Israel – New Heights

In a Tel Aviv conference in June this year, DLA Piper, White & Case, Freshfields Bruckhaus Deringer and Weil, Gotshal & Manges will rub shoulders with Israel’s legal elite in discussing the liberalisation and internationalisation of the country’s legal market. The conference, hosted by the Tel Aviv District Israel Bar Association and legal marketing and consulting company Robus, highlights the growing presence of international law firms in Israel. And while this may bear all the hallmarks of another instance of empire building by international advisers, the reality is actually a little more nuanced.

Israel may have only just liberalised its legal market to allow foreign entrants – through an order passed by the Israeli finance minister in August 2012 – but many firms have long been present in the jurisdiction unofficially. Regardless of whether the liberalisation process will fundamentally alter the state of the market or not, there is concern about its effect on the domestic Bar, which is already saturated by highly qualified Israeli lawyers, including immigrants who previously practised overseas.

The June conference, though, will underline Israel’s position as a major international legal hub. It may have a population of less than eight million, but its economic might extends across the world, most notably to the US. This is despite the political stasis at the start of the year created by a hung parliament. Prime minister Benjamin Netanyahu took five weeks to assemble a coalition government, which was finally achieved in March.

Making waves

A liberalised legal profession and a more open economy hunting for foreign investment presents an attractive prospect for international law firms focused on cross-border transactions.

Of these, US firm Greenberg Traurig made the biggest splash in Israel in January 2012 by launching an ambitious practice in Tel Aviv. The office currently houses four lawyers though Gary Epstein, co-chair of the firm’s Israel practice, says that the firm is currently seeking more space and more fee-earners. ‘We have four full-time lawyers on the ground at the moment and we need to expand because they are at full capacity,’ he says.

Zeichner Ellman & Krause (ZEK), a US-based boutique firm with offices in New York, New Jersey and Connecticut, also launched a branch in Israel in August 2012. The office in Ramat Gan, a satellite district of Tel Aviv, is led by associate Daniel Rubel, who was eager to emigrate to Israel and practise locally. ‘Many Americans want to live here. It’s a great place to live and it’s a great business opportunity,’ he explains.

New York-based Stuart Krause, a founding ZEK partner, explains that despite his firm’s small size, he felt compelled to launch an Israel presence and build on the firm’s efforts over the years. ‘Israel is a hub for business and one of the most developed countries in the region,’ he says. ‘It is economically powerful beyond its size, but the reason you need a physical presence is that we have learned that the Israeli businessperson really cares about giving work to people who invest in the country and its success. We believe that if you want to develop that business you have to cross that Rubicon and make that commitment.’

London’s Berwin Leighton Paisner (BLP) is another firm that is a recognised brand in Israel and it launched a new office in December 2012, building on the work of corporate finance partner Paul Miller, who emigrated to Israel in 2007. ‘Israel has grown considerably over the last decade. It has all the attractions of an emerging market together with being a sophisticated and stable legal environment,’ Miller says. ‘It is an attractive market in that you have a growth economy producing many opportunities across a wide range of sectors and the people are approachable and always open to new ideas.’

‘We have room in our building to expand further, but I can’t see a firm in Israel growing to 500 lawyers.’
Alan Sacks, Herzog Fox & Neeman

BLP hired finance specialist Simon Baum as a partner from Allen & Overy’s London office in March this year and he is now working alongside Miller in Tel Aviv. The branch is a culmination of the firm’s efforts to broaden its offering to the Israeli market over the last few years. Jonathan Morris, a London-based corporate finance partner at BLP and a key member of the Israel practice, says that the firm has had to alter its approach since the financial crisis. ‘Initially the focus was more on the corporate and IPO side with a number of offerings on AIM and London’s Main List,’ he says. ‘But when the IPO market slowed down, we had to think about other opportunities, including defence, aviation, financial services, shipping and technology. And so we have expanded the breadth of our offering considerably. We are partner led and that plays well with the Israeli client base.’

Although BLP views the Israel branch as a representative office that principally generates work for the rest of the firm, it now has two partners based there, and has made a commitment that few international firms are willing to match. Firms such as Freshfields and DLA Piper have had representatives on the ground for several years, but they are currently wary of extending this to having a fully fledged office. Israel is a valuable market for them, but taking the step of establishing a branch there is a leap too far.

