Contributed By Giliberti Triscornia e Associati (Milan - HQ)
The M&A market in 2018 is maintaining the good momentum of 2017 in terms of deals made. There will be more emphasis on the financial aspects of transactions in the near future, in light of the expectations of a general increase in interest rates.
M&A activity in the private equity sector is following the path taken in recent years, with operators enjoying strong fund-raising and (for now) low interest rates. Private equity investments are currently focused on the acquisition of companies in an earlier stage of their life than was usual in the past, to benefit from an increased valuation at the exit, and on group-building transactions with portfolio companies, making pin-pointed acquisitions in sectors/markets of interest.
Also, in light of the general structure of the industrial sector (and contrary to what happened in the banking sector), Italy has yet to see a wave of consolidation transactions among established industrial operators, who instead seem to be more keen on pin-pointed acquisitions in sectors/markets of interest and opening to the stock-market, given the recent rise to prominence of the simplified AIM market and new legal figures of private individuals’ investments (PIRs), aimed at boosting investments on listed SMEs.
The sectors experiencing the most significant M&A activity are related to businesses that are either regulated or have a strong link with the public sector, such as telecommunications/IT infrastructure and healthcare.
Industrial entrepreneurs’ need to ensure a smooth generational shift has yet to become an extensive deal-driver.
The most frequent and straightforward way of acquiring a company is the direct purchase of a participation in the target company.
It is also usual to proceed with the seller making a contribution in favour of a special-purpose corporate vehicle to the activities of interest to the purchaser, and with the subsequent transfer to the purchaser of the participations in the same SPV. This allows a ring-fence of the activities of actual interest for the purchaser, and the target liabilities from the prior regime.
Market takeovers are often preceded by the acquisition of a relevant holding by the (relative) majority shareholders.
In any case, cash is the consideration in almost all transactions; share deals are rare.
The primary regulators are the Competition Authority (Autorità Garante della Concorrenza e del Mercato - AGCM), which oversees all the relevant concentrations, and the Government itself (Presidenza del Consiglio dei Ministri), which has “golden powers” to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, or to make them subject to conditions/undertakings.
There are further sector-specific authorities, like the Bank of Italy, with respect to transactions in the banking sector, or the Autorità per le Garanzie nelle Telecomunicazioni (AGCOM), in relation to the media and telecoms industry.
Restrictions on foreign investments are contained under the “Golden Power Law”, pursuant to which the Government has the power to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, or to make them subject to conditions/undertakings.
Recently enacted amendments to the antitrust laws provide for the following notification thresholds, to be considered when the transaction does not fall within the EU antitrust regulation:
The EU antitrust regulation serves as an interpretation guide with respect to the Italian antitrust national rules.
Transfers of shareholdings are not subject to works' council procedures, while mergers and transfers of businesses/branches of businesses involving more than 15 employees are subject to prior consultation with the trade unions to ensure that the transferred employees are not deprived of the rights enjoyed prior to the transaction.
A national security review is provided under the “Golden Power Law”, pursuant to which the Government has the power to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, or to make them subject to conditions/undertakings.
Reinforced screening is required for transactions carried out by non-EU players in critical sectors, such as data centres, financial infrastructure, artificial intelligence, robotics, semiconductors, network security and access to information.
In December 2017, the Government's “golden powers” were expanded to sectors such as data centres, financial infrastructure, network security and access to information, some of which are of relevance given the recent trends in infrastructure M&A.
Since December 2017, any entity that comes to hold a participation of greater than 10%, 20% or 25% of the voting capital in a listed company must disclose the following to the target company, CONSOB and the public:
If there is a change in the strategy within six months and on the basis of objective reasons, such change must be motivated and disclosed.
Stake-building is an increasingly narrow possibility, due to recent case law and the entry into force of the Market Abuse Regulation.
The crossing (upwards or downwards) of 3% (for large companies only), 5%, 15%, 20%, 25%, 30%, 50% and 66.6% of a listed company’s voting capital must be disclosed to the target company and CONSOB, which publishes the information on its website.
The possibility of lowering the reporting threshold is only granted to CONSOB, and the increase of such reporting threshold is prohibited.
The by-laws of a limited number of listed companies (usually those that have public relevance, such as utilities) provide for limits to share ownership.
