The promising land
6 August 2012 | By Joshua Freedman
6 August 2012
16 August 2010
6 December 2011
8 August 2011
23 April 2012
Israel is relaxing the protectionism of its legal market, but most think global and local firms will work hand-in-hand rather than going head-to-head
You know that DLA Piper means business when it sends Tony Angel along. Fresh in his first year as DLA Piper’s new senior partner, Angel travelled with a delegation of firm leaders, including Nigel Knowles’ co-CEO Lee Miller and London IP partner Simon Levine, in June to meet senior figures at local Israeli firms, as well as general counsel, investors and diplomats.
Photographs show a casually dressed Angel schmoozing with clients and DLA Piper partners on the ground in Israel. Angel and wife Ruth hosted a private dinner and cocktail event for clients and investors attended by the British Ambassador to Israel, while the following day the former Linklaters managing partner addressed more than 25 Israeli firm chiefs on ‘Innovations in Law Firm Management’.
London real estate partner Paul Jayson, who runs the firm’s Israel practice alongside Washington DC partner Jeremy Lustman, insists that Angel did not use the event as a chance to discuss tie-ups with Israeli firms. But liberalised regulations for foreign lawyers in Israel introduced earlier this year make a merger between an international outfit and an Israeli firm a credible option – and DLA Piper is very near the top of the list of firms competitors expect to be up for a deal.
Opening for business
The directive, signed in May by Israel’s finance minister Yuval Steinitz, followed around three years of discussion and fighting between the three parties involved in forming the new regulations: the Ministry of Finance, the Ministry of Justice and the Israel Bar Association.
The rules that came out at the other end were radical: foreign lawyers, previously only permitted to perform business development roles in Israel, can now practise foreign law on the ground, hire Israeli lawyers and even merge with local firms. In theory the rules could transform the market from one in which Israeli firms dominate the domestic work and foreign lawyers scout out the land ready to pounce on outbound opportunities, to one where the local practices are competing directly with UK and US leaders, or even one where combined Israeli-foreign entities offer advice on both legal systems.
The reality is not quite like this.
The overwhelming consensus among both foreign and Israeli lawyers is that the domestic market offers little that the top-tier international firms would be interested in. Competition in the market is high, no doubt because Israel supposedly has the most lawyers per capita in the world and charge-out rates are disappointing: roughly $200 (£127) per hour for partners and in the $150-$200 range for associates. Even one of the potential mega sell-offs of Israeli assets resulting from new regulations against dominant tycoons would be unlikely to break the $100m mark for deal value, which may represent a tasty piece of work for an Israeli firm, but would be nothing to get excited about for an elite outsider.
Then there is the red tape.
“You need to open up a logistics firm, which is bureaucracy,” says DLA Piper’s Jayson, who makes frequent business trips to the country. “We often open up subsidiary firms in order to meet local requirements. You have to apply for a licence to do that.”
The conditions do not allow for a simple merger, despite the fact that Israeli firms are becoming more sophisticated targets by turning to management consultants and merger brokers, such as the widely recognised GLawBAL. While foreign predators are almost invariably LLPs, Israeli law does not permit legal practices to be anything other than old-fashioned partnerships, and this is not looking like changing. A foreign firm wishing to combine with a local counterpart would have to set up a new entity or operate an alliance. The waters are still untested.
Maybe, maybe not…
For Jayson a merger is not on the firm’s agenda, but it is a question that the market discusses and is seen as a likely option for a mid-market firm, especially one based in Silicon Valley.
“It’s something that’s been speculated about for decades,” says Jayson. “I think one of the differences is that there’s obviously a bias in terms of where business is coming from. And the firms such as BLP [Berwin Leighton Paisner] and firms that have longstanding Jewish connections are obviously interested in Israel – our experience is that they’re able to do a lot of the work themselves.
