Israeli Government Lets Pyramid Loophole Stand, For Now

Minister of Justice Ayelet Shaked decided on Thursday to let stand a loophole in the law regulating business concentration, allowing IDB Development Corporation to be considered in compliance with restrictions on pyramid structure through a sale to a fellow subsidiary of the company that controls it.

Following the decision, IDB can proceed with its proposed sale of Discount Investment Corporation through what is known as a seller’s loan, according to Globes.

Shaked’s ruling concludes months of deliberations within her ministry and the Securities Authority about whether to permit the ploy. The minister had reportedly intended to order the loophole closed only recently, on the grounds that the IDB maneuver would set a precedent that would encourage other business groups to follow suit.

The Justice Ministry released a statement explaining its action on Thursday:

“Following a number of meetings on the subject, and after the various alternatives were presented by the professional echelon, the minister of justice accepted the Securities Authority’s view that this was not the right time to revise the law and close the loophole, among other things because of the supreme importance of maintaining regulatory stability, and that it would not be proper to change the rules in midstream without providing adequate advance notice. At the same time, the minister of justice made it clear that should other companies follow this path, a legislative amendment closing the loophole will definitely be considered.”

The Promotion of Competition and Reduction of Concentration Law requires that the pyramid structure of companies whose shares are traded in Israel must reduce that pyramid to no more than three levels by December 2017, and to no more than two levels by December 2019.

The government’s ruling on the case was prompted by an IDB statement to the Securities Authority several weeks ago, which said that it was unable to reduce the number of pyramid levels from 4 to 3 as required by December 31 in the normal ways. So, the company requested permission to take advantage of the loophole in order to avoid being held in violation of the law.

The loophole allows IDB to sell its shares in Discount Investment to a new SPV that would be a private company controlled by IDB controlling shareholder Eduardo Elsztain. In this way, IDB would exit the group’s pyramid, and would be replaced by Discount Investment as the top level. The private company is to receive the money for acquiring Discount Investment from IDB itself as a seller’s loan (which IDB is to raise in a bond issue), Globes said.