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Israel justice reforms spark tech investor flight fears

January 27, 2023 at 4:36 pm

A man holds a flag during a protest in front of the Israel Embassy in San Salvador on June 4, 2010 to condemn the attack against the freedom flotilla by Israel troops last May 31. The Salvadorean goverment officially condemned the attack [Jose CABEZAS/AFP via Getty Images)

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

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 radical 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 right wing government of Prime Minister, Benjamin Netanyahu, to strengthen political control over judicial appointments while weakening the Israeli Supreme Court’s ability to overturn legislation or rule against government action have brought tens of thousands on to the streets of Tel Aviv and other cities over fears they will politicise 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 who, given concerns about stability about corruption or whatever, might put more hurdles in front of especially a new fund manager,” he said.

Earlier 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”.

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Netanyahu’s office did not immediately comment when approached by Reuters on Friday but, during a meeting with dozens of senior businessmen, he said the judicial reforms would boost growth while the legal system would remain independent.

“Not only will the reform not harm the economy, it will jumpstart it,” he said in a statement.

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, Anat 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.

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 per cent of the country’s overall economic output, 10 per cent 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.

READ: Israel: ‘Thugs want to save Netanyahu from corruption trial,’ says former PM

“That can be lost very quickly,” Fisher added.

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 those who disagreed with it.

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 fiercely nationalist tone of the new government and its pro-settler and religious parties.

Netanyahu, who is himself on trial on corruption charges which he denies, was forced this week by the Supreme Court to sack the head of one of his coalition partners as Interior Minister over a tax conviction.

For some of those running tech businesses in Israel, the judicial reform 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.