Equity Finance 2024 Comparisons

Over the past decade, the Italian venture capital market has expanded rapidly, and there is optimism about its future, both in terms of the number of deals and their scale. Legal frameworks have evolved to accommodate a variety of transaction-based deal structures, tailored to the company’s stage of development.

For early-stage financing (pre-seed and seed rounds), hybrid financing structures are commonly used, often incorporating US-style instruments such as SAFEs (Simple Agreements for Future Equity). These allow funds to be treated as “net equity” rather than debt, with shares only being issued upon the occurrence of a trigger event, such as an M&A transaction, a new equity round, an IPO, or liquidation.

From Series A onwards, as the deals become larger, the structures typically follow more traditional approaches, similar to those seen in the UK or the USA. At this stage, investors receive new classes of shares directly in exchange for their capital.

Hybrid financing options, such as mezzanine or convertible loans, are less frequently employed at the early stages but may be utilised in later-stage financing for their flexibility.

Growth and private equity financing differ significantly from early-stage and venture financing, as outlined in 1.1. Early-Stage and Venture Capital Financing. Early-stage financing often uses hybrid instruments like SAFEs, which do not initially require the issuance of new shares. New shares are only issued once the triggering event stipulated in the SAFE occurs. The popularity of SAFEs at this stage stems from their simplicity and cost-effectiveness, as companies are often too young to justify the time and expense of structuring complex legal agreements or bearing the costs associated with issuing shares, such as taxes and notarial fees.

In contrast, growth and private equity financing are more structured, typically involving an actual equity round. Investors at this stage are often more sophisticated, such as private equity firms, institutional investors, or industrial players, rather than angel investors. As these investors are frequently subject to regulatory scrutiny, they require more comprehensive legal protections in the deal.

Growth and private equity deals generally involve the issuance of a new class of shares, which often carry different rights from those issued in earlier rounds. From a financing perspective, this qualifies as a “primary” issuance. It is relatively uncommon for a growth round to involve a “secondary” market element (ie, the partial or total exit of early investors), which typically occurs after Series B or C.

From a legal standpoint, the principal agreements involved are: (i) the investment agreement; (ii) the shareholders’ agreement and by-laws, which incorporate legally enforceable provisions; and (iii) agreements with founders and key personnel.

The key distinction between growth financing and private equity rounds lies not in the investment mechanism but in the exit strategy. Growth rounds do not typically include put or call options for later-stage investors or founders in the event they struggle to find buyers for their equity or the company. In contrast, private equity transactions often enable founders, who are typically experienced managers or entrepreneurs, or the company itself (if sufficiently funded), to buy back investors’ shares if traditional exit routes fail.

The process for equity listing in Italy generally involves several key steps:

• Preparation and planning: Companies start by assessing their readiness for a public offering. This includes mainly the definition of strategy and competitive positioning, the identification of the listing perimeter and the evaluation of the financial health and corporate governance structure of the company.
• Engagement of advisers: The listing process requires the involvement of several actors, namely the listing agent (in case of listing on the main regulated market, Euronext Milan) or the Euronext Growth Advisor (in case of listing on the multilateral trading facilities, Euronext Growth Milan (EGM), the global co-ordinator for the offer of the financial instruments, who are financial intermediaries and assist the company in the entire process, financial advisers, legal counsel, and external auditors.
• Due diligence: A deep due diligence process is needed to ensure that all financial, legal, and operational aspects of the company are transparent and comply with the applicable regulations.
• Drafting the prospectus or the admission document: In case of listing on Euronext Milan, the company must prepare a detailed prospectus, which mainly outlines the business model, financial performance, risk factors, and intended use of the funds raised. This document is submitted to the Italian financial regulator authority, CONSOB (Commissione Nazionale per le Società e la Borsa), for approval. In case of listing on EGM, if specific offering requirements are met, the company is required to prepare, instead of a full prospectus, a shorter document, called an admission document, which does not need to be approved by CONSOB.
• Regulatory approval: In case of listing on Euronext Milan, after submitting the prospectus, the company awaits CONSOB’s review and approval. This process can involve back-and-forth discussions to address any concerns raised by the authority.
• Marketing the IPO: Once approved, the company embarks on a marketing campaign, often called a “roadshow”, where it presents its business to potential investors to trigger interest and build demand for the shares.
• Pricing and allocation: Following the roadshow, the company and its advisers determine the final offer price for the shares. This decision is influenced by investor feedback and market conditions;
• Listing: The company’s shares are then listed on a stock exchange, such as Euronext Milan, or on a multilateral trading facilities, such as EGM.

While Italy boasts essential public equity markets, they remain significantly undersized and less liquid compared to their counterparts in other European and international jurisdictions.

