This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Italy.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The key corporate laws governing M&A are primarily: (i) the Italian Civil Code (Royal Decree No. 262/1942) for privately held companies; and (ii) the Consolidated Financial Act (Legislative Decree No. 58/1998, Testo Unico della Finanza), which is the main law governing the financial sector and was approved in 1998 to provide a coherent and complete set of rules in line with EU law and that deals with, among other things, M&A transactions of publicly traded companies.
Publicly traded companies are subject to the supervisory authority of Consob (Commissione Nazionale per le Società e la Borsa), which has the duty to, among other things, monitor takeover bids on listed companies with registered offices in Italy and companies admitted to trading on Italian regulated markets.
The M&A market is also regulated by antitrust regulation, primarily Law No. 287/1990, which constitutes the basis of Italian antitrust law. Indeed, if an acquisition or merger among a plurality of companies results in a concentration of undertakings, exceeding certain thresholds (i.e., aggregate turnover exceeding EUR 492 million and aggregate domestic turnover of each of at least two of the merging companies exceeding EUR 30 million), the Italian Antitrust Authority (AGCM – Autorità Garante della Concorrenza e del Mercato) evaluates whether the entity resulting from the concentration is capable of creating undue competition distortion. M&A transactions are also subject to EU antitrust rules if they meet other thresholds (two exist, under EU Council Regulation No. 139/2004: the first requires, e.g., a combined worldwide turnover of all the merging firms of over EUR 5,000 million and an EU-wide turnover for each of at least two of the companies of over EUR 250 million).
The Italian government has special “golden powers”, which allow it to intervene to protect companies that operate in strategic areas (e.g. defence, national security, energy, transport and communications). These powers are governed by Law Decree No. 21/2012, which regulates the exceptional circumstances likely to cause serious and irreparable harm to the fundamental interests of the State (such as reasons of public security and defence) that entitle the government to exercise the “golden powers”. The decree requires that the government be notified of every transaction (including M&A transactions) that affect the functioning or ownership of strategic assets.
In such cases, the government can impose conditions on the transaction and veto shareholders’ meetings and board of directors’ resolutions or turn down purchases of shares that would lead to a voting interest capable of affecting national security interests.
What is the current state of the market?
The M&A market was very active in 2017 and the auspices are good for 2018. The number of transactions in 2017 topped a historical high (although the overall deal value was significantly lower) and the perception is that asset valuation is generally at the high end of the spectrum. Last year, Entirely domestic deals account for approximately half of the number of deals, worth one-third of the total.
Which market sectors have been particularly active recently?
The industrial products and services sector has been the most dynamic one in 2017, with the highest number of deals. The consumer retail sector was the first one for the total value of deals completed.
Financial services and energy sectors have also been quite active in 2017, in terms of both number and value of deals completed. The pharmaceutical sector, instead, has experienced a contraction compared to 2016.
Infrastructure sector has been rather active as well.
Lastly, in 2017 the number of IPOs has increased. Up to October, 19 companies decided to go public. Besides the success of the Alternative Investment Market, the positive result is to be ascribed to the rise of SPACs.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Keeping the current M&A pace in the coming two years will depend mostly on macro-economic factors – specifically, meeting the economic growth forecast for Italy and the EU area and the actions that the ECB takes on interest rates and bond-buying programmes.
At a domestic level, uncertainty regarding the upcoming general elections (taking place in early March) is expected to influence investments if a protracted period of political instability follows. Additionally, the stability of the banking system, which could suffer in the event of economic slowdown or major political instability, could influence the ability of the M&A market to keep its current pace throughout 2018 and 2019.
What are the key means of effecting the acquisition of a publicly traded company?
Most public M&A transactions take the form of an acquisition of shares for cash preceded or followed by a public tender offer. Alternatively, acquisitions can take place through mergers or exchanges of shares that, depending on the circumstances, can be followed by a public tender offer.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Both privately and publicly held companies must publish their annual financial statements, which can be consulted at any time by submitting a request to the chamber of commerce.
Listed companies are required to publish: (i) interim management reports at least once every six months, and (ii) annual accounts on their websites, together with information on their by-laws, governance, corporate structure and shareholders.
