Private Equity 2019 Comparisons

Last Updated September 12, 2019

Contributed By Dentons

Law and Practice


Dentons has expanded its Corporate M&A and Private Equity department to eight partners and a total of 31 professionals, with the specific aim of strengthening the firm’s offering and capabilities in the area of private equity. The team provides private equity clients with full-service assistance, drawing also from other practices within the firm. The lawyers are experienced in representing both funds and sellers, enabling them to see transactions from all angles and thereby provide clients with more effective solutions. The Corporate, M&A and Private Equity practice is part of the world’s largest global Corporate M&A and Private Equity practice, with more than 1,500 lawyers. The local team can draw upon the global network to provide clients with cross-regional advice in line with their needs.

Based on the first quarter’s data, Italian M&A trends in 2019 seem to be substantially in line with those observed in the second part of 2018, in terms of both deal number and the ratio of private equity and total M&A deals. In particular, the total number of deals in 2019 Q1 was 253 (projections suggest a slight slowdown compared to 2018, when the total number of M&A deals was 1,042), with private equity transactions representing approximately 22% of the overall number of M&A transactions, as opposed to 20% recorded in 2018 and 24% recorded in 2017. Such data confirms the momentum of private equity firms in Italy, where they have been involved in 50% of the top ten Italian deals so far in 2019. On the contrary, 2019 projections suggest that the total value of M&A deals might be significantly lower than the EUR98.7 billion recorded in 2018 (the total value recorded in 2019 Q1 was EUR18.5 billion), thus confirming the European downward trend of corporate M&A. The best estimation as of 31 March 2019 for the total number of portfolio companies invested by private equity firms is 859. 

42 out of 56 private equity deals consummated in Q1 2019 are newly invested targets, with the remaining 14 deals deemed as add-ons. Such ratio appears to be in line with 2018 results (143 vs. 66), while the weight of add-ons in 2016 and 2017 was higher. 

2019 projections also foresee a decrease in the total number of leveraged transactions, representing 45% of the total number of M&A deals consummated in Q1 2019 as opposed to 64% recorded in 2018. 

(Data source: Prof. V. Conca, Osservatorio Private Equity & Finanza per la Crescita, SDA Bocconi, 2019.) 

The top three sectors for M&A activities in the first part of 2019 are as follows:

  • industrial and chemicals, with 75 deals and a total value of approx. EUR2.6 billion (22.8%);
  • consumer goods, with 47 deals and a total value of approx. EUR2.3 billion (20.1%); and
  • pharma/biotech, with 24 deals and a total value of approx. EUR1.3 billion (13.1%), which makes it one of the most attractive Italian sectors for private equity firms and institutional investors.

Other significant sectors for M&A activities include transport (11.3%), technology (9.1%), energy (6.8%), financial services (5.5%) and construction (4.1%). The consumer sector is the only sector recording a significant increase in M&A activities (95.7%) in the first semester of 2019 compared to H1 2018. 

(Data source: Mergermarket, EMEA Trend Summary H19 Italy.)

The Italian legal framework governing private equity players and investments has remained stable in the last few years, with no disruptive amendment affecting the market. 

A number of tax incentives have recently been granted to venture capital investors (including both angel investors and VC firms), including a 30% tax allowance for investments in innovative start-ups and small and medium enterprises (ie, companies that employ fewer than 250 employees and have a turnover below EUR50 million or a net worth below EUR43 million).

The main legal developments that have affected portfolio companies recently are related to the following:

  • the implementation of the EU General Data Protection Regulation, which has led most Italian companies to re-design their data protection and management systems;
  • super-depreciation and hyper-depreciation, entailing a variable increase in the ordinary depreciation deductions for certain designated investments;
  • a 50% incremental tax credit for R&D investments exceeding expenditures recorded in previous years; and
  • certain new restrictive rules governing fixed-term employment contracts.     

On 10 January 2019, the new code for distress and insolvency was approved by the Italian Government, to replace the Italian Bankruptcy Law of 1942, which has been in force for more than 77 years. The new code will mostly enter into force on 14 August 2020, and will deeply affect the way corporate crises have been addressed in Italy, introducing a clear favour for ongoing business restructuring over liquidation and a system of preventative alert procedures with the aim of increasing the chances of recovery by anticipating acknowledgment of the crisis status.