The typical listed companies are (i) large companies with a capitalisation of over EUR1 billion, such as Eni (energy) and Ferrari (automotive), which use the equity markets to raise capital, increase visibility, and enhance credibility on the international stage and (ii) small and medium-sized enterprises (SMEs) which typically access the equity capital markets through a listing on EGM, a multilateral trading facility designed for SMEs with high growth potential. For these companies, a listing provides an avenue to secure funding and capitalise on the enhanced credibility and reliability associated with being a publicly traded entity.

The key drivers behind listing decisions are:

• Raising capital to finance growth: Being listed makes it possible to raise capital by diversifying the sources of financing to accelerate development, strengthen competitiveness in the global environment, grow through internal and external lines and optimise the capital structure.
• Increasing visibility and reliability: Being listed enhances a company’s reputation both domestically and internationally through compliance with applicable transparency rules, and expands the shareholder base with global institutional, professional and retail investors.
• Liquidity for existing investors: Being listed on the public markets allows existing shareholders, such as private equity fund or founders, to liquidate some or all of their investment and also facilitates the generational transition.

On the other hand, one reason why companies opt not to list is the regulatory burden and costs associated with being a public company. This is particularly true for the listing on the main market (Euronext Milan) and less for the listing on EGM, which offers a more flexible and lighter process for going public and a less stringent market regulatory environment. Favourable market conditions, such as high liquidity or positive investor sentiment, can also drive a decision to list. Conversely, companies may delay or avoid listing during periods of market volatility or economic downturns.

In the Italian market, companies facing financial distress often turn to a variety of equity restructuring techniques to stabilise their operations and regain financial strength. One commonly employed method is the debt-to-equity swap, where a company converts its debt into shares. While this can relieve financial pressure, it presents challenges such as diluting the ownership of existing shareholders, potentially altering corporate governance, and facing resistance from creditors who may hesitate to accept shares, especially in companies with uncertain growth.

Another method is raising funds through a down round, which involves issuing shares at a lower valuation than in previous funding rounds. This, however, can undermine shareholder value, damage the company’s reputation, and create challenges in securing investor confidence for future capital raises.

Another common strategy is capital increases, where new shares are issued to raise funds. Although this can provide much-needed liquidity, it often dilutes existing shareholders’ stakes significantly. Moreover, in negative market conditions, raising sufficient capital may be difficult, and tensions can arise with long-term investors.

For companies in more severe financial distress, debt restructuring through insolvency procedures offers a legal pathway to negotiate with creditors and avoid bankruptcy. These procedures can include complex mechanisms like debt-to-equity swaps or other negotiated settlements. However, the involvement of courts under Italy’s Code of Corporate Crisis and Insolvency adds legal complexity and can erode market confidence.

In more extreme cases, mergers and acquisitions provide an opportunity for companies to merge with or be acquired by other firms to access new financial resources and boost their market position. Though this can offer a lifeline, it may lead to governance conflicts, integration risks, and dilution of existing shareholder control. Italian law has increasingly supported this route, even within insolvency procedures, to protect creditor interests and facilitate corporate recovery.

In companies with more than one shareholder, corporate governance arrangements typically define how decisions regarding management and key business activities are made. These rules can either be set by law or outlined in shareholder agreements, which are legally binding contracts between shareholders. These agreements allow shareholders to tailor the governance structure, decision-making processes, and rights more closely.

Key features of such agreements include:

• Information rights: Shareholder agreements often grant shareholders enhanced rights to access financial statements, board meeting minutes, and other critical company documents, ensuring greater transparency and enabling investors to monitor the company’s performance and their investment. In some cases, specific reporting timelines or content are defined to keep investors regularly informed of business activities.
• Decision-making and voting rights:
1. Appointment of directors: Shareholder agreements can specify how directors are appointed, often allowing significant shareholders to nominate or appoint specific board members. This ensures that shareholders have direct influence over the company’s management.
2. Reserved matters: Some shareholder agreements list reserved matters (for example, major business decisions like mergers, acquisitions, capital increases, or changes to the company’s by-laws) that require approval from a supermajority or unanimous consent of shareholders.
3. Veto rights: Minority shareholders may negotiate veto rights over specific decisions, allowing them to block certain actions, even if they lack majority control.
• Exit rights:
1. Right of first refusal: Shareholders are often granted the right of first refusal, meaning if another shareholder wishes to sell their shares, the remaining shareholders have the first opportunity to purchase them at the same price before the shares are offered to an outsider.
• Tag-along and drag-along rights:
1. Tag-along rights allow minority shareholders to sell their shares at the same price and terms as the majority shareholder if a third-party buyer acquires a controlling stake. This protects minority shareholders from being left behind in a sale.
2. Drag-along rights allow majority shareholders to force minority shareholders to sell their shares in the event of a full company sale, ensuring a smooth and comprehensive transaction.
• Put and call options: These provisions allow shareholders to either force the company or other shareholders to buy their shares (put option) or force shareholders to sell their shares (call option) under specified conditions.
• Protection of minority shareholders:
1. Pre-emptive rights: To prevent dilution, shareholders are often granted the right to purchase new shares before they are offered to third parties. This allows shareholders to maintain their ownership percentage.
2. Anti-dilution provisions: Shareholder agreements may contain specific clauses to protect minority shareholders from dilution in case of capital increases or new equity issuance.

