The Israeli legal market over the last 25 years – then and now

Yigal Arnon’s Simon Weintraub and Ruth Loven report on the burgeoning Israeli market.

The Israeli legal market has undergone a robust expansion in the last 25 years. In 1990 there were 10,697 lawyers registered with the Israel Bar Association. As of the beginning of 2014 there were 53,750 registered lawyers in Israel. Israel has the highest number per capita of lawyers in the world, with 585 lawyers per 10,000 people. Correspondingly, there has been a significant increase in the size of Israeli law firms. If you look at our law firm as a microcosm you will note that in 1990 there were only 21 lawyers in Yigal Arnon & Co., and currently, in 2014, Yigal Arnon & Co. has approximately 140 lawyers. In 1990 there was no single Israeli law firm which had even 50 lawyers and today there are approximately 11 law firms in Israel who have more than 100 lawyers. Law firms in Israel have been consistently growing in size from year to year with an emphasis on creating large ‘one-stop shop’ law firms.

One of the most significant changes to the Israeli legal profession occurred in August 2012 when the Israel Bar Association Law was finally amended to allow foreign law firms to operate in Israel. While in practice this change of law has not yet had a significant impact on the Israeli legal market, the amendment is significant from a globalisation perspective and such change is expected to create change in the market in years to come. To date, most foreign law firms in Israel host only small representative offices which primarily serve as business development desks, but the expectation is that foreign law firms will eventually start merging with local firms as has occurred in other jurisdictions.

One contributing factor to the surging Israeli legal market which stands out is undoubtedly the rise of the Israeli ‘Start-up Nation’. In the last decade alone approximately $15bn has been invested in Israeli hi-tech companies and approximately $37bn has been ‘exported’ by way of M&A or IPO events. In addition to many lawyers, Israel has the highest concentration of engineers in the world and more scientists per capita than any other developed country, which includes 140 scientists and 135 engineers for every 10,000 employees. This focus on technology and research and development has resulted in the need for large Israeli law firms with global connections to provide full-service shops with expertise in a multitude of disciplines and jurisdictions. The Israeli legal market is sophisticated today and is servicing cross-border transactions on a daily basis. At least in the hi-tech industry, ‘Silicon Valley’ practices have been adapted to the Israeli legal and business environment.

Another significant change has been the adoption of the Israel Companies Law in 1999. This law replaced the Companies Ordinance of 1983 and was a major overhaul and revolutionary approach to corporate law in Israel. Essentially there was a shift from an Israeli corporate law system adapted from the old British system which was replaced with a new modern system strongly influenced by Delaware corporate law. Such change in corporate law coupled with significant changes in the Israeli taxation law have created a commercial friendly environment and serve as a strong contributing factor to the growth of Israeli hi-tech. Another example of change was the complete removal of currency controls and stamp duty tax. In addition, the Israeli Companies Law has continued to develop and today includes provisions allowing for acquisitions by way of reverse triangular merger, which is a must in the field of M&A.

With 90 companies valued at $40bn already traded on Nasdaq, Israel is second only to China in the number of foreign firms it has listed. This is clearly a testament not only to the confidence that foreign investors have in the Israeli marketplace, but also to the much improved corporate and tax law regimes.

Another major change in the Israeli economy, which is already impacting the Israeli legal market, is the discovery of offshore natural gas. The Yam Tethys offshore gasfield was first discovered in 1999 and was the spark which ignited Israel’s newly founded natural gas industry. The Tamar field has been operational since April 2013 and is currently selling gas to the domestic market. The Leviathan field is expected to be operational by 2017 and to include the sale of natural gas by Israel to foreign markets, including neighbouring countries. This new blossoming industry requires incredible amounts of capital and massive amounts of foreign investment. This has resulted in many large-scale financing transactions in this field, including the recently closed $2bn bond offering by two of the partners in the Tamar project, Avner Oil and Delek Drilling, in which our firm served as Israeli counsel to the underwriters.