The Italian regulatory framework applicable to private equity funds provides for a comprehensive set of rules governing the activities of Italian asset management companies (Società di Gestione del Risparmio – SGR), which are subject to a number of controls and a supervisory scrutiny similar, to a certain extent, to that applicable to credit institutions. In general, asset management companies are subject to the vigilance of both Banca d’Italia (the Italian central bank, which is responsible for the surveillance of the Italian credit system) and CONSOB (the Italian Independent Authority, which is responsible for supervising the Italian financial markets). In particular, Banca d’Italia is responsible for supervising PE firms’ risk management system, and the stability and sound and prudent management of assets, whilst CONSOB is responsible for supervising transparency and the fairness of management behaviour. 

In general, M&A activities are not subject to governmental scrutiny. However, antitrust and anti-monopoly review may be necessary at both national and EU level, if the relevant thresholds are met. Furthermore, M&A transactions regarding targets operating in regulated sectors (eg, banks, insurance companies, financial intermediaries, etc) may be subject to the approval of the competent Supervising Authority (Banca d’Italia, CONSOB, IVASS). A national security regime is also in place, and its scope has recently been extended, covering – with a different level of scrutiny – strategic assets for national security and public order relating to security (regardless of the nationality of the investor), infrastructural networks and plants, and acquisitions in the hi-tech sector (eg, artificial intelligence, robotics, semiconductors, dual-use technology, network security, aerospace and nuclear technology, and 5G networks and systems). No special rules, controls or exemptions are provided for private equity-backed buyers, which are subject to the same rules as apply to industrial investors. 

There is no standard level of legal due diligence in Italy, and the scope usually depends on a number of factors, including the target’s sector, size, business model and financial conditions, as well as the nature of the investor.

Private equity-backed buyers usually carry out a full due diligence exercise, requiring their legal advisers to summarise the main findings in a red-flag report to be submitted to the investment committee. Although sensitive areas depend on the specific characteristics of the target, Italian institutional buyers usually focus their attention on areas that may have an impact on the target’s valuation and their investments’ return, such as employment and health and safety, licences and regulatory permits, environmental issues, guarantees and IP. The aging of credits is usually a sensitive issue in Italy, where payment terms are generally longer than in comparable economies. Transactions with related parties is also a country-specific area to be carefully investigated where the acquisition target is a family-owned SME.   

The Italian economy has been facing significant challenges since 2008, and its GDP has not yet reached the pre-2008 level. Given this macro-economic context, exit is definitely the most critical phase in the life cycle of a typical Italian private equity investment. Therefore, it is not uncommon for a private equity investor to decide to arrange for a vendor due diligence to reduce the transaction costs of potential suitors and accelerate the sale process. On the other hand, in a market mainly characterised by small deals and limited returns, advisers’ costs are generally conservatively managed by private equity firms. 

The reliability of vendor due diligence reports is generally related to the advisers’ ability to provide a full reliance to their buy-side reports, which is usually discussed and agreed on a case-by-case basis. In general, a private equity-invested company is not usually deemed to be a high-risk target and, therefore, legal due diligence on PE portfolio companies is generally carried out to a high level.

The Italian economy is bank-centred, and the development level of the equity market is still limited and not comparable to the US or UK markets. Therefore, acquisitions by private equity funds are usually carried out by privately negotiated sale and purchase agreements. 

Given the Italian economy conditions in the last ten years, a significant number of Italian companies have faced financial troubles and a distressed assets market has emerged along with PE turnaround firms. Distressed assets are usually bought under a court-approved scheme, with workout agreements with creditors and debt-restructuring procedures being the most commonly used protections from creditors sought by distressed companies. 

Given the limited number of Italian listed companies (357 as of 31 December 2018), tender offers represent a very limited portion of the M&A market, and there are very few Italian public companies whose control is really contestable.

Although each deal has its own story, it is possible to say that acquisition terms are different in privately negotiated transactions or auctions, where the competitive tension generated by a plurality of suitors usually results in a higher premium for the seller. In any case, it is a common market practice to request an exclusivity commitment from the seller at a certain stage of the auction. 

It is not easy to define the typical structure of an Italian private equity-backed buyer, since a number of factors may affect it and there is no generally accepted management style among private equity players. 

However, the main PE players are usually significantly involved in the preparation and negotiation of transaction documents, although they are usually assisted by both financial and legal advisers. It is not at all common for a transaction involving a PE fund to be completely managed in-house by the PE firm, as the comfort provided by advisers is generally necessary to obtain the green light from the investment committee.