Dealings in derivatives are allowed, provided that net short positions are disclosed if they are greater than 0.2% (and following 0.1% steps), and that long positions are disclosed, in relation to both cash settled and physical delivery instruments – when the aggregate position (inclusive of the shares owned by the investor) crosses (upwards or downwards) 5%, 15%, 20%, 25%, 30%, 50% and 66.6% of a listed company’s voting capital (no offset with any concurrent short position is allowed).
See 4.4 Dealings in Derivatives.
Derivatives are not counted for the computation of participation thresholds for antitrust purposes.
Outside the information due in the tender offer document with respect to the bidder’s future intentions and plans regarding the target company, and prior to the launch of a takeover bid, any entity that comes to hold a participation greater than 10%, 20% and 25% of the voting capital in a listed company must disclose the following to the target company, CONSOB and the public:
Under the Market Abuse Regulation, and assuming a multi-stage process, a deal must be disclosed the moment there is a reasonable expectation that the transaction will actually take place (“reasonable expectation test”). Disclosure may therefore take place prior to the execution of binding documentation, but must specify the actual status of the process.
In any case, the parties may avail themselves of the possibility to delay disclosure if doing so might jeopardise the negotiations or the implementation of the deal.
Recent developments under the Market Abuse Regulation will see an increase in delaying the disclosure of information on the deal, provided that it is possible to ensure the secrecy of the relevant information among the parties involved.
In a negotiated business combination, the scope of legal due diligence is usually very broad, covering the following:
If listed companies are involved, the scope is usually narrower or has higher materiality thresholds, given the high degree of publicly available information.
Exclusivity clauses are the absolute norm, while standstills are frequent in the context of transactions involving listed companies, in order to avoid insider-dealing issues on the part of the relevant listed companies' directors.
If the offer is launched by joint parties, the terms and conditions of such are set in a binding agreement between the parties, which is entered into prior to the launch of the offer and must be disclosed to the public.
If due diligence is to be carried out, the process lasts between eight and 12 weeks for the signing of the binding documentation; closing usually takes place five weeks after if antitrust clearance is needed.
The tender offer threshold is set at 25% for large companies (in the absence of another shareholder owning a higher participation) and 30% for SMEs (companies with a turnover of less than EUR300 million or a market capitalisation of less than EUR500 million). The by-laws may provide for different thresholds, but they cannot be lower than 25% or higher than 40%.
The sell-out threshold is set at 90%, while the squeeze-out threshold is set at 95%.
Cash is the dominant form of consideration.
As a matter of law, mandatory takeover bids cannot be subject to conditions but voluntary bids may be; the occurrence of such conditions does not depend on the offeror’s will only.
Usual conditions to voluntary tender offers are acceptance thresholds, to ensure that the offerors achieve control of the target (or its de-listing), antitrust/regulatory clearances, and MAC clauses. Sometimes the offerors put the obtainment of a lenders’ waiver to change-of-control provisions under the relevant financing agreements as a condition to the offer.
The usual acceptance threshold is 50% plus one share (to be calculated by also computing any shares already owned by the offeror). However, the offeror sometimes reserves the right to waive the condition if the acceptance levels allow it to control the target on a de facto basis.
No provisions of law prevent a business combination being conditional on the bidder obtaining financing.
The most common security measure is an equity commitment letter from the purchaser’s shareholders to cover the amount of the consideration; break-up fees are rare in Italy.
Minority shareholders are usually granted a board representation and veto rights (at board or general meeting level), aimed at protecting the essential character and risk profile of their investment, as the case may be, covering:
The above veto rights are deemed not to create a joint control with the minority shareholder.
Shareholders can vote by proxy, and proxy solicitations are common in respect of listed companies.
A squeeze-out with the forced and simultaneous purchase of all the remaining shares is the most common way to buy out the shareholders that have not tendered and is allowed if the offeror has come to hold (also considering the target shares owned prior to the offer) at least 95% of the target share capital, after a tender offer (or a sell-out procedure) on all the target shares. The squeeze-out price is determined by law and is usually equal to the price of the preceding offer.
If the offeror has not reached the sell-out/squeeze-out threshold (respectively set at 90% and 95%), it has the possibility to merge the listed target company into a non-listed entity, with the target residual shareholders having a right of withdrawal from the company. However, this mechanism has rarely been used.
