What is Israel's new Business Concentration Law and why should we care?
It sets a global precedent in tackling tycoons with too much power.
The Business Concentration Law passed by the Knesset on December 9 aims to strengthen competition and curtail the excessive clout of a relatively small number of business groups over the Israeli economy.
The law consists of three parts. The first bans groups from owning both financial and non-financial enterprises. Any group that has both must divest one or the other.
The second section of the law dismantles multi-tiered corporate holding structures – or "business pyramids" as they're known as in Israel – and sets a worldwide precedent. Under the law, no group may have more than two tiers of publicly listed companies (whether they've issued stocks or bonds). Among other things this aims to stymie controlling shareholders who call the shots at companies low down in the pyramid despite owning just a small fraction of a company's equity.
The third part deals with something never before addressed by legislation in Israel or around the world: the concentration of power in the hands of tycoons in multiple sectors, securing them undue influence over decision makers - to the extent of endangering democracy.
Who stands to benefit from the law?
Mainly small, medium-sized, and new businesses that, until now, found it hard to enter the market and grow, since most financial credit and regulations tended to favor the large concerns. These will now have a better chance to compete.
When does the law take effect?
Most of it will go into effect in one year. Some parts take effect immediately, such as the ban on creating new pyramids with more than two tiers of public companies. Other parts will take much longer to implement. Existing pyramids, for instance, have four years to consolidate into three tiers plus another two years to reach the maximum allowed two-level formation.
When will it start affecting the economy?
In some areas, immediately, and in some places it's already had impact. In conformance with the approach followed in the third section of the law, for example, the antitrust commissioner intervened to prevent the Ofer group from prevailing in its bid to operate Eilat Port even before the law was enacted.
It can be assumed that steps are being taken towards dismantling the corporate pyramids. The principal owners will need to get financing to buy out the public's holdings in companies that need to be taken private or, alternatively, find buyers for them. Either way, it is doubtful they'll wait until the last minute.
Have the pyramids already been disbanded?
No. The stock exchange has dozens of companies under the indirect cascading control of large concerns, the most prominent being the IDB group. Although this group is expected to imminently change hands, it still remains a pyramid of companies that must be dismantled by law. The process already started with the buyout of Koor Industries by Discount Investment Corporation.
Was the law aimed at dismantling IDB?
The law wasn't directed at IDB but at all the pyramids and was mainly aimed at preventing new ones from forming. However, the members of the concentration committee were witness to IDB's conduct in which, they claimed, most drawbacks of the pyramids came into play – including out-and-out interested party deals like the sale of privately-owned Israir by Dankner and his partners to the publicly-owned IDB concern, a move that harmed IDB's other shareholders.
Why doesn't the law prevent another pyramid from acquiring control of IDB?
This is a problem. Technically the law only applies to companies registered in Israel, but the problem of lower-tier companies being exploited also exists in pyramids registered abroad. The deal will therefore be submitted to other regulators for approval after it is signed, and they'll need to weigh in on this matter too.
Can foreign pyramids buy Israeli pyramids?
The concentration law doesn't tackle this question. After giving the matter its consideration, the concentration committee failed to come up with any recommendations and it will shortly be taken up again by the Justice Ministry and the Prime Minister's Office.
What is the ban on financial and non-financial cross-holdings?
Anyone controlling a major non-financial company (industry, services) can't also own a major financial institution (ban, brokerage, insurance company). This applied to operational companies with over 6 billion shekels ($1.7 billion) in annual turnover or debts exceeding that amount.
A major financial institution is defined as having 40 billion shekels in assets.
The law bars financial institutions from owning more than 10% of a major operational company, while anyone owning more than a 5% stake in a major operational company is prohibited from having a controlling stake in a financial institution.
Regarding monopolies, ones with annual sales of at least 2 billion shekels in monopolized markets and at least 300 million shekels in any one market in which it holds a monopoly is also classified as a major company.
Tnuva, for example, is deemed a monopoly in milk and hard cheeses. If its sales in each of these categories are over 300 million shekels and over 2 billion shekels together, it will be termed a major operational organization. In any case if likely qualifies as such since its overall sales are 7.5 billion shekels according to government figures.
Does the law prevent insider transactions?
No. It makes do with the existing restrictions on board members.
Who will enforce the law?
A committee headed by antitrust commissioner David Gilo and treasury officials.