Contributed By BonelliErede
Banks (Italian and international) are still the main players as lenders in the Italian acquisition finance market. Funds and insurance companies as well as securitisation vehicles have not played a material role as lenders so far, due to the restrictions provided by the Italian banking laws (although some restrictions have been removed, as explained below). Certain transactions have involved the issuance of bonds, which are normally listed (or a regulated or non-regulated market) and underwritten by qualified investors.
In the last few years, in reaction to the credit crunch, the Italian Government has implemented important changes to the Italian regulatory and tax framework with the aim of making new financing options (alternatives to the traditional bank financing model) available to Italian companies.
Law Decree No 91 of 24 June 2014 (Competitiveness Decree), converted into Law No 116 of 11 August 2014, has allowed Italian insurance companies and Italian securitisation vehicles (that is, companies incorporated in accordance with the Italian securitisation law) to engage in direct lending to Italian borrowers, subject to the fulfilment of certain conditions and requirements.
Furthermore, Legislative Decree No 44 of 4 March 2014, which implemented Directive 2011/61/EU on alternative investment fund managers (AIFM Directive), has allowed Italian AIFs to invest in credit by granting facilities. Law Decree No 18 of 14 February 2016, converted into Law No 49 of 8 April 2016, has also authorised European AIFs to invest in credit in Italy (including in the form of direct lending) subject to certain conditions and without requiring funds to set up a permanent establishment.
Italian corporates frequently utilise full-recourse financing structures to fund the acquisition of their targets. Thus, Italian corporates are not so active in the leveraged buyout (LBO) market.
2020 was a difficult year, during which the globalised lending market faced a global pandemic with unpredictable effects. This did not stop the acquisition business in Italy completely, but it had an impact, mainly on transactions' timelines, especially due to the fact that the economic and financial analysis relating to the target companies became more difficult both for sponsors and lenders.
From a legal standpoint, one of the main issues raised in the lending market was the impact of the COVID-19 pandemic on certain provisions of the facilities agreements, such as the “material adverse effect” clauses, the moratorium clauses and the “suspension of business” clauses, due mainly to the fact that several businesses were temporarily closed by way of orders issued by public authorities and certain borrowers had the opportunity to benefit from a moratorium disposed by law.
In addition, following the EU Commission guidelines issued on 25 March 2020, the Italian government adopted a new decree to strengthen the “Golden Power” rules in Italy aimed at protecting Italian strategic sectors.
If the acquisition finance transaction is local and both the acquiring company and the lenders are Italian, the documentation is usually governed by Italian law. However, if the transaction involves an international purchaser, a private equity fund or international lenders or if the size of the deal is significant, the finance documents still tend to be governed by English law. In these cases, the acquisitions can also be funded through an issuance of bonds.
If the finance documents are governed by English law, it is necessary to amend certain sections of the documents to address Italian law-related issues.
As far as governing law aspects are concerned, there is no remarkable differences between corporate loans, acquisition finance and LBO transactions in the Italian lending market.
Standard documentation (such as the Loan Market Association (LMA) documentation, adapted to the features of the Italian market) is generally used as a basis for drafting and negotiating acquisition finance documents.
While these documents can be governed by English law, certain sections need to be amended to deal with specific Italian law issues.
A loan document governed by Italian law can be negotiated and executed in either the Italian or English language. If it is executed in English, an Italian sworn translation is required for admissibility in evidence before an Italian court.
The issuance of legal opinions is standard in the context of acquisition finance transactions in Italy. Usually, lenders’ counsels issue the validity and enforceability legal opinion on the finance documents, while the borrower’s counsels deal with the issuance of the due incorporation and corporate capacity legal opinion. However, if the financing transaction is structured in the form of a bond issuance, the borrower/issuer’s counsel is also required to issue an enforceability opinion with respect to the bond documents.
Senior debt is typically used in corporate acquisition finance. Leverage finance transactions can include a senior and a junior component.
