Transcript Committee on Increasing Competitiveness in the Economy

Committee on Increasing
Competitiveness in the
Economy
Principal Recommendations
September 2011
1
Disclaimer : The binding version is the Hebrew text only.
Mandate of the Committee
The Committee was appointed in October 2010 by the Prime
Minister, the Minister of Finance and the Governor of the Bank of
Israel
Mandate of the Committee: Examining the effect of the existing structure
of the economy on the level of competitiveness in its various sectors; on
the economy’s financial stability and economic efficiency; and
recommending advisable policy measures, particularly with respect to the
following issues:
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1.
Actions required to reinforce corporate governance in public companies
2.
The issue of the control of real companies over financial companies
3.
The scope of the antitrust policy
4.
The issue of control of a public company using a pyramid holding structure
5.
Examining the imposition of stricter conditions on business groups with respect
to the acquisition of government assets and the receipt of licenses and
concessions
Members of the Committee
•
Chaim Shani, Director General of the Ministry of Finance, Chairman
•
Eyal Gabbay, outgoing Director General of the Prime Minister’s Office, Chairman
•
Prof. Eugene Kandel, Prime Minister’s Office, Head of the National Economic Council
•
Prof. Shmuel Hauser, Chairman of the Securities Authority
•
Prof. David Gilo, Antitrust Commissioner
•
Gal Hershkovitz, Ministry of Finance, Budget Director
•
Dr. Karnit Flug, Bank of Israel, Assistant Governor of the Bank of Israel
•
David Zaken, Bank of Israel, Supervisor of Banks
•
Prof. Oded Sarig, Ministry of Finance, Commissioner of Capital Markets, Insurance and Savings
•
Adv. Avi Licht, Ministry of Justice, Deputy Attorney General
•
Dr. Gitit Gur-Gershgoren, Economics Department Director, Securities Authority
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Work of the Committee
Three work teams:
• Team for the review of real and financial holdings
Headed by Prof. Eugene Kandel, Head of the National Economic Council
• Team for the review of control using a pyramid holding
structure
Headed by Prof. Shmuel Hauser, Chairman of the Securities Authority
• Team for the review of the conditions for the allotment of
public assets
Headed by Prof. David Gilo, Antitrust Commissioner
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The Committee’s Work Procedures
•
Called for the public’s position prior to the formulation of a draft
•
Examined Ministry papers on and studies of the Israeli economy
•
Held dozens of discussions in full session and numerous other discussions in smaller teams
•
Received 30 position papers from organizations and individuals
•
Heard close to 20 speakers, including experts and academics, NGO’s representatives and
organizations and bodies that represent interested parties
•
Will hear the public’s positions on the draft recommendations
•
Received an opinion from Prof. Arye Bebchuk of Harvard University
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Review of Real Holdings Structure
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Real financial holding?
Controlling
shareholder
Pension
fund
Public
funds
Bank
Pension
fund
Bank
Provident
fund
Bank
Financial sector
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Controlling
shareholder
Real
estate
Food
Commerce
Infrastructure
Energy
Communications
Business sector
Potential Problems of Real-Financial Connection
• Ineffective allocation of resources
• Conflict of interests – use of insider information
• Competition blocks – withholding credit from competitors
• Business relations between related companies
• Systemic risk
 Advantage – controlling shareholder with substantial capital
(stability)
In an economy as small as the Israeli economy, it is preferable to maintain major
borrowers and lenders detached
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Recommendations
1.
Prohibition of control or holding in a significant financial institution by
a significant real entity or by the controlling shareholder of a
significant real entity.
Controlling
shareholder
OR
Significant real operations:
1. NIS 8 billion in sales
OR
2. Balance in excess of NIS 20
billion
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Significant financial operations:
1. NIS 50 billion
Recommendations
2.
Restricting directors from serving concurrently in a financial entity and a
real entity
Significant financial entity
Significant real entity
OR
3.
4.
