercise period would be shortened and there would then not be a requirement for a tender offer.

We note that the above decision may be subject to additional review and appeal, and is therefore not necessarily the final word on this matter.

This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances.

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