Mezzanine debt is not frequently used in Italian acquisition deals, although it can be used in multi-jurisdictional deals. Equally, payment-in-kind debt and equity kicker structures are not commonly used.
Bridge loans are commonly used in Italian LBOs acquisition deals and are generally refinanced upon the merger of the acquisition vehicle with the target company.
In recent years, the acquisition deals carried out by private equity funds have been financed with the proceeds from the issuance of high-yield bonds (usually combined with a revolving credit facility).
For the utilisation of private placements, see 3.4 Bonds/High-Yield Bonds. Loan notes instead are not common in the Italian market.
In the Italian market, the standard acquisition finance transaction is an asset-based transaction. As further described in 5.5 Financial Assistance, due to the restrictions on financial assistance, security interests over the assets of a target company are granted only after the "whitewash" merger between the target company and the acquiring entity is completed; therefore, in the first phase, the transaction is only secured by the acquiring entity’s assets and the security interests granted, include thepledge over the acquiring entity’s shares, the pledge over the target company’s shares and the assignment by way of security of certain receivables (ie, the receivables deriving from inter-company loans and the indemnity receivables deriving from the share purchase agreement) of the acquiring entity.
The components of a debt financing vary, depending on the size of the deal. Larger financings can comprise a combination of the following:
Where multiple sources of debt are used, there would be different categories of creditors keen to protect their respective interests. The purpose of intercreditor agreements is to regulate contractually the relationship between the different categories of creditors through the following:
These intercreditor issues mostly arise in the case of large cross-border acquisition finance deals where there is a subordinated piece in the debt structure (that is, second lien, mezzanine debt, and so on). In these cases, the intercreditor documentation is often based on Loan Market Association standards. Most deals in the Italian market (particularly domestic deals) are currently funded on a pari passu basis. Therefore, intercreditor issues do not represent a major concern in most cases, or the intercreditor documentation is relatively simple. However, an intercreditor agreement is always needed if the acquisition financing contemplates the use of a vendor loan (which is not unusual).
See 4.1 Typical Elements.
It is quite standard in acquisition financing transactions to have an intercreditor agreement among lenders and hedge counterparties, in order to regulate (i) the pari passu or subordinated ranking of the hedge counterparties vis-à-vis the lenders (and the waterfall of payments), and (ii) the distribution of the enforcement proceeds among lenders and hedge counterparties.
If a new company is created to carry out an acquisition, it is standard practice for lenders to take security over both:
Lenders generally request to enter into security arrangements with all the group companies, while the borrower seeks to agree on security principles excluding non-material assets and setting out materiality thresholds and limitations of liability.
Under Italian law, security can be taken mainly over:
The methods of taking security over the assets described in 5.1 Types of Security Commonly Used vary according to the type of asset concerned.
Shares or Quotas
In order to grant a pledge over shares in a joint-stock company or quotas in a limited liability company, a deed of pledge is required. To perfect a pledge over shares, a director of the company whose shares are pledged must annotate the pledge on the share certificates (or the shareholder should endorse the certificates by way of security in favour of the secured creditors) and in the company's shareholders' ledger. To perfect a pledge over quotas, the relevant deed must be notarised and filed with the competent companies' register (registro delle imprese). If the deed was executed before a foreign notary public, it must also be apostilled (where necessary) and deposited with an Italian notary public, together with a sworn translation (if it is not executed in Italian).
If the company whose shares are pledged is listed (or has opted to have dematerialised shares), no share certificates will be available and the pledge would be subject to:
In principle, a pledge over equipment and machinery (and raw materials) can be granted. However, in order for a pledge to be created, the pledged assets (or the document conferring the power to dispose of the asset) must be delivered to the lenders or to a third party designated as custodian by both the lenders and the grantor. As an alternative to a pledge, a form of floating charge (privilegio speciale) can be created if the financing has a term of more than 18 months (Article 46, Italian Banking Law). In order to perfect this security interest, the floating charge (privilegio speciale) must be registered in the register kept pursuant to Article 1524, paragraph 2, of the Italian civil code.
