1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
The main difference between private and public transactions is the transparency involved. For private transactions, the structure is fairly open and will depend on the intent of the parties (eg, sale of a majority or minority) and the terms of their agreements (terms and conditions and shareholders' agreement). By contrast, public transactions must take place in a manner that allows all shareholders to participate in the majority premium (earnings) that the transaction may involve. Two key principles apply in this regard:
- The launch of a takeover bid is mandatory when control of a listed company is transferred; and
- The bid must be carried out in compliance with certain rules of conduct aimed at protecting the recipients of the offer and the regular functioning of the market.
One example of a mandatory subsequent takeover bid is a full takeover bid made by anyone that holds a stake of more than 30% (as a result of a purchase) in order to allow the minority shareholders to sell their shares following a change in the controlling shareholder. Another option for an investor is to launch a preventive takeover bid with the aim of acquiring a stake of more than 30%. Such a preventive tender offer is not mandatory and the bidder can freely set the purchase price.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
Private M&A transactions are more flexible in terms of the terms and conditions. However, it can be difficult to reach agreement on the pricing, because sometimes comparable transactions are not disclosed. This is especially true in a country such as Italy, where a lot of companies operate in very narrow sectoral niches. Public M&A transactions are subject to a rigid regulatory framework, which makes them more cumbersome (and expensive); although listing on a public market is an advantage when it comes to fixing the price of the transaction. The abundance of information that is available on listed companies is also helpful – for instance, it is easier to conduct due diligence and compare transactions involving companies with a similar business model.
1.3 What factors commonly influence the choice of sale process/transaction structure?
The structure of a transaction is primarily determined by the objectives of the seller – in particular, the choice between the sale of a majority or a minority. This will influence:
- the nature of the investor (some private equity firms specialise in minorities or majorities);
- the price of the transaction (majority premium); and
- the governance (shareholders' agreement more or less balanced in favour of one of the two parties).
Another important factor is the expected performance of the company, which can significantly influence the price and the investor's exit strategy.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
The first document to be entered into is usually a non-disclosure agreement, which enables the prospective sellers and buyer to share preliminary information that may form the basis for a letter of interest. The letter of interest can be binding or not binding, and will usually set out the timeline of the M&A process, with a deadline for the completion of due diligence and conditions precedent that must be satisfied in order to proceed with the transaction.
During the due diligence process, the advisers of the sellers or buyer may negotiate in order to have their clients agree on a formula to calculate the equity value of the company and thus negotiate the price to be included in the purchase agreement.
Following the completion of due diligence, a binding letter might be signed or a purchase agreement may be executed. The binding letter will usually set out the estimated closing price (or the formula for calculating the price at closing) and the updated timeline; while the purchase agreement will set out the key elements of the transaction.
In some transaction, the date of execution of the purchase and the closing date might not coincide for some reason (eg, the need to close the fiscal year). In this case, the purchase agreement will detail the main documents to be delivered or updated on the closing date, as well as permitted actions during the interim period between execution and closing, including those which require the approval of the prospective buyer.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
Break fees are generally permitted in Italy and are becoming more common, but only for deals of a certain size and where parties might be subject to financing or require government authorisations to proceed with the transaction.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
In our experience, we generally see a mix of debt and equity. In particular, where small and medium-sized companies are bought by medium-sized companies, the transaction is generally executed in cash and financed through debt. These acquisitions are generally financed by banks, as the equity of the target is small compared to that of the prospective buyer. The purchase price, paid in cash, can be paid in instalments, including on the basis of earn-out clauses that may provide for an increase in the purchase price. Alternatively, the purchase price can be paid immediately, but with an obligation to deposit part of the value in an escrow account, to provide the buyer with a guarantee in relation to representations made by the sellers.
Where a medium-sized company buys a smaller company with a medium value, the acquisition will generally be financed in part by debt and in part by equity. Some transactions can also include a payment in cash to the former owners which constitutes a small part of the transaction price, with the remainder paid in the form of shares in the buyer.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
For both buyer and sellers, the advisers include:
- legal advisers;
- certified accountants;
- labour consultants and
- depending on the type of industry, other relevant specialists, such as environmental experts and IP experts.
