Contributed By Nunziante Magrone Studio Legale Associato
The Italian M&A market had a very complex 2020, and the COVID-19 pandemic had a significant impact. The health emergency situation has slowed down operations, causing a contraction both in terms of the number of reported operations carried out (830 in 2020 against 1,085 in 2019), and in terms of reported total value (EUR34.5 billion in 2020 against EUR52.4 billion in 2019).
According to economists, Italian domestic transactions recorded strong growth in terms of turnover, with a total of around EUR16 billion (up 18% compared to EUR13 billion in 2019), despite a reduction of around 16% in the number of transactions: 480 in 2020 (compared to 571 in 2019). Many important transactions belong to the financial services sector, such as the acquisition of UBI Banca by Intesa Sanpaolo, for a value of approximately EUR4 billion and the entry of Assicurazioni Generali into Cattolica (EUR300 million for 24.5% of the share capital. There were also interesting ideas in other sectors such as publishing, energy, and food.
The extraordinary financial activity of Italian companies abroad is confirmed at the previous year's levels: over EUR13 billion of total investment, albeit concentrated in a smaller number of transactions (134 in 2020, compared to 197 in 2019).
In the past 12 months, the banking and finance, energy, food, biotech, pharmaceutical and publishing sectors have experienced the most M&A activity. In contrast, the COVID-19 pandemic has negatively affected primarily restaurants, tourism and the art (ie, theatres, cinemas, etc) because of the lockdown measures.
The means of acquisition of listed companies typically involve a takeover bid, with cash tender offer or, in whole or in part, other considerations such as securities. Takeover bids may be divided into mandatory, and voluntary takeovers. Alternative means of acquisition of both listed and unlisted companies involve direct or reverse merger with the target company.
The means of acquisition of unlisted companies typically involve private negotiations between the parties and the consideration is paid in cash. Several guaranties may be provided upon completion of the transaction depending on the specific needs of the parties involved.
It is also possible for the seller to make a contribution to the activities of interest to the purchaser, to a special-purpose corporate vehicle (SPV) and with the subsequent transfer to the purchaser of the participations in the same SPV.
The consideration mostly used in the transactions is cash, while share deals are rare.
The primary regulators for M&A activity in Italy are:
The "Golden Power" Regime
Among the recent measures put in place by the Italian government to fight the negative effects of the COVID-19 pandemic is Decree-Law No 23/2020 (the “Liquidity Decree”), which has extended the scope of application of the “Golden Power” regime, a system of special intervention powers of the Italian State already provided for by Decree Law No 21/2012 (the “Golden Power Decree”), the purpose of which is to safeguard strategic sectors of national interest.
The Golden Power regime has gone beyond the former principle of "privileged participation" which assigned the State a "golden share" with special prerogatives and rights (such as influencing the decisions of the companies concerned) and set a new system according to which the State receives certain "Golden Powers" exercisable in the event of extraordinary transactions involving companies operating in national strategic sectors.
The areas of application of the Golden Power regime, as amended by the Liquidity Decree, are defence, national security, energy, transport, communication, and have been gradually expanded with subsequent measures, to include the telecommunications sector and the 5G technology.
See 3.1 Significant Court Decisions or Legal Developments for further information.
In relation to these sectors, a regulatory “shield” has been introduced according to which the Italian government has, inter alia, the right to:
Under Italian Antitrust Law enacted by Law No 287/1990, as amended, all mergers and acquisitions involving undertakings with aggregate turnover in Italy exceeding EUR504 million and when the aggregate domestic turnover of each of at least two of the undertakings concerned exceeds EUR31 million, must be previously notified to and authorised by the Italian Antitrust Authority (Autorità Garante della Concorrenza e del Mercato or AGCM). These are the thresholds published on 23 March 2020 and they are adjusted annually. Both thresholds need to be met to trigger the need for any notification.
In cases where the operation results in a change of the employer for the employees working in the relevant business, the acquirer of a business should take account of the labour law regulations applicable to the transfer of business or going concern. In the case of companies employing more than 15 employees, a prior trade union consultation procedure should be carried out. This is not applicable when the transaction involves the sale of shareholdings, as there will be no change in the employer, unless otherwise provided for by collective bargaining agreements in certain sectors.
