Gazit Globe’s Gilson Says Israeli Competition Plan Is ‘Unwise’

Proposals by an Israeli government- appointed committee on increasing competitiveness in the economy are “unwise” and “seriously misguided,” Ronald Gilson, a professor at Columbia Law School and Stanford Law School, said in an interview in Jerusalem.

Gilson and Yale Law School professor Alan Schwartz represented Tel Aviv-traded Gazit Globe Ltd. (GLOB) and Alony Hetz Properties & Investments Ltd. (ALHE) in hearings before the committee. The companies are among those that will be affected by the panel’s recommendations and chose to submit their objections to the proposals.

Gilson’s findings relate to the committee’s recommendations for the corporate governance of Israeli corporations organized as pyramids. The panel said its recommendations will help to strengthen the position of minority shareholders and encourage activism of institutional investors.

A pyramid was defined by the committee as a chain of companies or several chains, at the top of which there is a joint controlling shareholder. Each company in the chain controls the company directly below it, but doesn’t hold 100 percent of the equity.

On why the proposals are unnecessary:

“The committee’s recommendations are seriously misguided. The recommendations ignore the ability of courts, especially the new Israeli corporate court, to police self-interested transactions.”

On the detrimental effect of the proposals on entrepreneurship:

“These recommendations not only are unwise. They would materially deter entrepreneurs from creating Israeli companies.”

On how the proposals may encourage entrepreneurs to locate in other countries:

“No other advanced country imposes such costly and inapt restrictions on the governance of public companies. An entrepreneur with a choice -- most of them -- would locate in more hospitable jurisdictions.”

On why the proposed rules aren’t needed:

“The usual methods of controlling self-dealing -- approval by a majority of the minority and judicial review -- can effectively deter these duty-of-loyalty violations. The ability of the law to act is particularly strong in Israel, which recently created a special corporate court that can police loyalty violations.”

On the ability of the Israeli legal system to cope with self- dealing:

“The recommendations aren’t desirable because they operate to eliminate a way of organizing business that’s commonplace in the world. The better alternative is focusing on the potential for these groups doing bad things, and the Israeli legal system is perfectly capable of doing that.”

On the potential for harm to jobs and investment:

“The first response if the recommendations are adopted is for companies to change where they incorporate. That constrains one way in which the Israeli government can regulate companies. If the government then moves to regulate the actual behavior of companies, their response may be to move the activity, and that is harmful, in terms of jobs and investment.”

On the possibility that the proposals may be politically motivated:

“The puzzle I have with the recommendations is this disconnect between what they say the problem is -- interested transactions -- and the solution, which is to discriminate against the form of organization. That’s a big mistake and it’s a pretty obvious mistake. It leads me to speculate that this is really about something else: That it is an effort to discriminate against a business form, which because of political or other reasons, the business form is associated with something political that people don’t like, which would at least explain what they are doing but wouldn’t justify it.”

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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