The stakeholders will include:
- the shareholders – which may be numerous in the case of a public company;
- union representatives; and
- in the case of partly state-owned corporations, the competent ministerial officer and potentially the government commissioner.
The sellers and the buyer must be involved at all stages of the process and must often be well informed on some of the technical issues of the deal, such as:
- warranty provisions;
- the escrow mechanism;
- post-closing guarantees;
- the relevance of the due diligence results; and
- especially in the case of private companies, and in particular family businesses, all (or the most relevant) implications of the deal under the governing law (whether civil law or, as is usually the case in international transactions, common law).
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
The target normally pays only the costs of its own advisers. In other words, each party in the transaction bears the costs of its respective consultants.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
- Compliance with Legislative Decree 231/2001: Model 231;
- Internal procedures for compliance;
- Charts, minutes and resolutions of the supervisory body; and
- The company code of ethics.
- Examining the economic and financial health of the target;
- Verifying the accounting principles used;
- Checking the correctness of financial statements and analysing their key components;
- Verifying the types of financial debts owed by the target and their maturity;
- Verifying claims on clients and other third parties – in particular, in relation to the target's ability to collect long-term or expired claims; and
- Veryifying tax debts and claims.
- Any petitions before the administrative court or the State Council relating to the company challenging any administrative decision or acting as defendant.
- Copies of the target's income tax returns, with receipts for submission and payment;
- Documentation relating to extraordinary transactions involving the target, and to the tax payments due on specific transactions (extraordinary or ordinary);
- Balance sheets and profit and loss accounts;
- Accounting books and value added tax books; and
- Tax returns and any assessments carried out by the tax authorities.
- The applicability and implementation of legal provisions concerning mandatory employment engagement;
- Any applicable national collective labour agreements;
- Workers' mobility procedures, spin-offs or leases relating to corporate assets, together with any related documents or agreements;
- Information concerning solidarity contracts used by the company and any requested recourse to the ordinary or extraordinary wage supplementation fund;
- Documents relating to information and consultation procedures with unions and works councils, and/or authorisation from the Ministry of Labour;
- Documents relating to quasi-subordinate workers (‘lavoratori parasubordinati' in Italian) and supply of labour force, and any contracts between the company and self-employed persons; and
- Authorisations issued by the Labour Commission or agreements with trade union representation bodies concerning distance monitoring of employees.
(f) Intellectual property and IT
- The target's portfolio of industrial property titles, comprising patents, trademarks and designs, to identify possible legal issues and clearly assess its value.
(g) Data protection
- If personal data is exported outside the European Economic Area (EEA), a copy of the relevant agreements, codes or other written arrangements, processing agreements or standard form data processing clauses, irrespective of whether the processing takes place within or outside the EEA; and
- The form used to obtain consent from data subjects.
Cyber risk is not only a technological risk, but also a strategic and corporate risk – hence the need for in-depth corporate cyber intelligence due diligence, to allow the potential buyer to understand the possible exposure and consequent liabilities and risks, even after the transaction has been concluded. Such due diligence should:
- include a review and analysis of IT policies, programmes and systems and their proper configuration, as well as data protection procedures; and
- cover not only the target, but also third parties, such as suppliers and key employees.
(i) Real estate
- Collective building agreements, relevant resolutions of the competent public authority, cadastral plans, a copy of any guarantees submitted to public authorities and any other agreement entered into with public authorities; and
- A 20-year notarial report relating to real estate owned by the company.
- Classification as an environmentally safe industry; and
- An indication of dangerous activities due to the use of hazardous substances pursuant to Legislative Decree 334/99 (so-called Seveso-bis).
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
It is possible to research the following in the database of the Italian Chambers of Commerce and Industry:
- registration certificates;
- financial statements of the target;
- information concerning the target's registered owners; and
- the history of corporate changes and amendments to the target's corporate documents.