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A controlling shareholder in a significant financial entity that is a bank will
be prohibited from controlling a significant financial entity that is not a
bank
(insurance – supplement to the Bachar Committee)
Advancement of the required supplemental legislation, as a prerequisite
for the implementation of the recommendations
Implementation Mechanisms and Exceptions
Transitional provisions:
 Entities will be required to execute the separation within
four years
 Separation of Boards of Directors – within four years
Encouragement of competition:
 In order to encourage small entities to compete, they will be
permitted to grow (without acquisitions) and exceed certain
prescribed thresholds
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Pyramid Holding Structure
12
International comparison:
Percentage of public companies’ market value
The weight of the ten largest groups in the market value of
public companies
70%
60%
OECD countries
41%
Non-OECD countries
50%
40%
30%
20%
10%
0%
Sources of the data: Claessens, Djankov & Lang; Faccio & Lang. Processed by
the Securities
Authority’sDjankov
Economics
Department.
Faccio
& Lang Claessens,
& Lang
* According to Claessens et al., the- rate in Sweden is close to 10%. According
50%.
Hogfeldt to Hogfeldt,
- in 2000 this rate exceededClaessens
et al.
13
Source: the Securities Authority’s Economics Department
Most Israeli Companies Have a Controlling
Shareholder
Distribution of control in Israeli public companies
12%
With a controlling
‫ט‬
shareholder
Without a controlling
‫ט‬
‫א‬
88%
shareholder
Source: the Securities Authority’s Economics Department
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The common denominator of the major
groups in Israel is their incorporation under
a pyramid structure with a controlling
shareholder
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Decoupling Phenomenon
• Decoupling of the economic interest from the ability to control the
company
• The larger the wedge driven by the decoupling between the voting
rights and the equity rights, the greater the potential prejudice of
the minority shareholders and the holders of debentures
• Decoupling and control may be achieved by a number of means,
including the creation of a pyramid of control or a cross holding
structure
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Who is affected by the Committee’s
recommendations?
Whenever the interests of the controlling
shareholder differ from the interests of the public
companies that he controls
Public
Controlling
shareholder
51%
Public
Company A
Equity: 51%
Voting: 51%
Wedge company:
A company in which the controlling shareholder
does not have majority ownership and cannot be
replaced
51%
Company B
Public
Equity: 26%
Voting: 51%
51%
Company C
Equity: 13%
Voting: 51%
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Potential Advantages of Business Groups
• Intercompany backup when necessary
• Sharing of knowhow, business relations
• Penetration of new areas
• Substitution for missing institutions
• Survivability
The pyramid structure is very common in emerging markets
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Potential Problems of the Pyramid Structure
 Tunneling of resources
Public
 Ineffective allocation of resources
Controlling
shareholder
 Excessive risk taking
51%
Public
 Internal capital market (ineffective)
Company A
Equity: 51%
Voting: 51%
51%
 Double leverage
Company B
Public
 persistence
Equity: 26%
Equity: 51%
51%
Company C
Equity: 13%
The interests of the controlling shareholder may differ
from the interests of the companies that he controls
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Equity: 51%
Potential Problems on the Economy Level
• Detrimental to stability
• Multi market contacts
• Determent of foreign
investors
• Inflation of indexes
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The
‫ ט‬Wedge Between Investment and Control
in Business Groups ‫א‬
: ‫ט‬
NIS in billions
Value of equity holdings of all controlling shareholders
Market value of shares
Market value of debentures*
1
3
21
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
* The market value of debentures includes corporate bonds, convertible debentures, debentures of private companies in the group and
institutional
trading. Additionally,
and indirect holding‫ט‬in equity. The value
capital
.
‫ א‬it relates
, to direct
.
‫ א‬, of the issued
‫ א‬, and paid share
‫א‬
‫ א‬was
used as an estimate for debentures traded in the institutional trading system.
.
‫א‬
‫א‬
* Data in effect as of June 30, 2010.
30.06.2010-
The Securities Authority’s, Economics Department
Japan
Taiwan
UK
South Africa
Korea
Norway
Canada
France
Finland
Australia
Hong Kong
USA
Spain
Netherlands
Singapore
Sweden
New Zealand
Egypt
Denmark
Malaysia
Switzerland
Indonesia
Thailand
Philippines
Germany
Turkey
Poland
Argentina
Chile
Colombia
Italy
Peru
Portugal
Israel
Venezuela
Czech
Austria
Mexico
Brazil
International Comparison
Average Control Premium
60%
50%
40%
30%
20%
10%
0%
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Source: Dyck and Zingales (2004)- Private Benefits Of Control: An International Comparison
-10%
International Comparison – Number of Layers
Average pyramid depth
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Source: Masulis et al. 2011- Family Business Groups around the World: Financing Advantages, Control
Motivations and Organizational Choices
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The Guiding Principles for the Committee’s
Recommendations
1. Strengthening the position of minority shareholders
2. Restricting the volumes of credit in the major groups
3. Reinforcing the authority of the Antitrust Commissioner
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Principals of the Recommendations
Reinforcement of Regulation – Corporate
Governance
1.