“If you get a Herzog Fox [& Neeman], which is the equivalent of a Clifford Chance or Linklaters, the chances of them tying up with someone is low. At the moment, if there’s a job that comes up, Israeli firms can do both aspects. In terms of the overseas law firms coming in, I’m not sure there’s much desire to practise domestic law. If [a merger] happens, it will happen in the mid-market.”
A breed of small, mid-market Israeli firms are lining up as potential merger suitors, with the spin-offs from the elite domestic firms marked out as the most likely to combine with foreign suitors.
“It definitely will happen,” says Simon Jaffa, a partner at Barnea & Co, which he co-founded nine years ago after leaving Herzog Fox, where he was an associate. “One of these firms will come to the conclusion, ‘let’s give it a go, let’s be the first to do it and see if we can pick up business’. It won’t be a top five or even a top 10 firm – I don’t think it will be a Herzog Fox. Some Israeli firms almost kid themselves that it won’t happen.”
“Those Israeli law firms that have developed an international reputation want to maintain relations with as many international law firms as possible,” states Herzog Fox partner Mark Phillips. “They don’t want to commit to one global law firm and break ties with the others.
“On the other hand, it may be worthwhile for a smaller Israeli law firm to affiliate itself to a multinational law firm in order to enjoy the benefit of international branding.”
Mergers aside, a number of international firms have taken advantage of the new regulations to set up shop in Israel, practising foreign law on the ground. US firm Greenberg Traurig announced its launch in Tel Aviv in December last year. The move is a strong sign that it intends to do more than just attract Israeli clients for outbound work.
Tel Aviv Greenberg Traurig partner Scott Mortman, who recently joined from Mayer Brown’s New York office, has a clear sales pitch: Israel, famous for being the land of informal enterprise, has developed a sense of maturity and moved beyond the local advisers.
“What we’re seeing that’s unique is we’ve been known for a time as being a start-up nation,” says Mortman. “We’re moving to be a smart-up nation. A number of companies in Israel are realising that to attract capital they need lawyers and professionals like Greenberg Traurig.”
Indeed, clients have horizons well beyond the streets of Tel Aviv.
“Any generalisation is wrong, but we’re seeing that as well as seeing a number of start-ups, the start-ups of five to eight years ago are no longer start-ups. They’re looking at Africa, at infrastructure, they’re looking at South America,” Mortman adds.
Greenberg Traurig claims to be the first foreign law firm to launch an office in Israel with full-time lawyers, although Asserson Law Offices has been based in Israel since 2005, advising solely on English law. Others have since followed it: New York-based Zeichner Ellman & Krause (ZEK), for example, is set to open an office in the same mould in the high-tech hub of Ramat Gan on the edge of Tel Aviv later this year.
ZEK litigation associate Daniel Rubel has emigrated to Israel to set up an official attorneys’ office under the new regulations, practising foreign law.
Litigation partner Stuart Krause, who runs the firm’s Israel practice from the US East Coast, is aware that there are more options on the horizon for foreign firms.
“Ultimately, a firm from the US has the option of bringing in fully fledged members of the Israeli Bar and have a hybrid practice,” he states.
Shekels and chains
The process is harder than one might think. First, any firm wishing to open under the new regulations and practise law on the ground must either take out insurance for up to NIS2m (£315,300) or deposit the same amount in an Israeli bank to cover the cost of claims if the foreign lawyer is deemed to have caused harm to domestic lawyers. The insurance option is thought to be the more popular option, with Greenberg Traurig expected to choose this.
Foreign lawyers are even required to sit a written ethics test when applying for a licence, although the exact contents are still up in the air. Candidate firms are given a list of questions to enable the insurer to establish the level of risk.
“They’ve developed an ethics exam for foreign attorneys so they can demonstrate some rudimentary familiarity with the ethics,” says Krause.
