Private Equity 2020

Last Updated August 05, 2020


Law and Practice


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The Italian M&A market has been deeply hit by the COVID-19 outbreak in 2020, and experienced a significant decrease in the number of deals. A significant drop-off was recorded in Q1 2020 compared to the same period of 2019, making it the worst quarter of the last five years. The same trend was repeated in Q2 2020, with an aggregate deal value of about EUR3.5 billion, compared to more than EUR8 billion in the same period of 2019. While the overall economic scenario is facing a recession with material social challenges, the general expectation is that the situation will remain unchanged throughout the remaining part of the year, with fluctuations depending on the actual deployment of the pandemic crisis.

On the other hand, international investors remain active observers in the Italian market and appear ready to pursue the opportunities offered by an environment affected by great volatility and uncertainty. Indeed, the widespread feeling is that the current market conditions will not be seller-friendly and that, therefore, profitable and healthy companies will not be put on sale while there is still room for interesting and opportunistic deals such as turnaround and scale-up business combinations.

The pandemic outbreak has significantly slowed down the deal flow in certain sectors that have historically played a pivotal role in the Italian M&A market, such as automotive, retail, leisure and fashion. By contrast, industries that by nature are less inclined to be affected by the COVID-19 restrictions have attracted the interest of private equity operators. Looking at H1 2020 data, the most active sectors have been financial services (which recorded the most important deals in terms of value), technology and food, where deals involving well-known or top-tier companies have been signed or are expected to be signed by the end of the year. Healthcare and infrastructure industries are also gaining popularity, as they are expected to be the main targets of the public investments that will be implemented by the government in the upcoming months to boost economic growth.

Regarding the ECM market, IPO activity is expected to continue to be restrained, while more intense activity is expected in the secondary market due to recapitalisations and takeover attempts.

In April 2020, as a response to the pandemic crisis, the Italian government extended the scope of the legislation on foreign investment control by adopting a number of provisions that increased the power of the government to monitor and impose conditions on acquisitions in a wide range of strategic sectors (see 3.1 Primary Regulators and Regulatory Issues for further details). While the large-scale impact of this recently enacted legislation remains to be seen, the Italian government – in this early phase – has shown a certain activism in the exercise of its powers in this subject matter.

Therefore, it is possible to anticipate that this trend will have a certain impact on the way in which private equity transactions are planned and structured in the Italian jurisdiction. In particular, it may become advisable for private equity operators – acting on either the sell-side or the buy-side – to carefully evaluate the business sector of the target in order to assess the right timeframe and structure for the project. In addition, private equity operators seeking to acquire a target in a strategic sector might want to run an early check with their advisers in order to make sure that they have all the information required for the filing of the foreign investment control notification, at the proper time. Finally, it is likely that the existing restrictions will lead to more articulated clauses on this subject matter being included in the transactions documents, especially regarding conditions precedent, interim obligations and break fees.

Antitrust Regulation

The acquisition of control of any undertaking operating in Italy may be subject to the antitrust control of concentrations carried out by the Italian Antitrust Authority (AGCM). In particular, the prior notification of a transaction to the AGCM is mandatory if both the following thresholds are met:

  • the aggregate turnover realised in Italy by all undertakings concerned exceeds EUR504 million; and
  • the aggregate turnover realised in Italy by each of at least two of the undertakings concerned exceeds EUR31 million.

The AGCM does not have competence over transactions that meet the separate thresholds set forth under Article 1 of EC Regulation, the filing of which has to be submitted before the European Commission.

Foreign Investment Control

In addition to the above, investments in undertakings that are active in Italy may be subject to prior control by the Italian government on foreign investments. In particular, according to currently applicable rules, the following sectors are included in the scope of foreign investment review:

  • defence and national security;
  • energy;
  • transport;
  • telecommunications;
  • finance, banking and insurance; and
  • certain critical technologies and infrastructures of “hi-tech” sectors (eg, dual use, robotics, artificial intelligence, etc).

Depending on the type of transaction (eg, the acquisition of control over a company holding strategic assets, or transactions directly concerning the strategic assets), the prior filing of a transaction is requested for any foreign company or only for extra-EU companies (taking into account also the nationality of the relevant controlling entity) acting on the buy-side.

The scope of foreign investment control has been provisionally widened (with effect until 31 December 2020) as part of the legislation adopted in response to the COVID-19 outbreak, which introduced the obligation for entities outside the EU to notify the government of the acquisition of minority and non-controlling stakes (higher than 10%) in companies operating strategic assets.

The powers granted to the Italian government according to the foreign investment control legislation include the possibility to veto a transaction or impose conditions on its completion in order to protect public security and safety, as well as the functioning and continuity of networks and supplies.

Finally, please note that further controls and/or authorisations may be required to complete the acquisition of specific targets, particularly in regulated fields, such as Bank of Italy’s authorisation for the acquisitions of banks or financial firms/intermediaries, and IVASS (Italian insurance authority) authorisation with respect to the acquisition of insurance companies and/or certain insurance assets.

Private equity funds usually require a thorough legal due diligence exercise to be carried out with reference to the target company. In most cases, the due diligence review is conducted by means of a virtual data room where the relevant documentation is uploaded. The advisers of the private equity firm are also generally allowed to submit questions or requests for clarification concerning the documentation reviewed and, most of the time, management meetings or site visits are also scheduled. The output generally requested by the private equity fund is not a full report with a detailed description of the documentation reviewed but rather a red-flag report where only the main critical issues are highlighted.

Key areas of focus for legal due diligence in private equity transactions generally include corporate, commercial/business contracts, financing, authorisations/licences, employment, tax, litigation and IP. More business-specific areas, depending on the industry in which the target company operates, may cover regulatory (eg, for banks, insurance companies or other regulated entities), environmental (eg, for industrial and production companies) or real estate issues (including for deals in the energy sector).

A vendor due diligence report is usually made available in the context of an auction, if the size of the target company justifies the costs relating thereto (in terms of both advisers’ fees and the internal resources involved in the process). To the contrary, no vendor due diligence activity is normally arranged for small or medium-sized deals.

