1. [Translated from Globes Wednesday 24 Hesvan, 5760 (November 3, 1999)]
A LEGAL OPINION SUBMITTED TO MIVTACHIM, MAKEFET AND THE CENTRAL
PENSION FUND:
“BANK HAPOALIM CONTINUES IN EFFECT TO BE
THE CONTROLLING INTEREST IN GEMUL
COMPANY – DESPITE EQUALIZATION OF THE
RIGHTS”
ADV. GILEAD AMOZEG: THERE SHOULD BE AN EXAMINATION AS TO WHETHER
BANK HAPOALIM AND CHEVRAT HA-OVDIM DID NOT ENRICH THEMSELVES AND NOT
LAWFULLY SO WHEN THEY RECEIVED COMPENSATION WITH RESPECT TO GIVING
UP THE CONTROL.
By David Hayyoun
Captions under photographs, from right to left:
Menachem Zuta
Avi Olshinsky
Richard Armon
Adv. Gilead Amozeg, of the firm of Zellermayer, Pelossof has recently
completed a comprehensive opinion for the pension funds in the matter of the
control of Gemul Company. He determines that the composition of the Gemul
board of directors is delaying the transfer of control in Gemul and is
preventing a majority of the share-holders from passing a resolution regarding
composition of the body that is supposed to control it.
In his opinion, Amozeg determines, in effect, that the equalization of rights
which was carried out in Gemul a number of years ago did not achieve its
purpose “because the equalization of rights at Gemul in effect exchanged one
control mechanism, which relied on excess constitutional rights for another,
softer, control mechanism, that secured for various time spans the period of
the terms of office of the directors who had been appointed through the first
mechanism.”.
Amozeg said that his examination focused on the fact that the board of
directors of Gemul is an organ through which the control in the company is
obtained. That being so, he looked at the mechanism for the appointment and
dismissal of the directors at Gemul before and after the equalization of rights.
The examination showed that, in effect, the board of directors which was
elected after the equalization of rights was secure for a number of years and,
in consequence thereof, its composition is almost identical to that which
controlled Gemul before the equalization of rights.
Amozeg was asked to prepare the opinion by the Central Pension Fund (CPF)
of the employees of the Histadrut (General Federation of Labor), Makefet
Fund and Mivtachim Fund. The latter is the largest share-holder in Gemul.

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According to him, he was asked to restrict the examination to an initial
document that was to serve as the basis for a discussion regarding the
holdings of the Histadrut pension funds in Gemul. This was in preparation by
the pension funds for the expected cancellation of the temporary exemption
from income tax that had been given to Gemul on its revenues.
The examination was based on the following assumptions: Bank Hapoalim
and Chevrat Ha-Ovdim received 32.4 million Sheqels by way of an allocation
of preference shares in Gemul, in exchange for giving up the control of the
Company; the following directors are connected to Bank Hapoalim and to
Chevrat Ha-Ovdim or were appointed upon their recommendation: Richard
Armon, Avi Olshinsky, Yitzchak Bechar, Israel Brown, Menachem Zuta, Arye
Abend and Amir Ronen.
Amozeg points out that, over a year ago, the authorized director of the
pension fund of the construction workers, Yehiel Katz, wrote to the controller
of the capital market, Zippy Sumet, and pointed out to her that the control of
Gemul remained in the hands of Bank Hapoalim, despite the equalization of
rights process and after completion of its implementation.
Amozeg notes that the situation at present is that Bank Hapoalim, which holds
8.1% of Gemul shares, and Chevrat Ha-Ovdim, which holds 0.25% of the
share capital, together have a 46.6% representation on the Gemul board of
directors, through directors with a tie to them or who were appointed upon
their recommendation.
According to Amozeg, the move to equalize the rights in Gemul purported to
be an overall move, the end purpose of which was to take the control of
Gemul away from Bank Hapoalim and Chevrat Ha-Ovdim, and not just to
combine the share capital of Gemul into one category of shares. The formal
approach, according to him, misses the mark of the background underlying
the equalization of rights, the actions undertaken in the course thereof and the
purpose which the equalization of rights was intended to achieve.
Amozeg further writes that note is to be made of the fact that the arbitrator
who considered the matter of the equalization of rights, at that time, Judge
Emeritus Shaul Aloni, granted Bank Hapoalim and Chevrat Ha-Ovdim
compensation for the loss of their control of Gemul. At that time, he adds, it
was clear to all parties that the equalization move was intended to take
control of Gemul away from Bank Hapoalim and Chevrat Ha-Ovdim.
It is mentioned in the opinion that control of the board of directors means
almost total control of Gemul because it permits the appointment of key staff
in the Company, including the director-general.
The step securing the board of directors was taken in June 1997, just one
month after the rights in the Company were equalized: the total composition
of the board of directors was secured for a time of one year; 80% of the
composition was secured for two years; 60% for three years, 40% for four