DLA Piper London real estate partner Paul Jayson, who is a key member of the firm’s Israel practice, says: ‘Nothing is off the table but currently we do not consider we are missing out by not having an official branch.’

Joshua Kiernan, a London-based capital markets partner at White & Case and head of the firm’s Israel practice, agrees that large international firms have little to gain from taking office space in Tel Aviv. ‘I don’t think we will see big firms with official offices here,’ he explains. ‘Partly because of political reasons but also because there are so many highly qualified lawyers here, including former practitioners at US and UK firms and their rates are very low.’

Frank Miller, head of Freshfields’ Israel practice, is sanguine about the work that Israel is generating for the global firm. Freshfields employs a representative on the ground, Adir Waldman, a former associate at Wall Street firm Wachtell, Lipton, Rosen & Katz, but Miller says that the firm does not feel compelled to open an official branch. ‘Israel is stacking up pretty well against our strategy and business plan,’ he says. ‘The matters we work on involve lawyers from all across our network, whether it be combined US/English law restructuring advice or “dawn raid” advice in a German antitrust matter,’ he explains.

Waldman agrees and says that building a team in Israel would be hard to marry with the firm’s global financial model. ‘I don’t think there will be a flood of additional foreign firms coming in. They will find it difficult to put a lot of people on the ground here. The margins are very low compared to elsewhere,’ he notes.

Large international firms have been reluctant to open fee-earning offices in Israel, because billing rates would then have to fall in line with domestic law firms to win work. With representatives on the ground, operating primarily in a business development capacity, firms can then invoice from overseas cities such as New York and London. Assuming that the Israeli client is willing to pay them, the firms then charge their usual international rates.

Kiernan says capital markets deals are returning after a long slump but historically he worked on a multitude of offerings by Israeli issuers before the markets tanked, including representing the underwriters on Oil Refineries’ $1.6bn IPO on the Tel Aviv Stock Exchange and AFI Development on its $1.4bn London Stock Exchange IPO – both in 2007. He argues that simply visiting Israel on a regular basis rather than having a permanent base in the country does not hinder his practice. ‘The deal flow is quite good. The volume of capital markets and M&A transactions is starting to match the pre-crisis levels. Right now the pipeline looks great,’ he says.

Tuvia Geffen, a corporate and securities partner at domestic firm Naschitz Brandes and former associate at Sullivan & Cromwell, is also enthused by the increase in capital markets activity: ‘The capital markets are coming back. There has been a wake up in Israeli companies going to the US to raise money.’ Geffen expects a handful of Israeli companies to raise money on Nasdaq in the second or third quarter of 2013.

GDP Growth compared: Israel v UK and US
Year	Israel	UK	US
2012	2.9%	0.1%	2.2%
2011	4.6%	0.8%	1.8%
2010	5.7%	1.8%	2.4%
Source: CIA – The World Factbook

Big draw

Israel is clearly attracting plenty of international attention and not just from the US and UK markets. Germany’s HEUSSEN established an Israel desk in Munich two years ago, headed by Israeli lawyer Meital Werner. Werner says that Germany was Israel’s second biggest trading partner until 2010, when China pushed it into third place. According to Reuters, a delegation of senior Chinese business leaders visited Israel in December 2012 in order to boost Chinese investment into Israeli technology. This followed China National Chemical Corporation (ChemChina) acquiring Israeli agrochemicals manufacturer Makhteshim Agan Industries for $2.4bn in 2011. Israeli firm Herzog Fox & Neeman advised Makhteshim Agan, with fellow domestic firm GKH Law Offices advising ChemChina.

Despite Germany losing ground to China, Werner suggests that trade links between Israel and Germany have never been stronger. This is illustrated by the fact that the two nations are world leaders in renewable energy and Werner says that this sector accounts for some 25-30% of the firm’s Israel practice. ‘I see a very good potential with Germany as a market leader in renewable energy in Europe and with Israel’s culture of innovation and technology. I believe we can expect more activity between the two countries in this sector.’