There is no prevailing way of financing private equity deals in the Italian market. Leveraged transactions represented 58% of the total number of PE acquisitions in 2016, 44% in 2017, 64% in 2018 and 45% in Q1 2019, excluding early stage and infrastructural deals. 

Equity commitment letters may be used to provide contractual certainty of funds from a private equity-backed buyer, but their use is not the rule.

Controlling investments are still prevailing in Italy. In particular, 63% of acquisitions consummated in 2018 regarded the entire corporate capital of the target (31% completed by institutional investors and 32% by industrial investors), 24% of deals regarded an equity interest of between 50% and 100% (14% completed by institutional investors and 10% by industrial investors), 10% of 2018 acquisitions concerned an equity interest of between 25% and 50% (8% completed by institutional investors and 2% by industrial investors), and only 3% of deals had as their object an equity interest below 3% (data source: Prof. V. Conca, Osservatorio Private Equity & Finanza per la Crescita, SDA Bocconi, 2019).

Due to cultural and historical reasons (the Italian territory was divided into micro and city-states for centuries, thus generating a strong sense of parochialism and lack of co-operation among competitors), consortia are not common in Italy. Therefore, deals involving a consortium of private equity sponsors are not common at all, also considering the very limited number of jumbo deals consummated by Italian PE firms. LBOs are the most common way of risk diversification implemented by PE firms. Joint ventures between institutional and industrial investors are limited as well, and are generally limited to distressed situations.

There is no largely predominant form of consideration structure in the Italian PE market. Out of 54 M&A deals recently closed by PE investors, 15 were based on a price adjustment mechanism without a collar and 11 provided for a form of limitation to price adjustment; earn-out clauses were provided in 13 deals, whilst the parties agreed upon a locked box mechanism in 15 cases (data source: Prof. V. Conca, Osservatorio Private Equity & Finanza per la Crescita, SDA Bocconi, 2019). Such statistics provide a fair representation of the general market practice.

The most commonly used forms of protection for deferred considerations are escrows and bank guarantees. Private equity sellers are usually deemed more reliable than corporate sellers and are therefore less inclined to provide guarantees of any sort. Private equity investors acting buy-side may also accept mechanisms of protection based on setting-off vendor loans or adjusting shareholdings.

Given the steadily low interest rates, applying interest on leakages arising from locked box mechanisms is generally not a bargaining priority. Where an interest charge is requested – usually by financial buyers – they are calculated at a rate slightly higher than the legal interest rate (eg, three-month Euribor plus a fixed number of basis points). 

Dispute resolution mechanisms are generally agreed upon to manage potential issues arising from locked box consideration structures or price adjustment mechanisms. The appointment of an expert and arbitration are the most commonly used legal tools to address such financial disputes.

The level of conditionality in private equity transactions varies from deal to deal, based on a number of factors, including whether the institutional investor is acting as buyer or seller, the level of financial indebtedness of the target, the shareholding structure, the sector, etc. 

After mandatory regulatory approvals (eg, antitrust), third party consent is likely the second most common condition precedent, followed by completion of pre-closing actions and financing. Shareholders’ approval is not usually included among condition precedents, since it can be deemed as a purely arbitrary condition, which is null and void under Italian law.   

Material adverse change clauses are not common in Italian M&A practice (only two out of 54 PE deals recently completed in Italy contemplate a MAC clause – data source: Prof. V. Conca, Osservatorio Private Equity & Finanza per la Crescita, SDA Bocconi, 2019), although private equity investors may require their inclusion in the transaction documents when the business of the target is deemed not sound, or when the target is highly dependent on a very limited number of clients.

"Hell or high water" undertakings are not common in the Italian private equity market, regardless of the nature of the buyer. 

Break and reverse break fees are rarely agreed upon in Italian M&A practice, and they may be subject to a potential judicial reduction if they are deemed to be grossly excessive. 

Under Italian law, parties are entitled to agree upon withdrawal clauses in an agreement, although their enforceability may be limited in the case of bankruptcy. However, termination clauses are not commonly provided for in acquisition agreements, unless in the context of distressed M&A, where termination rights may be the only protection granted to the buyer in a breach of the (limited) representations and warranties granted by the seller. 