Law Decree No 59 of 3 May 2016, as converted into Law No 119 of 30 June 2016, introduced the so-called "non-possessory pledge" (pegno non possessorio) to the Italian legal system. This aims to allow the perfection of a security interest over movable assets relating to the exercise of the business activity of an enterprise without the need to deliver the asset to the secured creditor or a third-party custodian. The non-possessory pledge must then be registered in an electronic register held by the Italian Tax Agency (Agenzia delle Entrate), which has not yet been established.
This type of security qualifies as security over receivables (namely, over the balance on the relevant bank accounts) when the depositary bank is a third party. In the case of security over the balance of bank accounts, the depositary bank must make an annotation in its books in accordance with the Collateral Directive. In addition to the foregoing, according to the market practice the borrower is required to serve periodically to the depositary bank a notice bearing a “date certain at law” (data certa) showing the balance of the accounts in order to confirm the pledge over the balance of the accounts over time.
Receivables that can form the subject of a security interest include:
Security over receivables can be granted in the form of a security assignment or of a pledge. The perfection of both the security assignment and the pledge requires the notification to, or acceptance by, the relevant debtor (with a document bearing a date certain at law). With regard to insurance receivables, a loss payee clause (clausola di vincolo) executed by the insurance company is often requested.
Intellectual Property Rights
Security over Italian patents, designs, trade-mark registrations and trade-mark applications typically takes the form of a pledge. A deed of pledge is required for this purpose. The perfection of the pledge requires the filing of the deed of pledge with the Italian Patent and Trade Mark Office. The deed of pledge must be notarised, and is usually executed in Italian before an Italian notary public. It is in principle possible to execute it before a foreign notary public but, in this case, the deed must also be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation (if it is not drafted in Italian).
Real Estate Property
A deed of mortgage is required to grant a mortgage over land/property. The deed of mortgage must be notarised and registered in Italy. Therefore, it is usually executed in Italian before an Italian notary public. In principle, the deed can be executed before a foreign notary public, but he or she would not be able to carry out all the necessary title searches. The perfection of the mortgage requires registration with the competent land register (to be carried out by the Italian notary public) but the registration lasts for 20 years; therefore, before the expiry of that period, a renovation (rinnovazione) of the mortgage must be carried out in order to maintain a valid security interest.
Law Decree No 59 of 3 May 2016, converted into Law No 119 of 30 June 2016, introduced a new form of security interest over real estate properties, called "patto Marciano". The debtor (a company) and the creditor (a bank or other entity authorised to carry out lending activity in Italy) may agree that, upon default of the borrower, the creditor will become the owner of the real estate property subject to security. This security interest can be granted by way of notarial deed.
Common forms of security over movable property include:
The registration process varies according to the type of security and the type of asset concerned; see 5.2 Form Requirements.
See 6.2 Restrictions.
Due to the restrictions on financial assistance, security interests over the assets of a target company are granted only after the "whitewash" merger between the target company and the acquiring entity is completed, in accordance with Article 2501-bis of the Italian Civil Code. If the merger is carried out in accordance with this provision, the merger plan must identify the financial resources to be used by the company resulting from the merger in order to meet its debt obligations, and an independent expert must certify that the assumptions and conclusions drawn in the merger plan are reasonable.
See 6.2 Restrictions.
In general terms, if an enforcement event occurs, the secured creditor would be entitled to enforce the security interests created to its benefit. As a general principle, before enforcing the relevant security, the secured creditor usually has to serve a notice to the debtor (and/or the relevant security-provider) by which the debtor (and/or the relevant security-provider) is ordered to comply with its obligations and, should the default not be remedied, the secured creditor would be entitled to enforce the security interests.