Many of the shareholder agreements’ provisions described above cannot be applied to listed companies. This is because such companies are subject to strict regulations aimed at ensuring transparency, fairness, and equal treatment of all shareholders. In fact, for listed companies, corporate governance is primarily regulated by law and regulations issued by market authorities such as CONSOB or Borsa Italiana. Shareholder agreements concerning listed companies must be disclosed to the public.

Typically, investors who provide equity do not also offer debt to the same company, as the financial metrics and business priorities for equity and debt investments differ. Equity investments involve taking an ownership stake in the company, with returns directly linked to its performance. Debt investments, on the other hand, entail providing loans with a fixed return and repayment schedule, independent of the company’s operational success.

However, there are instances where an investor may provide both equity and debt, though this is more likely if the investor is an international investment firm with multiple business units, each with different focuses and capabilities. This scenario is relatively rare, particularly in countries like Italy. In such cases, an equity investor, already a shareholder, may decide to inject debt or quasi-debt (through hybrid instruments) to fund part of the business plan or cover a cash shortfall. This often happens when the company is not yet ready for another round of equity financing or if there is a discrepancy between the company’s pre-valuation and the expectations of founders or existing investors.

That said, providing debt as a shareholder carries certain legal risks. Debt provided by shareholders – whether they are investors, founders, or otherwise – may be reclassified as equity or quasi-equity. In such cases, the debt could be subordinated in the repayment hierarchy if the company enters liquidation.

In our jurisdiction, the most common instrument to raise equity is through a capital increase by issuing new shares. This approach is widely used throughout the market, from seed venture capital rounds to IPOs.

However, there are some differences in the instruments used depending on the stage of the company:

• Pre-seed and seed capital is raised by means of hybrid instruments such as SAFE, which provide flexibility for early-stage companies and investors.
• For venture capital, from round A to late-stage, the main instrument is capital increase via a new share issuance.
• Private equity firms (especially in buyout scenarios) prefer to acquire shares from founders, with an accompanying agreement for the founders to reinvest a portion of the proceeds back into the company.

Equity financing is provided by several players, depending on the stage of the company’s development. In the early stages, family office or business angels are common sources of equity. For growth capital, venture capital firms or corporate venture capital arms of multinational corporations are the main equity providers. When it comes to IPOs, institutional investors, banks, and multi-family offices are the typical equity financiers.

There is generally no restriction on who can provide equity financing or become a shareholder in a company. However, certain restrictions apply in specific situations, such as when a company issues shares in an IPO or approves a capital increase for a listed company. In this scenario, if shares are offered to retail investors, the global co-ordinator of the transaction (usually an investment bank) must ensure that potential investors comply with MIFID II rules. Additionally, the Golden Power Regulations may impose further restrictions on foreign investors in sectors deemed strategic, requiring government approval for certain equity transactions.

Generally, companies at different stages of development seek capital in varying forms based on factors such as size, age, shareholder composition, and industry. Seed-stage companies typically seek only equity financing because their financial statements are too underdeveloped to support traditional debt or hybrid instruments, which could be classified as debt. At this stage, their focus is on growth and proving their business model, which makes equity the more appropriate option.

In contrast, late-stage or mature businesses tend to pursue a mix of equity and debt. If a company faces challenges with equity financing – particularly if its pre-money valuation is not strong enough to support a purely equity raise – it may prefer to inject debt or issue convertible bonds. This allows the company to defer valuation discussions until a future point when the business may be more successful, and its valuation can be better supported.

The most active segment tends to be late-stage or mature businesses because they have the flexibility to raise capital through a combination of equity and debt, which is appealing to a broader range of investors and can support larger-scale growth or expansion.

Italy’s equity finance market is well-established and mature, particularly in the field of private equity and industrial private deals. However, when it comes to equity capital markets and venture capital, the market is still somewhat underdeveloped, considering the potential of the country’s entrepreneurial capacity. This is especially evident in the overall capitalisation of the Italian Stock Exchange, which remains below what would be expected given the size of the Italian economy.

As of 2024, 862 equity financing transactions involving Italian targets have been announced. Additionally, about 299 private equity deals were completed in the first half of 2024, amounting to EUR4.5 billion in value. This uptick in value is attributed to an increase in the number of higher-value transactions.

On the IPO front, 2024 saw 17 IPOs, with 16 of those taking place on EGM and only one on the main market. This demonstrates a strong focus on smaller, growth-oriented companies, as the average capital raised through EGM IPOs was around EUR7-8 million. Although there has been a slight decline in the number of IPOs compared to previous years, Italy still ranks well compared to other European markets in terms of IPO activity.