Termination rights for non-performance or so-called aliud pro alio (an exception that can be raised where the transferred asset belongs to a different “genus” – ie, it is completely different than that sold under the acquisition agreement – or where the asset shows defects that affect its capacity to perform its natural and typical economic function or the concrete function taken as fundamental by the parties) are usually replaced by indemnification obligations under a “sole remedy” clause, which excludes all remedies apart from the indemnification mechanism provided in the acquisition agreement in any breach of warranties.

Statutory termination rights are applicable, regardless of their inclusion in the transaction documents, in cases of genetic anamolies in the agreement, through a legal instrument called rescission. Such remedy – which does not have a conceptual equivalent in many legal systems and is different from dissolution – entails the cancellation of all the effects of the agreements and parties’ obligations, and it is applicable by a court decision on agreements that have been entered into in a state of danger and where a gross unfairness between the parties’ mutual obligations is detected.

No specific feature has to be noted in relation to the termination of transaction documents in Italian private equity practice. Italian private equity firms – as any other party – are seeking the certainty of contractual arrangements, especially where they are acting on the sell-side.

M&A transactions involving a private equity fund usually show a more unbalanced allocation of risk in favour of the institutional player compared to transactions between industrial players, where risks are usually allocated in a fairer fashion, depending on the bargaining power and the level of asymmetry of information of the parties.

Private equity firms are usually very reluctant to grant a full set of representations and warranties, and undertake indemnification obligations when acting sell-side (although W&I insurances are becoming increasingly popular in Italy to manage such reluctance). On the contrary, they usually require a full set of representations and warranties and comprehensive indemnity obligations when acting buy-side.   

De-minimis, baskets and caps are the most common types of contractual arrangements limiting a seller’s indemnification obligations. Limitations of liability clauses are not effective under Italian law in cases of gross negligence (ie, a serious breach of the duty of diligence by which the parties are bound) or willful conduct, or in connection with public order provisions (further exceptions are provided by consumer protections laws). Consequently, limitations of liability, such as indemnity caps, could be held to be ineffective by Italian courts if the buyer is able to provide evidence that the seller’s actions are affected by fraud or gross negligence.

Private equity sellers are usually very reluctant to grant a full set of representations and warranties, which under Italian M&A practice usually covers all the main areas of risk (eg, title, business, employment, tax, environmental, IP, liability, receivables, compliance, etc). The scope of representations and warranties released by a private equity seller depends on a number of factors and may vary from deal to deal. In any case, private equity sellers are always required to grant at least basic warranties concerning capacity and incorporation, title, approvals, good standing, permits, absence of conflicts and brokers. It is also common for private equity sellers to release representations and warranties covering compliance, receivables, employment and taxes. Other matters (such as material contracts, IP, real estate, inventory, litigation, etc) may also be covered if the seller’s bargaining power is limited or the purchaser’s offer is very attractive.

Representations and warranties from the management team to buyers are uncommon, unless they are also selling shareholders (in which case they undertake the same obligations of the institutional investor on a pro rata basis). However, management’s involvement in the indemnity provisions is usually triggered through the definition of the seller’s knowledge, which usually refers to the management team and may limit the seller’s liability.

Representations and warranties are usually subject to a term (18/24 months is the standard term for most, whilst certain specific types of representations and warranties – eg, those related to tax and environmental issues – are subject to a statute of limitation), which is shorter if the warranties are granted by a private equity player. 

Under Italian M&A practice, a seller may not be liable for breach of warranties in respect of a loss to the extent of the amount received in connection with such a loss by the purchaser: (i) pursuant to a policy of insurance; (ii) from a third party in connection with the matters giving rise to the loss; or (iii) to the extent that the events giving rise to the loss were fairly disclosed in the due diligence exercise or in the transaction documents. However, private equity buyers do not generally accept the last type of liability limitation, unless all contingent and potential liabilities are fully discounted from the purchase price.

The management team does not usually undertake indemnity obligations nor grant other forms of protection to the buyer, unless the managers are also selling shareholders. Of late, private equity sellers have preferred to enter into W&I insurance or – if the term of indemnity obligation is consistent with the remaining term of the PE fund – deposit a portion of the purchase price in escrow. Bank guarantees may also be used to secure indemnity obligations.

The most common litigated provisions in private equity transactions are warranties. The warranties that are most commonly breached resulting in post-closing claims are those concerning tax matters, receivables, financial statements, compliance, permits, litigation and the disclosure of material information. 