Nimrod Rosenblum, head of the corporate practice and co-founder of mid-sized local firm Epstein Rosenblum Maoz (ERM), says that while over 50% of the firm’s clients come from overseas it would be wrong to overstate Israel’s case as a major international legal market, which is another reason why the major firms have not seen the need to make a move. ‘Israel is not China, Brazil or Russia and there are political sensitivities as many foreign law firms have strong interests in the Gulf or other places like that,’ he explains.

Cautious welcome

Israeli law firms are both enthused by the influx of international firms and foreign lawyers, but also protective of their domestic practices. Although foreign entrants have come armed with assurances that they will attract more work for Israeli firms, the local Bar is wary of sturdy client relationships being weakened by these new intruders.

Clifford Davis, a former London solicitor at Gouldens (now Jones Day) and now a partner at Israel’s S. Horowitz & Co, is philosophical about Israel’s already populous legal profession becoming more crowded by foreign entrants. While Israel has a history of welcoming lawyers from overseas, Davis – who emigrated from the UK to Israel in the 1990s – cautions firms that believe they can simply take over the market. ‘The quality of the top ten law firms in Israel is as good as in the City of London or a white-shoe law firm,’ he maintains. ‘Israel is not like other less developed jurisdictions where foreign firms spent a lot of time retraining the local lawyers. There is a rich pool of legal talent in Israel.’

Alan Sacks, head of the international practice at leading Israeli firm Herzog Fox & Neeman, agrees foreign firms will alter the market, but believes that the effects will be limited by the existence of a strong and cosmopolitan local Bar. ‘In the long term, it must have ramifications for firms like ours that have a significant international presence,’ he says. ‘We act on so many transactions as the extended arm of foreign law firms. Slowly those firms will do more of the work that we are handling. But I don’t think they represent a challenge to the domestic market. I don’t think it will be like other jurisdictions where foreign law firms have overwhelmed the local Bar.’

Davis also says many top Israeli firms are already well equipped to advise on cross-border transactions, if not actually advising on English or US law for instance. ‘As a rule, I don’t like to advise on contracts governed by US and English law but I will do so if the client asks and, if necessary, foreign counsel is given the opportunity to give it a once-over at the end,’ he says.

Foreign lawyers are understandably keen to reassure their Israeli colleagues that their greater focus on the jurisdiction as a source of business should provide more positives than negatives for the Israeli legal market. DLA Piper partner Jeremy Lustman moved to Tel Aviv two years ago and although the firm has no official office in Israel, he says that international firms are generating more work for the local Bar. ‘In the last two years we have helped 40 multinationals do business here in Israel and every time we have introduced them to local counsel,’ he says.

Lustman explains that Israel’s status on the global stage is a compelling factor for both the domestic and international legal market. ‘The level of sophistication of Israeli dealmakers has grown considerably in the last ten to 15 years. There are tonnes of multinationals doing business here and tonnes of Israeli businesses doing business overseas. All the major airlines are here and you can now fly to all sectors of the globe on a daily basis,’ he remarks.

Going for growth

Israel’s status within the world economy is really encouraging growth within the domestic legal market. Not long ago, a firm of 50 fee-earners was considered large. Now there are three firms with more than 200 lawyers. Goldfarb Seligman & Co has 220 lawyers; Herzog Fox houses 215 attorneys; and Meitar Liquornik Geva Leshem Tal boasts 204 practitioners.

Meitar is the latest firm to join the 200-club after merging with 43-lawyer Kantor, Elhanani, Tal & Co in January 2013. Kantor had a market-leading banking practice led by the renowned Dalia Tal and her name has been added to the newly merged firm’s title. The 2012 issue of The Legal 500 EMEA ranks Kantor in tier 1 for banking and finance in Israel. Tal and her team are regular advisers to Bank Leumi, one of Israel’s two largest banks alongside Bank Hapoalim.

Cliff Felig, a partner in the corporate and securities group at Meitar, says that the firm has now created an evenly balanced practice covering all key sectors in Israel. ‘I can’t think of any holes in the practice that we need to fill, though this doesn’t mean we won’t grow in the future,’ he says.

Market consolidation has been a recent trend in Israel. In 2011 Goldfarb, Levy, Eran, Meiri, Tzafrir & Co merged with M. Seligman & Co to form Goldfarb Seligman & Co. Ashok Chandrasekhar, a legacy Goldfarb partner and a member of the merged firm’s corporate and securities department, says that being big can be bountiful. ‘In the past few years, size has been a significant test of credibility and people have paid a lot of attention to who are the five or so largest firms in Israel,’ he says.