As we look toward 2025, the private equity market in Italy is expected to remain strong. On the IPO front, the outlook is cautiously optimistic, with the market expected to either remain steady or improve slightly (especially on EGM), depending on broader economic conditions.

In Italy, privately allocated equity plays a more significant role than publicly raised equity. This is largely due to the nature of the Italian business landscape, where many companies are small to mid-sized and prefer private equity investments, such as private equity deals and industrial investments, over public offerings. Private equity is particularly well-suited to these businesses because it offers more tailored financing options and often includes strategic partnerships. In recent years, there has been a noticeable increase in build-up operations, where private equity firms acquire smaller companies to consolidate and grow.

However, the number of mid-cap companies turning to equity capital market financing is increasing. This shift is partly because the corporate governance constraints and rights granted to investors in public markets are often less intrusive than those imposed by private equity, which typically includes provisions like drag-along and tag-along rights. Furthermore, exit transactions between private equity funds have become more common, reflecting the growing maturity of the sector.

In contrast, over the past year, equity capital markets have been less active due to external factors such as the war in Ukraine, conflict in the Middle East, the energy crisis, inflation, and rising interest rates. When companies do raise capital publicly, institutional investors dominate the scene, with minimal involvement from retail investors. Most IPOs have occurred on EGM, a platform designed for smaller, high-growth companies. Although IPO numbers have remained relatively stable, the secondary market suffers from low liquidity. A recent trend has also seen an increase in delistings, where private equity firms launch takeover bids offering prices per share higher than the current market value.

The prominence of private investments in Italy is mainly a result of the size of Italian companies, which often find it easier and more advantageous to access private capital rather than go public. While public markets have recently become more accessible to smaller companies through platforms like EGM, private equity remains dominant. This is due, in part, to the ability to use leveraged financing in private negotiations, a strategy that is more difficult to implement in public markets.

In Italy, the financial advisory sector is consolidated. There are major international firms with well-structured teams operating within the country, but the bulk of deals, particularly those related to small to mid-sized companies, are typically handled by smaller financial advisers. These advisers, mostly based in Milan, are instrumental in sourcing and structuring most of the transactions in the market.

For industrial groups, deals are often initiated and managed directly by the business owners or entrepreneurs, who rely on their own accountants and legal consultants for support. On the other hand, private equity funds generally prefer to work with local financial advisers, even during the origination phase, as these advisers have a deep understanding of the local market and can facilitate the process efficiently.

For competitive auctions and larger deals, merchant banks and international firms are typically involved, bringing in their global expertise and resources to manage these more complex transactions.

Regarding IPOs, which are primarily focused on SMEs, national financial advisers take the lead. There are about 10 to 15 active banks and SIMs (financial intermediaries) that handle IPOs on EGM. The Italian financial community has been making a concerted effort to educate companies and proliferate information about the benefits and process of going public, which has contributed to a steady stream of IPOs.

In conclusion, Italy’s advisory market is well-developed, giving businesses and investors access to a broad range of expertise and resources. Whether companies are looking to raise capital through private equity or going public via an IPO, they can benefit from a strong network of local and international advisers.

In Italy, an investor typically realises the value of their equity investments through M&A transactions, which are the most common exit route. The investment holding period usually ranges between five and nine years (in general encompassing the grace period as well), after which the investor sells their stake to a third party. These third-party buyers are generally industrial companies or other private equity funds. Buyback operations, where the original entrepreneur repurchases the stake, are much less frequent and in any case this scenario happens only for mature businesses.

Exiting through the public market (eg, via an IPO) is rare in Italy, particularly on platforms like EGM, which is characterised by low liquidity and focuses on supporting the growth of companies. One notable example of a company that considered a public market exit is Golden Goose, the Italian luxury trainer brand. The brand had planned an IPO as a potential exit strategy but eventually postponed it, due to market conditions.

Special considerations for investors include the need to carefully assess the liquidity of the market if considering an IPO and the limited possibility of using public listings as an exit route. In contrast, the M&A market offers more robust opportunities, especially with the involvement of strategic industrial players or other private equity firms.

In Italy, debt finance has traditionally been more important for companies, with the banking system historically serving as the preferred financing partner for most businesses. Italian entrepreneurs have long relied on bank loans and debt instruments to finance their operations, as these were considered easier and more familiar to access.

However, in recent years, equity finance has gained significant ground, particularly through the growing influence of private equity. The private equity sector has matured, and firms are increasingly seeking investment opportunities in Italian SMEs. This shift has introduced more non-banking financial players into the debt market, offering alternatives like mini-bonds, unsecured debt, and mezzanine funds, giving businesses more options beyond traditional bank loans.

As the market becomes more sophisticated, entrepreneurs are also becoming more aware of the risks associated with undercapitalisation. While debt remains a valid and simpler option for many businesses, more companies are turning to equity finance to ensure they maintain a healthy capital structure. Equity financing can reduce the risk of excessive leverage, which can be particularly critical during periods of economic instability.