Price adjustment mechanisms and earn-outs are also commonly litigated. Other common disputes concern negotiations conducted in bad faith (eg, failure to fairly disclose material information) or failing to close the transaction (eg, fulfilment of conditions precedent, breaches of interim period covenants, etc). Liability actions against former directors are also common. Generally speaking, the risk of post-closing disputes is higher in Italy than in comparable legal systems. 

Most acquisition agreements – especially those governing cross-border transactions – provide for alternative dispute resolution mechanisms, although the cost of litigating before an Italian Court is significantly lower than arbitration. Italy has adhered to the New York Convention on the Recognition and Enforcement of International Arbitral Awards, which applies in almost 150 jurisdictions.

Public to private transactions are not common in Italy due to their complexity and high costs. Private equity transactions make no exception. Going-private transactions may be contemplated in the context of a restructuring transaction or in case of strategic industrial acquisitions. 

Disclosure obligations in relation to interests arise vis-à-vis the listed entity and CONSOB as a consequence of holding shares (or voting rights, as clarified below) exceeding or falling below 3% (unless the listed entity is a SME), 5%, 10%, 15%, 20%, 25%, 30%, 50%, 66.6% and 90% in the capital of the issuer. 

Thresholds lower than those set out above may be determined by CONSOB on a case-by-case basis, in relation to companies with a high capitalisation or a broad shareholding structure.

For the purpose of disclosure obligations, the capital of the issuer is represented by voting shares. In companies whose articles of association provide for increased voting rights or multiple-voting rights, capital refers to the total number of voting rights. 

Disclosure obligations are also applicable where exceeding or falling below the abovementioned thresholds is not a consequence of an investment decision of the investor (eg, it is due to a capital action amending the share capital). 

Italian corporate law aims to ensure the equal treatment of, and prevent discrimination against, the target company's shareholders (namely, the minority shareholders). 

One of the various derivatives of this principle of equal treatment is the so-called “mandatory tender offer”, the concept of which is that whoever comes to hold a controlling stake in an Italian listed company, or enough voting rights to control the company, shall be required to launch a tender offer for all of the remaining shares of such company at an equitable price, thus allowing the minority shareholders to tender their shares to the bidder at a price that is the same as or comparable to that paid by the bidder to acquire the controlling stake in the target company.

In particular, any investor who comes into possession of a shareholding (or voting rights) exceeding the 30% threshold, as a result of one or more acquisitions or increases in voting rights, shall promote a takeover bid addressed to all holders to acquire their entire stakes. 

In companies other than SMEs, the mandatory tender offer also has to be promoted by anyone who, subsequent to acquisitions, comes to hold a stake greater than 25%, if there is no other shareholder with a higher stake. The by-laws of SMEs may set forth a different threshold (not lower than 20% and not higher than 40%).

The obligation to promote a mandatory tender offer shall also be triggered by the acquisition – individually or in concert with others – of an investment that gives control of an unlisted company, where the acquirer comes to hold more than 30% of the securities of a listed company, either indirectly or as a result of the sum of direct and indirect equity investments.

The so-called “incremental tender offer” is triggered whenever someone holding more than 30% and less than 50% of the voting shares (or voting rights) in an Italian listed company acquires – directly or indirectly, individually or in concert with others – more than 5% of the voting shares (or more than 5% of the voting rights) of such company within any given 12-month period on a rolling basis.

A voluntary tender offer can be launched at a price that is freely decided by the bidder. The bidder can offer either cash or securities, or a combination of both. All-cash offers are very common. If the consideration includes non-listed securities, the applicable disclosure requirements are generally more burdensome.

The launch of either a voluntary or mandatory tender offer is irrevocable. However, the bidder may state in the prospectus that the voluntary tender offer is subject to certain conditions, if such conditions do not depend upon the “mere will” of the bidder. Therefore, conditions such as reaching a minimum target of shares, the issue of an antitrust clearance and the absence of any fact that causes a material adverse change in the financial conditions of the group controlled by the target have been considered valid and enforceable. On the contrary, a tender offer cannot be promoted subject to financing, since the payment of the consideration has to be secured in advance through the issue of a bank guarantee acceptable to CONSOB.

A bidder coming into possession of a shareholding of at least 95% of the capital represented by securities in an Italian listed company – following a global tender offer – has the right to squeeze-out on remaining securities within three months of the expiration of the time limit for bid acceptance, if the intention to exercise such right was declared in the prospectus. The non-accepting target’s shareholders have no right to object. Their shares are automatically transferred to the bidder as soon as it notifies the target that the purchase price for the shares has been deposited in a bank.

