U.S.-based law firms and investors participating in international proxy contests may find themselves at a disadvantage if they cannot match their opponent’s local knowledge and jurisdiction-specific research capabilities. Fortunately, a partnership with a dedicated investigations team that has substantial local experience can bridge the gap and increase the odds of a successful outcome. This is especially true in Israel, where there is a wealth of information to find, if one knows where to look.
Israel’s Companies Law is “considered a paradise for activist shareholders,” according to articles by Tel Aviv-based law firm Shibolet & Co.1 The regulatory environment has enabled campaigns by institutional investors as well as American and Israeli hedge funds. Traditionally, one major deterrent to activist campaigns in Israel has been a high proportion of listed companies with controlling shareholders, owning 50 percent or more of the issuer’s voting shares. In recent years, however, opportunities for activism by minority shareholders have increased alongside a trend away from listed companies having controlling shareholders.2
A well-known recent example of activism in the Israeli market was investor Starboard Value LP’s campaign against semiconductor company Mellanox Technologies Ltd. (NASDAQ: MLNX). In early 2018, Starboard leveraged its research into the Mellanox board and highlighted a “staggering” pattern: Mellanox’s board and management had been aggressively selling their shares in the company, with no open-market purchases recorded in the preceding years.3 Starboard used this information to argue that the Mellanox board was not confident in the company’s future and was also not committed to the company’s success. In June 2018, the parties reached a negotiated settlement, with Mellanox agreeing to replace three of its board members.4
The Starboard / Mellanox case displays the especially international nature of corporate contests in Israel. Many Israeli issuers are listed on both the Tel Aviv Stock Exchange and the NASDAQ. Activist campaigns are more likely to target dual-listed Israeli companies than entities focused solely on the local market. Likewise, trends in Israeli shareholder activism may be more dependent on global market conditions than the local economy. Navigating this landscape requires an approach that combines the nuanced insights of an Israel specialist with the broader perspective of an internationally savvy generalist.
Parties vying for an edge in an upcoming proxy battle in Israel will find themselves at a significant disadvantage if they cannot match their opponent’s research capabilities, both within Israel and internationally. The outcome may hinge on whether an activist’s research findings persuasively support an argument that significant change is needed. In any corporate contests involving an Israeli issuer, executive, or director, an investigative researcher should be adept in the following areas:
Diving into Hebrew-language media
The Israeli press is fairly accessible to English-language speakers, who can draw from a selection of translated media articles. Don’t be fooled, however, into assuming that all the necessary information will be available in English. Local business news outlets – including TheMarker, Globes, and Calcalist – publish many articles in Hebrew only.
A controversy or scandal may fly ‘under the radar’ of English-language media sources if, at the time, it appears to be a purely domestic Israeli matter. In the context of a high-stakes corporate contest, however, the details reported in Hebrew-language media about such a matter could be used to build a case for or against a proposed change. An investigator who can find these articles and properly interpret them – leveraging their familiarity with the local business and political environment – can therefore add a great deal of value during a corporate contest.
Identifying hidden relationships
The independence and integrity of a board member or director can be called into question with the revelation of a significant, undisclosed relationship. In a small market like Israel, there are increased chances that two people who are ostensibly unrelated actually have noteworthy ties. One method of uncovering such an affiliation in Israel is a thorough examination of publicly available company records. This research requires, at a minimum, Hebrew-language reading ability combined with experience using the relevant systems.
Hidden relationships can also be exposed via social media connections, and locating and examining these accounts should be a key component of research. A word of caution to those relying on automated translation tools: social media posts and comments can be undecipherable to those who cannot actually read Hebrew. As an example, a popular automatic translator once told users that the comment “חחחחחח” meant “I love you.” The accurate translation is “hahaha” or “lol.”
Reviewing Tel Aviv Stock Exchange filings
Some issuers’ financial reports are available in both English and Hebrew; this is especially true for dual-listed issuers. Additionally, this year the Tel Aviv Stock Exchange launched an English-language version of the “MAYA” corporate filings database. This is similar to the U.S. Securities and Exchange Commission’s EDGAR database for public company disclosures. However, while the Israel Securities Authority is encouraging companies to publish reports in English, many will choose not to. Importantly, earlier filings are usually not found on the English-language MAYA portal.
For example, the English-language MAYA search portal reveals two disclosures in recent years for oil and gas company Delek Drilling LP (TASE: DEDR.L). The Hebrew-language portal for the same company shows 125 disclosures in the past year alone.
For those comfortable reading Hebrew, the Tel Aviv Stock Exchange’s MAYA system is freely available, largely comprehensive, and searchable in various ways. The technical language and volume of data can feel overwhelming, but an experienced investigator who is familiar with Israeli company filings can uncover valuable information similar to what U.S.-focused researchers routinely find in SEC filings.
Uncovering red flags
In a contentious proxy battle, revelations about the integrity and track record of a key executive or director could swing the vote of other shareholders. Such discoveries are often found within litigation and bankruptcy records. Availability of such records in Israel is somewhat reduced compared to the United States, and a truly comprehensive search may not be possible. That said, pivotal findings can be found through a deep examination of Israeli litigation and bankruptcy records.
Experienced investigators know to search both official web portals and litigation data made available by respected third-party providers. Proper interpretation of documents can be challenging, because often the only available information about a legal proceeding is a judge’s ruling on a procedural matter. The original complaint or indictment may remain out of view. Another challenge is accurately confirming the identity of the parties; records often do not include national ID numbers. There are also data access restrictions – some records are available to Israeli lawyers only.
Whereas in the U.S. it is common to enlist the services of a court record retrieval service to conduct in-person, on-site research, this approach may be of limited value in Israel. Typically, to get information beyond what is available online, one must have a formal connection to the case (or have the consent of one or both parties).
Notwithstanding all of these limitations, past investigations have shown that extremely valuable information can be gleaned from Israeli litigation and bankruptcy records.
Taking research further with human intelligence
Local contacts in Israel can assist with a proxy contest by conducting interviews with knowledgeable local sources, who may be able to provide additional information about an Israeli company, executive, or board member. These individuals tend to run in small circles, where “everyone knows everyone.” Sometimes executives and directors are hired – even at publicly traded companies – without a formal background check. Human intelligence may be especially helpful in such a context, but there are reasons to be cautious with this approach.
According to Eyal (Allan) Weiss, the CEO of an Israel-based competitive intelligence consultancy named The Firm, local sources are generally willing to speak with an investigator so long as the approach is done properly. It is essential to have a clear, sensible reason for asking questions, and to build trust with each contact.
Any real or perceived attempt to obtain material non-public information (MNPI) is fraught with risk, and interviewers must be explicit that they are not seeking and do not wish to receive MNPI. Likewise, any investigator who misrepresents themselves (a controversial tactic called “pretexting”) could bring both legal and reputational risk upon their client; a modern, ethical investigations firm will scrupulously avoid using this technique. Especially for proxy contest matters, legal counsel should be involved prior to entering the realm of human source inquiries. Those who are risk-averse may prefer to skip this form of research entirely and focus solely on public records.
Law firms and investors can effectively navigate the somewhat daunting Israeli information landscape by enlisting the services of a dedicated investigative team. U.S.-based law firms and investors would be well advised to select an investigative services partner that both knows the Israeli research environment and has direct experience working on corporate contests.
Daniel Greenberg is a Partner of Forward Risk and Intelligence Inc., a corporate investigations firm with offices in Washington, DC and New York. More information can be found at www.forwardrisk.com. This post is published with thanks to Professor Assaf Hamdani of Tel Aviv University and Eyal Weiss from The Firm for their helpful insights.