The advisers to the buyer provide credence to the vendor legal report drafted by external law firms, in general terms, but in any case the information therein is usually double checked based on the available due diligence documentation. Moreover, for certain specific areas or in relation to issues that are particularly material, an additional and more detailed due diligence analysis is carried out by the buyer’s advisers. Additional due diligence activities are also required when the vendor due diligence report does not address all the matters the buyer wishes to cover.

Regarding the due diligence report prepared on the buy-side, advisers usually provide reliance thereon to their client and, sometimes, to banks or financing parties (if any), subject to terms and conditions to be agreed from time to time.

The Italian economy is based on a banking lending system and its industrial sector is mainly composed of micro-small and medium-sized enterprises, which are the pillars of the Italian manufacturing industry. Italy has a very limited number of multinational corporations, and most companies are not listed. In the above described private sector scenario, the typical shareholding structure of an Italian corporation consists of a limited number of shareholders (sometimes belonging to the same family).

In such a framework, the following conditions apply:

  • acquisitions by private equity funds are usually carried out through privately negotiated sale and purchase agreements;
  • depending upon the target’s appeal, the M&A transaction may alternatively be structured as a competitive auction;
  • distressed assets are usually bought under court-approved schemes; and
  • tender offers, having either a mandatory or a voluntary nature, represent a rather limited portion of the Italian M&A market.

In principle, although each deal may differ from the next, acquisition terms may be significantly different depending on whether the transaction is a peer-to-peer negotiation or an auction process, in the context of which the tension between the competitors often results in provisions that are more favourable to the seller.

Private equity deals are usually carried out through one or more acquisition vehicles – set up in Italy or abroad, based on tax-driven structures – belonging to the control chain of the private equity buyer.

If the vehicles are not already incorporated upon signing, the relevant transaction documents are entered into by the private equity firm, which reserves the right to designate a third party (ie, an acquisition vehicle) between signing and closing in order to complete the acquisition. In such a case, appropriate protections are normally included in the transaction documents to safeguard the interests of the seller to receive the funds at closing.

Deal Financing

Private equity deals in the Italian market are usually financed through a mix of equity and debt, with the latter consisting more often of acquisition financing granted by banks or other financing institutions or, less frequently, by special debt instruments, such as acquisition bonds.

When the deal structure contemplates a special purpose vehicle acting on the buy-side, private equity operators might be requested by the seller to submit equity and debt commitment letters providing contractual certainty of the availability at closing of the funds necessary to close the deal, as an attachment to the binding offer, especially in the context of an auction sale.

Acquired Stake

Indeed, private equity buyers typically prefer to acquire a controlling stake in the target. However, depending on the target's operating business and the specific expertise that might be needed to run it, buyers might welcome – or be willing to consider – a minority investment in the target by the sellers and/or the management of the target, which is often carried out through the re-investment of part of the sale proceeds.

Minority investments are also carried out by specialised divisions of private equity firms, especially in tier-one companies or in companies operating in strategic sectors.

It is not uncommon for private equity sponsors to create a consortium in order to take part in an acquisition process, especially in the case of auction sales targeting a medium-large size company.

These types of consortia or joint ventures typically include institutional investors operating in the same industry; alliances between institutional investors and industrial operators are less often pursued. The consortium is generally created and agreed upon prior to signing although, in some instances, a syndication mechanism may take place in the interim period between signing and closing.

Consideration Structure

In the Italian market, the predominant form of purchase price structures are as follows:

  • the locked box mechanism, where the price is determined by reference to the target’s accounts at an agreed date and is subject to adjustment – normally on a Euro-for-Euro basis – only for unpermitted leakages after that date; or
  • the completion accounts mechanism, where the initial agreed price is subject to post-closing adjustments based on certain criteria (such as the target’s net indebtedness and operating working capital), to be calculated at the closing date.

A fixed price structure (ie, a structure other than the locked-box mechanism or completion accounts mechanism) is relatively uncommon. Locked-box mechanisms are gaining popularity, particularly in auction sales involving private equity operators, as this mechanism makes it easier to compare the offers received and gives more certainty on the purchase price final amount.

Deferred consideration is not common between Italian-based parties, while earn-outs (based on agreed future performance measured by reference to certain parameters) are not unusual, although sellers – particularly private equity funds – are increasingly reluctant to accept such payment structures; private equity funds are more inclined to include earn-out mechanisms when acting on the buy-side.

Collateral in Case of Deferred Payments

A private equity seller is generally reluctant to provide guarantees to secure post-closing adjustments that are not market standard. To the contrary, in the case of corporate sellers, post-closing adjustments may be backed by an escrow or bank guarantee, which would also cover any possible indemnification obligations.

With respect to the locked box consideration structure, the price has to be paid at closing and may provide for interest on the leakages occurred until closing, although this provision is not very common. Ultimately, this is more a matter of negotiation between the parties, and the acceptance of this principle depends on the type of transaction, on how the price is calculated and on the applicable interest rate.

A contractual dispute resolution mechanism is commonly used in private equity transactions to settle disputes on the calculation of leakages (in the locked-box consideration structure) or post-closing adjustments (in the completion accounts consideration structure), with the involvement of an independent accountant acting as an expert. The accountant is customarily entitled to settle only technical or accounting matters with binding effects on the parties, whilst disputes on any legal matter requiring an interpretation of the contract will be determined by the court or through arbitration.

The level of conditionality in private equity transactions varies according to the sector in which the target operates and the features of the buyer, among other factors. Regulatory conditions are typical, such as merger control clearance, foreign investment control, authorisation by the Bank of Italy, etc. A financing condition may be provided, although sellers are very reluctant to accept such conditions.

Material adverse change provisions are not uncommon, but the relevant definition is heavily negotiated and has become even more important following the COVID-19 emergency.

Third party consents (eg, major clients or strategic suppliers) are commonly provided as a condition to closing, but this mainly depends on the level of materiality for the transaction or the business. Sellers are not generally keen to accept this as a condition, as third parties may use it as leverage to bargain or re-open negotiations on the relevant business relationship. Also, the fulfilment of pre-closing covenants and the performance of pre-closing transactions are quite commonly regulated as conditions that would allow the buyer not to close in the case of a breach of the relevant covenant (or, less frequently, vice versa).