For companies, the choice between equity and debt often depends on factors like:

• Risk appetite: Companies are cautious about taking on too much debt, particularly in uncertain times, and they may prefer equity to avoid fixed repayment obligations.
• Growth potential: Companies with high growth ambitions might opt for equity, as it can bring in both capital and strategic expertise from investors.
• Control: Entrepreneurs who do not want to dilute their ownership might still prefer debt over equity, even as equity financing becomes more attractive.

For investors, the decision is driven by:

• Risk-return profiles: Debt offers steady returns with lower risk, while equity comes with higher risk but potential for greater rewards.
• Market conditions: In low interest rate environments, debt might be more appealing, but when growth opportunities are abundant, equity investments may offer better returns.

The evolving landscape in Italy reflects this shift, with a balance now being struck between debt and equity financing. While debt financing continues to play a dominant role, equity finance is becoming increasingly important as the market diversifies, and companies seek to balance growth with financial stability.

In Italy, the time it takes for a company to raise equity finance varies depending on the structure used.

Private equity deals are generally faster compared to industrial transactions. On average, private equity transactions take around four to five months, depending on the complexity of the deal. Private equity investors tend to have streamlined processes, and the focus is often on smaller or mid-sized companies, which makes these transactions relatively quick.

For IPOs, the process is more complex and typically takes around five to eight months. Various factors can affect this timeline, including the company’s readiness, regulatory requirements, and market conditions. For instance, the process could be postponed or even interrupted if market conditions are unfavourable.

The greatest challenges in raising equity finance include market conditions, which can significantly impact the timing, especially for IPOs. Regulatory compliance, due diligence, and ensuring the company’s financials are in order are also time-consuming tasks that can slow down the process. Additionally, for private equity, the complexity of the deal itself and the negotiation process with investors can affect the timeframe.

Italy has established foreign direct investment (FDI) regulations known as Golden Power Regulations, which grant the government special intervention powers to protect national interests in key sectors. These regulations, outlined in Decree-Law No. 21/2012 and supported by EU Regulation (2019/452), allow the government to review and intervene in mergers, acquisitions, or transactions involving assets deemed strategic for national security and economic stability.

The Golden Power Regulations provide the Italian government with the authority to oppose, veto, or impose conditions on certain transactions, especially in industries considered crucial to national security. These include sectors such as defence, energy, telecommunications, and transportation. The government’s powers can be triggered when a foreign investor (either from within or outside the EU) acquires control of a company operating in these strategic sectors or transfers certain assets that could influence national interests.

These powers have expanded over time, reflecting Italy’s increasing sensitivity to global economic shifts and national security concerns. If a transaction falls under the Golden Power Regulations, the acquiring party must notify the government within ten working days of signing the agreement. Both the buyer and the target company can participate in this process. The government has 45 days to approve, reject, or impose conditions on the deal, extendable to 75 days if more information is required. Violations of the notification requirements or imposed conditions can lead to severe sanctions, including fines and the invalidation of the transactions. The law mandates a formal notification process if a transaction falls under its scope, with the possibility of pre-notification to clarify the applicability of the regulations.

Formal notification is required when certain conditions are met:

• Nature of the transaction: Transactions involving the acquisition of a controlling interest in companies operating in strategic sectors must be notified. This includes both direct and indirect acquisitions.
• Origin of the investor: The regulations monitor transactions where control or ownership transfers to foreign entities, whether they are from EU or non-EU countries. The ultimate beneficial owner of the acquiring party is also scrutinised. For highly sensitive sectors, such as defence and national security, even domestic investors are subject to notification, reflecting the critical nature of these industries. The law also mandates that investors disclose any connections to Russian or Belarusian nationals, given current geopolitical concerns, particularly in the context of sectors deemed strategic.
• Strategic sectors: Sectors that trigger the notification requirement include defence, energy, telecommunications, and other critical infrastructures. More recently, the scope has been broadened to include sectors like health, data processing, biotechnology, and industrial automation, highlighting the evolving nature of national security concerns.

For foreign investors, particularly those from outside the EU, the Golden Power Regulations represent a potential hurdle, especially when targeting sectors closely linked to national security. These rules can lead to delays in deal completion and, in some cases, the imposition of conditions that may affect the overall transaction’s attractiveness. However, investors can mitigate these obstacles through pre-notification or early engagement with government authorities to understand the regulatory landscape.

In practice, while the Golden Power Regulations impose additional scrutiny, they have not deterred foreign investment significantly. The Italian government typically uses its powers to safeguard key interests without entirely blocking transactions, opting instead to impose conditions that balance national security with foreign investment inflows.

There are certain limitations on a company in Italy paying dividends to its investors or repatriating capital outside the country. These limitations primarily arise from tax obligations, especially regarding withholding taxes on dividend payments to non-resident or foreign investors.

