This article can be considered as a general introduction and it refers only to private companies and, consequently, it does not present neither state-owned companies nor those listed in the stock exchange.
In Italy acquisitions are usually financed either with purchaser's own capitals or with bank and other financial institution capitals.
In this respect please note that the Italian banking system has recently been reformed by the new Italian Banking Law (Leg. Decr. No. 385 of 1/9/93). This law caused a significant de-regulation of the banking system. The "universal banking" principle has been introduced in Italy for those banks which are entitled to exercise any other financial activities allowed by its articles of association. Following the principle of mutual recognition (the 2nd Banking Directive) and certain requirements, EU banks may operate in Italy, either indirectly through a subsidiary, or directly through their "home member state". Therefore, in Italy EU banks are allowed to carry out all the activities recognised by the relevant EU country.
Common forms of financing for acquisition transaction are contained in the Italian Civil Code (i.e. capital increase, loan stock issue).
With regard to the capital increase a relevant resolution is to be approved at an EGM (Extraordinary General Meeting) together with the pro-rata offer of the new shares to the existing shareholders. If the company is listed in the stock exchange or if an offer is made to the public, specific regulations would be applied.
The procedure relating to the issue of a loan stock is also regulated by the provisions of the Civil Code. Such a loan stock may be issued in a maximum amount, not exceeding the paid-up capital of the company (in accordance with the latest approved accounts). This limit may be exceeded when specified security is given. The company may issue both convertible and non-convertible bonds. If convertible bonds are issued, a capital increase corresponding to the nominal value of the shares to be granted on conversion must be approved in an extraordinary general meeting. This occurs at the same time of the issue. Loan stock will generally be offered to existing shareholders pro-rata with their existing interests. In this case special regulations would be applied in relation to quoted companies.
3. Exchange and investment control
There are no longer any exchange control or currency limitations restricting foreign investment in Italy. The exchange control regulations were amended by January 1989, with the result that now (with the exception of a small number of specific restrictions), all normal international currency transactions are allowed. There are practically no restrictions on currency transfers between residents and non-residents, although it should be noted that, following the implementation of EC Directive no. 308 of 10th June 1991 concerning the prevention of the use of the financial system with the aim of money laundering, Italian law follows European standards. This means that Member States have to take appropriate measures and sanctions to fight against money laundering. The new Legislative Decree was enacted on 18th April 1997. Pursuant to the Decree, today is possible to transfer capitals exceeding the amount of ITL 20,000,000 without using a credit institution. However, the transferring money should be notified to the Italian Exchange Office, giving all information concerning the relevant transaction.
This notice can be lodged at Custom Offices, Banks, Post Offices or Guardia di Finanza commands which will forward it to the Italian Exchange Office.
With regard to taxation, no distinction is made between Italian and foreign corporations and individuals resident in Italy for tax purposes.
With regard to dividend payments, interests and royalties made abroad and foreign currencies being held in Italian bank accounts, no restrictions are imposed. Italy is party to double tax treaties with all EU Member States and also with other countries. There are no obstacles to dividend repatriation, capitals or assets in case of disinvestment by a foreign individual or a company.
As far as investment in Italy is concerned, the Government offers various incentives in order to encourage investment in certain parts of Italy, especially in the South which suffers from high unemployment and dependency on the tourist and agricultural industries. Such areas have been called `developing areas` and new ventures may benefit from low interest loans and special tax relief.
There are no general legal restrictions or limitations on foreign participation in Italian companies, partnerships or joint ventures, nor on the establishment of subsidiaries or branch offices. However, specific restrictions, limitations or requirements may be done in a small number of fields (i.e. in the media and broadcasting field). If we consider the acquisitions in the financial field, evidence of 'good reputation' (onorabilita) of certain parties will be required (purchase, directors, controlling parties, as applicable). Such an evidence would certify in a certain way that the party concerned has not been convicted for criminal offences. Directors must also be able to demonstrate that they respond to certain 'professional requirements.