The legislation applicable in the period after the operation has been completed to be taken into consideration is the following:
The provisions laid down by collective bargaining agreements at a national and company level should also be taken into consideration, as governing a large part of the employment relationship, including, without limitation, minimum salaries and job levels.
Under the Golden Power regime, the following acquisitions must be notified to the Prime Minister’s Office (Presidenza del Consiglio dei Ministri) by the purchaser, within ten days, together with any information useful for the general description of the acquisition project in relevant sectors, the purchaser and its area of operation:
Threat of Serious Prejudice
If the purchase of any such assets of strategic importance involves a threat of serious prejudice to the essential interests of Italy or a danger to security or public order then, within 45 days from the said notification, and with a decree of the Prime Minister, the effectiveness of the purchase may be conditional on the purchaser's assumption of commitments aimed at guaranteeing the protection of the aforementioned interests. If the government does not respond during the 45-day period, the transaction is considered authorised under the principle of silence-approval (silenzio assenso).
The government’s assessment on the transaction is based on objective and non-discriminatory criteria and also takes into account any positions expressed by the European institutions. The governmental check is aimed at verifying whether the post-transaction situation is likely to jeopardise the safety and continuity of supplies, plants and essential production chains as well as whether it can, in general, threaten the national interest.
The violation of the indications or of the procedure, entails the application a penalty which extends from the suspension of voting rights to the nullity of the deeds; in most cases, an administrative sanction is also applied, for an amount up to double the value of the transaction and, in any case, not less than 1% of the turnover achieved by the companies concerned in the last financial year, in addition to the obligation to restore of the status quo ante.
As mentioned in 2.3 Restrictions on Foreign Investments, the most significant legal developments related to M&A are the measures extending the scope of application of the “Golden Power” regime, a system of special intervention powers of the Italian State the purpose of which is to safeguard strategic sectors of national interest, enacted by the Golden Power Decree and extended by the Liquidity Decree.
Decree Law No 137/2020 (the "First Refreshments Decree"), as converted and amended by Law No 176/2020, has further extended by six months, namely from 31 December 2020, as originally envisaged, to 30 June 2021, the scope of application of the obligation to notify the purchase of shareholdings and the related Golden Powers exercisable by the Italian Government including those which result in the assumption of control even by a foreign entity belonging to the European Union.
The extension of such notification obligation concerns:
Regulations implementing the Golden Power regime were also enacted by the Italian government with DPCM No 179 of 18 December 2020, concerning the identification of assets and relationships of national interest in the sectors referred to in Article 4, paragraph 1, of Regulation (EU) 2019/452 of the European Parliament and of the Council, of 19 March 2019, pursuant to Article 2, paragraph 1-ter, of the Golden Power Decree, and with DPCM No 180 of 23 December 2020 concerning the identification of assets of strategic importance in the energy, transport and communications sectors, pursuant to Article 2, paragraph 1, of the Golden Power Decree.
Significant changes to takeover legislation in the past 12 months have been enacted with the Liquidity Decree, which extended the scope of application of the Golden Power Decree in an effort to protect Italian assets from hostile takeovers by foreign investors.
Stakebuilding strategies are not so customary in Italy considering, in particular, the entry into force of the Market Abuse Regulation.
In relation to shares, under Article 120 of the Consolidated Act on Finance enacted by Legislative Decree No 58/1998 (TUF), as last amended by Legislative Decree No 49/2019 in force as of 10 June 2019), parties with a shareholding in an issuer of listed shares, having Italy as their home member state, in an amount greater than 3% (5% if the issuer is a SME) must notify the company and CONSOB. Under Article 117 of CONSOB Regulation (the Regulation No 11971/1999, as last amended by Resolution No 21016/2019 in force as of August 2019), parties holding the share capital of a listed company must notify the investee company and CONSOB:
In relation to financial instruments:
Under Article 119 of CONSOB Regulation, parties who, directly or through nominees, trustees or subsidiary companies, hold an investment in financial instruments, must disclose to the investee company and to CONSOB when:
Under Article 122-bis of CONSOB Regulation, anyone who holds financial instruments to which the appointment of a member of the board of directors or of the board of statutory auditors is reserved, shall inform the issuer and CONSOB if either:
In the case of a tender offer, the main hurdles are:
The bylaws of a limited number of listed companies provide for limits to share ownership.