When an Italian company pays dividends to foreign investors (whether individuals or legal entities), the dividends are generally subject to withholding tax in Italy. On the other hand, “inbound” dividends (ie, dividends received from a non-Italian resident entity) are taxed differently based on the recipient:

• For Italian resident enterprises, these dividends are included in the taxable business income, though a substantial portion may be excluded from taxation under certain conditions.
• For Italian resident individuals, inbound dividends are subject to a 26% withholding tax.

The potential tax burden on dividends can be mitigated by the provisions of double taxation treaties (DTTs) between Italy and the investor’s home country. DTTs may reduce the withholding tax rate or exempt the dividends from taxation altogether, depending on the treaty terms.

Under the EU Sanctions Regulations related to Russia and Belarus, there are additional limitations on paying dividends to Russian or Belarusian individuals or entities. These restrictions apply if the individual or entity is listed as a sanctioned person under the annexes of the EU Regulations. Furthermore, limitations apply if the shares owned by a sanctioned person have been seized under the same regulations. In such cases, while the shares may retain their right to dividends, the dividends must be deposited into a seized banking account belonging to the sanctioned person.

Lastly, there are no specific restrictions in Italy preventing the repatriation of capital for foreign investors, provided that tax obligations, such as withholding taxes, are met.

Italy has a comprehensive legal framework governing AML and KYC requirements, which are applicable to a wide range of transactions, particularly those involving financial, equity, and advisory activities. These regulations are designed to combat money laundering, terrorist financing, and other financial crimes by ensuring that businesses involved in financial transactions conduct due diligence on their clients and report suspicious activities.

The core legislative framework for AML and KYC in Italy is derived from Legislative Decree No. 231/2007, which implements the EU Anti-Money Laundering Directives, most recently updated with Directive (EU) 2018/843 (5th AML Directive). The law requires all “obliged entities” to perform customer due diligence (CDD) to verify the identity of their clients, understand the nature of their business, and assess the risk of money laundering or terrorist financing. Entities subject to AML and KYC requirements include banks and financial institutions, credit brokers and financial agents, asset managers and virtual asset service providers (eg, cryptocurrency platforms), professionals such as law firms, audit firms, chartered accountants, notaries, financial advisers, and firms engaged in equity transactions.

Before completing a transaction or formalising a business engagement, these entities must follow several steps:

• Customer identification: This includes verifying the identity of the customer using official documents, such as passports, identity cards, or registration numbers for legal entities.
• Risk assessment: Obliged entities must assess the risk profile of the client based on factors such as their location, nature of business, and the type of transaction.
• Ongoing monitoring: Obliged entities are required to continuously monitor their clients’ activities and transactions to identify any unusual or suspicious behaviour that could indicate money laundering.

If there is any doubt or suspicion about the client’s compliance with AML rules, the entity is required to report this to the relevant office at the Bank of Italy. This procedure is called a Suspicious Activity Report (SAR). Failure to comply with this reporting obligation can lead to significant penalties, both administrative and criminal, for the entity involved.

These regulations play a crucial role in keeping the financial system honest, but they can also be tough for businesses dealing with complex transactions or companies with several ownership layers. To mitigate these issues, businesses often employ AML software and compliance teams to ensure they meet the regulatory requirements effectively. Companies can also use pre-transaction KYC checks to identify high-risk clients and take appropriate measures before the transaction process begins.

In equity financing transactions involving Italian companies or investors, Italian law is commonly chosen, while in international transactions, especially with institutional investors or global funds, English or US law (often New York law) is preferred.

When Italian law is chosen as the governing law, the competent forum is usually an Italian court, which generally corresponds to the company’s registered office or the place where the contract is concluded. Statistically, the chosen forum is often Milan, which is the main forum for disputes relating to financial transactions.

However, under the Rome I Regulation (EC No. 593/2008), parties can opt for foreign law even before an Italian court, as long as it aligns with Italian public policy and other mandatory rules, such as those related to significant connections with other countries. Regardless of the chosen law, certain Italian domestic laws, like consumer protection, labour laws, and tax regulations, must always apply. For international disputes, arbitration is often preferred, with institutions such as the Milan Chamber of Arbitration, LCIA, or ICC selected as venues. Arbitration offers procedural flexibility, neutrality, and international enforceability, which are key in cross-border financing.

Choice of Court Clauses in International Commercial Relations

The 2005 Hague Convention governs choice-of-court agreements, except when the parties involved are from the same state, or all the elements of the contract are governed by the law of just one of the parties. In this case, the choice-of-court agreement is binding on the parties, meaning that only the designated court can handle the dispute. If the Hague Convention does not apply, the jurisdiction is governed by Italy’s Law 218/1995. At the EU level, the Brussels I bis Regulation (EU Reg. 1215/2012) handles jurisdiction in civil and commercial matters. Article 25 of the Brussels I bis Regulation regulates choice of court agreements by allowing the parties to choose the EU court before which to bring their dispute.