‘The quality of the top ten law firms in Israel is as good as in the City of London or a white-shoe law firm.’
Clifford Davis, S. Horowitz & Co.

He explains that Seligman brought additional kudos to the merged firm, but most notably in litigation. Eli Zohar, a legacy Seligman partner, became Goldfarb Seligman’s chairman and is one of Israel’s premier litigators. The Seligman side of the firm is also widely known for its white-collar crime expertise.

These mergers have clearly affected the market, with a senior figure at one of Israel’s leading law firms saying: ‘Those of us in the 150-lawyer range are no longer among the top three. The over 200-class has three members now and it is certainly giving rise to the thought that one should join the class. So there is a lot of dating going on and people looking at what kind of mergers make sense. It is not a big secret that we are looking around for potential merger partners.’

Yaacov Yisraeli, a founding partner of Shibolet & Co, says: ‘There is no doubt in my mind that, generally speaking, being the largest law firm in the country has a positive psychological effect. However, it is not the only denominator determining a firm’s success.’

Herzog Fox’s Sacks suggests that there are limitations as to how much further firms can grow. ‘We have room in our building to expand further, but I can’t see a firm in Israel growing to 500 lawyers,’ he remarks. ‘Given Israel’s geopolitical situation, there is a limit to the size of the local marketplace. There are only a few firms that have a large core practice of high-profile and large-scale cross-border work, and we tend to meet them again and again.’

Open season

Despite the recent political uncertainty caused by a hung parliament and signs that the global financial crisis has finally caught up with the Israeli economy, both domestic and international firms are buoyed by the prospects of growth in cross-border transactions.

Last year, in response to widespread protests at the perceived over-concentration of economic power within Israel’s large family-owned conglomerates, the Israeli government proposed that these businesses should be dismantled in a bid to redistribute economic power. This was expected to lead to a stream of acquisitions and disposals.

Yet with Israel’s general election in January 2013 leaving incumbent prime minister Benjamin Netanyahu unable to form a coalition government until March, the proposals, put forward by the government’s Economic Concentration Committee, are currently shelved and awaiting the political whims of the new government.

Even so, market forces have already turned up the heat on Israel’s tycoons, who have been keen users of leveraged finance to build their business empires. Some of these conglomerates are now struggling to service their debt and banks and bondholders are demanding that they sell assets to raise cash.

IDB Holding Corporation, one of the biggest conglomerates in Israel and owned by Nochi Dankner, was reported to be struggling with a debt of $514m according to news reports at the end of 2012.

Top ten Legal Advisers by value on Israeli M&A Transactions in 2012
Rank	House	Value (US$m)	No. of deals
1	Meitar Liquornik Geva Leshem Tal	2,759	10
2	Yigal Arnon & Co	2,419	3
3	Herzog Fox & Neeman	2,289	16
=4	Epstein Rosenblum Maoz	1,989	2
=4	Freshfields Bruckhaus Deringer	1,989	2
=4	RosenRam	1,989	2
7	Kirkland & Ellis	1,707	3
8	Gibson, Dunn & Crutcher	1,198	2
9	Goldfarb Seligman & Co	1,123	3
10	GKH Law Offices	951	6
Source: mergermarket

In May last year, America’s Access Industries acquired a 49.9% stake in Clal Industries and Investments from IDB Development. The deal was valued at $332m. Herzog Fox teamed up with Weil, Gotshal & Manges to advise Access Industries, while Goldfarb Seligman represented Clal Industries and Investments.

Moriel Matalon, managing partner of leading Israeli firm Gornitzky & Co, says these asset sales could be very attractive for investors. ‘We do face difficulties with some of the conglomerates,’ he explains. ‘Interestingly enough, you will find that the top of the pyramid is experiencing the difficulties because the original purchases were leveraged with heavy financing. But when you go below the top of the pyramid, the underlying companies are very solid.’ In 2012 Gornitzky represented Israeli tycoon Yitzhak Tshuva on the debt settlement between Delek Real Estate and its bondholders. Lipa Meir & Co advised Delek.