At the same time, the so-called "residual tender offer" is triggered whenever an investor becomes the holder of a shareholding exceeding 90% or 95% of the share capital. In particular: 

  • any investor becoming the holder of a shareholding exceeding 90% of capital shall be committed to squeeze-out the remaining securities should any holder so request, unless a float sufficient to ensure regular trading performance is restored within 90 days; and
  • if the bidder becomes the holder of at least 95% of the capital as a result of a global tender offer, the bidder shall be committed to squeeze-out the remaining securities should any other holder so request.

While Italian law provides for certain exemptions from the obligation to launch a global mandatory tender offer or an incremental tender offer, no exemptions from the obligation to launch a residual tender offer are provided. 

It must be noted that squeeze-out rules have been amended several times in the last ten years, creating significant confusion among operators. In transactions contemplating squeeze-out it is strongly advisable to double check that any advice received in relation to the transaction structure is properly updated.

Irrevocable commitments to tender by shareholders of the target company are not uncommon in Italian market practice, and are usually agreed before the commencement of the offering period (as an alternative, the shares are sold to the bidder before the launching of the tender offer, thus triggering the obligation to launch a mandatory tender offer, rather than a voluntary one). From a legal point of view, irrevocable commitments are very sensitive in nature, since they may be qualified as shareholders’ agreements (especially where they are entered into in the context of a broader agreement). If a competing mandatory public tender offer is promoted on the shares of the company that is the object of a commitment, the parties thereto who intend to accept a competing offer (or a second higher offer of the same bidder) are entitled to withdraw from the irrevocable commitment without giving any prior notice. However, the withdrawal is deemed effective only upon the transfer of the relevant shares in the public tender offer. If no competing offer is promoted, the commitment has to be deemed as binding.

Although fully permitted by law, hostile takeover offers are not common in Italy, for both cultural and technical reasons (eg, they may result in a very costly exercise). Private equity investors make no exception.

Equity incentivisation of the management team is not uncommon in Italian private equity transactions, although a number of tax and regulatory issues may arise for both the target and the employee. For example, non-transferable options are generally deemed as securities under the EU Prospectus Directive and, therefore, unless an offer of options falls within statutory exemptions, a prospectus may be required. The need to involve a financial intermediary may also arise, unless the exercise method is fully cashless. 

The level of equity ownership granted to the management team may vary depending on a number of factors, including the stage of the company life cycle, its size, and management’s availability to invest. For example, in early-stage transactions, management’s equity participation is limited, whilst it may be higher in expansion or buyout transactions. Incentive plans may grant management an overall shareholding ranging from 5% to 15%.

There is no typical way of structuring management participation in Italian private equity transactions. Stock-option plans related to the target’s performance (IRR is the most commonly used parameter) and the achievement of milestones are a popular way of structuring and implementing management participation, especially in the context of LBOs. It is not uncommon to vest management’s shares with special or preferential rights, also in the form of a claim to higher dividends or asset distributions after exit. Waterfall profit arrangements are also commonly used. Sweet equity/institutional strip arrangements are gaining popularity, although they may trigger more complex tax consequences in Italy and also potential re-classification risks under Italian employment law.

Employment agreements with managers usually govern in detail the terms and conditions of a potential early termination, providing for a different treatment under the typical good leaver/bad leaver scheme. For example, if the employment relationship is terminated by the company without cause or as a result of events that are not attributable to the employee (eg, death or serious illness affecting the manager’s ability to work), the manager usually keeps the rights to exercise the stock-option – in whole or in part, also depending on the stage of the investment, achieved targets and the length of the employment term. On the contrary, in the case of a bad leaver, due to dismissal for cause or voluntary resignation, the manager is usually prevented or limited to exercising its stock options, and the investor usually has the right to buy back the shares already granted to the bad leaving manager. 

A number of restrictive covenants are usually agreed upon between the company and managers, regardless of whether or not they are involved in the equity structure. 

The most common restriction is the non-compete undertaking, whereby an employee undertakes not to carry out activities in competition with the employer after the termination of the employment relationship. A non-compete obligation is statutorily provided for directors and members of partnerships while they keep the office as director or the status of member (there is no similar provision applicable to shareholders of limited liability companies or joint-stock companies). Contractual non-compete arrangements – which are necessary to bind a former director after the termination of the office or a former member upon exit from the partnership – are highly regulated under Italian law, which provides for the following:

  • a maximum three-year term, extended up to five years in certain cases for managers;
  • the written form;
  • a detailed definition of the scope of competing activities that are subject to prohibition, or the relevant territory where such prohibited activities are not allowed to be performed; and
  • the obligation to grant compensation to the employee, which has to be adequate for the limitations to his/her professional life set forth by the non-compete arrangement.