Furthermore, it is possible to obtain a business profile certificate (visura camerale) of any company registered with the companies’ register. The certificate gives a brief overview of the company, including the structure of its corporate bodies and its share capital.
No obligation exists to disclose information to a potential buyer in an M&A transaction. However, target companies spontaneously share confidential/non-public information with potential buyers within the limits of the company’s corporate interests.
To what level of detail is due diligence customarily undertaken?
Generally, the number of details disclosed regarding target companies involved is rather high in private acquisitions. Less information tends to be shared in public takeovers.
A further element likely to affect the extent of disclosure is the nature of the counterparty-buyer: if a competitor, the target company generally prefers to share information to the minimum extent possible due to the inherent risks if the transaction does not go through.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
If the transaction is structured as a sale and purchase of shares, the target company’s corporate bodies play a substantially limited and passive role. Specifically, directors tend to be impartial, especially in view of a change of control that might affect the composition of the management body. Corporate bodies do not have approval rights unless the by-laws of the target company (if non listed) so provide.
In mergers and equity contributions, boards of directors and shareholders play a more active role.
With regard to mergers, the boards of directors of each company involved must draft a merger plan setting out the terms of the merger and fundamental information (such as the new by-laws) of the resulting company and the exchange ratio. Furthermore, approval by resolution of an extraordinary shareholders’ meeting is required.
If the transaction is structured as or involves an equity contribution in kind of a going concern, the capital increase requires approval by resolution of an extraordinary shareholders’ meeting. Furthermore, directors are entrusted with certain duties, such as to re-evaluate the court-appointed expert’s estimate of the value of the assets.
What are the duties of the directors and controlling shareholders of a target company?
No specific duties are imposed on directors of privately held companies in relation to acquisitions, save for a general duty to be impartial regarding the choices of the shareholders and to act in the company’s interests.
Conversely, with regard to publicly held companies, Art. 104 of the Consolidated Financial Act, in furtherance of EU Directive 2004/25/CE, introduced the “passivity rule”, which aims to balance the powers of directors with the interest of the shareholders in evaluating an offer from a third party. To this extent, directors must refrain from taking any action that could conflict with the goals of the offer, unless the action is first approved by resolution of an extraordinary shareholders’ meeting. Merely seeking other offers is not considered to conflict with the goals of the offer.
Do employees/other stakeholders have any specific approval, consultation or other rights?
If a transaction is structured as a purchase of a business or a branch or as a merger that will lead to a change of ownership of the company’s assets and liabilities, the employees are entitled to maintain their jobs and, therefore, their employment continues uninterruptedly with the buyer.
If the companies involved have more than 15 employees, the buyer and seller must follow a consultation procedure with the trade unions (under Law No. 428/1990). In brief, the seller and buyer must provide the trade unions advance notice of the planned transaction. The trade unions can request a joint examination to evaluate both the buyer’s management capacity in connection with the treatment of employees and its plans for future employment levels. The consultation is deemed completed after 10 days even if no agreement is reached. The outcome of the consultation is not binding.
With regard to publicly traded companies, as soon as a takeover bid is disclosed to the public, the target company must communicate the offer to the employees’ representatives or, if none exist, to the employees (under Art. 102 of the Consolidated Financial Act). The employees’ representatives can submit a document containing alleged transaction’s potentially harmful consequences on their employment (under Art. 103 of the Consolidated Financial Act).
To what degree is conditionality an accepted market feature on acquisitions?
Conditions precedent are frequent in M&A transactions. They must be sufficiently precise, and their occurrence cannot depend solely on the will of a party (Art. 1355 of the Italian Civil Code).
Another common condition precedent in M&A transactions is clearance by the antitrust authority, i.e., attestation that the concentration through an acquisition fulfils compatibility requirements.
Indeed, conditions precedent are widely used in cases in which authorities’ or third parties’ consent to a transaction is required.
At times, sale and purchase transactions are conditional on the completion of a corporate reorganisation: in this case, breach does not preclude full validity of the sale and purchase agreement but rather constitutes a failure to fulfil a contractual obligation, for which the buyer is entitled to compensation for damage.
