Company valuation is one of the most substantive issues in business restructuring. In every restructuring it affects the consideration allocated to each shareholder and the holding ratio between the parties, and in mergers and spin-offs it is one of the key conditions determining whether the merger or spin-off can be carried out tax-free at all.
Here are a few important points that come up again and again in valuation work:
- External expert requirement for mergers and spin-offs — A merger or spin-off requires a valuation by an "expert": someone whose business is valuations, who is not a related party to the companies and does not provide them with ongoing services. The Israel Tax Authority does not dictate the valuation method or its content — it only requires the expert to confirm that the value ratios required by law are met.
- Can you get an exemption? Generally, no. The Corporate Restructuring Division's longstanding position is that a valuation is a mandatory condition for a merger or spin-off, even when an external indicator of value exists (such as an acquisition transaction or a quoted market price) — even then, valuation work is required to confirm that the external indicator reflects fair market value. A genuine exemption exists only in specific exceptions, such as a subsidiary merging into its parent, or a merger between "sister companies" that meets the conditions of the special regulations.
- You don't always need to state an absolute value — The expert isn't required to determine the companies' value in absolute figures, only to indicate a "relative value" — the ratio between the companies. This helps in cases where objective pricing is difficult (insurance companies, for example, because of actuarial liabilities), or when the parties prefer not to disclose an absolute value but can still estimate the ratio.
- Restructuring transactions other than a merger or spin-off — a lower bar. For example, when transferring an asset to a company (Section 104A) or in transfers between sister companies or to a parent company (Sections 104B(f), 104C), an internal valuation or "management valuation" can suffice, without needing an external expert — except for real estate assets, where an external real-estate appraiser's valuation is required in any event for purchase-tax purposes.
- When valuation is difficult — sometimes it can be simplified. Where valuing the companies is significantly difficult, it's sometimes possible to reach an agreement and rely on the equity ratio between the companies as a substitute for a full valuation — though even then, the external expert must confirm that the chosen figure reflects fair market value.
In Summary
This is only the tip of the iceberg — every case has its own circumstances, and it's worth examining the valuation question in a restructuring as early as possible. Considering a restructuring and want to look into this in advance? Get in touch.