Squeeze-Out and Compulsory Acquisition in Israel: The 95% Rule for M&A Transactions

A foreign company completes a takeover of an Israeli business and ends up holding 93% of the shares. The remaining 7% is spread among dozens of small shareholders, some unreachable, some unwilling to sell. Cleaning up the cap table to achieve 100% ownership seems impossible without individually negotiating with each holdout. Israeli law has a direct solution: the squeeze-out mechanism (*rechishat kfiya*, רכישת כפייה) in Chapter 9 of the Companies Law 5759-1999.

The squeeze-out allows a majority buyer who crosses the 95% threshold to force out the remaining minority shareholders at a court-supervised "fair price" and complete a clean 100% acquisition. For any foreign buyer of an Israeli company who expects to reach majority ownership but not a unanimous one, understanding how this mechanism works, and the parallel rights it gives to minorities, matters before structuring the deal.

1. What Is a Squeeze-Out Under Israeli Law?

A squeeze-out is a statutory mechanism that lets a dominant shareholder who owns at least 95% of a company's shares compel the remaining shareholders to sell their shares at a determined price. It operates independently of whether the remaining shareholders want to sell. The underlying rationale, accepted by most modern company law jurisdictions, is that once a single owner holds 95%, the minority's practical ability to influence the company is negligible. A clean 100%-owned structure benefits the acquirer (no ongoing minority oversight obligations) and gives small shareholders a known exit from what would otherwise be a permanently illiquid stake.

Israeli law codifies the squeeze-out in Chapter 9 of the Companies Law 5759-1999, specifically Sections 336–340. These provisions apply to all Israeli companies, public and private, though the procedural pathway differs depending on whether the company's shares are listed on the Tel Aviv Stock Exchange (TASE) or traded on a foreign exchange.

Four things define how it operates:

• The threshold is 95% of the company's issued share capital, calculated on all issued shares regardless of class (unless the articles provide otherwise).
• The price standard is the "fair price" (mchir haogi, מחיר הוגן): what a willing buyer and a willing seller would agree to in an arm's-length transaction, based on the company's full value with no minority discount applied.
• Minorities cannot block it. Individual holdout shareholders have no veto; their only recourse is a court challenge to the price offered.
• There is a mirror sell-out right. At the same 95% threshold, minority shareholders can compel the majority to buy their shares, not just the other way around.

2. The 95% Threshold: How It Is Calculated

The trigger for both the squeeze-out right (majority forcing out the minority) and the sell-out right (minority demanding to be bought) is reaching 95% of the company's issued share capital. Getting this calculation right matters. Crossing the threshold activates statutory rights that the parties cannot contract around, and miscalculating it exposes the acquirer to legal challenges from the minority.

Under Section 336, the relevant percentage is measured against all issued shares, not against voting shares alone. This means:

• Non-voting preference shares count toward the total issued capital for the purpose of the threshold calculation.
• Treasury shares held by the company itself are not counted as issued shares and are excluded from the denominator.
• Shares underlying unexercised options, warrants, or convertible instruments are generally not counted unless they have been formally issued. A cap table with substantial dilutive potential can create a situation where formal ownership appears to cross 95% but will fall back below once instruments are exercised.
• Shares pledged to a lender remain part of the issued capital for threshold purposes, because the pledge does not transfer beneficial ownership.

Where a company has multiple share classes, Israeli courts have interpreted the threshold on a class-by-class basis unless the articles specifically provide that squeeze-out rights apply across all classes aggregated. In practice, most Israeli private company articles drafted by counsel since 2010 address this explicitly. Review the articles of association carefully before assuming a single 95% calculation is determinative.

3. The Squeeze-Out Process: Notice, Payment, and Timeline

Once the 95% threshold is crossed, Section 337 of the Companies Law sets out a specific procedural sequence that the acquirer must follow to effect the compulsory acquisition. Missing a step or a deadline can expose the acquirer to claims that the squeeze-out was defective.

Step 1 — Written notice to minority shareholders

The acquirer must deliver a written notice (*hoda'a*, הודעה) to each remaining minority shareholder specifying:

• That the acquirer has crossed the 95% threshold and is exercising the right of compulsory acquisition.
• The price offered per share (mchir rechisha, מחיר רכישה), together with the basis on which that price was determined (typically a valuation report prepared by an independent appraiser).
• The date by which payment will be made (which must be within a reasonable time after the notice period).
• The minority shareholder's right to apply to the Economic Department of the Tel Aviv District Court to contest the price.

