Italy: Mergers and Acquisitions - Pre-emption Clauses

Last Updated: 15 October 1998
A. Pre-emption Clauses in General.

Pre-emption clauses are recognised as valid under Italian law. In fact, Article 2355, § 3 of the Italian civil code ("c.c.") provides that the deed of incorporation of a company may make transfers of the company's shares subject to certain conditions.

Where the pre-emption clause is contained in the company's by-laws, it will be treated as a pre-emption right for all purposes ("prelazione reale"): meaning that a sale of the shares to a third party in breach of the clause would be null and void. If, however, the pre-emption right is merely contained in a shareholders' agreement, it will have effect purely as between the parties. This means that it will only bind the parties to the shareholders' agreement and is unenforceable against third parties.

As such a clause inserted in a shareholders' agreement constitutes a contractual restriction, a party who acts in breach of that restriction will be obliged to pay damages to the other parties of the shareholders' agreement. It should be borne in mind that under Italian law there is no concept of punitive damages, and therefore, even in the event of an intentional breach, damages will be limited solely to the actual pecuniary loss that the other parties can prove to the court.

It is accepted that the deed of incorporation may restrict, but may not prohibit, the transfer of shares. For this reason, the validity of clauses requiring the prior approval of the proposed transferee by the board of directors has been vigorously disputed. Initially case law declared that such clauses were fully valid, but subsequently declared that clauses which gave the board of directors total discretion as to approval would be void unless the board were obliged to indicate an "approved" person who was prepared to purchase the shares in the event that they refused consent to the transferee initially proposed.

The various problems which arise in disputes regarding pre-emption clauses are invariably in relation to the extent to which such clauses will apply.

B. Limits on Pre-emption Clauses.

One limitation on the scope of pre-emption clauses in Italian law derives from the fact that they are treated as an exception to the general principle that shareholdings should be freely transferable. For this reason pre-emption clauses will be strictly interpreted.

In order for the provisions of a pre-emption clause to be applicable, it has been established that the type of transaction pursuant to which the shares are to be transferred must be expressly covered by the provisions of the pre-emption clause, whether this is contained in the by-laws or in a share-holders' agreement. Therefore, where the expression "sale of shares" is used, the clause will only apply in the case of a sale, and not, for example, in the situation where a company makes a contribution of its own shares to a subsidiary and then subsequently transfers the subsidiary to another company. In this way the company which acquires control will become a shareholder without the shares having been offered in pre-emption.

It has been debated whether or not a pre-emption clause will apply to the case of a sale of the business as a whole unit or of all the assets amongst which are included the shares in the company.

The most authoritative school of thought considers that in this case the conditions of sale are patently different from the situation where the shares are sold separately and that the pre-requisite for attributing pre-emption rights is therefore missing. Other, less authoritative writers who have dealt with this question, have either not expressed an opinion on this point, or have even attributed to such pre-emption rights validity for all purposes (prelazione reale), including in the situation where they are contained in a shareholder's agreement, and have not made exceptions for situations relating to a transfer of the business.

C. Transfer of the business as a method of transferring a shareholding.

The transfer of a business is regulated by Articles 2555 c.c. et seq. Article 2555 c.c. defines the term business ("azienda") as being "the totality of the assets organised by the proprietor for the running of the undertaking". As can be seen, the definition is extremely vague and gives little assistance in identifying exactly what the assets are which belong to the business. There is no doubt that the following form part of the business: material objects necessary for the running of the undertaking (immovables, premises, buildings, plant, machinery, equipment, furniture etc.); the services which are co-ordinated and organised in the business; intangible assets relating to the undertaking such as brand-marks, the name, the symbol, corporate trade-mark, trade marks, patents, sole agency rights, rights of use, goodwill. It is difficult, however, to determine whether or not the shareholding in the company forms part of the assets organised by the proprietor for the running of the business.

Over the years the Court of Cassation has adopted various different formulas for defining the term "azienda" with reference to a transfer thereof. Amongst others, the following definitions have, from time to time been given: "a unit formed of assets organised for production purposes"; "totality of goods and services"; "a unit made up of tangible and intangible goods, for the purpose of running an undertaking, together with the relevant organisation and connected contractual relationships"; "a "universitas juris" which includes movable and immovable property, intangible goods, employment relationships, debts and credits with customers and in general all the factors organised functionally for the running of an undertaking"; etc.. The determination of which "assets" definitively constitute the business unit is therefore a question of fact which is left to the evaluation of the judge on the merits of each case.

The question of whether or not a shareholding falls within the concept of "azienda" therefore remains unresolved. It is in fact still an open question to be considered by the judge on the merits in case of a dispute. For this reason it is difficult to predict the outcome of a dispute (whether in the courts or in arbitration).There is, in fact, no judicial precedent which deals expressly with this point. In considering whether or not it is advisable to take this route, it comes down, on a final analysis, to making a financial evaluation of the legal risks resulting from the lack of objective certainty on this point in Italian law.

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

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