Israeli Tender Offers and the Foreign Minority Squeeze-Out

Being taken out of a shareholding you never put up for sale is a designed feature of Israeli company law, not a glitch. A retired investor in Manchester holds three percent of a Tel Aviv company through a UK broker. One morning the broker's platform shows a corporate action with a deadline five days away, in summary form, translated loosely from a Hebrew offer document he has never seen. He ignores it, because three percent of anything feels too small to matter. Six weeks later the shares are gone from his account, replaced by a cash figure he had no say in. He was carried out by a full tender offer, and nothing about the process needed his agreement.

The rules sit in Sections 336 to 340 of the Companies Law 5759-1999, read together with the Securities Regulations (Tender Offer) 5760-2000. A full tender offer is a bid for all the shares of a company. If holders of at least 95% of the shares accept it, the shares of every holder who did not accept transfer to the offeror automatically, at the offer price. The blunt logic is deliberate: the law would rather see a company fully acquired or the bid fail than leave a controller sitting on 96% with a trapped minority underneath.

The 95% rule and why bids lapse

The threshold does most of the work, and it cuts both ways. Because 95% acceptance is what triggers the compulsory transfer, a bidder who falls short of 95% is not permitted to complete above 90% at all. So an offer that attracts, say, 92% does not leave a 92% controlled company. It lapses, and the shares return to where they were. This is why Israeli takeover fights so often turn on a sliver of stock near the top of the range, and why a small foreign holder who assumes their stake is irrelevant can find it was the block the bidder needed.

Where the 95% is reached, the price every non-accepting holder receives is the offer price, full stop, unless they go to court for something better.

In Practice: Under Sections 336 to 340 of the Companies Law 5759-1999 and the Securities Regulations (Tender Offer) 5760-2000, a full tender offer accepted by holders of 95% of the shares transfers the remaining shares to the offeror compulsorily; short of 95%, the offeror may not exceed 90%. A holder who thinks the price was wrong applies for appraisal to the Economic Department of the Tel Aviv District Court within six months of completion. Court fees run at 2.5% of the amount in dispute, so a claim that a NIS 3,000,000 holding was undervalued by a third carries roughly NIS 25,000 in fees on filing, and a contested appraisal typically takes 18 to 30 months to a first-instance decision.

The appraisal remedy, and the trap inside it

If you are squeezed out and you believe the price understated the shares, the law gives you a way to argue it. You can apply to the court for appraisal, which asks the judge to set the fair value and award the difference. The window is six months from completion, and the cases are heard in the Economic Department of the Tel Aviv District Court, where valuation disputes are expert-led and unhurried.

The remedy comes with a qualification that catches people. The offeror is entitled to write into the offer that any holder who tenders their shares gives up the appraisal right, and offers routinely do exactly that. So the closing date presents a real choice. Tender, and you take the cash now at the price on the table, but you sign away the ability to complain about that price afterwards. Decline, and you keep the appraisal claim alive, but you accept the risk of being swept up at the same price if the 95% is reached without you. There is no third door where you take the cash and sue for more. A holder who wants to preserve the appraisal claim has to make the non-tender a deliberate act, not the accident of a missed notice, which for someone abroad is easier said than done.

Special tender offers and creeping control

The full tender offer is not the only mechanism a foreign holder meets. Section 328 of the Companies Law requires a special tender offer before anyone can acquire shares that would take them over 25% of the voting rights where no other holder is above 25%, or over 45% where no other holder is above 45%. This is the law's answer to a controller quietly building a blocking stake in the market. A special tender offer is offered to all holders and must attract genuine minority support to succeed, which gives the minority a collective say at the moment control changes hands rather than only at the end.

For the individual foreign shareholder the practical takeaway is that control of an Israeli company cannot ordinarily creep past these lines without an offer reaching you. Whether that offer is one you want to accept is a separate question, and where a controller is already entrenched the relevant protection is not the tender offer rules at all. Oppressive or unfairly prejudicial conduct is dealt with separately, and our answer on minority shareholder rights in an Israeli company for a non-resident sets out that route in detail.

In Practice: Where the grievance is conduct rather than a bid, Section 191 of the Companies Law 5759-1999 lets the court grant relief against oppression or unfair prejudice, including an order that the controller or the company buy the minority out at a value the court fixes. The application is made to the Economic Department of the Tel Aviv District Court, court fees again run at 2.5% of the sum claimed, so a NIS 2,000,000 buy-out claim carries about NIS 50,000 in fees split across the litigation, and a contested Section 191 case commonly takes two years or more before a valuation is ordered.

The cross-border friction a UK holder actually meets

Nothing in the timetable was built for a holder outside Israel. The offer document, the acceptance form and the deadline are published in Hebrew. If you hold through a UK broker or a pooled nominee account, you see the corporate action only as your custodian chooses to relay it, sometimes with a cut-off that closes days before the real Israeli one. The defence is dull and effective: instruct your custodian in writing, keep the instruction, and if you mean to preserve appraisal rights make sure the decision not to tender is recorded and deliberate. If the shares sit in a pooled account, whether you are even recognised as the holder for an appraisal application depends on the custody chain, and that has to be sorted out while the six months are running, not after.

On the tax side the disposal is a chargeable event for UK capital gains tax whether you tendered or were carried out, and the compulsion earns no relief. The proceeds are simply what you receive. The UK-Israel double taxation convention will generally leave a gain on quoted shares taxable in the UK rather than in Israel, so the practical problem is usually evidential: proving your acquisition cost in shekels to HMRC, ideally assembled before the money lands rather than reconstructed years later. A holder of shares in a private rather than a listed Israeli company should also check the shareholders agreement for any drag-along clause, because a contractual bring-along can force a sale on terms narrower than the statutory tender offer would.

What goes wrong

Common Mistake: A UK holder sees the corporate action late, through a custodian's summary, and tenders at the last moment to be safe. The offer contained a waiver clause. By tendering, the holder extinguished the appraisal right under Section 340, and when it later emerged that the offer price sat well below a recent related-party valuation of the same shares, there was no route back. The six-month appraisal window in the Economic Department of the Tel Aviv District Court is only open to holders who did not tender, so a defensive last-minute acceptance can cost a holder the very remedy that existed to protect them.

Practical Checklist

• Treat any corporate action on an Israeli holding as urgent and get the actual Hebrew offer document, not just the broker's summary, translated in full.
• Find the real Israeli deadline, which is often later than the custodian's internal cut-off, and diarise both.
• Decide tender-or-hold on the merits before the closing date, and if you want to keep appraisal rights, make the non-tender a written, deliberate instruction.
• Check the offer for a waiver clause under Section 340 before you tender anything.
• If your shares are in a pooled or nominee account, confirm you can be recognised as the holder for an appraisal application while the six months are still running.
• Assemble proof of your shekel acquisition cost for HMRC now, because a squeeze-out is a UK disposal regardless of your wishes.

Speak With an Israeli Attorney

A full tender offer moves on an Israeli timetable in Hebrew, and by the time a UK custodian relays it the decisions that matter are often already narrowing. We read the offer document for the waiver clause and the true deadline, advise whether tendering or holding out serves you better, and bring an appraisal application in Tel Aviv inside the six months where the price does not stand up.

Contact us for a confidential initial consultation.