Dealings in derivatives are allowed, upon certain conditions as described in 4.5 Filing/Reporting Obligations.
Dealings in derivatives are subject to the condition that net short positions are disclosed if they are greater than 0.1% (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).
Any entity that comes to hold a participation greater than 5% (if mandated by CONSOB) 10%, 20% and 25% of the voting capital in a listed company has to disclose the following to CONSOB, the target company and the public:
According to the Market Abuse Regulations, a deal must be disclosed when 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 effective status of the process.
Market practice on timing of disclosure may differ from legal requirements since the parties may delay disclosure when an early disclosure could jeopardise the negotiations or the completion of the transaction.
The Necessity of Due Diligence
When an M&A transaction is going to be carried out it is very important for a careful legal due diligence to be carried out by specialised outside Legal Counsel. It is usual in an investigation to check the actual contents of a business activity or of some of its aspects, in order to assess them from a legal and economic standpoint. In particular, it consists of gathering, examining and processing documents and information on the business and its parts.
Its fundamental purpose is that of reducing the discrepancies in information between the seller and the potential purchaser on the target of the transaction. By taking a “photograph” of the legal situation of the target business and its main legal risks, potential purchasers can confirm whether or not they are interested in the acquisition, its purpose and feasibility as initially envisaged, and can identify the best possible structure to achieve it. Furthermore, a careful legal due diligence will allow the initial economic valuation, the purchase price and any adjustments of it to be confirmed or corrected, providing a valid support also in the negotiation of the representations and warranties to be requested from the seller.
Broad Scope of Legal Due Diligence
The scope of legal due diligence is very broad, covering the following fields:
Particular care must be taken with respect to litigation, both commenced by the target and that against it, as also in the former case significant contingent liabilities could exist (losing the case and having to bear the legal costs, and also dangerous counterclaims). Furthermore, the investigation should extend not only to pending litigation but also to that threatened.
If listed companies are involved, the scope is usually narrower or has higher materiality thresholds, given the large amount of publicly available information. Normally a legal due diligence is inserted into the negotiation process which has already been started up between the seller and the buyer.
In general terms, the pandemic had an impact on the progress of transactions. Of course, in certain cases, the pandemic specifically affected the due diligence phase during negotiations. This may entail, should the negotiations be resumed after a significant period, the specific need of performing a new due diligence exercise.
It is customary that, during the negotiation phase, the parties, enter into standstills and/or exclusivity agreement. Standstill mechanisms are frequent for transactions involving listed companies. Standstills and exclusivity are considered as valid means useful to protect the specific interests of the parties, which may vary depending on the nature of the transaction. This protection can be obtained either by providing specific clauses in the letter of intent or in a non-disclosure agreement or by entering in separate specific agreements.
Terms and conditions of the offer are set in a definitive agreement and disclosed to the public.
The length of process in acquisition/sale transactions may vary on a case-by-case basis. It really depends on the structure of the transaction and on the complexity of negotiations.
2020 transactions experienced several practical delays in terms of length of the entire process, mostly due to the COVID-19 pandemic and relating lockdown measures. In some cases, the implementation of digital means aimed at guarantee the confrontation and negotiations between the parties, notwithstanding the lockdown and social distancing measures, played a crucial role in deals’ positive outcomes.
In addition, from a regulation standpoint, other emergency governmental interventions caused slowdowns in the acquisition/sale processes. In this respect it worth mentioning the Golden Power regulation according to which, subject to certain conditions, it is necessary to submit a notification of the intended investment to the Italian authorities. This notification process may have a delaying impact on the transaction, as a whole.