“Hell or high water” undertakings are rare and not commonly accepted in Italian deals, except in very specific (and rather exceptional) circumstances (eg, competitive auction sale where the buyer is extremely confident that no concerns will be raised by the antitrust authority on the filing).

A break fee in favour of the seller is not very common, even in conditional deals, particularly in the case of private equity-backed buyers, who are more frequently requested to provide evidence of the fact that all the funds required for the deal are fully committed upon signing. In any case, this mainly depends on the size of the deal, the reliability of the buyer or the restrictions or authorisations applicable to the use of funds by the buyer. On the other hand, reverse break fees are quite unusual in the Italian market.

The regulation of the break fee under the transaction documents has to be carefully assessed and evaluated as it may lead to different legal qualifications (and relevant deriving implications) under Italian law. In fact, if it is qualified as a penalty, the relevant amount may be subject to review by the judge if challenged by the party possibly obliged to pay it.

Termination of the acquisition agreement may be triggered by the non-occurrence of a condition precedent (to the extent not waived) within a certain agreed period of time. As conditions precedent are usually in the interest of the buyer (with certain exclusions, such as in case regulatory approvals are required), the buyer is more frequently entitled to terminate the agreement. It is relatively rare for parties to agree on an exclusive remedy provision in the case of a breach of pre-closing covenants; therefore, in such a case, the general provisions of the Italian Civil Code apply, including the right for a party to terminate the agreement and walk away from the deal if the breach of the other party(ies) is of material relevance.

In general terms, when acting as either seller or buyer, private equity operators tend to obtain more favourable risk allocations terms than those negotiated by industrial players. This is mainly due to the fact that private equity firms are less inclined to bear the business risk associated with the investment, and prefer to leverage on other deal items in order to accommodate the requests of their counterparty. For instance, when acting on the buy-side they might be willing to offer a more attractive price in exchange for a more generous set of protections whilst, when acting on the sell-side, they might consider accepting a slightly lower price if the overall deal terms ensures a smooth exit with limited tails.

For the above reasons, all the items associated with post-closing liabilities (eg, the scope of representations and warranties, de-minimis, threshold, cap and special indemnities – see 6.9 Warranty Protection for further details) are typically those which are more heavily negotiated in deals where private equity firms sit at both sides of the table.

That said, the allocation of risk between the buyer and the seller remains essentially a matter of negotiation and bargaining power, and is influenced by a number of factors that go beyond the mere nature of the parties involved (eg, market conditions, the type of sale process, the appeal of the target, etc).

Representations and Warranties of the Private Equity Operator

On the sell-side, private equity funds tend to minimise post-closing liabilities as they seek a clean exit, particularly in view of a distribution of the proceeds and/or in case of liquidation of the fund. Therefore, private equity sellers generally agree on a rather limited set of representations and warranties, and seek to avoid – or limit as much as possible – any warranties on business/operational matters. Ultimately, the extent and scope of such warranties depend on the features of the deal and the parties’ bargaining leverage.

On the buy-side, private equity funds usually expect a robust set of representations and warranties, including those on business or operational matters.

Bring-down clauses are common, providing for a repetition of the seller’s representations and warranties at closing, although the possibility for the seller to update disclosure at closing is not equally accepted.

Special indemnities for certain known and identified issues or risks may be agreed upon, although a private equity-backed seller is usually reluctant to accept them. Usually, no limitations (save for cap) apply to such specific indemnities.

Warranty Qualification

It is commonly accepted for the seller’s liability to be qualified by the disclosure of specific events listed in a disclosure schedule. The extent to which disclosure against one representation applies to others is heavily negotiated. Whether the sellers’ liability is qualified by general disclosure of all the data room content or by the general knowledge of the buyer is heavily negotiated.

Also, the qualification of certain specific representations to the seller’s knowledge is not unseen. In such a case, the parties usually negotiate which representations shall be subject to the seller's knowledge qualification and the scope of the relevant definition (eg, whether the seller’s knowledge shall be deemed as actual or deemed knowledge, or if it shall be deemed as the knowledge of the seller only, or also as the knowledge of the management of the target).

Warranty Limitation

The amount of the seller’s liability is usually limited by de minimis and threshold (either deductible or tipping basket) clauses, and capped at a maximum amount: relevant figures are usually negotiated and mainly depend on the size of the transaction.

In addition, the seller’s liability is limited to a certain period of time post-closing (usually from 12 to 36 months), except for certain matters where the seller’s liability will customarily extend to the applicable statute of limitation (eg, fundamental representations, tax, social security/employment).

In the case of a private equity-backed seller, the time limit for the duration of the claim period (12 to 24 months) and cap (10% to 20% of the price) are usually lower compared to those generally accepted by a private seller. In any case, by operation of law, no limitation would apply in case of the seller’s gross negligence or wilful misconduct.

Management Warranty

It is uncommon for the management team to provide representations and warranties to the buyer, except when the managers are also sellers, in which case managers usually give limited representations on their stake. However, they may also be requested to provide warranties on business/operational matters alongside the seller of the majority stake, and to undertake relevant indemnification obligation vis-à-vis the buyer on a pro-rata basis.

The seller’s liability for breach of representations and warranties is usually backed by an escrow or a first demand bank guarantee, for a limited period of time and up to a maximum agreed amount (usually lower than the cap).

The provision of warranty and indemnity insurance (W&I) is becoming increasingly common, particularly in transactions involving private equity funds. W&I policies typically cover most of the representations and warranties, and the areas that may be difficult to insure are becoming very few (eg, in certain cases, environmental liability, criminal liability, etc); it is now even possible to insure certain special indemnities, subject to certain conditions that depend on the subject matters of the special indemnity and/or the specific insurance policy used.

Litigation on disputed matters may occur with respect to M&A transactions, including those where private equity players are sellers or buyers. Indeed, private equity funds prefer arbitration to national courts, which are much slower and less efficient, albeit definitely less expensive.

The most commonly litigated provisions are surely those related to the price adjustments, the seller’s representations and warranties and earn-out clauses. It is less common to have litigation on breaches of pre-closing covenants or actions related to conditions precedent, although the number of these is expected to increase in the coming months because of the extraordinary situation brought about by the COVID-19 pandemic.

