Italy: Acquisition Finance

The acquisition finance market in Italy during the last decade has been impacted by a slowly but deeply changing. Starting from the approving, in 2012, of the Law Decree 83/2012, converted into Law 134/2012, as further amended, which first introduced the “mini bond” instrument in the Italian framework, the forms of financings has started to change. At first stage the new instrument was supposed to mainly be used to boost the growth of the companies which had not that easy access to the traditional banking credit narrows, but the development of players managing the funds of private debt capital and the increasing of the issuing, have contributed to create an effective alternative market to the banking one. The “mini bonds” have developed as much as catching all the capital structure: from an “equity like” bond to a senior financing, all the debt products are now in the offering book of the alternative lenders players who even more frequently are financing the acquisition and leverage finance deals in Italy.

These players are mainly private debt fund, both domestic and international, that can easily support any kind and dimension of transaction, from the smaller to the largest by way of unitranche financing, facing more the international structures even on the documentations side that is much more inspired by models provided by LMA (Loan Market Association).

The pandemic Covid 19 has not impacted badly on the leverage market. Quite the opposite, due to the push of the statal guarantees provided by SACE and Central Guarantee Fund, the acquisition transactions have been incremented in the biennial 2021- 2022 as never before. On the other side the Ukraine War together with the incredible increases of prices of raw materials and costs of productions which seemed to be the real disruption event in the very beginning of 2022, specially for those companies who the commercial exposure with Russia and other countries affected by sanctions was crucial, has not impacted that much the numbers of opportunities in the private capital markets and, consequently, in the leverage and acquisition markets.

A much more central role are taking ESG metrics in the financial risk valuations and in the remuneration of the risk capital: a discount on the margin levels is frequently accorded to those companies who met some ESG targets metrics. The introduction and valuation for credit application of the sustainability balance sheet (bilancio di sostenibilità) proof as the attention to the stakeholders value instead of shareholders one is becoming the new paradigm even for financial markets.

The sentence n. 12777 of March, 22 2019 of Supreme Court the fronting structures have been definetly declared illigal forbidding an Italian credit institute to serve as fronting bank in a financing where a foreign sub-participant lender not having the authorization to grant credit under Italian law superseeded the mandatory legal prohibition by way of a contractual construction incurring in the crime of shadow banking (esercizio abusivo del credito).

After that statement the attention to the requirements of potential lenders has increased and those is not authorize to directly grant loans not having the bank licence must necessary turns to alternative forms such as subscribing bonds which are subject on certain conditions provided by articles 2410 et seq of Italian Civil Code. A new instrument of direct lending has been introduced by the new Article 1ter of Law 130/99 (Italian Securitisation Law) which has allowed the securitisation companies to grant loans to entities other than individuals and micro-enterprises, as defined in Article 2, paragraph 1, of the Annex to European Commission Recommendation 2003/361/EC of 6 May 2003, as far as (i) the borrowers have been identified by a bank or a financial intermediary registered in the register referred to in Article 106 of Legislative Decree No. 385 of 1 September 1993; (ii) the notes issued by such securitisation companies to finance the advance of the loans shall be intended for (“riservati a”) qualified investors as defined in Article 100 of Legislative Decree No. 58 of 24 February 1998, and (ii) the bank or the financial intermediary retains a significant economic interest in the transaction, in accordance with the rules set out by the implementing provisions of the Bank of Italy.

This extension to new entities which can provide debt answers to the urgent need of expand the alternative players to the traditional banks allowing a much more easy access to credit.

The first issue to be considered in structuring of acquisition financing is the subjective profile of potential lender: if this is a bank or financial intermediaries registered onto the roll under article 106 of Legislative Decree 385/1993, the transaction may be structure as simple financing, if this not falls under the authorized subject who can provide direct lending then the deal shall be structured as issuing of bond, typically a private placement, not listed and subscribed by one or more subjects. The issuing of a bond for a joint stock company is regulated under Article 2410 and seq of Italian Civil Code that  states few limits to the issuing of bonds linked to the level of net worth. These limits can be superseded in certain circumstances among that the subcriber is a quelified investor as defined under Article 100 of Legislative Decree No. 58 of 24 February 1998.

The second issue to be considered in the structuring, especially on the choice of the  securities to be granted, is the financial assistance constraints. The article 2358 of Italian Civil Code, indeed, prevent a company from financing or granting guarantees in directed to the purchase of its shares. This means that security over the assets of the target company and its subsidiaries may only be created to secure the obligations under the non-acquisition facilities, provided that following the merger of target and the acquiring company pursuant to article 2501-bis of the Italian Civil Code or the “whitewash procedure” under article 2358 of the Italian Civil Code, such security may be also extended to acquisition facilities.