2.
3.
4.
5.
6.
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Reinforcing the independence of the Board of Directors
Executive compensation
Transactions with interested parties
Strengthening the position of minority shareholders
Encouragement of individual enforcement by the shareholders
Encouragement of activism of institutional investors
Principals of the Recommendations – cont.
Structural changes
7.
8.
9.
Prohibition of the listing for trade of a duplicate activity
Restrictions on the creation of a new wedge company
Granting an “exit” right to shareholders in a company within a pyramid in
the event that the controlling shareholder undermines an outside bid
Reducing leverage and the risks to the economy
10. Disallowing financing expenses (for tax purpose)
11. Restrictions on credit from institutional investors
Encouragement of competition
12. Broadening the authority of the Antitrust Commissioner
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Details of the Recommendations
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1. Reinforcing the Independence of the
Board of Directors
1.1 One third of the members of the Board of Directors will be
outside directors
1.2 Outside directors will be approved by the minority
shareholders rather than by the controlling shareholder
1.3 The appointment of a director in a subsidiary by the
controlling shareholder will be subject to the approval of the
Audit Committee
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2. Executive Compensation
The Committee recommends the advancement of the
amendment to the Companies Law concerning executive
compensation, pursuant to the recommendations of the
Neeman Committee, so that the granting of the
compensation would be subject to the approval of the
minority shareholders that are not related parties of the
controlling shareholder
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3. Transactions with Interested Parties
3.1 Adopt or disclose with respect to the performance of a
competitive procedure prior to the approval of a transaction
with an interested party in the event of the sale of an asset,
the receipt of operating services, the purchase of a shelf
product or the receipt of a loan
3.2 Authorization and supervision by the Audit Committee of
transactions that, although not “extraordinary”, are also not
financially negligible
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4. Strengthening the Position of the Minority
Shareholders
4.1 The following resolutions will require approval by the
general meeting with a majority of the minority shareholders
I. Acquisition of a significant operation
II. Acquisition of a control core in another public company
III. Raising of capital or debt in a significant amount
4.2 Shareholders and debenture holders will be permitted to
vote via the Internet
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5. Encouragement of Individual
Enforcement by the Shareholders
5.1 The Securities Authority will expand the financing of class
actions and derivative claims
5.2 Arrangements will be determined with respect to the
financing of class actions or derivative claims that are
submitted by institutional investors
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6. Encouragement of Activism of
Institutional Investors
6.1 Institutional investors will be allowed to coordinate positions
ahead of the general meeting
6.2 Institutional investors will be required to take into
consideration the quality of the corporate governance when
making an investment decision
6.3 The disclosure requirements that are applicable to the voting
by institutional investors will be expanded
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7. Prohibition of the Listing for Trade of a
Duplicate Activity
7.1 Prohibition of the inclusion of a duplicate activity in the
Stock Exchange indexes
When 70% of the operations come from B
A – holding company
B – operations company
7.2 Prohibition of the future issuance of a duplicate activity in a
wedge company
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8. Restrictions on the Creation of a New
Wedge Company
• Company C is interested in acquiring a control
core in company D
• As a result, company D becomes a wedge
company
Public
Controlling
shareholder
51%
Company A
Equity: 51%
• The acquiring company will be required to
offer to purchase all of the shares of the
acquired company for
the price offered for
Controlling
the control core
shareholder
Public
51%
Company B
Equity: 26%
Public
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Voting: 51%
51%
51%
Company D
Equity: 51%
Voting: 51%
Voting: 51%
Company C
Equity: 13%
Bid
Voting: 51%
9. Granting an “Exit” Right to Shareholders
• Outside bid on company C for all the
company’s shares at 10% over the
market price
• The controlling shareholder undermines
the bid by refusing to accept it
• Public shareholders in C are interested in
the offer
• The controlling shareholder would be
required to accept the bid or to
offer to buy the minority shares
at the price of the bid
Public
51%
Company A
Public
Equity: 51%
Voting: 51%
51%
Company B
Bid
51%
Exists at least 7 years
Controlling
shareholder
Public
Equity: 26%
Voting: 51%
51%
Company C
Company C
Equity: 13%
Voting: 51%
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Restricting the influence of the controlling
shareholder over the general meeting
The Committee requests to receive the public’s