Simon Jaffa, a founding partner at mid-sized Israeli firm Barnea & Co, says that foreign investors are circling because they see Israeli assets can be acquired at attractive prices. He explains: ‘Many of these family-owned conglomerates are being pressured by the banks that they need to be less leveraged and that they need to sell certain assets. All of a sudden there are a number of interesting opportunities where companies are being put up for sale. There are almost no buyers in Israel, because there is hardly anyone around with the financial resources to do these types of deals. So we are working on three different M&A deals at the moment for foreign investors, including private equity funds looking at the possibility of buying large companies in Israel that would in the past have been snapped up by the major Israeli players.’

In December 2012 Barnea represented UK private equity house Ethemba Capital on its $107m acquisition of a controlling stake in non-woven fabric manufacturer Avgol from Israel Petrochemical Enterprises, which is owned by Israeli businessman David Federman. Jaffa says that this kind of deal is almost certainly the start of many: ‘We represent a significant number of overseas companies and deals are heating up around us with interested parties conducting due diligence of potential targets. The indication is that there will be more opportunities on the horizon.’

ERM’s Rosenblum agrees that the market is ripe for overseas financial sponsors to come into Israel: ‘During the next two to three years, I expect mid-sized private equity houses to acquire very good assets in Israel at very good prices.’

This optimistic sentiment explains much of the current focus on Israel as a market that can deliver for both the domestic Bar and the international legal market. S. Horowitz’s Davis wonders why it has taken his foreign colleagues so long to see the light. ‘One of the many beauties of Israel is that it has more companies listed on Nasdaq than any other country outside of North America,’ he says. ‘It is rich in technology and rich in potential, and now has a burgeoning gas industry. If you put that all together, you wonder why foreign firms did not come out here earlier.’ LB

Top ten Israeli M&A transactions in 2012
Announcement date	Target company	Target/seller legal adviser	Bidder company	Bidder legal adviser	Deal value (US$m}
5 June 2012	Scailex Corporation (75% stake)	Kirkland & Ellis	Hutchison Whampoa; and Li Ka Shing Foundation	Herzog Fox & Neeman	1,392
7 March 2012	Migdal Insurance and Financial Holdings (69.1% Stake)	Epstein Rosenblum Maoz; Freshfields Bruckhaus Deringer; RosenRam	Shlomo Eliahu (Private investor)	Yigal Arnon & Co	1,098
6 September 2012	Migdal Insurance and Financial Holdings (69.13% Stake)	Epstein Rosenblum Maoz; Freshfields Bruckhaus Deringer; RosenRam	Shlomo Eliahu (Private investor)	Yigal Arnon & Co	891
16 April 2012	Objet	Cooley; Meitar Liquornik Geva Leshem Tal	Stratasys	Fischer Behar Chen Well Orion & Co; Latham & Watkins; McLaughlin & Stern; Richards, Layton & Finger	630
28 November 2012	Retalix	Gibson, Dunn & Crutcher; Greenberg Traurig; (Advising Jefferies & Advocates and Notary; Company); Meitar Liquornik Geva Leshem Tal	NCR Corporation	Amit, Pollak, Matalon & Co. Morrison & Foerster	606
12 August 2012	Taro Pharmaceutical Industries (33.68% Stake)	Gibson, Dunn & Crutcher (Advising Citi); Goldfarb Seligman & Co; Willkie Farr & Gallagher	Sun Pharmaceutical Industries	Shearman & Sterling	592
10 May 2012	XtremIO	GKH Law Offices	EMC Corporation	Cleary Gottlieb Steen & Hamilton; Milbank, Tweed, Hadley & McCloy; Yigal Arnon & Co	430
12 January 2012	Anobit Technologies	Meitar Liquornik Geva Leshem Tal	Apple	Herzog Fox & Neeman	390
10 February 2012	Mashav Initiating and Development (55% Stake)	Goldfarb Seligman & Co	Livnat Family		356
20 May 2012	Clal Industries and Investments (49.9% Stake)	Goldfarb Seligman & Co	Access Industries	Herzog Fox & Neeman; Weil, Gotshal & Manges	332
NB: Bold indicates lapsed deals.					Source: mergermarket