Step 2 — Deposit of purchase price

The acquirer must deposit the aggregate purchase price for all minority shares with the company (or in a designated escrow or trust account) at or before the date specified in the notice. This deposit is a condition of the compulsory acquisition taking effect. Failure to deposit the price by the stated date invalidates the squeeze-out notice for those shares whose price has not been deposited.

Step 3 — Transfer of title

Once the notice period expires and the purchase price is deposited, title to the minority shares transfers to the acquirer by operation of law, without any further act by the minority shareholders. The company then records the acquirer as the registered owner of those shares in the shareholders' register (*pinkas ba'alei hamanioth*, פנקס בעלי המניות). The minority shareholders become entitled to collect the deposited purchase price from the company or escrow holder.

Step 4 — Payment collection by minority shareholders

Minority shareholders who do not challenge the price can collect the deposited purchase consideration from the company after the title transfer. For foreign shareholders who cannot easily present themselves in Israel, a power of attorney allowing an Israeli representative to collect payment simplifies this step.

4. Appraisal Rights: How Minority Shareholders Challenge the Price

A minority shareholder who believes the price offered in the squeeze-out notice is too low has the right to apply to the Economic Department of the Tel Aviv District Court (*Machlaket Kalkalit*, המחלקה הכלכלית) for a determination of the fair price. This is the minority's primary legal lever in a squeeze-out, and usually their only one.

Who can apply: Any minority shareholder who received a squeeze-out notice under Section 337. There is no minimum shareholding required to make an application; even a single-share holder can invoke the right.

Deadline: The application must be made within six months of the date of the squeeze-out notice (Section 338). Courts have not accepted late applications. Foreign shareholders who receive a squeeze-out notice should immediately forward it to Israeli legal counsel to preserve the option to challenge.

Standard of review: The court does not simply second-guess the acquirer's appraiser. The question before the Economic Court is: what price would a willing buyer and a willing seller agree to for a minority shareholding in this company, viewed on a pro-rata basis, reflecting the minority's proportionate share of the enterprise value, without a minority discount. Israeli courts have consistently rejected minority discounts in appraisal proceedings. The court may appoint its own appraiser if the parties' expert reports diverge significantly.

Common valuation methodologies used in Israeli appraisal proceedings:

• Discounted Cash Flow (DCF): Particularly common for technology and growth companies; disputes often focus on the discount rate (WACC) and terminal growth assumptions.
• Comparable company multiples: Revenue or EBITDA multiples from comparable listed companies or recent private transactions.
• Precedent transactions: What similar Israeli companies sold for in recent M&A transactions.
• Net Asset Value (NAV): More common for real estate holding companies and investment vehicles than for operating businesses.

What happens to the shares during the challenge period: Even if a minority shareholder files an appraisal application, the title transfer is not suspended. The acquirer holds the shares from the date of transfer; the shareholder holds a claim for additional consideration if the court awards a higher price. The deposited consideration remains available for collection regardless of whether the challenge is pending.

5. Sell-Out Rights: The Minority's Mirror Right

The squeeze-out is a right of the majority to force the minority to sell. Israeli law also provides the reverse: a sell-out right (*zchut mechira*, זכות מכירה) that allows a minority shareholder to compel the majority buyer to acquire their shares, once the 95% threshold is reached.

The sell-out right under Section 339 of the Companies Law is triggered by the same facts as the squeeze-out: once any person (and their associates) holds 95% or more of a company's issued share capital. The minority shareholder exercises the right by giving written notice to the company and to the majority holder.

• The price standard is the same as the squeeze-out: fair value with no minority discount. If no squeeze-out notice has been issued, the minority shareholder retains an appraiser to establish a starting price.
• The majority buyer must pay within a reasonable period of receiving the minority's notice, usually 30–60 days in practice.
• If the majority buyer refuses or disputes the price, the minority can apply to the Economic Department of the Tel Aviv District Court for an order requiring the purchase at a court-determined fair price. The same six-month limitation period applies from the date the majority holder crossed 95%.
• A majority buyer cannot offer different prices to different minority shareholders exercising sell-out rights in the same transaction context.

