Israel’s tech industry rebels against Netanyahu’s judicial reform

Tech executives and workers joined tens of thousands of mostly secular Israelis as Mr. Netanyahu began advancing legislation this week with a simple parliamentary majority to overturn Israel’s Supreme Court, limiting its powers and giving ruling coalitions the power to appoint judges. Some tech companies have said they are pulling money out of Israel and incorporating new businesses as countermeasures if the laws cause an economic downturn.

The fight is part of a cultural clash between the religious parties that came to power with Mr. Netanyahu in last fall’s election and Tel Aviv, a Mediterranean city known for its cafe culture and traditional culture. Vibrant gay community. Supporters of the reforms say Israel’s top court is dominated by left-wing judges who can easily strike down laws, policies and appointees in a country that is shifting to the right and becoming increasingly religious.

Some tech executives say the bill would strip the courts of their independence and the unchecked power of Mr. Netanyahu’s government would push Israel into a place where entrepreneurs, investors and talent no longer want to live or do business. They refer to proposals by Mr. Netanyahu’s coalition to allow segregation of the sexes in public spaces. allowing businesses not to serve LGBT customers; And annexing the occupied West Bank without giving full equal rights to Palestinians living there—a move some tech executives say could further damage Israel’s international reputation.

Guy Taitunovitch, CEO and founder of CHEQ, a large Israeli cyber security company, says some LGBT employees are asking about relocation. “They’re scared,” he said.

The Israeli currency, the shekel, has fallen 7 percent against the U.S. dollar in the past month and was down 2 percent on Tuesday, as analysts say political unrest has weakened confidence in the economy. Update started. According to Rafi Gozlan, Chief Economist of IBI Investment House, it is the worst performing global currency after the Russian ruble. Hundreds of economists, including the Central Bank of Israel and JPMorgan Chase & Co., have warned that the reforms could hurt the economy.

Mr Netanyahu dismissed the fears as overblown and said the judicial reform would eliminate “excessive legal processes” that hamper economic growth. Mr. Netanyahu, who was a world champion in the field of technology, As finance minister in the early 2000s, he is credited with laying the foundation for Israel’s economic prosperity by introducing tax cuts, deregulation, spending cuts and raising the retirement age.

Coalition members said the reform would restore balance to the justice system and increase representation of Mizrahim, or Jews of Middle Eastern descent, on the Supreme Court. Mizrahim is a pillar of Mr. Netanyahu’s support.

“Israel is a democracy and will remain a democracy, with majority rule and proper protection of civil liberties,” Mr. Netanyahu said on Sunday.

Speaking to investors in 2015, Mr Netanyahu said: He said there were dire economic predictions during the fiscal reforms of the early 2000s that turned out to be wrong.

Israel’s attorney general has blocked Mr. Netanyahu from carrying out the judicial reform, saying he has a conflict of interest because it could affect pending corruption charges. Mr Netanyahu has been charged with bribery, fraud and breach of trust in connection with three separate investigations, the first time a sitting Israeli leader has been charged. He denies any wrongdoing.

According to a poll published by the Jerusalem-based Israel Democracy Institute, a majority of Israelis oppose judicial changes, including a minority who voted for parties in the ruling coalition. Nearly three-quarters of Israelis want reconciliation, according to a poll.

US Ambassador to Israel Thomas Nides and Israeli President Isaac Herzog, who are outside his party, urged Mr Netanyahu to seek negotiations. The ruling coalition has called for negotiations to pass the law by the end of March while simultaneously pushing it forward.

Fearing a compromise, Israeli tech companies, entrepreneurs and wealthy individuals are taking steps to protect their finances and businesses.

Israeli online transcription service Verbit is among at least nine tech companies moving financial holdings outside of Israel and facing pressure from investors or risk managers, executives and company advisers said.

“I’m worried that all of a sudden they won’t let people send money overseas or they’re going to be too difficult or ask crazy taxes,” said Verbit CEO Tom Livne.

Mr. Netanyahu’s government has given no indication that it will implement capital controls or raise taxes significantly.

John Medved, founder and CEO of OurCrowd, is among Israel’s most active VCs, and the country’s tech industry and economy are likely to be strong. Last week, more than 6,400 people from 81 countries attended the OurCrowd investment summit in Jerusalem and pledged tens of millions in funding, the company announced.

“It was war, recession, internal struggle,” he said of the economy. But “if this is not handled properly, there could be some level of damage,” he added.

Investment still flows to countries with few government checks and balances and authoritarian regimes like China where investors want exposure to huge domestic markets.

Adam Fisher, one of the top investors at Tel Aviv-based Bessemer Venture Partners, a San Francisco firm, said Israel is at greater risk as a small country dependent on exports, foreign investors and international technology talent. Israeli technology companies. Tech companies say they believe they are at risk of leaving Israel for the US because their CEOs and employees are disillusioned with the country’s direction.

Bessemer advised portfolio companies to limit their exposure to the Israeli currency and hold their dollar reserves in U.S. financial institutions when necessary.

“Our fear is that an illiberal government could gradually take decisions on Israeli companies, mainly in Western markets where Israel is controversial. It’s a fear, not a certainty,” Mr. Fisher said.

In recent weeks, most new Israeli companies have been incorporated in the U.S. rather than Israel, a move that makes it easier to sever or reduce ties to Israel if necessary, lawyers, investors and entrepreneurs say.

Any problems with Israel’s tech industry will have a major impact on the country’s economy. The sector accounts for 15 percent of Israel’s gross domestic product and half of its exports, an economic boom that has made the country a magnet for foreign investment and one of the world’s most expensive real estate markets.

The shekel’s decline coincided with the Israeli stock market underperforming global indexes. Those trends mark the beginning of a crisis, the CEOs of Israel’s biggest banks warned last week in talks with Bezal Smotrich, one of Mr Netanyahu’s most important religious coalition partners.

The offices of Mr Smotrich and Economy Minister Nir Barkat declined to comment.

— Aaron Boxerman contributed to this article.

Write to Dov Lieber at dov.lieber@wsj.com