Public-to-private transactions account for a great number of the transactions involving major private equity firms in the last few months. In fact, the relatively low capitalisation of important and strategic companies has resulted in great activism among private equity funds in pursuing the acquisition of such companies with the aim of taking them private. In this respect, it is worth highlighting the great attention paid by all economic players to this kind of transaction, and the high level of scrutiny that the government is entitled to apply in accordance with the newly enforced golden power legislation.

First Shareholding Reporting Thresholds and Common Features

The first shareholding disclosure threshold is set at 3% of the share capital for Italian “large” companies listed on Italian regulated markets. For “small/medium enterprises" (SMEs), the first threshold is set at 5% of the share capital. A list of SMEs is kept by CONSOB, the Italian securities regulator, and is available on the CONSOB website. For the purposes of the shareholding reporting obligations, share capital shall be intended as the corporate capital represented by shares with voting rights attached. In the wake of the COVID-19 pandemic, CONSOB has temporarily lowered the above first reporting thresholds to 1% and 3% for certain companies (the list of which is available on the CONSOB website) until 12 October 2020. Certain exemptions to the shareholding disclosure regime apply – eg, in connection with market making or stabilisation activities. If the participant reaches the above thresholds (or reduces its interest below them), it shall file a disclosure form with CONSOB and the participating company, within four trading days.

Additional Shareholding Reporting Thresholds

The same disclosure obligations apply if the participant exceeds 5% (for companies other than SMEs), 10%, 15%, 20%, 25%, 30%, 50%, 66.6% and 90% of the share capital of the participating company, and if it reduces its stake below each of the above thresholds.

Potential Shareholding

Disclosure obligations analogous to those referred to above also apply if a participant holds a potential shareholding (eg, through derivatives) that reaches or exceeds – by itself or jointly with an actual shareholding – 5%, 10%, 15%, 20%, 25%, 30%, 50% or 66.6% of the share capital.

Declarations of Intents

As a separate obligation, whoever reaches 10%, 20% or 25% of the share capital of an Italian listed entity shall file within four trading days with CONSOB and the participating entity a declaration stating its intents for the following six months, including with respect to the composition of the management and control bodies of the participated entity and with respect to its intention (if any) to acquire control over the entire entity. Certain exceptions apply – eg, if the exceeding of the threshold triggers the obligation to launch a mandatory tender offer. As a response to the COVID-19 outbreak, CONSOB has temporarily lowered the first threshold referred to above to 5% for certain companies (the list of which is available on the CONSOB website) until 12 October 2020.

Mandatory Offer Thresholds and General Remarks

A mandatory tender offer obligation is triggered when a person/entity, alone or acting in concert, comes to hold a participation in excess of 30% of the voting rights of an Italian listed company as a consequence of the purchase of securities. The same obligation is triggered with respect to companies not qualifying as SMEs upon reaching the 25% threshold (to the extent no other shareholder holds a higher stake in the company). The by-laws of SMEs can provide for different thresholds, ranging from 25% to 40% of voting rights. The obligation to launch a mandatory tender offer is also triggered in the acquisition of derivatives that grant a long position to the relevant holder in excess of the above thresholds. For the calculation of the participation thresholds in such a case, reference shall be made to the shares underlying the derivative instrument. If a mandatory offer is triggered, it shall be addressed to all shareholders on an equal treatment basis, at a price equal to the higher price paid by the offeror or the persons acting in concert with it for the securities concerned by the offer in the 12 months preceding the date on which the offer is announced (or, in the absence of relevant purchases, at a price equal to the weighted average price of the securities during the same period referred to above).

Consolidation Mandatory Offer Threshold

The obligation to launch a tender offer is also triggered if a person/entity that holds more than 30% and less than 50% of the voting rights of an Italian listed company acquires, alone or acting in concern, more than 5% of the voting rights in such company over a 12-month period.

In the context of tender offers, cash is by far the most common consideration offered. Offering shares as a consideration is relatively rare due to the increased complexity of exchange offers (or cash-shares mixed offers). If the securities offered as consideration are not listed on an EU regulated market, the bidder is compelled to also offer cash as consideration, and the target shareholders will be free to choose between the two.

While conditions are not allowed in the context of mandatory offers, voluntary offers are generally subject to conditions set by the bidder. The most frequent conditions concern the absence of material adverse events; the absence of actions by the target company that could frustrate the purpose of the offer; the reaching of a certain percentage of the target voting rights (often set at 66.7% in order to be able to control the extraordinary shareholders’ meeting); and the obtainment of the necessary regulatory clearance – eg, antitrust. As a general principle, voluntary offers can be subject to any conditions, to the extent the satisfaction of such conditions is not dependent upon the mere will of the bidder.

The takeover offer cannot be conditional upon the bidder obtaining financing: upon the announcement of the offer the bidder must be in a position to confirm it has sufficient funds to discharge the full payment obligations deriving from the offer.

If the bidder comes to hold less than 100% of the voting rights of an Italian listed company as a consequence of a tender offer, it has the right to maintain the obtained shareholding and – depending on the relevant size – control the target (eg, appointing the majority of the board’s members and having the majority at shareholders’ meeting level); if the obtained shareholding is higher than 95% of the voting rights, the bidder has the right to squeeze-out the remaining shareholders, whose shares will be automatically transferred to the bidder. The squeeze-out operates to the extent the bidder has disclosed in advance its intention to exercise such right, in the context of the offer document.

In voluntary tender offers, it is common for the bidder to approach the largest shareholders and seek to obtain an irrevocable commitment to tender their shares to the offer. In these cases, bidders generally approach the largest shareholders before the announcement of the offer, so as to verify in advance the chances of the offer being successful. Irrevocable commitments usually qualify as a shareholders’ agreement and are subject to the relevant disclosure regime and limitations set out by the law. The shareholder(s) who enter into the irrevocable commitment are allowed to withdraw from the commitment if a competing mandatory offer is launched and becomes successful.

Hostile takeovers are permitted under Italian laws but are not common, mainly due to the concentrated ownership structure of most Italian listed companies (at the end of 2018, only 13 companies over 231 had “widely held” shareholding) and the increased complexity and costs associated with hostile offers, as opposed to negotiated/friendly offers. For these reasons, private equity buyers tend to avoid engaging in hostile offers.       

