Israel’s Tech Sector Says Judicial Overhaul Could Hurt Economy

Those moves followed a letter from hundreds of Israeli economists warning that the judicial changes would concentrate political power and remove democratic checks and balances in a way that “could cripple the country’s economy.” Two former Bank of Israel governors warned in an opinion column about the negative economic impacts of changes to the top court.

Israeli Prime Minister

Benjamin Netanyahu

and his recently sworn-in government are advancing plans that would give the ruling coalition control over which judges are appointed, and allow a simple majority of lawmakers to override decisions by the Supreme Court. The plan would also limit which cases the court can hear.

Top members of the justice system and the political opposition have criticized the overhaul as an attempt to concentrate all power in the hands of the ruling coalition.

Israel is highly reliant on its technology sector, which accounts for 15% of the country’s gross domestic product and around half of its exports. The country has prospered in recent decades, attracting foreign investment that has fueled an explosion of startups and technology companies. Many Israeli tech companies are based in or have workers who live in the Tel Aviv area, a base for secular and liberal Israelis, many of whom oppose Mr. Netanyahu’s government.

On Thursday, Papaya Global Ltd., a human-resources-software company that raised $250 million in 2021 at a valuation of $3.7 billion, said it would move its bank accounts outside of Israel because of the judicial-overhaul plans.

“In the emerging reform, there is no certainty that we can conduct international economic activity from Israel. This is a painful but necessary business step,” said Papaya Global’s Israeli chief executive, Eynat Guez, in a tweet.

Tal Barnoach, an Israeli general partner at venture-capital firms Disruptive Technologies Venture Capital and Disruptive AI, said Thursday that, given the planned judicial overhaul, the next time his firms raise capital the money would be put in banks outside of Israel.

In a news conference Wednesday, Mr. Netanyahu defended his administration’s judicial plans. “Not only will our moves to strengthen democracy in Israel not hurt the economy, they will strengthen it,” he said.

Mr. Netanyahu said the changes would remove what he called “superfluous legal processes” that had delayed major infrastructure projects in Israel for years and stunted the growth of Israel’s economy.

The Israeli leader also said the plan wouldn’t damage the independence of the courts, and no harm would come to intellectual-property rights or the honoring of agreements.

Yair Geva, a mergers-and-acquisitions lawyer at Israeli law firm Herzog, Fox and Ne’eman, said the concern is that after the judicial overhaul is enacted, judges will be appointed by politicians, making them susceptible to “external party influence or incompetent training.”

Judges in Israel are currently appointed by a committee that includes lawmakers, ministers, sitting judges and members of the bar association. Under the proposed changes, a majority of committee members would be members of the coalition, raising concerns that they wouldn’t be independent.

Mr. Geva said Israeli entrepreneurs had asked for his advice about incorporating their companies in the U.S. rather than Israel, in case they would have trouble fundraising from foreign investors if the overhaul is passed.

He said they also fear the reforms would allow the government to pass legislation that could be seen as clashing with environmental, social and governance requirements applicable to foreign and local venture-capital funds, such as ensuring no employees are discriminated against.

The current coalition is considering laws that could disqualify most current lawmakers from the Arab minority from running in elections for statements seen as supporting Palestinian militants, and allow businesses to refuse to serve LGBT people if doing so clashes with their religious beliefs.

“I think almost every founder these days is thinking about the subject and considering next steps,” Mr. Geva said, adding that he was speaking for himself and not his firm.

It could significantly affect tax revenue for Israel if those companies also decide to move leadership operations to the U.S. as well, Mr. Geva said.

On Tuesday, hundreds of tech workers left their offices in Tel Aviv for an hour at midday to participate in what was the first tech-specific protest against the judicial-overhaul plans.

“No democracy, no hi-tech,” said many protesters’ signs.

Tens of thousands of Israelis have joined what has become a weekly Saturday night protest against the judicial overhaul for the past three weeks. Another protest is planned for Saturday.

—Aaron Boxerman contributed to this article.

Write to Dov Lieber at [email protected]