On occasion, in privately held companies, an offer to buy can be subject to financing when the buyer has not yet concluded a financing agreement with a bank at the time of negotiations and, thus, submits only a commitment letter (or, at least, a highly confident letter) from the bank to demonstrate the existence of the bank’s undertaking (or, at least, the bank’s intention) to grant financing. In these circumstances, the conclusion of the financing contract with the bank is a condition precedent to the closing.
Furthermore, material adverse change clauses enforced as conditions precedent are used in M&A transactions but are not particularly common.
What steps can an acquirer of a target company take to secure deal exclusivity?
Exclusivity agreements are the usual practice to secure deal exclusivity.
Parties must conduct negotiations in good faith and cannot withdraw in bad faith. This rule is to be interpreted in the sense that a party, in the event of unjustified withdrawal, is liable for both the costs incurred by the other party throughout the negotiations and the opportunities lost by the other party due to the legitimate expectation that the negotiations would have been duly carried out.
Since this rule does not prohibit the parties from pursuing their own interests and seeking a better deal elsewhere, exclusivity agreements are common in sale and purchase agreements regulated by Italian law.
Normally, the shareholders sign an exclusivity agreement with the buyer; for mergers and equity contributions, exclusivity can be agreed with the target company.
Sometimes exclusivity is guaranteed by a penalty clause, which obliges a party that breaches the exclusivity agreement to pay a predetermined amount, with the possibility (which must be expressly included in the contract) of the non-breaching party to request compensation for any further damage (under Art. 1382 of the Italian Civil Code). With regard to the predetermined amount, the counterparty has the right to start legal proceedings to have the predetermined amount recalculated, which can be granted on a discretionary basis by the judge if the obligation was only partially fulfilled or the judge considers the amount manifestly excessive.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
The parties can agree break-up fees (but they are not common) in a letter of intent, in a preliminary agreement, or in an exclusivity agreement. This clause entails a penalty if a party breaks off the negotiations without reasonable cause; the purpose being to compensate the purhcaser for the cost of time and resources spent negotiating, in line with the general principle under Art. 1337 of the Italian Civil Code, whereby parties have a duty to conduct negotiations in good faith. Please see question 12 regarding the scope and issues of penalty clauses under Italian law.
Which forms of consideration are most commonly used?
Cash is the most common consideration in private M&A transactions. In public M&A transactions, the Consolidated Financial Act allows cash and share offers (and combinations of both).
However, in public tender offers Art. 106 of the Consolidated Financial Act requires a cash alternative (i.e., the duty to offer cash in lieu of shares) at the seller’s choice, under certain conditions: (i) if the shares offered are not admitted to trading on a regulated market, or (ii) if the offeror bought, in cash, shares representing at least 5% of the voting rights at ordinary shareholders’ meetings of the target company within the last 12 months. The rule is the expression of a general principle of equal treatment among all the shareholders to whom the offer is addressed.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Art. 120 of the Consolidated Financial Act requires, in public M&A transactions, disclosure as soon as a party holds more than 3% (5% for small- to mid-sized listed companies) of the share capital in a share issuer whose state of origin is Italy. In this case, Consob and the company must be promptly notified.
Under the Issuers’ Regulation (Consob Resolution No. 11971/1999, Regolamento Emittenti), those who hold, directly or indirectly, financial instruments with voting rights must inform the company and Consob if the holding of the instruments achieves, over-achieves or is reduced below some significant and progressive thresholds (5%, 10%, 15%, 20%, 25%, 30%, 50%, 66.6% and 90%).
The Issuers’ Regulation provides that those who directly or indirectly hold “potential investments” (i.e., cash settled and/or share settled derivatives or options) also have disclosure obligations to target companies and Consob when the relevant thresholds are exceeded.
At what stage of negotiation is public disclosure required or customary?
In private M&A transactions, public disclosure is customarily after the signing or at the same time as the closing.