According to Article 106 of the TUF, whoever has acquired (directly or indirectly) a shareholding in excess of 30% of the ordinary share capital of a publicly listed company is obliged to launch a takeover bid on all the remaining ordinary shares. The obligation also arises for whoever already holds 30% of voting shares and acquires more than 5% of the share capital.
The consideration offered may be cash, existing or new shares or other securities (such as convertible bonds or warrants), or a combination thereof. In the case of mandatory takeover, however, the bidder is required to offer cash payment as an alternative if the offer includes securities that are not traded on any EU Regulated Market.
CONSOB should receive and analyse all necessary documentation relating to the guarantees at least one day before the date of publication of the offer document, as the bidder should must provide evidence that the consideration, whether in cash or securities, is available in advance of the acceptance period.
Mandatory takeover bids cannot be subject to any conditions while voluntary bids may be subject to certain terms.
Common conditions to voluntary tender offers are acceptance thresholds, to ensure that the bidder achieves control of the target (or its de-listing), and antitrust/regulatory clearances. The bidder may 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 bidder). The bidder may reserve the right to waive the condition if the acceptance levels allow them to control the target on a de facto basis.
There are no provisions preventing 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.
Minority shareholders can be granted a board representation and veto rights aimed at protecting the essential risk profile of their investment covering:
The above-mentioned veto rights are deemed not to create a joint control with the minority shareholder.
In Italy, the voting right can be exercised by proxy upon certain conditions.
During 2020, in the context of the emergency regulation, the Italian government approved the so-called "Cure-Italy" Decree, through which the following provisions were introduced, applicable to shareholders' meetings called by 31 July 2020 or by the date, if later, until which the state of emergency on the national territory (regarding the health risk connected with COVID-19 pandemic) is in force:
Resorting to the Institution of the Appointed Representative
The possibility, for all companies with listed shares, to resort to the institution of the appointed representative pursuant to Article 135-undecies TUF for the exercise of voting rights at ordinary and extraordinary shareholders' meetings, even if any clauses in the By-laws provide otherwise. Moreover, the same companies can also provide in the notice of call that the participation in the meeting is carried out exclusively through the said representative and that they are granted proxies and sub-delegations pursuant to Article 135-novies TUF and as an exception to Article 135-undecies, paragraph 4 TUF.
The above-mentioned provisions also apply to companies admitted to trading on a multilateral trading system and to companies with shares widely distributed among the public.
Obligation to Appoint Said Representative
The obligation for companies with listed shares to appoint the representative referred to above, if they do not adopt remote voting methods, and the power for these companies, in the event that, on the date on which the provisions of the "Cure-Italy" Decree enter into force, a meeting has already been called without the representative having been appointed or remote voting methods having been envisaged, allows the postponement of the meeting or its reconvening.
According to Article 111 TUF, squeeze-out with the forced and simultaneous purchase of all the remaining shares is allowed if the bidder has come to hold at least 95% of the target share capital, after a tender offer on all the target shares. The squeeze-out price is determined by law and is usually equal to the price of the preceding bid.
If the bidder has not reached the squeeze-out threshold (respectively set at 90% and 95%), they may merge the listed target company into a non-listed entity, with the target residual shareholders having a right of withdrawal from the company.
Commitments to tender are common in friendly offers and are usually entered into prior to the launch of the offer itself (less frequently during the offer period). Their execution and contents must be disclosed to the public.
The shareholder is only allowed to withdraw from the commitment to tender the shares in the case of a competing, higher offer.
A bid is made public as soon as the relevant decision has been made by the bidder or the relevant obligation has arisen, provided that they have obtained the financial resources to pay for the consideration.
If the absorbing entity is not listed, the parties to the business combination must make available the following information:
If the absorbing entity is listed and the shares to be issued amount to more than 20% of the share capital, it is also mandatory to publish an information document containing:
All parties involved in a transaction must disclose three prior annual financial statements and transaction reference accounts.
When listed companies are involved, also 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.
The merger plan is made available to the public.
