June Edition 2023

55 The approval process becomes more complicated where the controlling shareholder of the Target has a personal interest in approving the merger. Israeli case law commonly defines “personal interest” as the existence of a material “excess interest” that a controlling shareholder (or any other person in which such controlling shareholder has an interest) possesses, compared to the common interest of other public shareholders. The most common circumstances of personal interest are transactions in which a controlling shareholder attempts to “squeezeout” the minority shareholders and become the sole-shareholder of the Target. Where a controlling shareholder has a personal interest, the merger will require a set of three-level approvals: (i) approval by the Target’s audit committee, (ii) approval by the Target’s board of directors (acting on the recommendation of a special independent board committee formed for this purpose as further set forth below), and (iii) approval by a super-majority of the Target’s shareholders, which consists of either the affirmative vote of the majority of the shareholders who are not controlling shareholders and have no personal interest in the transaction (the “Disinterested Shareholders”), or that the votes of such Disinterested Shareholders do not exceed 2% of the aggregate voting rights of the Target. A going private transaction involving a squeeze-out by the controlling shareholder that is effected via a merger transaction is generally viewed by Israeli courts as inherently suspicious and subject to increased scrutiny. This type of transaction is usually challenged in court by dissenting minority shareholders, arguing that the directors who approved the merger have done so not in the best interest of the Target, but for the benefit of the controlling shareholder. Because of the inherent conflict of interest, the directors would not benefit from the “business judgment rule”. The courts would rather review such a transaction by applying the “entire fairness” standard, which reviews the three main aspects of the transaction: full disclosure, due process and fair value of the consideration. As part of that review, the court would examine the process by which the board approved the transaction and its implementation of due process and would also apply its own discretion as to the sufficiency of the considerations. In scrutinizing the sufficiency of the considerations, the court would rely on expert opinions submitted by the parties and may also rely on market indicators. For example, if some of the Disinterested Shareholders who voted in favor of the merger were sophisticated institutional investors, this would be an indication that the consideration was reasonable.