Key private M&A deal structures

In Italy, it is market practice to achieve an M&A transaction by way of a share deal (i.e., purchase of shares) or an asset deal (i.e., purchase of assets or a business as a going concern). Generally, Italian sellers tend to prefer share deals due to a quicker and leaner process (without, by way of example, independent valuations or trade union consultations being required). Moreover, Italian sellers may prefer share deals since they entail a clear allocation of liability upon completion of the transaction; in asset deals – without prejudice to certain rules providing for the ring-fencing of liabilities and to specific contractual arrangements – the seller and the buyer remain jointly and severally liable for certain liabilities existing on the closing date.

Mergers, demergers and consolidations are also methods of acquisitions in M&A deals in Italy; although such methods have mainly been implemented in intra-group reorganizations so far, they have recently become more common as methods of achieving acquisition transactions as well. A merger (fusione) occurs where the assets and liabilities of one or more companies, including its / their corporate name and identity, become part of the assets and liabilities of another, so that the latter is then treated as the successor of the former as the only surviving company. A demerger (scissione) occurs where one company transfers part or all of its assets and liabilities to one or more newly incorporated or pre‑existing companies, resulting in the allocation of such assets and liabilities — together with the related corporate functions — to the receiving entities. The transferring company may continue to exist (in the case of a partial demerger) or cease to exist (in the case of a full demerger), while the beneficiaries of the demerger succeed to the transferred assets and liabilities by universal succession limited to the portion of the assets assigned to each of them. A consolidation is a variant of a merger and occurs when two or more companies pool their assets and liabilities by forming a new joint venture company. At the end of the process, only the new company will be in existence and will be treated as the successor of the consolidated companies.

Key private M&A deal process

While bilateral transactions are market practice in Italy, auction processes have become more and more frequent over recent years, particularly for major deals and/or when seller(s) are private equity player(s). The trend is increasingly toward managing auctions through binding bid process letters rather than through indicative nonbinding letters. In the first round of the process, bidders are usually invited to submit their offers based on limited and preliminary information provided by the seller(s), usually by means of a vendor due diligence report and a limited due diligence process. Then, the selected bidders who are admitted to the second round are allowed to conduct full due diligence investigations and are requested to submit their binding offers by providing comments on the draft acquisition agreement, and any other transaction documents, which are commonly prepared by the seller(s).

In Italy, there are two forms of corporations assuring limited liability to all shareholders: the S.p.A. (Società per azioni) and the S.r.l. (Società a responsabilità limitata).

S.r.l.s are normally used for closely held companies with limited equity. The minimum capital is EUR 10,000 and it is represented by a "quota" (as opposed to being represented by a number of shares), which is not represented by certificates. Each shareholder is granted a single indivisible quota, with a nominal value corresponding to the portion of the corporate capital subscribed and paid by that shareholder, for a value that cannot be higher than the value of the contribution made. The aggregate value of the contributions cannot be lower than the total amount of the corporate capital. The governance of this type of company is more flexible than that of S.p.A.s. It is well suited not only for smaller operations, but also as a wholly owned subsidiary vehicle in Italy of a multinational parent corporation or, in certain circumstances, as a joint venture company. S.r.l.s may also be incorporated with a capital lower than EUR 10,000 (equal to at least EUR 1). However, in such cases the S.r.l.s must allocate at least 20% of the yearly profits to the mandatory reserve until the aggregate value of the corporate capital and the mandatory reserve jointly reach the threshold of EUR 10,000.

In S.p.A.s, the minimum required corporate capital at incorporation is EUR 50,000. The capital is divided into shares, and the liability of the shareholders is limited to shares. Shares can be issued as certificates (and recorded in the shareholders' ledger — libro soci) or they can be dematerialized — where no certificates exist and they can be issued in book-entry form. Each shareholder is granted a number of shares that is proportional to the portion of the corporate capital subscribed and paid by that shareholder, for a value that cannot be higher than the value of the contribution made. The aggregate value of the contributions cannot be lower than the total amount of the corporate capital. Shareholders of an S.p.A. usually have equal rights (Civil Code, Article 2348). However, besides ordinary shares, an S.p.A. may also issue special categories of shares to which different rights and prerogatives might be assigned.

There are no restrictions imposed by law. The minimum/maximum number of shareholders may be regulated in the relevant company's bylaws.