Pursuant to Italian law, depending on the type of security interest, a creditor can start different enforcement proceedings which may be classified, mainly, in court-administered proceedings and out-of-court proceedings (in particular, the Italian legal framework implementing the Collateral Directive (Directive 2002/47/EC) provides special procedures for the enforcement of security interests on financial collaterals).
Guarantees are a common form of credit support and are normally documented in a written undertaking executed by the guarantor for the benefit of the lender(s). A guarantee can be in the form of either:
As a general rule, for an Italian company to provide a guarantee:
While a corporate benefit for a downstream guarantee/security is usually self-evident, this may not always be true in the case of an up-stream or cross-stream guarantee/security.
Generally, an Italian company can provide an up-stream or cross-stream guarantee/security if there is an actual corporate benefit, such as a direct or indirect consideration for the provision of the guarantee/security. The company's directors must address and evaluate the existence of a corporate benefit. As the concept of "group benefit" is not sufficient per se to justify a guarantee under Italian law, the relevant board of directors must also carry out a careful analysis of the transaction when deciding whether there is a corporate benefit.
The provision of an up-stream or cross-stream guarantee/security must be financially balanced. Therefore, a cap limiting the maximum guaranteed/secured amount must be inserted in the guarantee/security. This cap must be in line with both:
Usually, no fees are required to grant a guarantee in favour of a debtor when the companies belong to the same corporate group. However, the payment of a fee could be useful to reinforce the relevant corporate benefit.
Under Italian law, a lender can in principle be liable to the borrower for:
A lender can also be liable to the borrower's creditors for unlawful financing (concessione abusiva di credito).
The following applies in relation to claw-back (Articles 67 and 65, Royal Decree No 267 of 16 March 1942 (Italian Bankruptcy Law)):
It should be noted that the Italian legal framework relating to insolvency/bankruptcy proceedings has been overhauled pursuant to Legislative Decree 12 January 2019 No 14, which at the time this article goes to press has not yet come into effect (except for few provisions): due to the COVID-19 pandemic, a legislative decree postponed the entry into force of the law, which should become fully effective on 1 September 2021. However, the new legal insolvency law framework confirms the aforementioned claw-back principles in the context of the new insolvency proceedings regulated thereunder.
Favourable tax regimes and exemptions from withholding tax on interest payments have been made available to medium-/long-term financings granted by banks and other entities established in an EU country. The Law Decree No 91 of 24 June 2014 (Competitiveness Decree) has significantly amended the tax rules applicable to medium-/long-term loans, through the following measures:
a) financial entities established in an EU Member State;
b) entities listed under Article 2, paragraph 5, numbers 4) to 23) of EU Directive 2013/36/EU on capital requirements;
c) insurance companies incorporated and authorised to carry out their activity according to rules issued by an EU Member State; and
d) institutional investors (that is, entities whose activity consists of making or managing investments on their own behalf or on behalf of other persons, as defined by Circular Letter No 23/E of 1 March 2002, among others), even if they are not treated as taxpayers in their country of residence, but provided that they are resident in a country allowing an adequate exchange of information and subject to supervision in the country in which they are incorporated;
a) Italian or EU banks;
b) Italian securitisation vehicles incorporated in accordance with Law No 130 of 1999;
c) insurance companies incorporated and authorised to carry on their business in accordance with rules issued by an EU Member State; or
d) investment funds established in an EU Member State or a European Economic Area state that has an adequate system for the exchange of information with Italy.
a) the relevant loan agreement will be subject to substitute tax at the flat rate of 0.25% calculated on the amount of the loan advanced to the borrower; and
b) the loan agreement (together with any related security and guarantee granted) will be exempt from registration tax (imposta di registro), stamp duty (imposta di bollo), cadastral and mortgage taxes (imposte ipotecarie e catastali) and government franchise tax (tassa sulle concessioni governative), which would otherwise apply.