During the due diligence, an extract from the Central Credit Register at the Bank of Italy may be requested to verify any financial problems of the target, past or present. If the target owns or leases buildings and/or land, documents from the land registry and notarised deeds or a notarial report will usually be requested.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
This is a common step in the transaction. The outcome of the legal due diligence can represent some form of exemption from liability. However, it is not possible to say what the cap might be, because this amount (or percentage) can vary significantly from case to case.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
The acquisition of companies is subject to antitrust regulation, which is essential to protect competition. Where a merger or acquisition exceeds a certain turnover, the parties are obliged to notify the Italian Competition Authority (AGCM).
Under the Antitrust Law (Law 124 of 4 August 2017), the AGCM evaluates mergers and acquisitions that meet certain turnover thresholds, beyond which notification is mandatory for investors. This law has increased the number of notifications that must be made to the AGCM.
In the case of listed companies, Article 120 of the Consolidated Law on Finance, as implemented by the Commissione Nazionale per le Società e la Borsa (CONSOB), imposes a notification requirement on anyone that – directly or through the intermediation of persons, trustees or subsidiaries – holds voting social interests that exceed the 3% threshold (5% where the issuer is a small or medium-sized enterprise). Both the company and CONSOB must be notified. These provisions give CONSOB a complete overview of the shareholding structures of listed companies. Article 120 was recently supplemented by Legislative Decree 148 of 16 October 2017 (converted by Law 172 of 4 December 2017), which provides that where a stake in a listed issuer is acquired which is equal to or above the thresholds of 10%, 20% or 25% of its capital, the notifying party must disclose the objectives that it will pursue over the following six months.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
M&A transactions are subject to the supervision or approval of various authorities, according to the sector and the nature of the companies involved. In such cases, acquisitions are scrutinised for compliance with the applicable legal requirements, by the following bodies:
- CONSOB, which is the public authority that oversees mergers and acquisitions among Italian listed entities. Approval from the competent supervisory authorities (the European Central Bank (ECB), the Bank of Italy or the Istituto Per La Vigilanza Sulle Assicurazioni (IVASS) may also be required; as may Italian or EU antitrust approval, for deals in regulated industries or where the merger would lead to a concentration;
- the Bank of Italy or the ECB, in relation to banks and financial intermediaries;
- IVASS, in relation to insurers;
- the Italian or EU antitrust authorities (eg, the AGCM or the European Commission), in case of concentrations with an EU dimension. The AGCM aims to prevent market imbalances that would arise where a company acquires market power through ‘external' growth, with detrimental conditions for supply to consumers. As part of the wider European Competition Network, the AGCM can prohibit a proposed merger or acquisition which, in its opinion, would give rise to a dominant position in the national market and eliminate fair competition. More often, it imposes amendments which thereby permit the implementation of the transaction; and
- the Autorità Per Le Garanzie Nelle Comunicazioni.
4.3 What transfer taxes apply and who typically bears them?
In the case of public mergers and acquisitions that involve the transfer of shares and securities of Italian joint stock companies, a financial transactions tax is applied (Tobin tax) of 0.2% of the value of the transaction, to be paid by the transferee within 16 days. A reduction in the Tobin tax is available for transfers made on regulated markets or multilateral trading facilities (where the tax is reduced to 0.1%), and an exemption applies where the shares that are being transferred belong to a company with a capitalisation of less than €500 million.
For private mergers and acquisitions, a distinction must be drawn between a share sale and an asset sale. In share sales, any kind of notarised deed is subject to a €200 tax, while no mortgage tax or cadastral tax is applicable. In asset sales, value added tax is usually not applicable. However, business acquisitions are subject to a registration tax, which can be paid equally by either the buyer or the seller. The amount of this tax depends on the asset sold and is calculated on its fair market value as follows:
- accounts receivable: 0.5%;
- buildings: 9%;
- agricultural land: 15%; and
- movable and intangible assets (including goodwill, patents and trademarks): 3%.
A single transaction may require separate tax rates to be applied to the various assets. This tax does not apply:
- if the counterparty is the Italian government, the European Union, any other European institution or a pension fund; or
- for intra-group transactions.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
The target will usually make the following representations and warranties:
- It is duly organised; its existence is valid; it is duly registered in the Companies Register and in good standing under the laws of its jurisdiction; and it has the full power and authority to conduct its business.
- It is not insolvent or subject to any bankruptcy, liquidation or composition with creditors.
