When an international law firm targets a market for the establishment of a new office, it often enters that market on the shoulders of a major capital venture, depending on the solid and reliable revenues that historically have been generated from due diligence exercises. Presently, Italy has become the target for an invasion of English, and, more recently, American law firms. For these firms, a country like Italy, which is on the verge of potentially dazzling growth in the capital market, and which offers relatively weak domestic competition in the legal services market, is irresistible.
The traditional Italian corporate finance structure based on family proprietorships and personal guarantees to secure enormous bank loans is succumbing to increasing pressure from competition in the global market. In addition, privatisation and the introduction of legislative initiatives encouraging investment in the capital markets by private and institutional investors, such as the Testo Unico dell'Intermediazione Finanziaria, are the harbingers of the impending transition from debt to equity in corporate finance. The Testo Unico, for example, introduces initiatives in corporate governance that are designed to stimulate institutional investment, as well as enhancing the protection of minority shareholder rights in listed companies under the Italian Civil Code (including a relaxation of the requirements for bringing a derivative suit). In addition, the Testo Unico has broadened and enhanced the responsibilities and powers of CONSOB, Italy's version of the Securities Exchange Commission. Many market analysts predict that the low number of listed Italian companies (around 250 compared to around 1900 in Great Britain and around 7000 in the United States) will grow dramatically.
The conversion to a dynamic capital market creates a steadily increasing demand for legal services, particularly with respect to the due diligence exercises required to facilitate capital ventures. However, cross-border and cross-culture due diligence is notoriously problematic. Inevitably, there are conflicts, especially when different legal systems are involved. In these cases, the parties who sponsor capital ventures are not nearly as comfortable with representations, warranties and indemnities as are their legal counsel. The problem is that many of those parties have a duty of care or a fiduciary duty to avoid loss, as well as a keen desire to realise gain. A protracted lawsuit, arbitration or enforcement proceedings, all or part of which may occur in a foreign jurisdiction, means opportunity cost and opportunity lost.
The convergence in Europe of the Year 2000 problem and the Euro conversion once again illustrates the enormous importance of the frequently tiresome and tedious task of junior lawyers to ascertain and quantify the practical and potential risks in investing in or purchasing target companies by conducting thorough due diligence exercises. Many will find that their greatest obstacle to evaluating the inherent IT risks is a widespread ambivalence to both problems. The irony is that the IT inertia is based on a vague uncertainty about the future of the new European currency and the technological prospects of the new millennium--everybody is talking about Italy's future growth potential (already its gross domestic product is higher than Great Britain's), but is anybody doing anything about it?
According to most surveys as well as the top management consulting firms, many Italian companies, either potential targets for acquisitions/takeovers or those who intend to generate corporate capital through a public offering, will probably not have adequately addressed the Year 2k problem, nor will they have made realistic contingency plans for the introduction of the Euro into circulation in 1999 (only 6 months away). In addition, the Italian government has not yet established any initiatives to enforce compliance either in the public or private sectors with respect to the Year 2k problem, and the Euro initiatives are scarce and behind schedule.
For firms conducting due diligence exercises, comprehensive auditing of the information technology and automation systems of acquisition or investment target companies will be imperative. Careful attention will have to be paid in areas as varied as regulatory compliance, were applicable, to the most fundamental relationships like supply contracts and accounts receivable. The progress and quality of any target company IT conversion initiatives must be evaluated, including the risks arising out of intellectual property issues (eg., source code copyright infringement), fluctuations in the IT workforce, and outsourcing budgets. In fact, the Year 2k and Euro conversion problems are not just technical IT issues; they are to a large degree questions of resource management. Evaluation of any existing target company contingency plans will require an even greater multidisciplinary expertise for lawyers conducting due diligence exercises.
For those international law firms trying to establish a permanent presence in the Italian market, either by invasion or by engaging the services of the few local law firms which are capable of handling the workload, the threat of a crippling IT crisis in Italian companies who are courting underwriters or who may be acquisition targets will mean that highly articulated and multidisciplinary IT due diligence exercises may become the key to success in a newly invigorated Italian capital market.
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