Management incentive schemes have become quite common in Italian private equity practice and are often implemented for retention and management alignment purposes when private equity investors act on the buy-side.

In recent years, management incentive schemes have been addressed by specific legislation which, inter alia, sets forth a more favourable tax regime in case the management participation is sold upon the occurrence of an exit by the private equity investor, provided that the scheme complies with a number of specific features. In such a case, the proceeds deriving from the sale of the management participation are taxed as financial income, at a rate that is generally lower than that applied to ordinary employment income.

In order to take advantage of the above benefits, management incentive schemes are typically structured in the form of equity participation for an overall percentage which, in most cases, does not exceed 10%, with 1% being the minimum threshold required to benefit from the more favourable tax regime noted above.

Management participation schemes typically take the form of a special class of shares (sweet equity), which allows the managers to receive a preferred return if the private equity investor achieves a minimum “hurdle” on its investment. The exception made for this privilege is that sweet equity often provides for limited administrative and economic rights on other matters (eg, no right to vote in the ordinary shareholders’ meeting and restricted rights to interim dividends). In addition, the transfer of the sweet equity participation by the manager is typically subject to limitations in order to ensure that the relevant shares are kept by the manager until the exit or the occurrence of a good leaver/bad leaver event, whichever is earlier. In some circumstances, managers are also offered the possibility to invest in ordinary shares, alongside the private equity buyer, acting as minority financial investors.

Management participation schemes generally include vesting and leaver provisions, which make the shareholding interest held by the manager dependent upon the lapse of a certain period of time and the occurrence of events concerning the working relationship that the same manager has in place with the target group. In particular, rights associated with the manager participation commonly vest over a period of time (the so-called holding period), which is set in accordance with the retention and maturity targets of the investment. In order to take advantage of certain tax benefits, the minimum holding period is generally five years or the earlier date on which an exit is achieved by the private equity investor. The occurrence of a leaver event during the holding period and prior to the exit might lead the manager to lose all or part of his/her participation or the rights associated therewith.

Leaver events are normally divided between the following:

  • good leaver circumstances, which are not dependant on the will of the manager (eg, death, permanent illness, termination with no just cause), upon the occurrence of which the manager is normally entitled to retain part of the rights associated with his/her participation; and
  • bad leaver events which, on the other hand, are generally dependant upon the will of the manager or associated with his/her misconduct (eg, voluntary resignations, termination with just cause) and that, therefore, lead to the manager losing all the benefits associated with the relevant participation.

Managers and key employees are often bound by a number of undertakings aimed at preserving the know-how and competitive advantage of the target throughout the duration of the employment/working relationships and for a certain period after its termination. All these undertakings are normally included in the relevant employment/management agreement and then, to a certain extent, replicated as part of the arrangements that govern the participation of the managers in the target group.

Typical undertakings include non-compete, non-solicitation and exclusivity covenants, which have to comply with certain restrictions as to their scope (in terms of both territory and competing business) and duration in order to be enforceable vis-à-vis the managers. In particular, non-compete obligations cannot last for more than five years after the termination of the manager’s office, and shall be construed in such a way as not to prevent the manager exercising any activity within his/her reasonable professional background. In addition, non-compete undertakings assumed as part of an employment relationship have to be specifically remunerated. Non-disparaging undertakings are less common, except in certain specific industries characterised by high reputational standards.

As management incentive schemes are mainly conceived to recognise a preferred return on the investment in the case of a successful exit by the private equity investor, the minority protections associated therewith are, in principle, rather limited and typically restricted to a tag-along right in the case of a sale by the majority shareholder.

On the other side, a more articulated package of protections is normally granted to managers who acquire a minority stake in the target group as part of a financial investment made alongside the private equity buyer. In such a case, managers are generally offered a set of governance rights, which might include veto rights on selected matters (eg, capital increases, extraordinary transactions, material amendments to the business purpose, etc), possibly coupled with the right to appoint one or more directors within the board. The actual scope and content of the minority rights can vary depending upon the size of the investment made by the managers and their strategic importance for the development of the business plan. In any case, the control over certain specific strategic matters, such as the exit process, is generally retained by the private equity investor.

The level of control of a private equity fund over its portfolio company depends on whether the fund is the majority shareholder or whether there are other controlling shareholders and the fund is co-investing alongside them as a minority investor. Obviously, if the fund is the sole shareholder it has the full control over the company and can exercise all the economic and administrative rights without limitation, in compliance with the applicable law.

Private Equity Fund as Controlling Shareholder

If the private equity firm controls the portfolio company but there are also other minority shareholders holding a stake that is not immaterial, the fund and the other shareholders usually enter into a shareholders’ agreement whereby certain rights are granted to the minority shareholders.

Generally speaking, such rights include the right for the minority shareholders to:

  • designate one or more directors or (but less frequently) members of the management team;
  • designate a statutory auditor; and
  • veto resolutions concerning certain matters, such as amendments to the company’s bylaws, increases of the corporate capital with the exclusion of the option right or other than at fair market value, or the issue of financial instruments having an impact on the corporate capital, extraordinary transactions, related party transactions, the assumption of indebtedness for an amount higher than a certain threshold, the sale of participations/assets having a value higher than a certain threshold, etc.

The rights granted to the minority shareholder are usually also reflected in the bylaws of the portfolio company, so that the relevant provisions are enforceable vis-à-vis third parties.

The rights above are in addition to those granted by operation of law to minority shareholders (eg, the rights to vote in the shareholders’ meeting, to examine certain corporate documentation and books, to sue directors or statutory auditors for damages in case of misconduct, to submit claims to the statutory auditors or before Italian courts, etc).

Private Equity Fund as Minority Shareholder

If the private equity firm is a minority investor, the rights granted to it are usually similar to those set out above, although it is quite likely that such private equity investor would require a wider set of rights if it intends to actively co-operate in the development of the target company. As a rule, in such scenario the fund requires the right to designate one or more non-executive directors at the portfolio company’s board level (even though it often wants to be involved in the selection process of certain top managers), and to be granted wide information rights and veto rights relating to the most relevant matters.