The third aspect to be taken into consideration is the tax profile: if the financing is a medium or long-term financing granted by banks and other qualified financial institutions may benefit from the application of an optional Imposta Sostitutiva regime provided for by article 15 et seq. of Presidential Decree 601/1973, generally levied at a rate of 0.25% of the total amount of the loan requested, instead of the levying of indirect taxes, such as registration tax, mortgage and cadastral taxes and stamp duty otherwise applicable. Due to the fact that the substitute tax is not mandatory is necessary to evaluate case by case the convenience of the option. The choice typically depends by the kind of securities: if there are securities which need to be constituted by notarial act to be registered and the registration tax is higher than the amount of the substitution tax, then the choice will be to make the option.

The lending activity in Italy, carried out on a professional basis, is an activity reserved to banks and, subject to certain conditions, to financial intermediaries registered onto the roll under article 106 of Legislative Decree 385/1993 (as amended and supplemented, the “Consolidated Banking Act“).

In relation to the authorisation necessary to grant financing and to perform other banking activities, the Bank of Italy, together with the European Central Bank (“ECB“), shall assess the existence of certain conditions to ensure the sound and prudent management.
In particular, the following requirements must be fulfilled:

1. incorporation in the form of a joint stock company;
2. a registered office and headquarters in Italy;
3. minimum share capital of euro 10 million (or higher if required due to the activities envisaged in the relevant programme of activities);
4. submission of the deed of incorporation together with the by-laws and a programme of initial activities;
5. shareholders meeting the requirements provided by article 19 of the Consolidated Banking Act; and
6. directors meeting the eligible criteria provided by article 26 of the Consolidated Banking Act.

The Consolidated Banking Act provides that the application for authorisation is first sent to the Bank of Italy. The latter makes its own assessment of compliance with the above-mentioned requirements and, if the assessment is positive, it forwards its assessment to the European Central Bank, which is responsible for the final decision on the authorisation. In any other case, authorisation is denied, by the Bank of Italy or by the ECB and namely any time the authority considers that the above conditions do not guarantee the sound and prudent management.

As per financial intermediaries according to article 106 of the Consolidated Banking Act, those are entities, other than banks, allowed to grant credit on a professional basis to the public. Relevant rules are not harmonised at European level and therefore mutual recognition within the EU is not permitted.

The absence of a harmonised regime means that authorisation to perform the granting financing in any form is granted to financial intermediaries directly by the Bank of Italy, which enrols such entities in a special register provided for in article 106 of the Consolidated Banking Act.

Finally, lending activities in Italy, even if subject to specific conditions and requirements under relevant laws and regulations, may also be carried out by:

1. Italian and EU alternative investment funds;
2. Italian insurance companies;
3. Italian securitisation vehicles.

From a regulatory point of view, there are no legal restrictions on the advance of loan proceeds or the repayment of principal, interest or fees in a foreign currency.

From a financial regulatory point of view, the provision of financing to foreign investors in Italy is subject to same rules than those towards domestic clients, thus reserved to banks and other licensed entities, provided that the services are performed in Italy and not involve the provision of services by Italian entities on a cross border basis.

With respect to the ability of foreign entities to acquire assets in Italy, the so-called “Golden Power” regime grants to the Italian government certain special powers in connection with extraordinary transactions concerning companies that hold assets and/or relationships in Italy that are deemed strategic for the national interests in the fields of (i) defense and national security, or (ii) communications, energy, transport as well as (iii) in the other strategic sectors referred to in article 4 of the EU Regulation 2019/452.  In case the acquisition by a  foreign entity could materially jeopardise the national interests, the Italian government may condition the transaction on the buyer’s undertaking certain commitments aimed at protecting the above-mentioned public interests. Should the acquisition raise an exceptional threat of material prejudice to such public interests (which may not be addressed by commitments undertaken by the buyer), the government can veto the acquisition. In order to allow the Italian government to assess whether a given transaction may warrant the exercise of the above-described special powers, Law Decree 21/2012 (converted into Law 56/2012), as subsequently (and repeatedly) amended, provides that, inter alia, acquisitions by foreign entities of companies holding assets and/or relationships in Italy in one or more of the above-mentioned sectors, which may be viewed as strategic for the national interests, are subject to a prior notification obligation to and a prior clearance by the Italian government.

Typically security package includes (i) the pledge over the shares or quotas issued by the target company, (ii) the pledge over the shares or quotas issued by (material) subsidiaries of the target company, (iii) the assignment by way of security (or pledge) of the indemnity receivables under or in connection with the acquisition agreement, and (iv) the assignment by way of security (or pledge) of shareholders’ loans and intra-group loans. Leveraged buy-outs also includes the pledge over the shares or quotas issued by the acquiring company.

In addition, acquisition financings are sometimes also secured by (i) security over trademarks, patents and other intellectual property rights, (ii) security (so called “privilegio speciale“, special lien) pursuant to article 46 of the Consolidated Banking Act over certain non-registered movable assets, including inventory, equipment and machinery, (iii) mortgage over real estate assets, and/or (iv) security over receivables in connection with bank accounts.