In a share deal, the buyer purchases from the seller part of or the entire capital of the target, becoming the new partial or sole shareholder of the company. All the existing liabilities of the acquired company remain with the company and are indirectly transferred to the buyer, although they can be addressed by the parties by means of specific provisions in the acquisition agreement (such as appropriate representations and warranties, specific indemnities and specific undertakings or conditions precedent).

The shares of an “S.p.A.” company and the quota of an “S.r.l.” company are generally freely transferable, unless they are burdened by specific encumbrances or unless it is otherwise provided in the company’s bylaws or by a standing shareholders’ agreement. An S.p.A.'s bylaws may prohibit the transfer of shares for a maximum of five years from the company's incorporation or from the date of the special shareholders' resolution that resolved to include such restriction in the bylaws. Restrictions may also be included in shareholders' agreements executed between the seller and the other shareholders of the company prior to the completion of the new transaction. Restrictions in the bylaws are binding on, and enforceable against, the shareholders and the company, as well as third parties; restrictions in shareholders' agreements are only binding on, and enforceable against, the shareholders that are parties to such agreements. The bylaws may also subject the transfer of the shares/quota to the discretionary approval of the company's corporate bodies or the shareholders. If approval is not granted, either of the following will apply:

1. The selling shareholder shall be entitled to exercise its right of withdrawal from the company; and
2. The company or the other shareholders may be bound to purchase the shares.

The bylaws of an S.r.l. may provide for a term not exceeding two years from the incorporation of the company or subscription of the quota, before which the right of withdrawal may not be exercised.

The bylaws of S.p.A.s and S.r.l.s may also provide for pre-emption or first refusal rights, requiring a shareholder that intends to transfer its shares to first offer them pro rata to the other shareholders.

Other examples of restrictions on share transfers in the company bylaws (subject to relevant limitations and specific provisions) may include lock-up provisions, as well as tag-along and drag-along rights.

The acquisition of the assets of an Italian company may be achieved through a sale or contribution of either the entire target's business (azienda) or of a line of business (ramo d'azienda), commonly referred to as “business as a going concern”.

The purchase of a business as a going concern gives the buyer a higher degree of isolation from the overall liabilities of the seller. However, the buyer and the seller remain jointly liable vis- à-vis the seller's creditors for the seller's liabilities and the relevant unsatisfied creditors of the seller could therefore later on also raise their claims against the buyer of the business; however, the buyer’s joint liability is limited to liabilities specifically reflected in the seller's accounting books (which the buyer should thoroughly inspect in the context of the due diligence process, before entering into the acquisition agreement). Moreover, such joint liability can be further limited between the buyer and the seller through specific provisions in the transaction documents.

In terms of liability, specific rules are provided with respect to labor and tax liabilities. The buyer shall be liable, jointly with the seller:

1. Vis-à-vis the employees, for the payment of severance (“TFR”) and any other payments or obligations connected to the employment relationships that were accrued at the time of the transfer;
2. Vis-à-vis the tax authorities, for the seller's tax liabilities (including unpaid taxes and sanctions due for any noncompliance with tax laws) of the transferred business related to the year in which the closing occurred and the two prior years (and for any tax assessments by the tax authority in the same period), regardless of whether they were reflected in the seller's accounting books. In relation to this latter matter, it is important to note that, before completion of the transfer, the seller, upon request of the buyer, can apply for a certificate relating to the transferred company, to be issued by the tax authorities, stating whether there are any outstanding liabilities as at the transfer date. If the certificate shows there are no such liabilities or the authority does not issue a certificate within 40 days, then the buyer is exempted from the joint liability for pre-transfer taxes. If the issued certificate shows pre-transfer taxes, then the buyer's liability is limited to those indicated in the certificate, and the allocation of such liability becomes a negotiation matter between the parties.

In the event the acquisition concerns a line of business only, it is essential for the buyer to identify the perimeter of the business (including assets, contractual relationships, employees and liabilities) to be acquired, in order to ensure that the buyer acquires all assets required and/or appropriate to operate the business after completion, addressing any separation issue that may prevent or hinder the operations of the acquired business from day one. Failing to identify all the assets (inclusive of contractual relationships and employees) as part of the business to be acquired might adversely affect their assignment to the buyer; to mitigate such risk, the acquisition agreement generally provides for wrong-pocket provisions.