The manager's/independent experts' reports are disclosed only to the shareholders. If listed companies are involved, all the documentation must be made available to the public. The merger resolutions and implementation act are carried out through public notarial deeds.
The directors of the target company must manage a conflict of “corporate interests”: on the one hand, they must protect the right of shareholders to sell. This right constitutes a “corporate interest” that as such must be facilitated; on the other hand, they must preserve the right of the target company to confidentiality, on penalty of liability under Article 2391, last paragraph and 2392, first paragraph, Italian Civil Code.
The assistance of a specialised Legal Counsel in the due diligence is also important with respect to a possible liability of the directors of the buyer who have decided to acquire a target which then turns out to be detrimental. Since the diligence of the directors under Article 2392, first paragraph, Italian Civil Code, “can never affect management choices […], but only the omission of those precautions, preventive verifications normally required for a choice of this type” (see Court of Cassation, 28 April 1997, No 3652), the performance of an appropriate due diligence must normally be considered to be a mandatory act.
It is not common for board of directors to establish special or ad hoc committees in business combination. Ad hoc committees are formally established only within the 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.
The target directors in Italy must take a stance on the offer, recommending whether to tender the shares from a financial fairness standpoint (with the help of an independent fairness opinion). They may take defensive measures (see 9.2 Directors' Use of Defensive Measures) only with the authorisation of a general meeting (in the absence of a prior authorisation under the bylaws).
Under Italian Law, a court-appointed independent expert must render a fairness opinion on the combination exchange ratio. Furthermore, the involved entities’ directors may retain their own advisers on a voluntary basis.
Director’s conflict of interest represents one of the most common subjects of corporate litigation in Italy. Referring to listed companies, CONSOB sometimes opens investigations to verify compliance with the related parties' transaction rules.
Hostile takeovers are rarely carried out in Italy. The TUF admits friendly as well as hostile takeover bids.
Directors of the target company can take defensive measures, ie, any measure to prevent or frustrate the success of the takeover. This type of action is aimed at raising the costs or reducing the benefits for the bidder and can be adopted by the target before or after the bid has been launched. The TUF regulates defensive measures in principle but does not provide any rules detailing cases or circumstances which would amount to defensive measures.
The effectiveness of defensive measures is affected by the “passivity rule” (ie, any defensive action in response to an offer must first be approved by the target company’s shareholders under Article 104 of the TUF) and by the “breakthrough” (ie, restrictions on voting rights and limitations on the transfer of securities shall have no effect, under Article 104-bis of the TUF).
Typical defensive measures available to the company are:
Listed companies have the right to waive the passivity rule, in whole or in part, by amending their articles of association and by communicating this decision to CONSOB. While the offeror’s board of directors acts independently, that of the target would need the previous authorisation of the shareholders’ meeting in order to take defensive measures.
When the directors enact defensive measures, they have to obtain the prior authorisation of the general meeting (in the absence of a prior blanket authorisation under the bylaws).
The position of the directors on the bid and their recommendation on whether to offer the shares from a financial equity point of view are not binding on the shareholders or on the bidder. If they seek to take defensive measures, in the absence of prior authorisation under the bylaws, the directors must obtain prior authorisations from the general meeting.
Within the field of M&A deals referring to non-listed companies, arbitration is more frequent than litigation. Litigation in connection with M&A is not common in Italy.
M&A litigation takes place after the closing, usually within the next two years.
In 2020, there have been certain delays also in jurisdictional activities and, therefore, no particular lessons were learned. An increase in disputes can be expected in the next months when court activities will be reinstated on a regular basis.
The scenario that has emerged following the outbreak of COVID-19 and the resulting greater market volatility has widened the operating space for greater shareholder activism.
The focus of activism is aimed at obtaining a better overall management of the investee company, direct representation on the board or an increase in the price of the takeover bid.
Sometimes activists publish a manifesto recommending that the company make certain transactions that, in their view, would raise stock prices. Their aim is to pursue a better overall management and board representation.
Activists have tried to interfere with ongoing transactions through proxy struggles and litigation, attempting to block the implementation of a transaction or obtain a raise in the takeover bid price.