Non-solicitation agreements are also very popular, since it is possible under Italian law to contractually prohibit a leaving manager from soliciting and hiring former colleagues after the termination of the employment relationship.

Non-disparagement undertakings are less popular, unless the transaction contemplates the involvement of Asian investors, who usually require such kind of arrangements for cultural reasons. In any case, Italian law provides for statutory remedies for the protection of corporate reputation.

Managers participating in the equity usually enjoy a number of typical minority rights, depending on the size of their shareholdings and their role within the company. Anti-dilution protections are not usually granted to managers, although certain administrative rights (eg, the right to designate a director or veto rights) may be granted to them regardless of the size of their shareholding. The right to a seat on the Board of Directors is usually granted to top managers/shareholders, especially if they have a significant managerial role or a minimum shareholding. Veto rights in relation to reserved matters are also generally included among manager/shareholder protections. However, it is not common for such veto rights to be extended to exit-related matters.

The level of control requested by and granted to private equity investors usually varies from deal to deal in terms of both type and scope. 

A (qualified) minority shareholder of an Italian company is statutorily granted a number of minority rights, which are also applicable to private equity investors, including the following:

  • the right to access and review all the documents filed at the company’s registered office in connection with, and in view of, shareholders' meetings;
  • the right to participate in shareholders’ meetings;
  • the right to vote;
  • the right to examine certain corporate books and corporate documents;
  • the option right (unless expressly limited by the shareholders’ meeting while passing the capital increase resolution);
  • the right to call the shareholders’ meeting;
  • the right to receive dividends;
  • the right to challenge a resolution passed by the shareholders’ meeting;
  • the right to address complaints to Italian Courts and Statutory Auditors;
  • the right to bring a liability action against the directors and statutory auditors; and
  • the right of withdrawal if specific resolutions are passed without the investor’s consent.

In addition, a non-controlling PE investor usually requires the provision in the transaction documents of the right to appoint one or more directors and statutory auditors (including the Chairman of the Board of Statutory Auditors) as well as certain managers (eg, the CFO or at least a controller), and the veto right in relation to specific reserved matters (eg, amendments to the by-laws; applications for insolvency proceedings; capital actions; amendments of the registered office; amendments to the corporate governance structure; dividend distribution; the issuance of dilutive instruments; the formation, acquisition, disposal, liquidation, merger, demerger, investment, de-investment, sale/contribution/rental of going concern/part of going concern into any company or legal entities, involving the target and its subsidiaries; transactions with related parties; purchase and sale or annulment of treasury shares; major transactions, capital expenditures and assumption of indebtedness exceeding a fixed threshold; significant changes in accounting principles or change of the accounting reference date, etc). The scope of such rights is broader in early-stage and buy-out transactions, while it is usually narrower in expansion transactions, where private equity investors are less involved in the management and control of the company.

Exit rights and deadlock resolution mechanisms, which are generally provided for in transaction documents, may also be deemed as forms of protection for minority investors.

Generally speaking, shareholders of an Italian joint stock company cannot interfere with business decisions and, therefore, cannot be deemed liable for the actions of the portfolio companies. However, a manager of a private equity firm controlling a company may be deemed as a de facto director of the portfolio company and, consequently, may be subject to the directors’ liability regime where the manager works systematically as a manager of the portfolio company and keep relationships with third parties on its behalf, even if he/she has not been appointed as a director.

If the portfolio company is incorporated as a limited liability company, the shareholders are entitled to determine (within the by-laws) the subject matters over which they have competence to decide. In particular, shareholders may resolve upon the following:

  • the matters reserved to them by the law;
  • the matters listed under the by-laws; and
  • any matter brought to the approval of the shareholders by one or more directors and/or shareholders representing at least 1/3 of the corporate capital.

Shareholders are subject to the same liability regime as applies to to directors where they approve management decisions.

