Arison - Reuters - 19.4.12
Bank Hapoalim controlling shareholder Shari Arison. Photo by Reuters
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It's soon going to cost much more to buy control of an Israeli bank, under a reform Banks Commissioner David Zaken published for public review yesterday.

The change would ban companies with pyramid control structures from taking control of banks. It would also significantly increase the amount of stock an owner would need to take control of a bank.

For Bank Hapoalim and Bank Leumi, the buyer would need 30% of either bank's shares in order to be considered the controlling shareholder.

Bank Hapoalim controlling shareholder Shari Arison, for instance, would not meet the cutoff because she holds only 22.5% of the bank's shares.

Formally, there was no cutoff until now - all a potential controlling shareholder needed was a substantial slice and the regulator's approval. This is also the first time the regulator is setting clear rules for receiving approval.

Taking control of a midsize bank like Mizrahi-Tefahot or First International Bank of Israel (Beinleumi ) would require the buyer to hold 40% of the bank's shares. To control a small bank, the cutoff would be 50%.

Current controlling shareholders would not have to buy more shares to keep their control; the changes will take effect only when control of a bank is sold.

However, the new rules would not apply to foreign buyers, effectively encouraging foreign banks to enter Israel's market.

The reforms are a departure from the regulator's history of giving preference to a single controlling shareholder or group of shareholders, instead having a bank without any controlling party, said Zaken.

The changes will make it much harder to find the next round of controlling shareholders because the size of their investments will necessarily grow. Thus, when current controlling shareholders sell, they are more likely to sell their shares to the public at large, leaving their banks without any single controlling party.

"Anyone who has to sell shares due to the economic concentration committee's findings will have two options - selling to a new controlling shareholder or to the public. This makes the latter option more viable," said Zaken.

The regulator also intends changing how the next round of controlling shareholders can resell shares to the public. A controlling shareholder who wants to sell his holding to the public will likely do so over time instead of dropping the entire bloc of shares at once. Under the reform, he would not be allowed to maintain control during this transition period. Distributing dividends during this period likewise would be prohibited.

Also, the Bank of Israel under Governor Stanley Fischer announced yesterday that a buyer of a controlling share in a bank could not fund the purchase from the bank's own resources, for instance by buying a bank and immediately distributing a dividend. From now on, new shareholders will be able to distribute dividends only based on capital the bank accumulated after the purchase.

Controlling shareholders will also no longer be able to serve as board chairmen, only as board members, and will be limited in how much they can charge the bank as "management fees."

They will have to commit themselves to injecting funds into the bank should the Bank of Israel make the request, and thus will have to make a deposit with the central bank to ensure they can make good on this promise.

A potential controlling shareholder will have to have assets or cash worth 150% of the controlling share's value. Any debts will count against this.