- It is fully compliant with all tax payments and fulfilments and, in general, with the applicable tax laws.
- It is fully compliant with all laws, permits and similar requirements applicable to its respective assets and properties, and/or to the operation of its business.
- It is not in violation of any environmental or health and safety laws, and no material work or expenditure is required under any environmental or health and safety laws to continue to lawfully carry out its business.
The sellers will usually make the following representations and warranties:
- They have the legal capacity and the power to execute the sale agreement.
- The target has no disputes and/or litigation pending, or only those which have already been disclosed to the buyer.
- There is no conflict between the transaction and the sale agreement and the company's articles of incorporation or bylaws, or any agreement or instrument by which the sellers or the company is bound, and no violation of any order, judgment or decree.
- The information provided by the sellers to the buyer is accurate; and the financial statements shared by the sellers are true, accurate and correct, and have been prepared in accordance with applicable law and accounting principles.
- There is full compliance with Legislative Decree 231 of 8 June 2001.
Breach of the representation and warranties may result in the payment of indemnities by the sellers to the buyer, through a claim procedure that is usually agreed by the parties in the company sale agreement. The parties may also agree to create an on-demand bank guarantee, which can be activated by the buyer if any of the representations change.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
The buyer will usually be indemnified against:
- all losses, costs, damages and expenses (including legal fees) incurred or suffered by the buyer which would not have been incurred and/or suffered if the sellers' representations and warranties had been true, correct and accurate;
- any damage incurred or suffered by the buyer in the event of any breach by the sellers of any undertaking or obligation under the purchase agreement; and
- any loss, damage and/or expense suffered by the buyer arising from any non-compliance, inaccuracy or incompleteness of the representations and warranties made by the sellers under the contract and any other applicable law or regulation.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
In our experience, a bank guarantee is usually requested. To this end, a specific clause will thus be included in the share purchase agreement which provides that, on the date of execution of the agreement, an independent bank guarantee from a leading credit institution will be delivered by the seller on first demand in favour of the buyer.
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
Both bank guarantees and escrow accounts are used (especially in international transactions).
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
The sale and purchase agreement may contain:
- confidentiality clauses;
- non-compete agreements; and
- non-disclosure agreements.
A five-year timeframe is considered to be reasonable, but different terms may also apply; there is no fixed duration under law.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
Yes, there may be an intermediate period between signing and execution of the agreement, during which certain conditions must be fulfilled. The duration of this interim period is usually short (eg, 30-45 days).
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
Typically, the takeover process will take at least 90 days. Certain factors may influence the duration, such as the nature of the offer or a request for additional information by the Commissione Nazionale per le Società e la Borsa (CONSOB).
As a first step, the bidder will notify CONSOB of its decision to launch an offer. Within 20 days, it will then file the offer document along with evidence that it has adequate funds to fulfil its payment obligations. CONSOB has 15 days (which can be extended if further information is required) to approve the offer, which will subsequently be made public and submitted to the target.
At this point, the target must issue a statement on the adequacy of the offer, which must be sent to CONSOB at least two days before its disclosure to the market. The statement must then be published no later than the first day of the acceptance period. The acceptance period lasts between 15 and 40 days (between 15 and 25 days for mandatory offers; and between 25 and 40 days for other offers). The acceptance period can be extended up to 55 days by CONSOB or if a competing bid is launched. Once the acceptance period ends, the results are published and the settlement begins, as well as the sell-out period (which lasts three months).
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
The bidder can acquire (and sell) the target's securities on the market before or during the offer period without restrictions when there is no competing bid, as long as the transaction complies with insider trading regulations. Such purchases and sales must also be publicly disclosed in the market and in the bid document, due to their importance to the transaction process: they can have an impact on the bid price if the securities are bought at a higher price than the offer price, and they can influence the forms of consideration. In particular, if the price paid by the bidder to buy target shares during the offer is higher than the offer price, the offer price will automatically increase to the higher price paid.