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years and 20% for five years. Twelve of the currently serving directors
served in the position before the equalization of rights.
Amozeg proposes a string of legal measures which the pension funds could
take as a result of his conclusions: litigation with the capital market division
of the Ministry of Finance; examination of the implications of the Banking
Law with respect to the fact that Bank Hapoalim continues in practice to be
the controlling interest; examination of the propriety of the equalization of
rights move according to corporate law in general and the Companies’
Ordinance in particular.
He further says that a look should be taken to see if the matter is not as
serious as a breach of contract because Bank Hapoalim and Chevrat Ha-
Ovdim received financial compensation by way of the allocation of preference
shares.
He also feels that there should be an examination as to whether the fact that
Bank Hapoalim and Chevrat Ha-Ovdim received the control premium in
return for giving up their control of Gemul, without in fact giving it up,
constitutes unlawful enrichment.
At the end of his decision, Amozeg warns the pension funds about three
matters which, in his opinion, require immediate examination:
A danger of dilution – the Gemul Articles contain no legal
mechanisms for protection of the pension funds against their holdings in
Gemul. Since the board of directors of Gemul is controlled by Bank
Hapoalim and Chevrat Ha-Ovdim, there is a practical possibility that this
could happen in the future.
A possible breach of the obligation of trust by directors of Gemul –
there is a serious suspicion that continued activity of Gemul without tax
concessions will gravely harm those insured with the pension funds. The
taking of a measure, as stated, could amount to a breach of the obligation of
trust of the directors vis-à-vis the pension funds and the members who are
insured in them.
Tax exposure – there is a suspicion that assets which Gemul has
been acquiring recently are not eligible for tax concessions.
Box:
HISTORIC ESTATE
Gemul was founded in 1950 by Chevrat Ha-Ovdim, Bank Hapoalim and many
other bodies. Nowadays the Company is used as a central fund for
investments of pension funds and provident funds and provides consultancy
and computer services for the management of the investments of more than
100 provident funds and pension funds. Its share-holders, after the
equalization of rights, are: Mivtachim – 25%; Gadish Provident Fund – 17%;

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CPF – 9%; Bank Hapoalim – 8%; Pension Fund of the Construction Workers
– 5%; Chevrat Ha-Ovdim – 0.25%; and the remainder are held by hundreds of
pension funds and provident funds.
In 1975, Gemul was approved by the Ministry of Finance as a central fund for
investments, which approval accorded it an exemption from income tax on its
revenues.
For historical reasons, concerning the background to establishment of Gemul,
Bank Hapoalim and Chevrat Ha-Ovdim were granted preferential rights which
enabled them to control Gemul jointly. The control was anchored on division
of the share capital of Gemul into three categories and on the granting of extra
personal rights to Bank Hapoalim for the appointment of directors.
Seven years ago, the then State Comptroller, Miriam Ben-Porath, discussed
the problematic deriving from the fact that Chevrat Ha-Ovdim and Bank
Hapoalim held Gemul shares without there being members who had remitted
money for the management of Gemul. As a result of the said control, the
pension funds remitted amounts, at the request of Chevrat Ha-Ovdim, on
account of preference shares and ordinary shares of the investment fund of
Chevrat Ha-Ovdim – which investment caused losses to the pension funds.
Two years later, Ben-Porath raised apparent suspicions of potential conflicts
of interests in the activity of Gemul.
As a result of Ben-Porath’s first report, and with the intervention of the then
controller of the capital market, Meir Shavit, Gemul initiated a move for
unification of the share capital and equalization of the rights it accords.
Shavit demanded that Bank Hapoalim and Chevrat Ha-Ovdim be separated
from the control of Gemul.
The processes of the equalization of rights took a long time and included
many legal processes, inter alia, the appointment of Judge Emeritus Shaul
Aloni as an arbitrator for determination of the rate of compensation due, if at
all, to Bank Hapoalim and Chevrat Ha-Ovdim for the loss of control of
Gemul. At the end of the process, the share capital of Gemul was unified such
that it constituted just one category of share, with cancellation of the excess
rights which had been accorded to the special share of Chevrat Ha-Ovdim and
the voting rights which had been granted to the ordinary shares. The Articles
of Gemul were altered accordingly.
Gemul has recently been in an investment drive and, inter alia, has acquired
8% of Tau Investments Company, 20% of Orev Company and 25% of Milgam
Company.
David Hayyoun