Restrictive covenants and undertakings

General restrictive covenants

General restrictive covenants can be generally found in share purchase agreements with regard to, inter alia, non-competition, non-solicitation and non-disclosure of confidential information. A specific undertaking by the purchaser not to exercise its voting rights in respect of liability actions proposed against former directors of the target company can be also commonly found. For five years the directors are liable for loss caused by breach of the duties imposed on them by the law or by the by-laws of the company.


Under Italian law, non-competitive covenants in general must be evidenced in writing, be limited to a specific geographical area or a specific sector of business and must be within five years.

With regard to the validity of restrictive covenants obtained from employees in relation to any period after the end of their employment, it should be noted that they must be reasonably limited as to sector, territory and terms, and adequate compensation must be provided to the employee in their consideration. With regard to the term of validity, such restrictive covenants may not exceed five years for managers and three years for other employees.

A special attention must be paid to a non-competitive covenant in which a part of the purchase price is expressed as having been specifically allocated (generally 3-5%) for this purpose.

Transfer of business as a going concern

Where the transaction takes the form of a business transfer, or part thereof, as a going concern, where no express covenants are contained in the sale agreement, the provisions of the Civil Code prohibit the vendor of the business, for a period of five years following the sale, from setting up a new business which, by reason of its activity, location or other circumstances, is capable of attracting the customers of the sold business.

Liquidated damages

In view of the difficulties in quantifying damages due to the breach of restrictive covenants, liquidated damages clauses ("clausole penali") are commonly inserted. The following should be noted in relation to liquidated damages clauses in general under Italian law:

  • liquidated damages clauses are valid under Italian law. There is no restriction on "penalty" clauses (see comments below);
  • liquidated damages agreed contractually will be due irrespective of proof of loss. However, the court can reduce the level of the damages to be paid on equitable basis if there has been part(?) performance, or if the amount established is clearly excessive, taking into account the importance given to the injured party in compliance with the contract (Article 1384);
  • the damages recoverable in the event of breach will be limited to the amount specified, unless the parties expressly agree the right to the injured party to recover any further loss suffered (Article 1382).


Form of share purchase agreement

Traditionally, Italian share purchase agreements were rather simple in comparison with the average Anglo-Saxon contracts. This is due to the fact that many issues are dealt with by the provisions of the Italian Civil Code and they shall be automatically applied, unless there is express agreement to the contrary.

However, it has become common practice in Italy to adopt the standard "Anglo-Saxon" type of share purchase agreement used generally in international transactions.

Limited implied warranties

A purchaser may, in certain circumstances, find himself insufficiently protected under Italian law, as, in the absence of express warranties, only the limited warranties implied by the Civil Code in relation to sale contracts in general (warranty as to good title and as to the absence of latent defects) shall be applied. Under Italian law It is generally accepted in both case law and doctrine that a sale of shares or quotas cannot be construed as a sale of the underlying assets of the company, even though it is usually the latter which constitutes the real "target" of the purchaser. The legal "object" of the sale is therefore the shares/quotas. As a consequence of that, the implied warranties shall be applied only to the shares/ quotas of the target company.

The company's financial position (assets and business matters in general) is fully represented and warranted by the vendor.

Joint liability for vendors

Where there is more than one vendor, the Civil Code provides that they will be jointly liable in respect of their obligations under the contract (and accordingly for breach of the representation and warranties), unless the parties expressly agree otherwise (Articles 1292 and 1294). Where the intention is rather that each vendor should be liable severally in proportion to the percentage interest sold, this should be expressly stated.

General content of representations and warranties

As stated above, the representations and warranties offered in the event of a share sale tend to be more or less standardised. In general the covered areas reflect the practice in most international transactions. The points listed below are therefore limited to areas considered important according to the Italian legal system.

Accounting records

It is usually warranted that time limits imposed by law for the retention of certain accounting records have been observed. The relevant period under Italian law is ten years from the date of the final entry.

Intellectual property

The payment of all taxes due for registered intellectual or industrial property rights should be warranted, as failure to pay taxes could result in the loss of rights. Although taxes are due annually, recent practice is to pay taxes at the outset for the entire period of the registration (ten years for trade marks).