Disclosures must be made daily by the bidder, by any of its directors or by its statutory auditors when transactions take place during the offer. If the bidder has built up a stake representing more than 2% of the voting share capital, notice must also be given to the target and to CONSOB each time it reaches a 5% threshold (eg, 5%, 10%, 15%, 20%). CONSOB is responsible for informing the public. When stakes are higher than 10%, 20% or 25%, the bidder must disclose to the target and to CONSOB its plan for the following six-month period.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
An offeror that comes to own, as a result of a global tender offer, a participation of at least 95% in a listed company, and that has declared in the offer document its intention to exercise the squeeze-out right, must purchase all remaining shares from shareholders that request this, and has the right to buy all outstanding shares within three months of the deadline for the offer's acceptance. This is an opportunity for minority shareholders to sell their shares: the so-called ‘best price rule' applies, which requires that the price of the offer be aligned with the highest price paid by the offeror (this also extends to the six months following the end of the offer). The offeror should ensure that the same conditions apply to all target shareholders.
Sell-out rights also result from a mandatory offer: any party that, as the result of purchases or a tender offer, comes to own a shareholding that exceeds 90% in a listed company and does not restore a free float within the following 90 days is obliged to buy the remaining shares from any shareholder that requests this. In this case, the shareholders have the option to accept or decline the offer to buy.
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
Prior to announcing its intention to launch an offer, the bidder must prove its ability to fulfil its payment obligations (assuming that the offer will be fully accepted), by way of cash, open credit lines or a financing commitment from a financial institution. To this end, the bidder must provide CONSOB with adequate documentation that confirms the availability of funds at least one day before publication of the offer document. If the bidder has obtained guarantees, the offer document must include evidence of their existence.
The offer document must also include a detailed description of how the operation will be funded. If the transaction is carried out using securities, their approval documentation must be attached and sent to CONSOB; if the consideration includes debt financing, the offer document must include details of, among other things:
- the lending parties;
- the main conditions of the loan; and
- the terms and conditions of repayment.
6.5 What threshold/level of acceptances is required to delist a company?
In the context of public takeovers, delisting occurs automatically once a bidder comes to own a stake of more than 90% of the target's capital stock, after the completion of a sell-out or squeeze-out.
Even if the minority shareholders do not exercise their sell-out rights, the shares will be delisted. If the percentage held is even higher (95%), the bidder can apply its squeeze-out right and force the minority shareholders to sell their shares.
CONSOB generally cannot contest the delisting of an Italian listed company, assuming that investors have been adequately protected.
Other ways to delist include:
- global takeover offers without restoration of the minimum free float;
- the conversion of listed securities into non-listed securities; or
- the merger of a listed company with a private company (this may occur if one shareholder comes to own at least two-thirds of the listed company's outstanding voting shares). This is subject to dissenting shareholders' appraisal rights: those shareholders that vote against the merger, or do not vote, have the right to withdraw from the company itself. In this case, they will receive compensation equal to the weighted average of the market price in the preceding six months.
6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?
According to Global Legal Insights, several non-hostile takeovers were executed in 2019, including some in the banking sector. However, Italian listed companies are usually controlled and owned by large shareholders, with no possibility to contest. Therefore, institutional and/or activist investors and shareholders (the usual players in case of ‘bumpitrage') still experience difficulties in exploiting this strategy to affect M&A deals in Italy, even though shareholder activism has increased globally in recent years. ‘Proxy battles' in the Italian environment are rare; the most recent was recorded in 2012 (Impregilo SpA).
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
The level of consideration will change depending on the type of offer. In a voluntary tender offer, it can be freely set by the bidder and may include cash, stocks or other securities.
In a mandatory tender offer, the offer price cannot be lower than the highest price paid by the offeror for securities of the same kind in the 12 months preceding the offer announcement. This rule does not apply where:
- there were no purchases of securities of the same category in the 12 months before the offer; or
- the bid is the result of an obligation (eg, due to an increase in voting rights).
In these two cases, the minimum price is equal to the weighted average market price in the previous 12 months.
The ‘best-price rule' also applies: if shares are acquired during the offer period or in the six month following payment of the offer price at a higher price, the bidder must pay the difference between the offer price and the purchase price to the shareholders that are tendering their shares.
