Government Backs Down on Plan to Limit Pyramid Groups

Move possibly puts the government in collision course with Knesset panel; original plan was to limit companies to one level of subsidiaries.

The government late Monday backed down on a measure aimed at limiting the power of some of Israel's biggest conglomerates, backtracking on a plan that would restrict pyramid groups to no more than two levels of subsidiaries.

The move put the government on a possible collision course with the Knesset Finance Committee, most of whose members still back the two-level ceiling, according to a survey by TheMarker. The committee will begin voting this morning on clauses pertaining to pyramids - a key part of the proposed Business Concentration Law.

The government had originally intended to submit a proposal to the finance committee limiting companies to one level of subsidiaries. In other words, the proposal would have prohibited any subsidiary of a company from controlling subsidiaries of its own.

But in a meeting late Monday night, the cabinet drafted a revised plan exempting existing so-called bond companies - companies that issue bonds but not stock. That would exempt many of Israel's biggest holding companies, notably Nochi Danker IDB Development Corporation.

Others include British Israel, Gindi Investments, HOT Telecommunications, Tempo Beverages and state-owned Israel Aerospace Industries.

"We view with great concern the government's proposal," the Movement for Quality of Government said yesterday. "If bond companies aren't regarded as a tier in the pyramid, it effectively sets the number of tiers at three." It said this amounted to "a significant easing" of the original plan.

Pyramid control structures have found their way into regulators' sights because they give a person or company at the top voting rights in the companies further down without a proportional capital investment.

The controlling shareholder needs to own only slightly more than 50% of the top company's shares in order to control it. That company in turn needs to control only slightly more than 50% of a subsidiary's shares in order to control the second tier. Thus the controlling shareholder at the top can control the subsidiary with just over a 25% stake.

Under the government's plan, existing bond companies would be permitted to control subsidiaries and subsidiaries one level below them, constituting three-level pyramids. Bond companies formed after the law goes into effect would be restricted to two levels.

The government's proposal was agreed on by Prime Minister Benjamin Netanyahu, Finance Minister Yair Lapid, Justice Minister Tzipi Livni and Economy Minister Naftali Bennett, along with ministry staff.

But a poll by TheMarker found that 13 out of 17 Knesset Finance Committee members want to see all pyramids, including bond companies, limited to two levels. The 13 includes members of the coalition as well as the opposition.

But at yesterday's finance committee meeting, one of the supporters of the universal two-level restriction, MK Ofer Shelah (Yesh Atid ), proposed a compromise. He would allow holding companies two levels of subsidiaries, in addition to a level of bond companies. But he would place restrictions on how much bond debt such a company could raise. He would also impose a ceiling on how indebted the bond company could be relative to assets.

"If we don't find a way to limit leveraging, we'll have to regard bond companies like any other," said Shelah.

The committee's chairman, MK Nissan Slomiansky (Habait Hayehudi ), said he hadn't made a final decision. "There's a lot of sense in creating a bond company at the top of a pyramid," he said.

Reuters
Olivier Fitoussi
Knesset Constitution, Law and Justice Committee chairman MK Nissan Slomiansky.
Emil Salman