Furthermore, where a private equity fund exercising direction and co-ordination over portfolio companies acts in the business interest of itself or others, breaching the principles of correct corporate and business management, it may be deemed liable toward the other shareholders for the damage caused to the profitability and value of the shareholding, and toward the creditors for the damages caused to corporate assets. No liability is taken when there is no damage as a result of the activity of direction and co-ordination, or where damages are compensated by the so-called compensative benefits. In such a case, it is not the abuse of legal personality that is to be sanctioned, but the abusive exercise of the power to direct portfolio companies.

Each private equity firm has its own management style and may impose their compliance policies on portfolio companies. However, other Italian private equity firms may have a different approach, implementing other forms of control on the portfolio companies without imposing their own compliance policies (especially where they do not exercise control).

The typical holding period for private equity portfolio shareholdings in Italy is approximately 5 years (it was 5 years in 2013, 5.6 years in 2014, 5.2 years in 2015 and 2016, 5.3 years in 2017, and 5.5 years in 2018). Based on the preliminary 2019 data, the average holding period in the first quarter seems to be slightly longer, reaching 6.3 years. 

Trade sales (for controlling shareholdings) and secondary sales (for minority shareholdings) remain the most common exit methods for private equity investors, whilst the viability of IPOs is usually subject to market conditions. Unfortunately, write-offs still remain a not uncommon outcome of private equity investments in Italy. Although dual track exit processes are not common in Italy (mainly due to the costs of IPOs), there have been some recent significant cases of dual track, including that of the first private operator on the Italian high-speed rail network. Reinvestments of private equity sellers upon exit are also not common in Italy.

(Data source: Prof. V. Conca, Osservatorio Private Equity & Finanza per la Crescita, SDA Bocconi, 2019.)

Drag-along rights are typical in Italian equity arrangements involving private equity investors, who are always keen to agree upon arrangements facilitating exit. Such rights are generally imposed on all minority shareholders, including managers and institutional and industrial investors.

Courts and scholars have extensively discussed the lawfulness of drag-along clauses under Italian law in the last few years. The prevailing position is that drag-along clauses may be provided in investment agreements without limitation, while their inclusion by majority in the by-laws of an Italian company (necessary to make it enforceable erga omnes) is possible, provided that the following conditions are met:

  • the clause is applicable only in the joint and simultaneous divestment of all the shareholders through the sale of the entire corporate capital;
  • the clause provides for a minimum floor for the benefit of minority shareholders, who have to be entitled to receive, for the sale of their shares, an amount at least equal to the liquidation value determined according to the criteria set forth in the Italian Civil Code; and
  • equal treatment has to be granted to all shareholders.

Tag-along rights are also typical in equity arrangements involving private equity investors, and are generally granted to all minority shareholders, including managers and institutional and industrial investors. No tag-along threshold is typical in Italian market practice.

The Italian IPO market has been subject to significant fluctuation in the last few years, due to economic and political turmoil: the aggregate capital raised in Italy through IPOs was EUR1.4 billion in 2016 (14 IPOs), EUR5.4 billion in 2017 (32 IPOs) and EUR2 billion in 2018 (31 IPOs) (data source: Borsa Italiana S.p.A., the manager of the Italian Stock Exchange). 

Although an exit by way of IPO is usually welcomed by private equity investors and generally contemplated in investment agreements, such method is not always realistically available in Italy, where the equity capital market is not developed to an extent comparable to the main international financial markets and the average deal size is still small (with the large majority of Italian companies being SMEs with no appetite for going public).

A mandatory type of lock-up is provided in Italy for companies that have been operating for less than three financial years and apply for admission to listing on the MTAX market: the shareholders (and other persons such as founders, directors and managers) who have acquired shares in the previous 12 months have to undertake not to sell, offer or pledge and, in general, not to carry out transactions involving at least 80% of their shares for one year from listing. 

A 6/12-month lock-up period is commonly agreed upon on a voluntary basis by institutional investors in the case of an exit by IPO.


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Law and Practice in Italy


Dentons has expanded its Corporate M&A and Private Equity department to eight partners and a total of 31 professionals, with the specific aim of strengthening the firm’s offering and capabilities in the area of private equity. The team provides private equity clients with full-service assistance, drawing also from other practices within the firm. The lawyers are experienced in representing both funds and sellers, enabling them to see transactions from all angles and thereby provide clients with more effective solutions. The Corporate, M&A and Private Equity practice is part of the world’s largest global Corporate M&A and Private Equity practice, with more than 1,500 lawyers. The local team can draw upon the global network to provide clients with cross-regional advice in line with their needs.