As a general rule, shareholders of companies incorporated as limited liability companies (società a responsabilità limitata) or joint-stock companies (società per azioni) cannot be held liable for actions carried out by the companies in which they have a stake. Nevertheless, in certain limited (and rather exceptional) circumstances, the shareholders may be held liable through the piercing of the corporate veil.

Such exceptional circumstances include the following scenarios, for instance:

  • the sole shareholder of the company does not comply with certain mandatory provisions governing the equity contributions into the company or the obligation to disclose that the company has a sole shareholder;
  • the entity exercising direction and co-ordination activity over the company (ie, the dominant influence on the management activities of the portfolio company, which has to be assessed based on the de facto circumstances relating to the shape of the decision-making process of the company) abuses its direction and co-ordination powers, causing damage to the other shareholders or creditors of the company, which is not fully set off by the overall advantages deriving from the direction and co-ordination activity itself or remedied by means of ad hoc measures; or
  • the shareholder of a limited liability company (società a responsabilità limitata) wilfully approves or authorises activities that are prejudicial to the company, the other shareholders and/or third parties.

In all the above cases – where, as a common feature, the shareholder has breached certain mandatory law provisions or has mismanaged the company – the liability of the shareholder to restore the damages caused to the other shareholders or third parties (eg, creditors) may be material and possibly go beyond the amounts actually invested in the company.

In addition to the above, in principle – under certain particular circumstances such as bankruptcy or distressed scenarios – managers of the private equity firm controlling the portfolio company may be deemed “shadow directors” of the portfolio company, even without a formal appointment, if they interfere, on a continuous and permanent basis, with the management strategic decisions of the portfolio company. Such “shadow directors” might be subject to the same liability regime as applies to the company’s directors.

In the context of the acquisition of a target company, private equity firms usually ensure that the target company implements a high standard of compliance, normally in line with the standard adopted by the firm itself. However, the specific policies implemented at the portfolio company level depend on a large number of factors (including the size, sector and other business conditions concerning the company) and, therefore, the standards actually applied by the company may differ from the ones implemented by the fund.

The average holding period for private equity transactions ranges between four and five years. However, an exit may also be implemented at an earlier stage if there are favourable market conditions and/or the possibility for the fund to pursue a particularly convenient transaction in terms of return. On the other hand, external elements may also have an impact on the value of the asset, which may delay the exit process (eg, economic crisis or exceptional events like the pandemic occurring in 2020).

In 2020, the most common form of private equity exit has been the sale process, sometimes structured as an auction. Considering their costs and the relatively small size of the Italian capital market, IPOs are not easily achieved and are therefore not the most common exit strategy in Italy. “Dual track” processes (ie, an IPO and a sale process running simultaneously) are sometimes put in place in order to grant more options to the sellers. Normally, a “dual track” exit is implemented when a purchase offer matching the desired return of the shareholders is submitted during the IPO process pursued by the company.

In the context of an exit, it is not very common for private equity sellers to reinvest in the portfolio company, but obviously this depends on a large number of factors (including the investment strategy and the residual duration of the fund).

Equity arrangements between co-investors typically include a drag right in favour of the majority shareholder.

However, even if the drag right is provided for in the shareholders’ agreement (and generally also in the portfolio company’s bylaws), it is very rarely exercised as, in most cases, an exit is pursued with the general consent of all the shareholders. Nevertheless, there may be particular situations that require the exercise of the drag right – typically when the third party offer does not match the expected return of the minority shareholders. Drag rights usually also apply with reference to institutional minority co-investors.

The drag right is generally exercisable by the majority investor that intends to sell its entire stake in the company. The transaction documents may sometimes grant the drag right to the majority shareholder intending to sell not all of its shares but a stake representing more than 50% of the corporate capital (or, if different, the voting rights) in the portfolio company.

Please note that under Italian law the drag right must ensure the dragged shareholder a price that is at least equal to the fair market value of the dragged shareholding. If this is not the case, the dragged shareholder may challenge the lawfulness of the dragging shareholder’s right, even if such provision has been agreed at a contractual level.

The tag right generally applies to all minority shareholders (including institutional co-investors), and grants them the right to sell their stake in the company when the majority investor sells its own shares.

As a general rule, the tag right is provided in favour of the minority shareholders on a pro quota basis – ie, the minority shareholders have the right to sell a percentage of their shares equal to the percentage of the shareholding actually transferred by the majority shareholder. As an exception, should the majority shareholder intend to transfer more than 50% of the corporate capital (or, if different, the voting rights) of the company, the minority shareholders are usually entitled to sell all the shares they own in the company.

It is not common for private equity funds to exit by way of IPO, mainly due to the relatively smaller size of the Italian capital markets compared to other jurisdictions and the length and complexity of the listing process, although those are comparable to those existing in other EU jurisdictions. Over the past few years, only a handful of exits have been carried out through IPOs, notably in the financial sectors and mainly concerning large companies.

Joint Global Co-ordinators usually request the seller to abide by a lock-up period ranging from six to 12 months, starting from the IPO date.

So-called “relationship agreements” are substantially unknown in the Italian market.

Legance - Avvocati Associati

Via Broletto, 20
20121 Milano

+ 39 02 89 63 071

+ 39 02 896 307 810
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Trends and Developments


Legance - Avvocati Associati is an independent law firm with offices in Milan, Rome, London and New York. It was founded in 2007 and is a leader in the market, thanks to its qualities of being independent, dynamic and international. There are currently more than 270 lawyers at Legance. Each individual’s qualities and skills, coupled with the firm’s constant attention to clients, careful evaluation of business objectives, unconventional approach capable of anticipating legal requirements, and 24-hour availability, have helped to establish Legance as a recognised leader in domestic and international markets. Due to its strong international practice, Legance can support clients over several geographical areas, and can organise and co-ordinate multi-jurisdictional teams whenever required.

2020 will certainly be remembered as the year of the health emergency caused by the COVID-19 pandemic. Although the worst stage of this terrible virus seems to be passed in Italy, it is still difficult to accurately foresee all the social and economic developments that we will face in the future, as well as the “new normal” scenario that will characterise the social, economic and financial community when this pandemic is definitely over.