In practice, the sell-out right matters most to minority shareholders in two situations: (1) where the majority buyer initiates a squeeze-out but the price offered is disputed and the shareholder wants an independent determination, and (2) where the majority buyer reaches 95% through share purchases and does not initiate a squeeze-out, leaving minority holders permanently locked into an illiquid position. In the second case, the sell-out right provides an exit regardless of whether the buyer wants to proceed with a full cleanup.

6. Private Companies vs. Public Company Tender Offers

The squeeze-out mechanism under Sections 336–340 of the Companies Law applies to all Israeli companies, but its practical operation differs meaningfully between private and public companies.

Private Israeli companies (*chevrot prtiot*, חברות פרטיות):

• The 95% threshold is reached through negotiated share purchases, drag-along exercise under the shareholders' agreement, or a series of share transfers — not through a public tender offer.
• There is no securities regulator oversight of the squeeze-out price; the "fairness" of the price is determined by the parties' appraiser and, if challenged, by the Economic Court.
• The Companies Registrar does not need to approve the squeeze-out — the share register is simply updated after the notice and payment steps are completed.
• Shareholder agreements in Israeli private companies (particularly venture-backed startups) typically contain drag-along provisions that allow the majority to drag minority shareholders into a sale. These operate contractually, not under the statutory squeeze-out — but they achieve a similar result at lower majority thresholds (often 60–75%) and do not require court involvement.

Public Israeli companies / companies with listed shares:

• The squeeze-out process for publicly listed companies runs primarily through Regulation 336(b) of the Companies Law in conjunction with the Securities Law 5728-1968 and the Securities Regulations (Full Tender Offer) 5760-2000.
• A full tender offer (*hafatzat rechisha mele'a*) that results in the acquirer holding 95% or more of the shares automatically triggers the statutory squeeze-out right — the acquirer does not need to take a separate action; the right arises from the mechanics of the successful tender.
• The Israel Securities Authority (ISA) supervises the process, and the tender offer prospectus must include an independent fairness opinion. The ISA can comment on the fairness of the price offered before the offer closes.
• For TASE-listed companies, the 95% threshold for a squeeze-out in a full tender offer is measured against the shares held by the public (i.e., excluding shares held by the acquirer and its associates before the offer). The specific calculation mechanics are set out in the Securities Regulations.

7. Tax Implications for Foreign Sellers in a Squeeze-Out

For a foreign minority shareholder who is compulsorily acquired out of an Israeli company, the squeeze-out payment is a disposal of shares, and Israeli capital gains tax rules apply to the extent the seller has Israeli-source gains.

Non-resident capital gains exemption (Section 97(b) of the Income Tax Ordinance):

A foreign resident individual or company can generally sell shares in an Israeli company without Israeli capital gains tax if:

• The shares are not in a real property association (*igud mekarkain*, עיגוד מקרקעין) — a company whose main asset is Israeli real estate. If the company is an igud, the exemption does not apply and Israeli tax of 25% (for individuals) or the corporate rate applies.
• The shares were not acquired as part of Israeli-source business income (e.g., received as employment compensation subject to Israeli tax).
• The seller does not maintain a permanent establishment in Israel.

Withholding obligation (Section 68A of the Income Tax Ordinance):

The acquirer in a squeeze-out is required to withhold Israeli capital gains tax from the squeeze-out consideration and remit it to the Israel Tax Authority (ITA), unless the foreign seller has obtained an ITA Exemption Certificate (*ishur nikui*, אישור ניכוי) before the payment date. Without the certificate, the acquirer typically withholds at the standard 25% rate on the full gain. If the seller is exempt under Section 97(b), obtaining the certificate before the squeeze-out payment is deposited eliminates unnecessary withholding.

To obtain an ITA Exemption Certificate:

1. Submit an application to the Non-Residents Tax Unit at the ITA (*Misrad HaHashgaha*, Ministry of Finance Tax Authority) — typically handled by Israeli tax counsel.
2. Provide evidence of the seller's foreign residency (tax residency certificate from the home country), the share acquisition documentation, the price paid originally, and the squeeze-out consideration offered.
3. The ITA typically issues a response within 30–60 business days. For a squeeze-out on a tight timeline, apply as soon as the majority buyer announces their intention to reach 95%.