Arbitration and Mediation

Arbitration and mediation are often used in equity financing transactions involving foreign investors or international funds. As a result, it is common in such cases to include international arbitration or mediation clauses. By choosing arbitration, companies and investors can meet the following needs:

• procedural flexibility and expeditiousness;
• neutrality and competence of the decision-makers; and
• enforceability of decisions on an international basis.

According to the data of the main institutions that handle international arbitration proceedings (eg, the International Chamber of Commerce (ICC), and the London Court of International Arbitration (LCIA)), on average, more than 20% of the disputes managed by them relate to the banking sector. The Hong Kong International Arbitration Centre even notes that in 2022, banking and financial disputes accounted for 36.9% of the proceedings administered by it.

In 2024, investing in Italy comes with some challenges due to the global economic situation. However, Italy’s future is also expected to benefit from the positive effects deriving from the government’s National Recovery and Resilience Plan (NRRP), which is part of a larger European Union initiative to inject over EUR220 billion into the economy by 2026. This plan is designed to modernise Italy, investing in everything from infrastructure to digital innovation, and pushing the country toward greener, more sustainable energy. These initiatives are helping boost Italy’s appeal as a destination for investors, especially in sectors that align with these goals, such as clean energy and technology. The hope is that this large-scale investment will create more stable, long-term growth, making Italy an even better place for cross-border deals and equity investments.

Additionally, the Italian government is working to set up by 2025 a fund of funds, focusing on injecting capital into companies listed on Italian capital markets. Specifically, such fund will provide financing, co-investing with private institutional and retail professional investors, in a set of newly incorporated Italian funds (OICR) that will invest in listed companies or in companies undergoing IPOs. The fund of funds is expected to inject capital of up to EUR350 million, contributing up to 49% of the capital of each OICR. Private co-investors will contribute at least the remaining 51% (a minimum of approximately EUR350 million), resulting in a total combined investment of EUR700 million.

Payments of dividends from an Italian resident entity to investors that are: (i) Italian resident enterprises are included in the business’ income taxable base and, under certain circumstances, a significant portion of the dividend received can be excluded (up to 95%) from the taxable base; (ii) Italian resident individuals outside of a business activity are subject to a 26% withholding tax rate, to be applied by the payor upon payment; (iii) non-Italian resident persons (either natural or legal) are subject to a withholding tax at a 26% rate to be applied by the payor upon payment, and the mentioned rate can be reduced in case double tax treaty’s provisions can be applied.

Capital gains of: (i) Italian resident enterprises are included in the business’ income taxable base and, under certain circumstances, a significant portion (up to 95%) of the capital gain realised can be considered exempted for corporate income tax purposes; (ii) resident individuals outside of a business activity or non-resident persons (either natural or legal) are subject to a 26% substitute tax to be paid by the investor.

The contribution of money into a corporate entity is subject to a fixed registration tax of EUR200, whilst the purchase of stocks of Italian joint stock companies (società per azioni) is subject to a 0.2% financial transaction tax (or 0.10% in case of transactions carried out on regulated markets and in multilateral trading systems).

For investments in “innovative start-ups” and “innovative SMEs”, there is a strong incentive in the form of a tax allowance. Investors are eligible for a tax deduction of 30% of the invested amount, with annual limits: individuals can claim a deduction on up to EUR1 million invested, while businesses (subject to corporate tax) can claim a deduction on up to EUR1.8 million. In certain cases, the allowance can be even more generous, increasing up to 50%, though this higher rate depends on meeting specific conditions, such as investing in particularly high-impact or high-risk sectors.

Italy has entered into a number of double taxation treaty, and therefore has a strong tax treaty network providing certainty for non-resident investors. These treaties are crucial for ensuring that income, such as dividends, interest, royalties, and capital gains, are not subject to overlapping taxation in multiple jurisdictions. As of 2024, Italy has signed DTTs with over 100 countries, including major economies such as the United States, Germany, France, the United Kingdom, China, and Japan.

Moreover, Italy actively participates in the progress of the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Under these agreements, residents of treaty countries can benefit from reduced tax rates or exemptions on cross-border income.

In Italy, the start of insolvency proceedings has serious consequences for shareholders, who generally lose most of their rights and control over the company. The main consequences are as follows:

• Priority in liquidation: Shareholders are last in the distribution of assets, following super-priority, privileged and unsecured creditors. This means they have very little chance of recovering their investment once liquidation starts.
• Loss of control: Shareholders lose control over corporate governance, with varying degrees of impact depending on the procedure, culminating in complete dispossession in bankruptcy proceedings.
• Limited role in restructuring: Shareholders have limited influence in the restructuring process; however, under the rules introduced by the reform, they may vote in a composition with creditors (concordato preventivo) if the proposal involves capital restructuring and may submit competing restructuring proposals.
• Voting rights in “concordato preventivo”: Shareholders can vote on plans that affect their ownership, but restructuring plans can often be imposed without their agreement.
• Dilution or cancellation of shares: In many cases, corporate restructuring results in significant dilution or cancellation of existing shares.
• Limited options: Shareholders may sell their shares prior to the procedure, participate in new capital increases, or support acquisition offers in an attempt to save the company.