As the validity of a trade mark is subject to challenge by a third party at any time (see comments made above at 8.4.6), it is important to obtain a warranty from the vendor as to the absence of claims or objections in respect of violation of the rights of third parties.

Employment issues

Besides the existence of any disputes (including potential) at an individual or collective level, warranties of the issues (see 8.4.4) will be usually obtained in relation to the due diligence exercise.

A warranty to the effect that the fund for termination indemnities (TFR) has been correctly calculated is equally important. A warranty will also be required when relationships between agents and consultants have been conducted in such a way as to ensure that no claim may be made by such parties supposed to be treated as employees.

Taxes, contributions and penalties

The vendor will obviously be expected to warrant that all necessary returns have been filed and that payments of taxes, social security contributions or fees or charges of any nature in relation to the period prior to completion have been made.

It generally happens to attach an exhibit setting out all litigation or disputes pending with the relevant authorities. With respect to each preceding financial year, reference will often be made as to the position relating to that period, i.e. in case the amount due has been agreed with the authorities and due advantage has been taken of an applicable amnesty, and in case the limitation period has expired for challenge by the authorities.

It should be noted that "amnesties" are frequently granted n Italy in order to cover various types of irregularities, including taxes and building permits. Where an application has been made to take advantage of such amnesty, but the amount to be paid has not yet been determined, it is common to deal with the question of appropriate provision in relation thereto.

Purchaser's representations and warranties

Amongst the usual representations and warranties made by the purchaser, it is common to find a warranty according to which no consents are required for the execution of the agreement.


The usual clauses included in a typical Anglo-Saxon agreement requiring the vendor to indemnify the purchaser for the losses suffered for the breach of the representations and warranties are to be found.

Indemnity of vendor

Notwithstanding the sale of the target company, in the event that, under the purchaser's management, the company becomes insolvent, a vendor will remain at risk in respect of any debts incurred in any periods whatsoever. In these circumstances, the vendor will usually seek an appropriate indemnity clause. This will obviously be an issue where the target is a wholly-owned subsidiary.

Sole or cumulative remedy

The contractual rights of indemnity will be additional to the usual remedies provided by law unless the parties expressly state to the contrary. Where it is intended that the contractual rights should constitute the exclusive remedy available, this should be specified.

Limitations and exclusions of liability

Limitations and exclusions of liability (including caps and minimum threshold) are perfectly admissible under Italian law, although the Civil Code (Article 1229) prohibits the exclusion of liability for wilful misconduct/fraud ("dolo") or gross negligence ("colpa"). In addition any clause, seeking to exclude or limit liability for any act or omission which would be in breach of obligations deriving from the "public order" laws, (such as certain environmental laws or health and safety laws) will be null and void.

Limitation periods and notice of claims

It is standard practice to specify contractual limitation periods in relation to claims pursuant to indemnity clauses and the time period on the expiry of which rights to make such a claim will be lost if not notified to the other party.

Although the recent doctrine on the issue rejects this theory, it is sometimes argued that the specific "short" time limits prescribed by Article 1495 of the Civil Code in certain cases will be applicable. This latter specifies a limitation period of one year from the delivery of goods sold and requires claims to be notified within 8 days from the discovery thereof. In order to avoid doubts, "short" time limits are excluded, especially where the parties refer to the limitation periods "specified by the law". Indeed, although claims in respect of most of the representations and warranties are usually limited to one or two years, it is common to refer to the usual, statutory, limitation periods in respect of taxation and social security matters.


As stated above, in general the parties provide contractually for their remedies in the event of breach by the insertion of specific indemnity clauses. Unless these have been expressly excluded, the parties will take legal remedies for the breach of contract. The injured party will therefore be able to claim damages for breach of contract. Where the breach consists of failure by the vendor to complete the sale (e.g. failure to endorse share certificates) the purchaser can apply to the court for specific performance.


Due to the long process of ordinary civil court proceedings in Italy, parties provide any disputed to be dealt with by arbitration, particularly in international transactions. In this case, the parties specify that the arbitration is to be conducted in accordance with the "Rules of Conciliation and Arbitration of the International Chamber of Commerce" and the arbitrators are to be appointed in accordance with such rules.