The robust expansion of the Israeli legal market in general, and the correspondingly significant increase in the size of Israeli law firms in particular, was also derived from the substantial growth in international litigation as well as modern and sophisticated forms of class and group actions. These developments in the Israeli legal market are consistent with worldwide trends such as globalisation, on the one hand, and modernising consumer society, on the other hand, which have not passed over Israel. As more multinational conglomerates entered the Israeli market and established a business presence, international litigation became a separate and distinct area of expertise. If you look again at our law firm as a microcosm you will note that in 1990 our dispute resolution practice was primarily based on purely ‘Israeli’ cases (representing Israeli clients with respect to ‘Israeli disputes’), and international cases were not very common, whereas in 2014, international litigation – representing foreign entities or dealing with cross-border disputes – represents a substantial portion of our dispute resolution practice. The same trend is shared by all top law firms in Israel. International litigation features unique aspects of dispute resolution both in substance and in procedure, such as with respect to issues of the international jurisdiction of Israeli courts, conflict of law rules, enforcement of foreign judgments in Israel, international arbitrations and legal co-operation between states in civil and commercial matters, to name a few. In cases where a multinational conglomerate is litigating in Israel, it expects to receive a level of legal service and attorney attention that does not fall behind other jurisdictions, particularly the US or EU, and consequently the Israeli legal market has adapted to this high standard.

The Israeli legal market has evolved to respond to the needs of a modernised consumer society by, among other things, adapting and encouraging modern and sophisticated forms of class and group actions, similar to US-style class actions. This approach is evident in the Israeli Class Actions Law 2006 (the Law) which permits the filing and adjudication of class actions, and defines a class action as ‘an action managed in the name of a class of people, who have not empowered the class plaintiff for this purpose, and which raises material questions of fact or law that are shared by all members of the class’ (prior to the enactment of the Law, class actions were available in very specific and limited fields and causes of action).

The Law provides for an ‘opt-out’ mechanism, namely, any person or entity which falls under the class definition becomes a member of the class, unless they provide a withdrawal notice (while the court may, under special circumstances, apply an ‘opt-in’ mechanism). The filing of a class action is subject to the court’s approval and discretion, and is subject to meeting several criteria which are similar (although not identical) to those of the US Federal Rule of Civil Procedure 23. The Law sets forth a closed list of issues and subjects with respect to which a class action may be filed, including claims against manufacturers or dealers of various products and services, insurance providers, banking corporations, competition law-related claims, environmental claims, labour law claims, anti-spam regulation, unlawful collection of tax or other mandatory payments, and more.

The number of class actions filed each year has increased exponentially since the enactment of the Law in 2006. Pursuant to unofficial statistics, in 2007 there were approximately 131 class action lawsuits filed in Israel. This number has increased every year and in 2013 there were approximately 1,458 class actions filed in Israel. Based on unofficial statistics, in 2013 approximately 50% of class actions resulted in voluntary dismissal, approximately 16% resulted in class settlements (namely, settlement agreements binding all members of the class who did not exercise their right to ‘opt-out’ of the settlement), 15% resulted in denying the motion for certification as a class action, 8% resulted in granting the motion for certification as a class action and approximately 10% resulted in a ‘cessation notice’ which allows a public authority to cease from collection of tax, toll or other mandatory payment resulting in the conclusion of the class action without restitution of past payments collected.

The Law has resulted in a significant increase in consumer rights’ protection and enforcement and has influenced the policies and conduct of large companies in Israel. It also led to the recognition of novel theories of consumer damages, which are not necessarily recoverable in other legal systems. In one of the most interesting class actions in Israel to date, it was discovered in 1995 that an Israeli manufacturer of various food products added silicone (dimethylpolysiloxane) to its low-fat, long-life milk product in order to prevent its foaming, in violation of official standards and in contradiction of certain statements it made. The addition of this substance did not pose a threat to the wellbeing of consumers. A motion for certification of a class action was filed, and the class action was certified and approved in a decision of the Israeli Supreme Court in 2003, for compensation of the class members for injury to their ‘autonomy of will’. This was a precedent-making decision that ruled that even this type of damage is recoverable in a class action in the appropriate cases.

In conclusion, the Israeli legal market does not really resemble the market which was in place 25 years ago. The market has grown and matured and provides sophisticated and first class legal advice to local clients as well as to global clients who do business in Israel. While law firms have expanded to handle the increased and specialised workload, the Israeli legislature and judicial system has also stepped up to plate and has provided a legal system in Israel that allows Israel to compete in a global world. We are excited to think ahead and dream about what our legal market might look like in 25 years from now.