In general terms, a qualifying lender definition is essentially aimed at identifying those lenders which the borrower would have to gross up, specifically in the event of a change in law (or similar) which requires the application of withholding taxes on payments made to those lenders.
In the context of acquisition finance transactions, the concept of an Italian qualifying lender in principle refers to a lender beneficially entitled to receive interest and other proceeds assimilated to interest according to Italian tax law, falling within one of the categories listed below:
The 2008 Finance Bill repealed thin-capitalisation rules. Consequently, starting from 1 January 2008, the deductibility of interest paid by Italian companies on loans granted or guaranteed by qualified shareholders or related parties is no longer subject to thin-capitalisation rules. However, there are new provisions regulating the deduction of interest expenses, which provide that (Article 96, Presidential Decree No 917 of 1986, as amended by Article 1, paragraph 33, Finance Bill 2008, by Article 1, paragraph 1, Legislative Decree No 142 of 2018 and by Article 35, paragraph 1, Law Decree No 124 of 2019):
The operating gross margin is defined as the difference between the production value and the production costs, excluding the amortisation of intangible fixed assets, depreciation of tangible fixed assets and rent from financial leasing of fixed assets, as shown in the relevant profit and loss account, as calculated according to tax rules (tax EBITDA).
The portion of non-deductible interest exceeding the above threshold (interest excess) cannot be deducted in the fiscal year in which it accrues. However, the interest excess can be carried forward without any time limit and deducted from the income realised in the following fiscal years, if the relevant operating gross margin is not used entirely to allow interest accrued in the same year to be deducted (operating gross margin excess). Additionally, the operating gross margin excess of a fiscal year can be carried forward, with a five-year limitation. Specific rules apply to companies that opt for the domestic tax consolidation regime. More specifically, the operating gross margin excess of companies included in a tax unit can be used to allow the deduction of the interest excess of other companies included in the same tax unit.
The financial sector is the most important regulated industry in Italy, and includes:
a) investment companies with variable capital (società di investimento a capitale variabile) (SICAV); and
b) investment companies with fixed capital (società di investimento a capitale fisso) (SICAFs);
Since the Single Supervisory Mechanism entered into force in 2014, the (direct or indirect) acquisition of any of the following stakes in Italian banks requires the authorisation of the European Central Bank, after the Bank of Italy's assessment:
The authorisation procedure takes 60 working days, unless the term is suspended due to information requests by the authority.
The same thresholds and term apply to acquisitions of qualifying and controlling stakes in:
In all the above cases, the competent authority can grant the authorisation if the sound and prudent management of the target is ensured and specific requirements are satisfied, namely:
The current domestic situation has seen the M&A market revamped with the Italian banking sector that demonstrated a significant tendency towards consolidation and aggregation. In this context, the European Central Bank and Bank of Italy are increasingly focusing on:
while scrutinising authorisation applications to ensure sound and prudent management across the industry.
For acquisitions through indirect shareholdings, a key role in the legal framework’s development will also be played by the European Supervisory Authorities Joint Committee’s guidelines (not yet completely enacted in Italy). The guidelines introduce, among other thing, the new multiplication criterion – in addition to the former control criterion − as a trigger for prior authorisation in M&A transactions: the new criterion entails the multiplication of the percentages of the holdings throughout the corporate chain. It starts with the direct holding in the target undertaking – which has to be multiplied by the holding at the level immediately above – and continues up the corporate chain for as long as the result of the multiplication continues to be 10% or more (ie, a qualifying holding).
So far, the Italian Banking Act has recognised the control criterion as the sole criterion to identify the acquirer of an indirect holding in an Italian bank, whereas:
a) lead the subsidiary’s shareholders’ meetings; and/or
b) appoint or revoke the majority of the subsidiary’s board of directors.
