1. © 2005 Morrison & Foerster LLP All Rights Reserved New Issues in International Mergers and Acquisitions The Impact of Sarbanes Oxley on Israeli Companies Bruce Alan Mann Partner, Morrison Foerster March 28, 2005

2. 2 What we’ll discuss― How does SOX impact M&A transactions? What should a private seller do because of SOX? What should a public buyer do because of SOX?

3. 3 How does SOX impact M&A transactions? SOX doesn’t change the way deals are done A good deal is still a good deal A bad deal is still a bad deal Due diligence is still the key

4. 4 But SOX does― Create new reporting and disclosure obligations for the public suitor Require potential sellers to take action before negotiations start Call for expanded due diligence by potential buyers Increase the costs of getting a deal done

5. 5 What should a private seller do because of SOX?

6. 6 Make sure you comply with the SOX requirements that apply to private companies. A public suitor won’t want to inherit exposure for criminal offenses Retaliation against “whistleblowers” Destruction or falsification of records Review your internal controls over financial reporting to make sure they are adequate for auditor attestation What should a private seller do?

7. 7 Install information gathering and communications systems that will meet the needs of public company CEO and CFO certifications for disclosure controls and procedures If you expect to become a director or executive officer of the buyer, eliminate any corporate loans If your auditors may be the suitor’s auditors, make sure you don’t use them for non-audit services What should a private seller do?

8. 8 Be aware of SEC hot buttons that may impact your financials Revenue recognition issues – side agreements, distributor sales and channel stuffing Accrued pension liability assumptions Contingent liabilities Off-balance sheet arrangements Segment reporting What should a private seller do?

9. 9 The Bottom Line― Even SOX provisions that don’t apply to private companies or to Israeli companies with no activities in the U.S. can impact your marketability. Be prepared! What should a private seller do?

10. 10 What should a public buyer do because of SOX?

11. 11 Reporting and Disclosure Obligations depend on whether a company is a “Foreign Private Issuer” Organized under laws of a foreign country, and Either 50% of voting securities held by non-residents; or if more than 50% are held by U.S. residents, all of the following are true: A majority of the executive officers and a majority of the directors are not U. S. citizens or residents, and 50% or less of the assets are located in the U. S., and The business is not administered principally in the U.S. What should a public buyer do?

12. 12 Public companies that are not FPIs have Shortened deadlines for filing SEC 10-Q (presently 40 days) and 10-K (60 days for FY2005) reports 8-K reporting deadlines put pressure on M&A negotiations Generally 4 days for reportable events Simultaneous filing for FD compliance 71 days after initial report for financial statements of acquired businesses What should a public buyer do?

13. 13 Public companies that are not FPIs have expanded 8-K disclosure requirements that may be triggered in an M&A context Entry into material agreement Non-binding LOI term sheet need not be filed, but some NDAs and “no shop” agreements may need to be filed Definitive material merger agreements (equity in net book value or consideration exceeding 10% of total assets) Compensation agreements with NEOs, whether written or oral, even if terminable at will Filing actual agreements (or accepted offer letters) “encouraged” “but not required”, but must be filed with next 10-Q or 10-K What should a public buyer do?

14. 14 Public companies that are not FPIs have expanded 8-K disclosure requirements that may be triggered in an M&A context (cont’d) Termination of a material agreement Completion of an acquisition or disposition of significant assets Creation of a material direct financial obligation or off- balance sheet arrangement Exit or disposition of activities where costs would be material (triggered by board decision or management if board approval not required Material impairments to assets, goodwill, etc. What should a public buyer do?

15. 15 Public companies that are not FPIs have expanded 8-K disclosure requirements that may be triggered in an M&A context (cont’d) Appointment of NEO (CEO, President, CFO, CAO or COO) or new director - can defer reporting until public announcement Material modification of rights of securities holders New working capital restrictions and other limits on dividend payments Poison pills Issuance of senior securities Unregistered sales of equity securities Changes in control (subjective test) What should a public buyer do?

16. 16 FPIs can avoid many of these accelerated reporting and disclosure obligations No quarterly reports are required Annual report not due until 6 months after end of fiscal year No equivalent of 8-K, special reports only required for information made public under Israeli law, Exchange or NASDAQ rule, or distributed to shareholders What should a public buyer do?

17. 17 SOX has increased the amount of due diligence required Focus on the same issues private sellers should focus on, whether the target is private or public The fact that a company was recently acquired is no excuse for a weakness in internal controls Don’t rely on a materiality test for due diligence. Side agreements don’t need to impact revenue to result in a material weakness The SEC hot buttons apply to consolidated subsidiaries, even if they’ve just been acquired The acquired business can trigger segment reporting What should a public buyer do?

18. 18 The bottom line - the impact of SOX on M&A transactions for both sellers and buyers Structure your transaction to avoid losing FPI status if possible Be aware of heightened disclosure obligations if you are not a FPI Focus on prohibited transactions if acquiring a company not subject to SOX Recognize need for disclosure controls and procedures in the acquired company Make sure your system of internal controls is adequate and your auditors can attest to it

19. 19 The bottom line - the impact of SOX on M&A transactions for both sellers and buyers (cont’d) Be aware that the accountants have become more active Don’t assume they will accept prior auditors’ determinations Don’t assume a minor error won’t become a major problem Expect the post-acquisition accounting costs to increase substantially Make sure your pro-forma projections reflect Added compliance costs Increased stock compensation expense Impact of purchase price allocation to assets acquired and obligations assumed

20. 20 The bottom line - the impact of SOX on M&A transactions for both sellers and buyers (cont’d) Make sure you understand what diligence needs to be done before you enter negotiations Expect negotiation over expansion of representations and warranties Recognize that the cost and time to completion will be longer

21. 21 THANK YOU The International Law Firm for Israeli Companies Visit us at www.mofo.comwww.mofo.com Or www.mofo.co.il (Hebrew)www.mofo.co.il New Issues in International Mergers and Acquisitions