In other cases, CONSOB itself can decide that a higher (or lower) price is required to keep the market balanced. If the offer is for 100% of the voting shares, the consideration must comprise a cash amount.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
MAC clauses are generally permitted under Italian law, thanks to the principle of contractual freedom, which also applies to M&A agreements. A MAC clause can represent:
- a condition precedent or subsequent;
- an event that causes one party to withdraw; or
- a representation and warranty.
It can be:
- target related (eg, decline in assets, insolvency, compliance problems, reduced profitability); or
- market-related (worsening of the market).
In voluntary takeovers, the conditions expressed in MAC clauses may be subjective: there may be conditions concerning compliance with antitrust regulations or sector-specific approvals, and a minimum level of acceptance of the offer.
MAC clauses are enforceable depending on the wording used, but they cannot protect the offeror from adverse changes that occur after its offer announcement and before disclosure of the offer document.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
In Italy, irrevocable undertakings from key target shareholders are allowed and are usually sought by the bidder to increase its chances of success, although there is a risk that this may constitute ‘acting in concert'. They are regarded as a tool to protect the deal and must be disclosed in the offer document. However, if a competing bid is launched, existing shareholders which have already offered their shares to the first potential bidder can repeal their acceptance and offer them to the competing bidder. However, shareholder undertakings take the form of shareholders' agreements; therefore, shareholders can revoke them if the offer is ‘all-share' or if the bidder wishes to buy at least 60% of the shares.
Tender commitments are common in the Italian market and are usually undertaken before the offer process begins. These commitments are made to the bidder and may include other terms and conditions, such as a commitment to take no actions that could undermine the success of the process. Tender commitments do not constitute an exit clause if a better offer is made. Indeed, if there is no commitment to tender, acceptance of the bid is irrevocable by law; while if there is a competing offer, that new offer (whether made by a new bidder or by the initial bidder increasing the original consideration) can be accepted.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
If the target's management body does not recommend the acceptance of a public tender offer (either voluntary or mandatory), this is called a ‘hostile takeover'. The Consolidated Law on Finance allows both friendly and hostile acquisitions; however, as Italian listed companies commonly have a high concentration of shares in the hands of one or a few large shareholders, hostile takeovers are rare in Italy. Even where a hostile bid is made, the bidder must provide the target's shareholders with the following documents:
- the offer announcement;
- the tender offer document with the proposed terms and conditions, and an acceptance form; and
- the statement on the offer.
7.2 Must hostile bids be publicised?
The answer to this question can be found in the provisions of the Consolidated Law on Finance on the initial phase of communication of the decision to proceed with the offer (Article 102). This is a particularly important phase, as it is through this communication that the market learns of the existence of the transaction, which constitutes price sensitive information. From this point onwards, the passivity rule (or board neutrality rule) under Article 104 of the Consolidated Law on Finance, as well as the best price rule, will apply. Article 102 makes no distinction between consensual or hostile offers; therefore, it is assumed that the disclosure obligations also apply to hostile bids.
Article 102 of the Consolidated Law on Finance provides that a voluntary decision to bid or the emergence of an obligation to bid must be promptly communicated to the Commissione Nazionale per le Società e la Borsa (CONSOB) and simultaneously made public (a ‘decision' here refers to the adoption of the relevant resolution by the offeror's competent body according to the rules of corporate law). This consideration does not exclude possible disclosure obligations from arising at an earlier stage if the offeror is bound by disclosure obligations under Article 114 of the Consolidated Law on Finance, or if rumours about a possible takeover bid are spreading among the public. Failure to comply with the confidentiality regime within the organisation will lead to a disclosure obligation to restore market information symmetry. In this case, CONSOB may ask a potential bidder to disclose the information and documents required under Article 114, even if it has not taken the decision to proceed with the takeover bid (which would entail a disclosure obligation under Article 102).
The emergence of an early disclosure obligation at a stage when an offer decision has not yet been made may be seriously detrimental to the success of the offer itself. This is even more so the case if the offer is hostile, as it will give the target a defined timeframe in which to take defensive measures.
7.3 What defences are available to a target board against a hostile bid?
There are active defensive tactics (poison pills) that take effect if a hostile offer is launched. These tend to make the offer more expensive and may consist of:
- resolutions of capital increase reserved to certain persons;
- implementation of mergers/demergers;
- purchase of treasury shares;
- distribution of large dividends to shareholders; and
- increased debt.