If no reference is made to the above rules, then it is necessary to specify whether the arbitration proceedings are formal ("rituale)" or informal ("irrituale") and whether they are to be carried out pursuant to the principles of law ("di diritto") or principles of equity ("di equita"). It is common to find provision for the formal type of arbitration in share purchase contracts. This means that the arbitration is to be conducted in accordance with the specific rules of procedure set out in the code of civil procedure. Unless specified otherwise, the arbitrators' decisions in a formal arbitration will have the force of law and will be binding on the parties as if it were a judgement issued by the courts. In an informal arbitration, the arbitrators (or the parties in the contract) are free to adopt their own rules of procedure. The resulting decision will have the force of a contract between the parties and therefore, in the event of non-compliance with the decision, it will be inevitable to apply to the courts for breach of contract.

Competent court

In general (without prejudice to the arbitration clause) the competent forum is specified. As Italian courts have jurisdiction on specific geographic areas, it is necessary to specify the selected district.


The formal procedure for transferring title differs according to shares and quotas and therefore according to whether the target is an SPA or an SRL.

Transfer of shares

The formalities for transferring title to shares are set out in the Civil Code (Articles 2022 and 2023). The usual practice is that the vendor endorses the share certificate(s) in favour of the purchaser. The endorsement will include the purchaser's name, nationality and the date. Law requires the transferror's signature to be verified before (usually) a notary public, or alternatively, before an officer of a SIM (investment services company) or a bank. At this point the transaction will be complete, but it will only be binding on the company once the transfer has been duly registered in the shareholders' register.

Transfer of quotas

A deed of transfer must be executed before a notary public. The notary public will file the deed of transfer with the Court where the Company is registered. The transfer must be registered in the quotaholders' register of the company within 30 days from the filing. As with shares, the transfer will only be completed when the latter registration has been effected.

Capital gains tax

Common to both a transfer of shares and quotas is the requirement for the question of capital gains tax to be considered at the time of the disposal. Where the vendor is an individual or a non-resident company, the party in question must:

  • make immediate payment of the tax due on the gain realised from the sale; or
  • undertake to declare such gain by submitting a tax return in Italy for the appropriate year; or
  • (in the case of non-resident only) produce a declaration testing that the provisions of a double taxation treaty are applicable. Where, on the other hand, the vendor is an Italian company, any gain realised will be declared in due course in the company tax return and subject to corporation tax.

Transfer of the business

A contract for the sale of a business as a going concern must be in the form of either a notorial deed ("atto pubblico") or a private instrument ("scrittura privata"), in which case the parties' signatures must be certified by a notary. the contract is required to be filed with the registry of companies in the relevant court and with the relevant chamber of commerce. The notary who executes the deed or who certifies the signatures will be responsible for effecting the latter registrations. Although the above renders the sale effective between the parties, in order to render it effective against third parties, the necessary formalities must be complied with in relation to the transfer of certain of the individual assets transferred. This is particularly the case in relation to assets for which registration is required, e.g. real estate.


Following the expiry of the two month period allows for dissent by creditors, a formal deed of merger will be executed before a notary public and registered with the relevant companies registry.

Financial assistance

Loans/guarantees for the purchase of own shares prohibited

Italian law prohibits a company from directly participating in the purchase thereof, whether by lending the purchaser the necessary amount or by providing any form of guarantee for the finance obtained for the purchase. This is by reason of the provisions of Article 2358 of the Civil Code which expressly prohibit an SpA (article 2483 in relation to an SRL) from granting loan or providing guarantees for the purchase of its own shares. Neither may the company, including through a trust company of third party, accepts its own shares by way of guarantee. Any breach of the above provisions carries criminal sanctions for the directors (2630 c.c.) and will result in the relevant agreements (including the guarantees) being considered null and void.

Exceptions to prohibition

It should be noted that an express exception to the prohibition is made in the case of purchases of the shares by the employees of the company or its controlling company or controlled subsidiaries. In these circumstances, however, the amounts invested and the guarantees given must be within the limits of the distributable profits duly verified and of the available reserves shown in the last duly approved annual accounts. The latter limitation means however that it would be difficult for all, or even a majority, of the shares in the company to be purchased under this exception.

The content of this article is intended to provide a general to the subject matter. Specialist advice should be sought about your specific circumstances.