The trials and tribulations are all part of an attempt to keep foreign lawyers in check after what was an acrimonious journey towards liberalisation. Although it has been talked about for year, it was roughly only two and a half years ago that the proposal was initiated and the Ministry of Finance, Ministry of Justice and Israel Bar Association (IBA) entered into talks.
Paving the way
The IBA, a conservative organisation, was nonplussed. The potential competition for domestic firms meant the plans were dangerous.
“At first the IBA was very much against it,” explains Zohar Fisher, founder of law firm consultant Robus, who is advising close to 20 foreign firms that are either applying for licences to practise law in Israel or are considering doing so, including three UK firms and a smattering from Germany, Italy and Portugal. “The Ministry of Justice explained that the regulation was going to pass – it offered the IBA [the option] that it should pass, but not without them – as it was going to pass anyway. About a year ago the IBA agreed that the legislation was acceptable only if the IBA was involved in approving foreign attorneys.”
Opinion is split over the impact of the regulations.
“By the local Israeli law firms, it could be perceived in a negative way,” comments BLP corporate finance partner Jonathan Morris, who claims his firm has no plans to step beyond its current business development operation in Israel to start offering legal advice. “Israeli law firms understand that we have a strong Israeli practice. If we went for a full branch it would be perceived as being on their turf. I’m not sure there will be an influx of firms here. We’ll have to see.”
A lawyer at a domestic firm agrees.
“It seems to me like what [foreign firms] are doing is seeking more relationships and generating more business to go back to the original jurisdiction,” opines the lawyer. “I don’t think they really intend to open an Israeli law firm so to speak.”
Barry Levenfeld, a corporate and technology partner at Yigal Arnon & Co, agrees.
“The bottom line is that, at least in the foreseeable future, we don’t expect it to have too much of an effect on our business,” he states.
Plus there is the question of competing for talent: foreign firms would likely pay just above local firms’ rates in a bid to win the best lawyers. The starting salary for an articled clerk in Israel is roughly between NIS7,000 and NIS9,000 per month, with this rising to NIS30,000 for a highly paid associate.
The market seems convinced that Greenberg Traurig plans to outbid the competition to secure local talent, but the US firm insists that it pays at the standard Tel Aviv rates and says it would not make sense to pay above the odds given its strategy to charge local fees.
Moriel Matalon, managing partner at domestic firm Gornitzky & Co, has strong views on the matter of whether foreign firms will aim to directly compete with local ones.
“I’m somewhat sceptical over whether we’re going to have an inflow of foreign law firms in Israel,” he comments. “We’ll not see any of the major law firms – magic circle or major law firms in the US – opening in Israel. I don’t see an influx of major law firms to the Israeli market in the next few years. Why? First, because I believe most of those law firms prefer to work with major firms in Israel rather than compete with them.
“Second, I believe that, apart from the knowledge of international law, in order to practise in Israel you need to have deep knowledge of the local environment – not only the legal issues, but how to deal with the government. We’re becoming a country where the government controls everything. You remember Yes, Prime Minister? That’s how it’s become in Israel.”
According to Amos Konforti, a partner at Shenhav Konforti & Shavit & Co, international mergers are even less likely.
“Currently mergers between Israeli and foreign firms are a long shot,” he contends.
Konforti’s firm has operated a cooperation agreement with McGuire Woods since 2011. He declines to comment on a potential merger with the US firm, although he admits that they “could talk about” a fusion.
Clifford Felig, a corporate partner at Meitar Liquornik Geva & Leshem Brandwein, believes foreign firms that take the plunge will find it a challenge.
“If foreign firms want to come into the local market they’ll have to compete with the local firms, which provide services that are normally only provided by foreign firms in other jurisdictions. Foreign firms will need to cut out a niche,” says Felig.
Meital Werner, head of the Israel desk at Munich firm Heussen, says the German firm has launched an Israel practice to follow clients’ business into Israel, but that it has no intention of formalising this through a regulated office launch.