In this framework, the Italian Government (like the policymakers of many other countries) has enacted emergency measures that affect certain Italian corporate law provisions and, therefore, must be considered by Italian and foreign investors (including private equity investors) who are planning new acquisitions in Italy or currently managing investments in Italian portfolio companies.

Suspension of Certain Corporate Law Rules to Support Italian Companies

As a consequence of the COVID-19 emergency, many Italian companies that were sound and solvent before the coronavirus outbreak suffered severe losses to their turnover, especially due to prolonged inactivity caused by the legal restrictions enacted to contain the spread of the virus. Because of these losses, some companies entered a stage of financial tension and, in certain cases, suddenly found themselves on the verge of bankruptcy. Like many other countries, Italy passed a set of measures aimed at ensuring the survival of these companies by supporting their liquidity needs in various ways.

Unlike other European countries (which privileged equity injections, for instance, by means of convertible bonds, subordinated loans or hybrid financial instruments), Italy chose to facilitate the granting of banking facilities to eligible companies by providing, under certain terms and conditions, a State guarantee on most of the relevant exposures, mainly through a State-controlled company called SACE S.p.A. or by means of a specific fund dedicated to small-medium enterprises. As a complement to the above, the Italian lawmaker temporarily suspended certain corporate law provisions that could have hindered Italian companies from assuming the additional debt that may be crucial for their survivability.

Suspension of the “recapitalise or liquidate” rule

First of all, Italy decided to suspend the rules that oblige Italian companies to restore their corporate capital, until 31 December 2020, in the following scenarios:

  • if the capital is reduced by more than 1/3 as a consequence of losses occurring up to 31 December 2020; or
  • if these losses exceeding 1/3 of the corporate capital cause the same capital to fall below the minimum thresholds provided for by law (ie, EUR50,000 for joint stock companies and EUR10,000 for standard limited liability companies).

Moreover, until 31 December 2020, companies that suffered losses reducing the corporate capital below the minimum amount provided for by the law are not required to wind up their business as a mandatory alternative to restoring their corporate capital.

The temporary suspension of these rules therefore has the effect of deactivating the “recapitalise or liquidate” rule, with the aim of granting the directors of companies in emergency the freedom to select the most suitable instrument to obtain the liquidity that is necessary to guarantee the continuity of the business. In other words, even significant losses suffered as a consequence of the current COVID-19 emergency will not force companies to restore their corporate capital to avoid the winding-up of the company; to the contrary, directors will be free to opt, for example, for additional banking facilities assisted by the abovementioned guarantee of the State (if eligible), or to seek loans from their shareholders or other companies belonging to the same group.

Suspension of the statutory subordination rule applicable to shareholder and intra-group loans

Italian corporate law provides for a statutory subordination regime applicable to certain kinds of loans (see below) granted in favour of limited liability companies (società a responsabilità limitata) and, according to certain case law and scholars, joint stock companies (società per azioni) by the respective shareholders. This statutory subordination also applies to loans granted by a parent company exercising direction and co-ordination activity over the borrowing subsidiary, either directly or through other companies subject to the same direction and co-ordination activity. In particular, the shareholder loans that trigger the above statutory subordination are those facilities granted in any form in a moment when there is an excessive imbalance of the company’s indebtedness compared to its net worth – also taking into account the kind of activity carried out by the borrowing company – or when the financial situation of the company would have reasonably required an equity injection. If a loan qualifies as a “shareholder loan”, as described above, the repayment of it is subordinated to the prior satisfaction of all other company creditors’ claims, and, if made during the year preceding the declaration of the company’s bankruptcy, the loan must be returned to the company.

It is apparent that the above regime discourages shareholders from granting loans in favour of their companies, since those companies that suffered significant losses as a consequence of the COVID-19 emergency are likely to show the characteristics that trigger the statutory subordination regime (ie, indebtedness greater than their net worth and/or a situation that would reasonably require equity injections instead of additional debt).

In light of the above, the Italian Government decided to suspend the above subordination regime with respect to shareholders' loans granted from 9 April up to 31 December 2020, with a view to encouraging shareholders to support the liquidity needs of their subsidiaries/affiliates and ensure their business continuity, without being subordinated to the other creditors of the relevant company.

Business continuity

One of the key principles governing the drafting of companies’ annual accounts is that the financial statements must be prepared on a going concern basis, unless the directors intend to liquidate the company or have no alternative but to do so. In other words, the going concern perspective (also referred to as “business continuity”) characterises the financial statements of a sound and solvent company and distinguishes them from those prepared by companies under liquidation, which have the sole purpose of winding up their business. Unfortunately, in the current scenario, the directors and auditors of many companies significantly impacted by the adverse effects of the COVID-19 pandemic could be forced to question the continuity of the business not for an issue that specifically relates to their business or operations, but for an extraordinary economic-wide event that is affecting at least all the companies in the same industry. This is likely to entail potential implications on the companies’ assets, which in the absence of a going concern perspective should be devaluated.

To avoid the above-mentioned risks, the Italian lawmaker clarified that, in preparing the financial statements as of 31 December 2020, assets and liabilities can be, in any case, evaluated on a going concern basis, provided that the business continuity existed on the reference date of financial statements closed prior to 23 February 2020 (even if such financial statements have not yet been approved).

In light of this special temporary regime, the adverse effects of COVID-19 that occurred after 23 February 2020 can be lawfully (and exceptionally) disregarded, thus allowing companies that had a regular prospect of continuity before the health emergency to preserve this going concern perspective in the preparation of financial statements for the 2020 fiscal year.

Provisions Aimed at Facilitating Capital Increases

In the framework of the amendments to Italian corporate law aimed at helping Italian companies cope with the difficult economic situation caused by the COVID-19 pandemic, Law Decree No. 76/2020 (as converted into Law No. 120/2020) amended certain rules governing capital increases in order to facilitate and speed up these extraordinary transactions and allow companies to seek equity injections with more ease. Certain amendments have only a temporary effect (until 30 June 2021), while others are intended to be permanent.