In Italy, the provisions implementing Directive 2004/25/EC on takeover bids (Takeover Directive) are mainly included in:
The legal framework governing takeover bids is particularly complex and elaborate as it comprises several provisions and technical requirements, which apply differently depending on the specific cases. Takeover bids can be either voluntary or mandatory. Except for certain aspects (for example, price determination and the possibility to provide for conditions precedent), the procedure and information requirements are quite similar in both cases.
Under the Takeover Directive, EU member states can decide on the thresholds that trigger mandatory takeover bids (MTOs). Italy opted for a "bright-line rule", which provides that any of the following must launch a global takeover bid (that is, an offer to purchase addressed to all shareholders and for all the issuer's voting shares):
Issuers qualifying as small-medium enterprises can set different MTO thresholds (between 25% and 40%) in their articles of association.
In light of the foregoing, in Italy, the mere de facto control (that is, a situation where a party holds enough voting rights to exercise a so-called dominant influence, for instance by appointing the majority of the directors) through a stake not exceeding the above thresholds does not trigger per se the obligation to launch a takeover bid.
The Italian Consolidated Financial Act and the Issuers Regulation provide for specific exemptions from the obligation to launch a takeover bid when the relevant thresholds are triggered.
For the purpose of calculating whether the MTO thresholds have been exceeded, Italian law also includes derivatives, both physically settled and cash-settled (including, without limitation, swap, repos, futures, put-and-call options), which grant a long position on the securities, unless certain conditions, provided in the Issuers Regulation, occur.
Persons Acting in Concert
The obligation to launch a takeover bid is also triggered if one or more parties acting in concert acquire a percentage of voting rights in the target which is sufficient to reach in aggregate the thresholds referred to above. The Italian Consolidated Financial Act provides a broad definition of "persons acting in concert", according to which persons are presumed to be acting in concert when they co-operate by means of an agreement, either expressed or tacit, verbal or in writing, even invalid or without effect, for any of the following purposes:
Under Italian law, the following persons are presumed to be acting in concert in four cases:
The above presumptions are not rebuttable.
Additionally, the Issuers Regulation provides for the following:
Under Italian law, persons acting in concert are jointly obliged to launch an MTO when, as a result of purchases made by any one of those persons, they come to hold an interest that exceeds in aggregate the thresholds for MTOs.
The price of an MTO must correspond to either:
In particular cases, the CONSOB can determine a price that is higher or lower than the price previously referred to, in accordance with certain criteria set out in the Issuers Regulation.
Additionally, an offeror can offer securities, cash, or a combination of both as consideration for the takeover bid. However, the offeror must offer cash consideration as an alternative if either:
An offeror can launch a takeover bid only if it can comply fully with its payment obligations under the offer. Consistently, offers in exchange for financial products can only be launched if the corporate body responsible for the issuance of financial products has already been convened to authorise the issuance. Additionally, a cash confirmation (or a copy of the resolution concerning the issuance of the financial products to be offered in exchange) must be filed with the CONSOB immediately before the offer is launched.
A party that comes to hold a shareholding corresponding to more than 90% of an Italian listed company's voting capital (whether following a public tender offer or otherwise) must purchase the residual shares from any holder so requesting, unless the 90% shareholder restores, within 90 days, a float sufficient to ensure regular trading of the shares. If the threshold is exceeded by means of a tender offer, the sell-out price is normally the same contemplated under that tender offer. In other cases, the price is determined by the CONSOB in accordance with the criteria set out in the Issuers’ Regulation.
The right of squeeze-out applies whenever a party comes to hold a number of shares corresponding to at least 95% of the issuer's share capital exclusively following a public tender offer for all of the issuer's shares (either an MTO or a voluntary offer). In this case, the offeror has the right to purchase, and the remaining shareholders have an obligation to sell, all the remaining shares if the offeror declared its intention to exercise this right in the offer document that was published in relation to the previous tender offer. Sell-out also applies in this scenario. The squeeze-out price is determined by applying the same criteria provided for the sell-out price determination.
There are no further issues to be discussed.