New Amendment of Block Exemptions Anchored in the Israeli Restrictive Arrangements’ Regime Allows Parties to Self-Assess the Competitive Effect of their Joint Venture and Ancillary Restraints in Merger Agreements.

In recent years, the Israel Antitrust Authority (the "IAA") has shown a growing trend to become, and has slowly evolved into, a self-assessment regime, whereby it provides a general framework for examining the competitive implications of an arrangement, and the parties to such arrangement are then responsible for examining their own compliance under the guise of such framework. As a consequence, the IAA grants the parties, under specific circumstances, the freedom and independence to assess themselves the competitive nature and effect of their arrangement and, correspondingly, ascertain whether there exists a need to obtain regulatory approval(s) or not in respect of the restrictive arrangement in question. Although this approach may, in many cases, negate the requirement for applying to the IAA in order to obtain an exemption from approval of the relevant restrictive arrangement, it nonetheless imposes on the parties to an arrangement the additional burden and responsibility of examining themselves the competitive nature and effect of the transaction while simultaneously exposing them to retroactive examination and enforcement action on the part of the IAA, including following complaints filed with it by third parties, consumer groups, competitors, etc.

As part of this trend, on November 13, 2018, there was published in the Official Gazette (Reshumot) an amendment to the block exemption attributable to joint ventures as well as an amendment to the block exemption attributable to restraints ancillary to mergers. In the framework of these amendments, the IAA expanded application of the exemptions included in such block exemptions, and added to the existing criteria therein (which are based on technical tests involving the satisfaction of threshold criteria and market share requirements, without the need for materially examining their impact on competition (safe harbour)), also a substantive test, whereby an arrangement will benefit from the said block exemptions, even if it does not comply with the specific technical criteria prescribed therein, as long as:

(a)     the restraints do not limit competition in a significant part of the market affected by the arrangement, or they are liable to limit competition in a significant part of the market as aforesaid, but do not substantially harm competition in the said market; and

(b)     the objective of the arrangement (or merger, as the case may be) is not to reduce or prevent competition, and there are no restraints that are not necessary to realize its objective.

Therefore, a joint venture or a restrictive arrangement ancillary to a merger that does not satisfy the "traditional" threshold criteria of the relevant block exemptions, but—according to the parties to the arrangement—does meet the said substantive test, will be exempt from the obligation to apply to the IAA or to the Restrictive Trade Practices Tribunal for the relevant regulatory approval, based on the parties’ "self-assessment" of the arrangement and its effect on competition. In the context of the block exemption attributable to joint ventures, it should be noted that a joint venture between competitors relating to joint marketing in the specific area in which they compete, will still be subject to individual examination by the IAA and, in any event, will not be able to rely on the criterion for satisfying the substantive test as outlined above.

The practical implication of this is that, for example, parties to a non-compete provision which is ancillary to a merger transaction between them are no longer bound to limit it to the period specified in the block exemption to restraints ancillary to mergers, but rather can adapt it to suit their own particular needs, as long as the parties find that the non-compete provision inherent in the arrangement satisfies the substantive test criterion outlined above.

In addition, and in order to assist the parties in carrying out such "self-assessment", the IAA also published Opinion No. 1/18, which broadly presents its position with respect to the interpretation of section 14(a)(2) of the Restrictive Trade Practices Law (the "Law"), whose provisions are also included in the said block exemptions (see paragraph (b) above). In a nutshell, Opinion No. 1/18 clarifies that, within the framework of the test set out in section 14(a)(2) of the Law, the actual nature of the arrangement should be examined, rather than its mere title. At the same time, it is necessary for the arrangement to have an "actual objective" which is not intended to reduce or prevent competition, but is a legitimate and efficient arrangement. In addition, each restraint in the arrangement should be necessary and essential to realize its objective and the restrictions in the arrangement should not be broader than necessary (for example, in terms of duration, geographical scope, etc.) and should be merely secondary to the legitimate objective of the arrangement. It should also be noted that restraints in an arrangement that are intended to apply also post-term (such as non-compete restraints) will also be subject to these criteria.

The new amendments of the block exemptions may indeed ease the regulatory burden imposed on the business market in this context, but at the same time may give rise to another burden, and not necessarily an easier one—the onus of self-examining the competitive nature and effect of an arrangement in Israel, and the risk that the IAA will not hold the same conclusion reached by the parties when carrying out such self-examination, and consequently initiate enforcement measures against the parties.

Since this no doubt amounts to a fundamental change in the IAA's policy with respect to "ordinary" agreements and merger transactions alike, we will be happy to assist in connection with any contemplated joint venture or merger whose governing agreements contain restrictions of the nature discussed above. To this end, we shall be pleased to provide guidance on the specific treatment to be administered to the antitrust aspects included in such types of agreements.

This Memorandum is not a legal opinion, is not a substitute for legal advice, and is not intended for readers to rely on it as a legal opinion. In any case, you should seek professional legal advice.

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