Commitments to tender are commonplace in friendly offers and are usually entered into prior to the launch of the offer itself (less frequently during the offer period). Their conclusion and contents must be disclosed to the public.
The shareholder is only allowed to withdraw from the commitment in order to tender the shares to a competing, higher offer.
A bid is made public as soon as the relevant decision has been made by the offeror or the relevant obligation has arisen, provided that the offeror has obtained the financial resources to pay for the consideration.
If the absorbing entity is not listed, the parties to the business combination must make the following available:
In addition, the combination must result from a notarial deed duly inscribed at the Companies’ Register.
If the absorbing entity is listed and the shares to be issued amount to more than 10% of the share capital, it is further mandatory to publish – prior to the issuance of the shares – an information document which must be considered by CONSOB (the Italian market regulator) as equivalent to a prospectus and contain, inter alia:
Disclosure of the involved entities’ prior annual three accounts and the transaction reference accounts is mandatory for all kinds of company, while the pro-forma accounts (to be certified and drawn up in accordance with IFRS/IFRIC) are required only when listed entities are involved.
The merger plan is always made available to the public, while the manager's/independent experts' reports are only made available to the involved entities’ shareholders. If listed companies are involved, all the documentation must be made available to the public. The merger resolutions and implementation deed are carried out through public notarial documents.
Besides the general duty to protect the integrity of the company’s equity and to act in good faith, on an informed basis and with no conflict of interests, in a business combination the directors must draw up and approve the merger plan, and justify the transaction from a legal and business standpoint.
Ad hoc committees are formally set up in more complex transactions; otherwise, the Chief Executive Officer is put in charge of the process and periodically reports to the board. In the case of conflict of interest – such as in related parties' transactions – the independent/non-related directors must assume a prominent role in the decisional process.
In the context of a takeover, the target directors in Italy:
Italian law mandates that a Court-appointed independent expert must render a fairness opinion on the combination exchange ratio. In addition, the involved entities’ directors may retain their own advisers, on a voluntary basis.
One of the most litigated corporate issues in Italy is directors' conflicts of interest. Plus, with respect to listed companies, CONSOB sometimes opens investigations to verify compliance with the related parties' transaction rules.
Hostile tender offers are permitted, but do not happen often.
Defensive measures are allowed, but may be taken only with the prior authorisation of the shareholders' meeting (and restrictions on voting do not apply in such meetings, pursuant to the breakthrough rule). Pre-emptive authorisation in the by-laws is allowed, but has rarely been used.
There is not a long history of post-offer defensive measures in Italy. Only once has a target company effectively tried to defend itself from a take-over bid through the conversion of non-voting shares into voting ones, a buy-back programme and the disposal of non-strategic assets, but the proposals were rejected by the general meeting and the offer went through.
However, Italian law does allow for pre-emptive defensive measures, such as multiple voting shares, increased tender offer thresholds set forth in the by-laws (up to 40%), limitations to share ownership, and automatic conversion of special shares if an offer is launched.
Besides the general duty to protect the integrity of the company’s equity and to act in good faith, on an informed basis and with no conflicts of interest, when enacting defensive measures, the directors must obtain the prior authorisation of the general meeting (in the absence of a prior blanket authorisation under the by-laws).
The directors' stance on the offer and their recommendation on whether or not to tender the shares from a financial fairness point of view is not binding on the shareholders or the offeror.
If they seek to enact defensive measures, the directors must obtain the prior authorisation of the general meeting (in the absence of a prior authorisation under the by-laws).
Litigation is not uncommon and mainly relates to violations of the representations and warranties and the related claims for indemnity under the purchase agreement. It also happens that the purchaser sues the prior target company’s directors for mismanagement issues.
M&A litigation takes place after closing.
Given the increased presence of foreign investors on the Italian market, shareholder activism is becoming a recognisable force.
The focus of activism is aimed at obtaining better overall management of the participated company, direct board representation, or an increase in the tender offer price.
In seeking better overall management and board representation, activists sometimes publish a manifesto in which they recommend that the company enters into certain transactions that, in the activists’ view, would boost the shares prices.
Activists have sought to interfere with ongoing transactions through proxy fights and/or litigation, as the case may be, in an attempt to block the implementation of a transaction or obtain an increase of the tender-offer price.