“We’ve opened an Israeli desk due to the need that we saw – there’s a lot of business,” explains Werner, before adding: “For now, we don’t see any reason to make this concrete.”
Finding the groove
The niche for the major foreign firms appears to be something different altogether: either sourcing work to take abroad or working with an Israeli firm when private equity groups come to buy up Israeli assets – something that is widely expected to become a trend when a bill forcing the breakup of conglomerates kicks in.
“If KKR [Kohlberg Kravis Roberts] wanted to buy an Israeli telecoms company, they wouldn’t be happy using a local Israeli firm, they’d want to use an international firm,” suggests a partner at a foreign firm.
Indeed, the sale and purchase agreement and finance agreements would likely be under English or another foreign law, depending on the origin of the buyer.
BLP, DLA Piper, Freshfields Bruckhaus Deringer, Skadden Arps Slate Meagher & Flom and White & Case are just some of the international players with business-winning representatives on the ground in Israeli; while in May this year Linklaters sent London corporate managing associate Daniel Turgel to Israel to spend a significant proportion of his time in the jurisdiction sourcing work. The firm has no intention of launching Greenberg Traurig-style, but the move is a clear sign of the market’s potential.
“Over the past 12 months or so we’ve seen a significant increase in the number of international clients looking at opportunities in Israel,” reveals City corporate partner David Avery-Gee, who co-heads Linklaters’ Israel practice alongside London banking partner David Ereira. “At the same time our Israeli clients have been more active across our international network. The pickup in activity has been striking.”
“With the new regulations now coming into effect,” says Adir Waldman, managing director of Freshfields’ Israel practice, “law firms could look to merge or have their own Israeli lawyers. Freshfields isn’t looking at either approach because it isn’t focused on providing Israeli law advice. Working together with the Israeli firms remains the best approach for our business with Israeli clients.”
But there is one elephant in the room that local Israeli lawyers are keener to point out than their foreign counterparts. The Zionist ideology of ‘aliyah’ (literally ‘going up’), the act of moving to live in Israel, has caught on in the Jewish world, especially since the Six Day War in 1967, with the Jewish population of Israel surpassing that of the US in 2005 for the first time since the state’s birth in 1948. In some circles, making aliyahis is even seen as a religious commandment.
The natural outcome is a stream of Jewish lawyers in countries such as the US and the UK who are committed to emigrating and will take a job in Israel for ideological rather than financial reasons. A nice salary is a bonus. Either that or they have relatives in Israel they want to visit as often as possible.
“I don’t see why Greenberg Traurig is doing what it’s doing and what the hell it’s going to do with it. [It’s] Jewish lawyers who want to come to Israel a lot,” comments one local lawyer.
Gerson Panitch, a partner at US IP specialist Finnegan, spends a large proportion of his time in Israel and claims to know the difference between business and ideological aims.
“It’s a phenomenal country, but frankly it’s a very hard place to do business,” he admits. “You need to really understand the culture. It’s what’s referred to by some as a shuk [market] mentality, where everything’s up for negotiation and renegotiation. You’re also in a country where people are pulling things together on shoestrings.
“I was sitting in a pitch once and I explained to the CEO that I was committed to Israel. I’m not simply sitting in the chair because my son has a bar mitzvah in Jerusalem next week.”
Panitch was in for a shock. The CEO responded that he had a lawyer pitching the previous week who was only there because his son had a bar mitzvah the following week and wanted something to do.
“We’re doing it because I’m a partner at a law firm that’s a commercial law firm,” Gary Epstein of Greenberg Traurig counters. “If it didn’t make commercial sense I wouldn’t be doing it. I was absolutely overwhelmed [when the firm launched in Israel] with unsolicited resumes from people who fit into the category [of applicants who just wanted to make aliyah].”
Epstein says that, out of the several arguments he put to the firm’s executive committee, repopulating Israel was not one of them.
“What part of the divine plan we play, I don’t know,” he jokes.