comments on the proposal:
Controlling
shareholder
In a wedge company, each of the controlling
shareholders will have effective voting rights at the
general meeting that equal to:
The controlling shareholders’ equity interest
51%
Public
Company A
Equity: 51%
Voting: 51%
The controlling shareholders’ equity interest
+
Equity interests attributable to the other shareholders
51%
Public
Reduction of the controlling shareholders’ voting rights
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Company B
Equity: 25%
Voting: 33% 51%
Reducing the Leverage and the Risks to
the Economy
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10. Disallowing Financing Expenses
It is proposed that financing expenses will be initially allocated to
dividend income (for tax purpose)
If the financing expenses exceed the dividend income – the difference
will be added to the cost of shares for tax purposes
‘Controlling
shareholders’
100%
Debt + financing expenses
Parent company
51%
Subsidiary
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Dividend
11. Restrictions on Credit from institutional
investors
• The restrictions on the exposure of (financial) institutions to a
single entity and a group of borrowers (similarly to the
restrictions imposed by Banking Supervision) will be tightened
• The team in charge of systemic risk, headed by the Bank of
Israel, will allocate resources to the monitoring and handling
of business groups based on the applicable indicators
40
Encouragement of Competition
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Multi-market contacts
Banking
Group 1
Credit
cards
Group 6
Group 7
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Retail
Natural
gas
Marketing
of oil
distillates
X
Group 3
Group 5
Finance
X
Group 2
Group 4
Insurance
Income
generating
property
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Desalination
X
12. Broadening the Authority of the
Antitrust Commissioner
12.1 The Antitrust Court will be authorized to enforce changes
(structural remedies) in concentration groups
12.2 Imposition of administratively enforced sanctions
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Allocation of State Rights and Assets
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Recommendations
The functions that are in charge of the procedures for the
allocation of State rights and assets (sale of assets to private
entities, granting of concessions, licensing, BOT) will be required
to also take into consideration the competition in the sector and
the decentralization of control in essential infrastructures
Preventing the transfer of control in State infrastructure to the hands of few
45
Assimilation of Sector Competition
Considerations
1. A prerequisite for the allotment of rights will be to consult
the Antitrust Commissioner whenever the value of the right
or the asset is in excess of NIS 150 million or the economic
value of the asset does not reflect its significance to the
public
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Assimilation of Concentration Considerations
in the Control of Essential Infrastructures
2. A prerequisite for the allotment of rights in essential
infrastructures (as shall be defined by law) will be to consult
an Advisory Committee whenever the value of the right or
the asset is in excess of NIS 150 million or the economic
value of the asset does not reflect its significance to the
public
•
Members of the Advisory Committee: The Director General of the Ministry of
Finance, the Antitrust Commissioner, the Assistant Attorney General
(Economic-Fiscal), Head of the National Economic Council
•
Examples for areas of essential infrastructures: water, energy,
communications, transportation, healthcare and natural resources
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Principal Recommendations
1. Separation of the holdings in a significant real operation and a significant
financial operation
2. Separating the office of directors in real companies and in financial companies
(significant)
3. Imposing stricter corporate governance and strengthening the position
of the minority shareholders in pyramid-structured business groups
4. Changing the rules of the game of pyramidal expansion and of controlling
existing companies
5. Reinforcement of the capacities of the Anti Trust Commissioner when
treating concentration groups
6. Taking into account competition and centralization considerations in the
allotment of rights by the State
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Significance of the Overall Recommendations
of the Committee
• More effective allocation of capital in the economy
• Continued development of the Israeli capital market
• Allotment of national resources with the overall economy in
mind
• Increasing competitiveness in the market
• Reducing systemic risk
The full implementation of the recommendations will take place in stages and is
expected to affect the economy in the medium and long term
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Timetable for Implementation
• Submission of a draft report for hearings and elaborate
consulting with the public
– The report will be submitted within three weeks
– Hearings will be held over the course of the next two months
• Submission of a final report for government approval
– Within three months
• Completion of legislation
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Thank you
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