Overall, shareholders see their rights sharply reduced during insolvency proceedings and face the high risk of losing their entire investment. Their involvement in decision-making is minimal compared to creditors.

In the event of insolvency, equity investors are the last to receive any payments, if any resources remain after all other creditors have been satisfied. The payment order typically follows this hierarchy:

• Super-priority creditors are creditors with legal claims that must be paid first.
• Privileged creditors include employees (wages and social security contributions), secured creditors (such as banks holding mortgages), and tax authorities for unpaid taxes.
• Unsecured creditors include suppliers and banks with unsecured loans.
• Subordinated creditors can be paid only after all privileged and unsecured creditor claims have been satisfied. In some cases, shareholder loans may be considered subordinated to unsecured credits.
• Shareholders are the last to be paid, and typically do not receive anything.

Additionally, if the company’s shares are not fully paid up, shareholders may still be required to contribute any outstanding capital. However, even in such cases, recovering their investment remains highly unlikely.

In Italy, the duration of insolvency proceedings varies significantly, typically lasting anywhere from two to five years, but more complex cases can take even longer. The timeframe depends on the type of procedure chosen:

• Bankruptcy (fallimento): This process typically lasts between five and seven years.
• Composition with creditors (concordato preventivo): This can be shorter, ranging from six months to five years, depending on the complexity of the restructuring plan.
• Extraordinary administration (amministrazione straordinaria): This is reserved for large corporations and can easily extend beyond five years.

For shareholders, recovery prospects are limited. In bankruptcy, it is rare for them to recover anything, while in composition with creditors and extraordinary administration, there is a chance of recovery, though with risks of dilution or capital loss. Factors like the company’s debt levels, asset value, and the priority of creditors play a significant role in determining whether shareholders can recover any portion of their investment.

In Italy, several measures and procedures are available to save a financially distressed company and to prevent bankruptcy. The main options include:

• Capital increase: This method allows the company to raise new funds from shareholders or new investors. Shareholders who participate avoid share dilution but still risk losing their investment if the company fails to recover. Shareholders have the right to participate in capital increases and vote in the shareholders meetings that approve such operations. However, in practice, minority shareholders often have a limited influence over decisions.
• Mergers or acquisitions: These can inject new capital and management expertise into the company, but often result in dilution or loss of equity holdings. Shareholders are typically involved in voting on mergers or acquisitions. However, their power to influence these decisions can be limited, particularly in critical financial situations or if the company’s majority shareholders drive the process.
• Composition with creditors (concordato preventivo): This procedure involves a debt restructuring plan. Shareholders face the risk of capital dilution and play a less important role in the process, as creditors and the court “take the lead”. Shareholders generally do not have the right to vote directly on the plan, except in the specific cases already explained in 5.1 Impact of Insolvency Processes on Shareholder Rights.
• Debt restructuring: This entails agreements with creditors to renegotiate debt. This can lead to dilution of equity through debt-to-equity conversions or the issuance of participatory financial instruments with various obligatory terms. The role of the shareholders changes depending on whether or not they are sponsors of the restructuring plan. The decision on the restructuring instrument is the sole responsibility of the management body, even against the wishes of the shareholders.
• Extraordinary administration: This applies to large companies, where a court-appointed commissioner manages the restructuring or sale of the business. Shareholders play a passive role and generally lose both control and their investment.

Overall, in most of these procedures, shareholders play a secondary role compared to creditors. They often face the risk of losing their investment or seeing their ownership diluted unless they take proactive steps to participate in the restructuring, such as providing new financing or approving instruments like participatory shares.

In the case of insolvency, shareholders face several risks beyond losing their initial investment. The main risks include capital dilution, total loss of the investment and the potential obligation to pay unpaid share capital. Even in cases where the company is undergoing restructuring, the value of shares may drop sharply, or shareholders may lose their voting power and control over the company.

Investors may also be sued by insolvency receivers on various grounds, such as claims for unpaid capital, liability for “direction and co-ordination” (interpreted as influence over managerial decisions deemed to be negligent or careless), recovery actions on suspicious transactions, illegal distribution of profits and abnormal financing.

Regarding abnormal financing, it is worth noting that, under certain circumstances, shareholder loans to the company may be subordinated to regular creditors. This happens when shareholders, instead of increasing the company’s capital, lend money to the company in a situation of obvious financial difficulty. In such cases, shareholders may be sued to admit the subordination of their claim and cancel any repayments received prior to the declaration of insolvency.