In public M&A transactions:
- the resolution or obligation to launch a tender offer must be promptly communicated to Consob and simultaneously disclosed to the public. This obligation is binding, indistinctively, on any potential acquirer of a listed company, whether or not listed on a regulated market (under Art. 102 of the Consolidated Financial Act);
- investors who acquire certain amount of the share capital of a listed company (10%, 20%, 25%) are required to disclose to Consob and to the target company their strategy (i.e. whether or not the investor is acting alone, if he is willing to enter into a shareholders’ agreement, etc.) for the six month period following the acquisition (under Art. 120, subpar. 4-bis, of the Consolidated Financial Act); and
- information regarding M&A transactions involving a listed company that, if made public, would likely significantly affect the share price, must be disclosed as soon as possible (the Market Abuse Regulation, MAR).
However, listed companies are able to delay disclosure if their legitimate interests would likely be prejudiced and if: (i) the delay is not capable of misleading the public, and (ii) the issuer is able to ensure that the information remains confidential.
Is there any maximum time period for negotiations or due diligence?
No maximum time period exists for negotiations or due diligence.
Are there any circumstances where a minimum price may be set for the shares in a target company?
For private M&A transactions, no minimum price is required by law.
For public M&A transactions, Art. 106 of the Consolidated Financial Act provides that mandatory tender offers shall be launched as soon as an investor comes to hold an interest representing over 25% of the shares, or 30% for small to mid-sized companies. The takeover must be pursued at the highest price paid or agreed on for the shares in the previous 12 months.
Is it possible for target companies to provide financial assistance?
Financial assistance is generally forbidden. However, Art. 2358 of the Italian Civil Code sets forth the conditions under which it can be pursued for joint-stock companies (società per azioni).
In no circumstances is financial assistance permitted with respect to acquisitions of limited liability companies (società a responsabilità limitata (Art. 2474).
Art. 2358 provides that directors must prepare a report explaining the reasons and risks connected with the transaction, which can be enforced only by resolution of an extraordinary shareholders’ meeting. Furthermore, the amount of the transaction may not exceed the distributable profits and available reserves (as recorded in the most recently approved financial statements). A legal reserve of the same amount of the financial assistance granted, unavailable until the loan or guarantee is due, must be established.
Which governing law is customarily used on acquisitions?
Italian law normally governs acquisitions of Italian target companies
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Art. 102 of the Consolidated Financial Act provides that buyers that submit a tender offer must publish an “offer document”, which has to be sent to Consob within 20 days from when the offer is made public, in order for the offer’s compliance with the law provisions to be checked. Content requirements and the rules on filing and notification are set out under Art. 38 of the Issuers’ Regulation. Generally, the document must indicate: (i) the buyer’s identity, (ii) the category and quantity of securities involved, (iii) the price per share, (iv) the initial and final date of the acceptance period.
If listed shares are issued as consideration, the offer prospectus must comply with the principles and provisions under EU Commission Regulation No. 809/2004.
In the case of mergers, Art. 70 of the Issuers’ Regulation provides that an information document must be drafted by issuers that intend to carry out extraordinary transactions. The document must outline all risks and uncertainty regarding the transaction that could significantly influence the issuer’s business.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
There are two ways to document a transfer of shares in an Italian joint stock company:
a) Under Art. 2355 of the Italian Civil Code, transfer of shares can be executed through an endorsement notarised by a notary or by another person under special law provisions. The endorsee who can prove to be the holder of the shares on the basis of an uninterrupted series of endorsements has the right to obtain registration of the transfer in the shareholders’ register and has the authority to exercise every corporate right. This method is the most commonly used.
b) Under Art. 2022 (“transfer” in Italian legal terminology) it is also possible to document a transfer of shares by executing a notary deed of transfer and handing over the share certificate and indicating the name of the acquirer on the certificate and in the shareholders’ register (alternatively, a new certificate can be issued with the name of the new shareholder). This substitution of the shareholders’ name is carried out by the issuer (or by the transferor at its request). If the company has not issued share certificates, it is not necessary to hand over anything and the transfer, always after having executed the notary deed of transfer, takes place by simply registering the name of the new shareholder in shareholders’ register.
The transfer of dematerialised shares, which, for Italian listed companies, is maintained by Monte Titoli S.p.A., takes place by book entries in a centralised management system.
To document a transfer of shares in limited liability companies, the parties must execute a deed of transfer authenticated by a notary. To make the transfer effective toward the company the deed of transfer must be registered with the companies’ register.