4. Types of vendor
The shares of most Italian companies, including those listed in the stock exchange, tend to be held either by other limited liability companies, or by a few individuals, who, in many cases, can be members of the same family. Therefore investments in stocks, shares and bonds have not been a common form of saving among the Italian public, as the majority of them have been traditionally made in state bonds. However state bonds have recently become a less attractive option and this, together with the recent increasing availability of alternative financial products, and the increase in privatisation of state owned enterprises, may lead to an increase in investment in stock and shares by the general public. At the moment, in Italy, the shares of small and medium size companies are in the hands of a small number of shareholders. In the Italian peninsula the majority of acquisitions take the form of a private agreement between the vendor(s) and the purchaser.
When an acquisition takes the form of a business purchase, or of a part of it, as a going concern, the vendor will naturally be the company transferring its business, rather than the shareholders. On the contrary in case the share purchase the vendor will be the company shareholders.
Minority shareholders have no specific protection under the Italian law, although a certain protection may be provided by the articles of association(e.g. pre-emption rights, qualified majorities for certain resolutions, blocking votes in the general meeting or in board meetings by directors appointed by minority shareholders etc.) or by a shareholders' agreement. The level of protection afforded is different: the article of association relevant provisions will be enforceable both between the parties and against third parties, whereas the provisions of a shareholders' agreement can only be enforced against the other parties to the agreement. In case of breach of a shareholders' agreement the only remedy will be damages, with a specific performance of a particular clause which is not usually available.
Pre-emption clauses are recognised valid under Italian law. In case of a sale in breach of a pre-emption clause contained in company's articles of association, the sale of relevant shares will be null and void. It should be noted that for the purposes of Italian law, a sale of shares may be restricted, but may not be prohibited. In this respect, recent case law has tended to hold that clauses which make transfers of shares subject to the prior approval of the directors will only be valid in the event that the directors are obliged to indicate an `approved` person. This person should be prepared to purchase the shares in case they refuse consent to the transferee initially proposed.
5. The target
There are two forms of limited liability company in Italy:
- Societa per Azioni ('SpA'): whose corporate capital is divided into shares. All shares have the same par value and are represented by share certificates:
- Societa a Responsabilita Limitata ('Srl'): whose corporate capital is represented by 'quotas'. A Srl is treated as a single unit, with individual investments being represented by the relevant quota, which is the equivalent of company's capital value fraction. Therefore the quotas may be different par value. Quotas may not be represented by certificates.
Between the two forms the SpA is, financially speaking, the most significant and the most frequently used. A SpA is required to have a minimum share capital of Lire 200 million, (while a Srl requires Lire 20 million),and its shares, unlike the Srl quotas, are more marketable because they can be traded in the stock market.The SpA can also issue bonds, convertible bonds and warrants, whereas the Srl cannot.
All SpAs and any Srl with a corporate capital of more than Lire 200 million are obliged to appoint a board of statutory auditors (collegio sindacale) whose duties include general supervision, control of direction's actions and ensuring compliance with the Articles of Association and the applicable provisions of law.
Although other forms of limited liability structure exist (such as the Societa in Accomandita per Azioni, a form of partnership limited by shares in which the liability of certain partners is unlimited), they are not often used.
One important difference between an SpA and an Srl relates to the question of limited liability when there is at any time a sole shareholder/quotaholder.
Today a Srl may be incorporated by way of an unilateral deed and, therefore, with a sole quotaholder. Although a SpA may not be incorporated with a sole shareholder, the number of shareholders may subsequently be reduced to one. According to the Civil Code (Article 2497), in case of the insolvency of the company, a Srl sole quotaholder (including where the number of quotaholders have been subsequently reduced after incorporation) will be able to maintain the benefit of limited liability unless:
- the sole quotaholder is another legal person or, if an individual, he is already the sole quotaholder or shareholder of another company;
- the contributions have not been paid up as required by law;
- certain advertising requirements regarding the company's nature as a sole quotaholder company have not been complied with.
If any of the above situations occur the sole quotaholder will have unlimited liability for company's debts arose in the period when he was sole quotaholder.
On the contrary, the Civil Code (Article 2362) provides that in the event of a SpA insolvency, a sole shareholder will always have unlimited liability for any company's debts which arose when he was sole shareholder. It is therefore irrelevant whether such a sole shareholder is an individual or a legal person.
The question of the potential exposure of the vendor (in his role as a sole member) to unlimited liability may be relevant in relation to the indemnity clauses negotiated between the parties.
The content of this article is intended to provide a general to the subject matter. Specialist advice should be sought about your specific circumstances.
Parts B and C of this article will appear in the coming months.