The first exception to the current rules governing capital increases has a limited duration (until 30 June 2021) and concerns the supermajorities applicable to the shareholders’ meetings of joint-stock companies (S.p.A.) and limited liability companies (S.r.l.) required to pass resolutions aimed not only at directly increasing the corporate capital, but also at amending the bylaws in order to delegate to the board of directors the power to increase the corporate capital (within the limits set forth by the law and the relevant resolution of the shareholders’ meeting). Indeed, until 30 June 2021 the above resolutions may be adopted with the favourable vote of the absolute majority of the corporate capital represented at the shareholders’ meeting (instead of the above-mentioned supermajorities), if at least half of the corporate capital is represented. This exception applies even if the bylaws provide for a quorum equal to or greater than the one provided by law.

The second set of amendments aims to extend the scope of application of a particular case of exclusion of the statutory pre-emption right which, under Italian law, is granted to all ordinary shareholders of joint-stock companies (S.p.A.) with respect to new shares issued as a consequence of a capital increase. Indeed, this pre-emption right may be limited or excluded in specific situations, including, for instance, where the exclusion is motivated by a specific corporate benefit (to be explained in the relevant resolution) or where the capital increase is executed by means of a contribution in kind.

However, the exception to the pre-emption right targeted by Law Decree No. 76/2020 (as converted into Law No. 120/2020) is the right limited to joint-stock companies that have shares publicly traded on a regulated market, whose bylaws, before the enactment of the legislative amendments discussed herein, could exclude the pre-emption right within the limit of 10% of the pre-existing share capital, provided that the issue price of the new shares corresponds to the market value of the shares and that this is confirmed in a specific report prepared by an external auditor or auditing firm. With respect to this case of pre-emption right exclusion, Law Decree No. 76/2020 (as converted into Law No. 120/2020) introduces the following temporary amendments, which are effective until 30 June 2021:

  • the exemption is extended to all companies with shares traded on multilateral trading facilities (including AIM Italia, the Italian alternative investment market);
  • the threshold applicable to this kind of capital increase is raised from 10% to 20% of the pre-existing share capital; and
  • this pre-emption right exclusion is available even in the absence of an express bylaw provision to this effect.

However, the extension of the pre-emption right exclusion to all companies with shares traded on multilateral trading facilities will remain in force on a permanent basis after 30 June 2020.

Law Decree No. 76/2020 (as subsequently amended by Law No. 120/2020) also introduced permanent amendments to the provisions governing the pre-emption right offerings, with the same rationale of simplifying and speeding up capital increases. For example, the minimum duration of the pre-emption right offerings has been reduced from 15 to 14 days. Also, companies with shares publicly traded on a regulated market are now obliged to offer unexercised pre-emption rights on the market for at least two trading sessions (instead of the five trading sessions previously required) within the month following the expiry of the pre-emption right offering (unless such pre-emption rights are entirely sold on the market by that deadline).

Shareholders’ Meetings

In order to limit the spread of COVID-19, the Italian Government enacted provisions enabling companies to hold shareholder meetings without the physical attendance of shareholders, even if this possibility is not provided for in the company’s bylaws or is expressly prohibited.

In particular, all companies may call ordinary and extraordinary shareholders' meetings through a notice that entitles – also as a derogation to contrary provisions of the relevant bylaws – their shareholders to vote electronically or by mail and/or to attend the shareholders' meetings through telecommunication means. Companies are also allowed to hold their shareholders’ meeting completely in virtual mode – ie, exclusively by means of audioconference, videoconference or other telecommunication means that ensure the attendees’ identification, their attendance and their exercise of voting rights. This special regime also derogates from the provision that requires the chairman and the secretary of the meeting (or the public notary, if applicable) to be present in the same venue during the shareholders’ meeting.

Moreover, even if the relevant bylaws provide otherwise, all companies whose shares are publicly traded on a regulated market or on a multilateral trading facility (including AIM Italia), as well as companies with widespread shares (emittenti titoli diffusi), are entitled to appoint a designated representative to whom shareholders may grant proxies to exercise voting rights in an ordinary or extraordinary shareholders’ meeting. The relevant notices of call may also require the shareholders’ meeting to be held with the attendance of the designated representative only.

This new regime has represented a tremendous change in the usual functioning of companies, particularly listed companies, and it is now seen as an important step towards a more digitalised and modern corporate governance system that the so-called “new normal” needs in order to allow domestic and international investors to actively participate in the governance of target companies. However, please note that the above-mentioned special temporary regime will apply to all shareholders’ meetings called until the state of emergency declared on 31 January 2020 as a consequence of the COVID-19 pandemic emergency.

All the above provisions and regulations represent a massive change in the management of companies, not only from a mere legal perspective, but also from a financial and business standpoint. In fact, the capital structure, the financing sources and the corporate governance of the target companies represent the pillars of all the evaluations that investors – mainly private equity investors – carry out not only before completing an investment/acquisition but also in the management of the so-called portfolio companies, aimed at preserving and increasing their value before an exit, particularly in such difficult times as those experienced in Italy and across the entire globe over the last few months.

Legance - Avvocati Associati

Via Broletto, 20
20121 Milano

+ 39 02 89 63 071

+ 39 02 896 307 810
Author Business Card

Law and Practice


Legance - Avvocati Associati is an independent law firm with offices in Milan, Rome, London and New York. It was founded in 2007 and is a leader in the market, thanks to its qualities of being independent, dynamic and international. There are currently more than 270 lawyers at Legance. Each individual’s qualities and skills, coupled with the firm’s constant attention to clients, careful evaluation of business objectives, unconventional approach capable of anticipating legal requirements, and 24-hour availability, have helped to establish Legance as a recognised leader in domestic and international markets. Due to its strong international practice, Legance can support clients over several geographical areas, and can organise and co-ordinate multi-jurisdictional teams whenever required.

Trends and Development


Legance - Avvocati Associati is an independent law firm with offices in Milan, Rome, London and New York. It was founded in 2007 and is a leader in the market, thanks to its qualities of being independent, dynamic and international. There are currently more than 270 lawyers at Legance. Each individual’s qualities and skills, coupled with the firm’s constant attention to clients, careful evaluation of business objectives, unconventional approach capable of anticipating legal requirements, and 24-hour availability, have helped to establish Legance as a recognised leader in domestic and international markets. Due to its strong international practice, Legance can support clients over several geographical areas, and can organise and co-ordinate multi-jurisdictional teams whenever required.

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