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Importance of Independent Corporate Governance for Israeli Companies LESSONS FROM THE UNITED States. Marc I. Gross, Esq. Pomerantz Haudek Grossman & Gross. ISRAEL’S PYRAMIDS. Israel’s major companies – control concentrated 88% of all TASE companies controlled by one shareholder

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Marc I. Gross, Esq. Pomerantz Haudek Grossman & Gross

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    1. Importance of Independent Corporate Governance for Israeli CompaniesLESSONS FROM THE UNITED States Marc I. Gross, Esq. PomerantzHaudek Grossman & Gross

    2. ISRAEL’S PYRAMIDS Israel’s major companies – control concentrated • 88% of all TASE companies controlled by one shareholder • 64% of value of TASW 100 held by 24 Business Groups Often controlled without owning majority of shares (Pyramids)

    3. PROBLEMS WITH PYRAMIDS As noted in recent Report by Committee on Competiveness, such concentration: • Limits competition • Increases risk of systemic failures • Reduces stock price premiums over book value • Gives rise to potential abuse of control at expense of minority investors

    4. Examples of potential abuse • Delek made large dividend payouts to cash poor affiliates • Mutual and Provident Funds challenged • Delek also made $25M bridge loan to affiliate unable to secure financing • Another company repurchased its retiring Chairman’s stock for 53.5M NIS, even though the Company had no profits • Subject of a lawsuit

    5. RECENT ISRAELI SETTLEMENTS Israel Corp. Ofer Holdings owns 57% of Israel Corp. – Idan Ofer Chairman Israel Corp. owns 98% of Zim Israel Corp.: Purchased $246M Zim warrants; Loaned $111M to companies owned by Idan Ofer and Udi Angel Israel Corp. shareholders sued Settled for 45M repaid by Zim to Israel Corp. Koor Industries Similar transaction settled for $45M repayment

    6. LESSONS FROM THE U.S. Problem not unique to Israel Long history in U.S. Landmark Pomerantz case: Perlman v. Feldmann • Controlling shareholder offered a premium • No offer of premium to remaining shareholders • Court held that control premium was a corporate asset • Sale without participation of minority shareholders violated fiduciary duty

    7. ISRAELI LAW Similar fiduciary duties contained in Israel Companies Act Sections 192 and 193 Controlling shareholder: Must act “fairly” Must not “exploit power in the company” Perlman v. Feldman: Similar to “Gap Company” proposal in Committee on Competitiveness Report

    8. CAUTIONARY TALES FROM U.S. The failure to protect minority interest companies can be significant – Recent decision resulted in $1.2 billion repayment – Southern Peru Copper Groupo Mexico Owned 54% Southern Copper Owned 99% Minerva Same Chairman all 3 companies Groupo Mexico needed cash Minerva had little, but Southern Peru had lots;

    9. Groupo Mexico arranged for Southern Peru to buy Minerva – $2 billion in Southern Peru Stock/67.5M shares at time of deal negotiated By time deal closed, Southern Peru shares worth $3.75B (copper price rise) Southern Peru Special Committee had right to cancel deal Didn’t cancel

    10. Lawsuit by Southern Peru shareholder Court held that conflicts resulted in violation of fiduciary duties: • Special Committee justified pricing on following grounds: Minerva not publicly traded DCF analysis based on management projections Showed Southern Peru worth only $1.7B (60% of market cap) Less than Minerva’s value Thus, original price fair

    11. Court held that Southern Peru Special Committee: • Failed to challenge DCF valuation when projections turned out to be too low • Failed to insist on routine protections, such as collar • Failed to consider exercise right to cancel after $750M stock price rise Concluded that Southern Peru Special Committee: “Fell victim to a controlled mindset and allowed Groupo Mexico to dictate the terms and structure of the merger” Required Groupo Mexico to return Southern Peru shares worth $1.2B

    12. OTHER RECENT U.S. CASES • El Paso, Del Monte • Investment Bankers conflicted; worked on both sides • Del Monte settled for $87M • Clear Channel • Two Private Equity Firms own 100% Clear Channel (heavily indebted media company) • Clear Channel Outdoor own 89% of Clear Channel Outdoors • 4 Board members from Private Equity Firms sat on Clear Channel Outdoor Board • Outdoor loaned $656M to Clear Channel • 9.25% interest paid to Outdoor • Clear Channel bond yield 17.5% • Challenged by JHL Capital Corp ($1.5B hedge fund) – owns 1% of Outdoor shares

    13. CONCLUSIONS CORPORATIONS • Be sure to have independent directors involved in decisions regarding transactions with related companies • Be sure that your investment advisors on major transactions are not conflicted • Be sure that fairness to minority shareholders is considered and documents INVESTORS • Insist that controlled corporations explain transactions with related companies • Consider challenging them if terms not fair • Consider challenging sale of controlling interest when the minority shareholders receive less, or nothing, for their shares