With regards to transfer tax and duties requirements in the context of an acquisition transaction, the situation differs depending on whether the target company is a:
a) joint stock company, in which case no registration fees are required when the transfer is executed through the notarised endorsement (see point a above); contrarily, a fixed registration fee will apply if so-called “transfer” was used (see point b above). Lastly, transfers of shares require that the buyer pay so-called “Tobin Tax” at a rate of 0,20% of the transaction value (reduced to 0,10% in case the transaction is performed on regulated markets);
b) limited liability company, in which case the deed of transfer’s filing with the companies’ register requires a fixed registration fee.
Are hostile acquisitions a common feature?
Hostile acquisitions are quite rare in Italy, but they have occurred in the recent past.
What protections do directors of a target company have against a hostile approach?
Protection of directors of a company against a hostile acquisition is rather limited; in fact, they are subject to the passivity rule, under Art. 104 of the Consolidated Financial Act, which prohibits directors from taking actions that could frustrate the bid, unless they have authorisation to do so by resolution of a shareholders’ meeting.
Moreover, clauses in the company’s by-laws or contracts can make it more difficult or uneconomic to change the composition of the board of directors. For instance, companies can provide golden parachutes, which set a pay-out for a director if he or she is terminated or forced out from the company before the end of his/her contract.
By-laws can also provide for loyalty shares, which double the voting rights of shareholders that have held shares for a minimum of two years.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Under Art. 106 of the Consolidated Financial Act, anyone who, subsequent to the purchase of shares (or as a result of the attribution of further voting rights on the same shares) comes to hold a shareholding (or to have voting rights) greater than 25% of the share capital (30% in small- to mid-sized companies), must launch a public offer for the purchase of all the ordinary shares admitted to trading on a regulated market. The offer must not be launched if the shareholding is held owing to a prior tender offer for 100% of the share capital.
Other cases can also trigger a mandatory tender offer:
- indirect acquisition of control: a public tender offer on all outstanding shares of a certain company is mandatory when a threshold of 30% interest is achieved through the purchase of shares of another listed company which, in turn, has an interest in the first one; and
- the creep-in rule: a public tender offer is mandatory when an investor that already holds 30%–50% of the share capital of a company purchases the that company’s shares for an amount superior to 5% within 12 months.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders can make use of their usual rights arising from their ownership of the shares, such as the right, in publicly held companies, to appoint the chairperson of the board of statutory auditors and one director
Minority shareholders with a 1/1000 interest in the share capital of a publicly held company (5% of the share capital in privately held companies) can challenge unlawful shareholders’ meeting resolutions in court. They may also bring liability actions against the directors if they hold at least 1/40 (for publicly held companies) or 1/5 (for privately held companies) of the share capital.
Minority shareholders in Italian joint-stock companies have limited control powers over the company’s ordinary business. However, they have the right to consult the shareholders’ meeting book of minutes and the shareholders’ register (in which ownerships and transfers of shares are recorded).
Minority quotaholders in Italian limited liability companies play a more active role in the management of the company than shareholders in joint-stock companies.
One of the most effective powers in the hands of the minority quotaholders is the right to withdraw from the company if they disagree with certain resolutions of quotaholders’ meetings (such as a substantial change in the corporate purpose or the transfer abroad of the registered office).
Furthermore, quotaholders’ rights can largely be shaped by inserting apposite provisions in the company’s by-laws, including those generally reserved to shareholders’ agreements (such as veto powers granted to quotaholders identified by name).
Is a mechanism available to compulsorily acquire minority stakes?
Art. 111 of the Consolidated Financial Act contemplates a “squeeze-out” provision that applies each time that – following the launch of a takeover bid for all of the outstanding voting shares of the target company (whether the takeover bid is voluntary or mandatory) – the bidder holds at least 95% of the voting rights. Under this rule, a bidder in this condition has the right to purchase the remaining shares of the target company within three months from the expiry date of the offer, provided that the bidder asserted its wish to do so in the offer document.
Conversely, no mechanisms exists for compulsory acquisitions of minority stakes in privately held companies.