Contributed By Giliberti Triscornia e Associati
The M&A market in 2019 will be deeply influenced by macroeconomics, with several question marks coming from Europe, in light of:
Furthermore, the domestic scenario will see the enactment of several economic policies, especially in the employment and retail sector.
M&A managers should therefore consider all these matters in their evaluations and the first managers who will be able to properly factor them into their models will gain an edge.
According to the early surveys, private equity mangers:
Finally, the first part of 2019 is experiencing a new wave of take-to-private transactions by the incumbent majority shareholders of listed companies, a trend that is expected to increase as soon as a downturn of the Italian market occurs.
The private equity sector should continue to benefit from the prior strong fundraising and still manageable interest rates. This will lead M&A managers to focus more on new investments and on the development of current portfolio, instead of fundraising activity.
In light of macro-economic uncertainties, however, several lenders might decide to tighten the credit or to focus only on high-quality assets, with the consequent expected increase of alternative debt facilities (also favoured by a relaxation of Italian rules on direct lending) and transactions financed with a spread higher than 300 basis points. That said, senior debt extended by major banks would remain (by far) the most frequent option for investment financing.
Market operators also expect:
Investments in life sciences/healthcare and food/wine industries are expected to be on the rise, especially in respect of businesses located in northern/central Italy.
Conversely, investments in manufacturing, packaging and industrial products are expected to be on the decline.
In any case, the enactment of several new economic policies might shift the focus from one industry to another.
The most frequent and straightforward way of acquiring a company is the direct purchase of a participation in it.
It was also usual (but is less frequent, due to tax considerations) to proceed with the seller making a contribution to the activities of interest to the purchaser, in favour of a special-purpose corporate vehicle (SPV) 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 used 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/European Central Bank, 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.
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 national antitrust 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 almost identical to those mentioned in 2.3 Restrictions on Foreign Investments, above (since the restrictions to foreign investments are given by the national security review rules).
Reinforced screening is required for transactions carried out by non-EU players in critical sectors, eg, data centres, financial infrastructure, artificial intelligence, robotics, semi-conductors, network security and access to information.
In December 2017, the Government's ‘golden powers’ were expanded to sectors such as data centres, financial infrastructures, networks security and access to information, some of which are of relevance given the recent trends in infrastructure M&A.
Effective December 2018, CONSOB (the Italian financial market regulator) has issued technical guidelines to ascertain whether a company qualifies as a small or medium-sized enterprise (SME) for the purposes of takeover law, and is in the process of setting up a public list of such undertakings on its website.
Under takeover law, SMEs:
The new rules make therefore easier to find out the applicable threshold in respect of a given issuer or in relation to which issuer the foregoing solutions may be implemented.
Stakebuilding is a 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.
Further disclosure obligations relate to:
The possibility of lowering the reporting threshold is only granted to CONSOB, and the increase of such a reporting threshold is prohibited.
The bylaws of a limited number of listed companies (usually those that have public relevance, eg, 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). Long positions must also be 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).
Derivatives are not counted for the computation of participation thresholds for antitrust purposes. The other reporting obligations are summarised at 4, above.
Apart from the information required in the tender offer document regarding the bidder’s future intentions and plans for 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 Regulations, and assuming a multi-stage process, a deal must be disclosed the moment there is a reasonable expectation that the transaction will 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 event, the parties may delay disclosure if early disclosure could jeopardise the negotiations or the implementation of the deal.
Recent developments under the Market Abuse Regulations are leading to an increase in delaying the disclosure of information, 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 large amount of publicly available information.
Exclusivity clauses are the absolute norm, while standstills are frequent for transactions involving listed companies. This avoids insider-dealing issues for listed companies' directors.
If joint parties launch the offer, the terms and conditions are set in a binding agreement between the parties, which are entered into prior to the offer launch and must be disclosed to the public.
If due diligence is to be carried out, the process lasts eight-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, themselves to be calculated in accordance with the criteria set forth by CONSOB). The bylaws 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 most common form of consideration.
As a matter of law, mandatory takeover bids cannot be subject to conditions but voluntary bids may be subject to certain terms. The bidder may not be the only party to impose conditions.
Common 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 Material Adverse Change clauses. Sometimes the offerors include 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 may reserve the right to waive the condition if the acceptance levels allow him or her to control the target on a de facto basis.
Save for tender offers, for which a certain funds/cash confirmation letter is required prior to the start of the offer acceptance period, no provisions 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%), he or she may 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 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 he or she 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 in the Companies’ Register.
If the absorbing entity is listed and the shares to be issued amount to more than 20% of the share capital, it is further mandatory to publish – prior to the issue of the shares – an information document which must be considered by CONSOB (the Italian market regulator) as equivalent to a prospectus and contain:
All parties and all types of company involved in a transaction must disclose three prior annual accounts and transaction reference accounts, while the pro-forma accounts (to be certified and drawn up in accordance with International Financial Reporting Standards and the interpretation provided by the International Financial Reporting Interpretations Committee) 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 disclosed to the 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 interest, in a business combination the directors must draw up and approve the merger plan, as well as justify the transaction from a legal and business standpoint.
Ad hoc committees are formally established in more complex transactions; otherwise, the Chief Executive Officer is put in charge of the process and periodically reports to the board. In case of a conflict of interest, eg, in related parties' transactions, the independent/non-related directors must assume a prominent role in the decision-making 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 a director’s conflict 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 are not common.
Defensive measures are allowed, but may be taken only with the prior authorisation of the shareholders' meeting (restrictions on voting do not apply in such meetings, pursuant to the breakthrough rule). Pre-emptive authorisation in the bylaws is permitted, but has rarely been used.
There is no long history of post-offer defensive measures in Italy. Only once has a target company effectively tried to defend itself from a takeover 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 bylaws (up to 40%); limitations to share ownership; or 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 bylaws).
The directors' stance on the offer and their recommendation on whether 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 bylaws).
Litigation is not uncommon and mainly relates to violations of the representations and warranties and the related claims for indemnity under the purchase agreement. The purchaser may also sue 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 has become 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 enter into certain transactions that, in their view, would boost the shares prices.
Activists have sought to interfere with on-going 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.