There are also some preventive defensive techniques (shark repellents and golden parachutes) that can be put in place before a hostile bid, in order to prevent, discourage or try to obtain the greatest possible advantage from the acquisition of control by the bidder. These include:
- statutory provisions of a qualified quorum for certain transactions;
- shareholders' decisions regarding the disposal of valuable assets in case of a tender offer; and
- recognition of relevant benefits to managers and advisers following a tender offer.
These defensive tools are subject to certain rules, as follows:
- Passivity rule: This obliges the target, for the entire period of the offer, to refrain from any action aimed at frustrating the offer. However, this constraint is not absolute:
- The target may undertake defensive actions through a shareholders' resolution;
- The bylaws of the issuer may provide for derogations; and
- The target can search for a ‘white knight'.
- Breakthrough rule: This aims to neutralise certain defensive techniques, making them ineffective against the offeror (eg, limitations on the transfer of shares and restrictions on the exercise of voting rights).
- Reciprocity rule: This makes the passivity rule and the breakthrough rule inapplicable in case of a tender offer made by persons that are not subject to such provisions or to equivalent in its country.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
The impact of the Covid-19 pandemic is evident in the foreign direct investment segment and consequently in the M&A market, which up until January 2020 had seen foreign venture capital firms and/or foreign buyers play an active role. However, interest appeared to pick up again in the last quarter of 2020. Conversely, in the domestic sphere, given the average size of a typical Italian business – which has an average annual turnover of between €50 million and €150 million – a continuous process of aggregation is underway, due to the need for Italian companies to enhance their competitiveness at the international level and/or for family businesses to find a solution to generational change.
In the first nine months of 2020, 537 deals were formally closed in Italy, compared to 810 in September 2019 (-33.7%). The slowdown was also significant in terms of total value, which amounted to €28.5 billion, compared to €35.2 billion in the first three quarters of 2019 (-19%).
The Italian M&A sector is adapting to the crisis; but despite a final rush to complete some mega deals – for example, Intesa San Paolo acquired UBI Banca for €4.2 billion, and Giuliana Albera Caprotti and Marina Caprotti acquired 30% of Supermarkets Italiani SpA from Violetta and Giuseppe Caprotti (Esselunga) for €1.8 billion – the total value of deals closed in 2020 was €32 billion, down 28% on 2019.
However, despite the great challenges of 2020, the Italian real estate investment sector remained attractive, confirming its appeal as a market for professional and foreign operators.
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
One new development, which is expected to act as a great incentive to M&A deals and to boost foreign direct investment, is a provision envisaged in the 2021 budget law which has been long awaited by foreign financial operators active in the private equity sector. It aims to remedy (at least in part) unjustified discrimination that hitherto subjected foreign funds to less favourable fiscal treatment than equivalent investment funds set up in Italy.
Currently, foreign funds investing in Italy are subject to withholding tax at a rate of 26% pursuant to Article 27, paragraph 3 of Decree of the President of the Italian Republic 600/1973. Likewise, capital gains realised as a result of the sale of equity investments in resident companies are subject to taxation in Italy, pursuant to Article 23, paragraph 1, lit (f) of the Consolidated Income Tax Act.
In addition to applying to dividends and capital gains earned by foreign funds that directly hold stakes in Italian companies, the new provision will apply to foreign funds that participate indirectly in Italian companies through sub-holdings located in other EU member states.
In addition, as a result of another recent legal provision, foreign citizens will be able to invest in Italy without the obligation to have a tax code.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
In our experience, we believe that first of all, it is fundamental to understand the objectives of the deal. If the deal involves a foreign partner, a culturally correct approach is equally important throughout the process.
The parties should also fully understand the legal mechanisms involved, especially if they are unfamiliar with certain contractual mechanisms.
On the seller's side, the sticking points usually relate to the terms and conditions of payment, the escrow mechanism and attached guarantees.
On the buyer's side, the sticking points usually relate to provisions aimed at protecting the investment and guaranteeing the maintenance of the expected performance targets; and sometimes, to the continued presence in the new company of the previous owner.
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.