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Israeli justice reforms spark tech investor flight fears

ISRAEL-POLITICS-JUDICIARY-TECH:Israeli justice reforms spark tech investor flight fears
ISRAEL-POLITICS-JUDICIARY-TECH:Israeli justice reforms spark tech investor flight fears Copyright Thomson Reuters 2023
Copyright Thomson Reuters 2023
By Reuters
Published on Updated
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By Steven Scheer and Maayan Lubell

JERUSALEM -Barak Eilam, a former Israeli intelligence officer who now heads cloud-based software provider NICE, says he has never had problems selling Israel as an investment destination.

But on a call last week, Eilam sensed this may be changing when major investors he had partnered with for years began asking pointed questions about a judicial overhaul.

"For now, they're not pulling out any investment but they are kind of watching it carefully," the 47-year-old said.

The proposals by the new hard-right government of Prime Minister Benjamin Netanyahu to strengthen political control over judicial appointments while weakening the Supreme Court's ability to overturn legislation or rule against government action, have brought tens of thousands onto the streets of Tel Aviv and other cities. They fear the changes will politicize the judiciary and compromise its independence.

Yoav Tzruya, general partner at venture capital fund JVP, said investors were mainly worried about stability, corruption and a reliable judicial system.

"I think there will be some investors that, given concerns about stability about corruption or whatever might put more hurdles in front of especially a new fund manager," he said.

This week, an open letter from a group of more than 270 business and economy experts, including former central bank officials and Netanyahu advisers, said the judicial reforms represented "a danger to Israel's economy".

Netanyahu's office declined to comment to Reuters on Friday, but during a meeting with senior businessmen, he said the reforms would boost growth by cutting lengthy legal procedures, while the judiciary would remain independent.

"Not only will the reform not harm the economy, it will jumpstart it," he said, according to a spokesman.

An S&P Global Ratings analyst this month told Reuters that the planned changes could pressure Israel's sovereign credit rating.

On Friday, Moody's credit rating agency pointed Reuters to its Nov. 3 research report, published two days after Netanyahu's election victory. It noted some of the proposed judicial changes that are now being discussed in parliament.

"Implementation of such changes would clearly be negative for our assessment of the strength of institutions and governance, which we have so far considered to be a positive feature of Israel's sovereign credit profile," the reports said.

For Israel's tech companies, an independent legal system is crucial to protecting their main asset, intellectual property (IP), with some executives saying they may consider domiciling abroad as a result of the Netanyahu government's plans.

On Thursday, a day after Netanyahu and Finance Minister Bezalel Smotrich dismissed concerns that the proposals would harm the economy, Eynat Guez CEO of Papaya Global announced she was taking her payroll systems group's money out of Israel.

"Everybody knows Israel is never on safe ground because of the complicated diplomatic issues," Guez told Reuters. "But now we're adding this reform which is ultimately emerging as harming democracy, that's a fatal blow."

Netanyahu's administration says the overhaul is needed to rein in activist judges who it says have encroached into political decision making.

"Nobody will harm intellectual property rights and the honouring of agreements, values which are sacred to us and which are the critical test," Netanyahu said on Wednesday.

Hillel Fuld, a start-up marketing adviser, also dismissed the outcry as "unnecessary hysteria".

"We are still building the best tech in the world. Israeli tech isn't going anywhere. If people pull money then it's their loss, not ours", he said.

Israel's shekel, which weakened 1.1% against the dollar on Friday, is still 2.1% higher against the U.S. currency so far in 2023.

FIDUCIARY RESPONSIBILITY

In a country rife with divisions over the conflict with the Palestinians and matters of synagogue and state, Israel's tech sector has generally stayed out of sensitive political debates.

But for many in an industry that accounts for 15% of the country's overall economic output, 10% of its workforce, more than half of its exports and a quarter of its tax income, the judicial reform proposals have created palpable alarm.

"We worked really, really hard so that Israel is considered a top place to invest and it's not because of any government policy, or tax treatment, it was the entrepreneurs themselves," said Adam Fisher, a partner at investment firm Bessemer Venture Partners. "That can be lost very quickly."

Since 2015, globally-oriented Israeli high-tech firms have raised some $77 billion, mostly from foreign investors. Of that, $51 billion came between 2020 and 2022, with a record year of $26 billion in 2021.

Fisher said he worried a government that controlled the bench could defy world opinion, harm Israel's reputation abroad and make life less friendly at home for some.

There is also a deeper unease about the widening divisions between liberal Tel Aviv with its fast-paced style and plethora of tech start ups and the nationalist tone of the new government and its pro-settler and religious parties.

Netanyahu, who is on trial on corruption charges which he denies, was forced this week by the Supreme Court to sack the interior minister over a tax conviction.

For some of those running tech businesses in Israel the judicial reforms plans may have tipped the scales.

"I care very much about Israel," said Eilam, explaining the unease which prompted him to write to NICE's 8,500-strong workforce outlining his fears. But he added: "I have a fiduciary responsibility to my shareholders."

"If needed, we'll assess the situation and decide to do what's right for the company," Eilam added.

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