Due to financial assistance constraints, security over the assets of the target company and its subsidiaries may only be created to secure the obligations under the non-acquisition facilities, provided that following the merger of target and the acquiring company pursuant to article 2501-bis of the Italian Civil Code or the “whitewash procedure” under article 2358 of the Italian Civil Code, such security may be also extended to acquisition facilities.

Although under Italian law it is not possible to create security over all the assets of a company by means of a universal security document, it is still possible create security over the majority of the assets by means of separate security documents and to provide security over non-registered movable assets (“privilegio speciale“) of a company from time to time pursuant to article 46 of the Consolidated Banking Act in favour of EU banks and qualified holders of bonds issued by a company, provided that maturity of the loan or notes is in excess of 18 months.

With respect to taking security over future assets, in addition to “privilegio speciale“, which allows the security to extend to future assets, it is possible to create security over future receivables arising under existing agreements. However, it is debated (and not common) whether it is possible to create security over other future assets.

With respect to securing future obligations, given the accessory nature of security under Italian law, it is not possible to create security in respect of obligations arising out of agreements not existing at the date security is granted. It is instead possible to create security in respect of future or conditional obligations under existing agreements.

The agreement for the creation of a mortgage over real estate assets (or, in any case, the subsequent registration formalities with the real estate register) and the agreement for the creation of the “privilegio speciale” shall include the maximum secured amount, which is usually calculated as a percentage of the principal amount, typically in the range between 150% to 200%. Such range may differ depending on the interest rate and the maturity date of the secured obligations.

As a general rule security documents which have to be registered with public offices (companies’ register, real estate register, courts, patent’s and trademark’s offices) in order to validly create the relevant security shall be executed in notarial form while other security documents may be executed also by way of a non-notarial agreement.

However the security document shall be in notarial form also for the following non-registered security: (i) pledge over the shares, if the constitutional documents of the company provide that relevant shares are not represented by physical certificates; and (ii) security over certain receivables (in particular, receivables vis-à-vis public authorities and vis-à-vis tenants in relation to rental leases for a term in excess of three years).

As regards the perfection of security, each kind of security has its own perfection requirements according to the assets involved. In details:

1. Security over shares of a company: (a) the share certificates shall be endorsed by way of security in favour of the secured creditor by the pledgor or annotated by a director of the company that issued the shares, (b) the share certificates shall be delivered to the secured creditor or a custodian (which shall not be the pledgor), and (c) the creation of the pledge shall be annotated by a director of the company in its shareholders’ ledger. The security may be perfected on the same day of execution of the pledge agreement.
2. Security over quotas of a company: (a) the pledge agreement shall be filed for registration with the competent companies’ register, and (b) to the extent the constitutional documents of the company provide that the company maintains a shareholders’ ledger, the creation of the pledge shall be annotated by a director of the company in its shareholders’ ledger. The security is usually perfected within a week of filing of the pledge agreement.
3. Security over receivables (including bank accounts’ receivables): the creation of security shall be accepted by or notified to the debtor of receivables and relevant acceptance or notification shall bear undisputable date (“data certa“) under Italian law. The security may be perfected on the same day of execution of the security agreement.
4. Security over intellectual property rights: the security shall be recorded with the institutions where the intellectual property rights are registered (such as the Italian Patents and Trademarks Office and the European Union Intellectual Property Office). The security usually requires some weeks to be perfected and timing depends on the relevant offices.
5. Security (“privilegio speciale“, special lien) over certain non-registered movable assets: the security shall be recorded with the competent courts The security usually requires some weeks to be perfected and timing depends on the relevant courts.
6. Security over real estate assets: the security shall be recorded with the real estate registers of the place where the real estate assets are located. The security usually requires some weeks to be perfected and timing depends on the relevant offices.

Under Italian law guaranteeing (or securing) payment obligations of other members of the group requires that the guarantor (or security provider) has adequate corporate benefit in doing so. The existence of actual corporate benefit shall be carefully evaluated on a case by case basis by the directors of the guarantor (or security provider).

While downstream guarantees do not usually raise particular issues, the existence of corporate benefit in relation to upstream and cross-stream guarantees shall be assessed thoroughly and documented in the corporate minutes approving the guarantee. The maximum amount recoverable by a guarantor for payment obligations of parent or sister companies is often capped due to corporate benefit reasons to an amount not exceeding a threshold, which may be determined by reference to, for example, the value of the company or the aggregate of financial resources made available to that guarantor and its subsidiaries by other members of the group and amounts borrowed by it under the financing agreement.

In addition to minor fees due to public offices for registered security, providing security and guarantees may trigger the registration taxes detailed under question 28 below.

Guaranteeing in relation to indebtedness of members of the same group is not subject to authorisations or consents by any authority.

Restrictions on providing security include financial assistance (see question 13 below) and corporate benefit (see question 11 above).

Italian legislation differentiates rules on financial assistance between limited liability companies (“società a responsabilità limitata“) and joint stock companies (“società per azioni“). 

Limited liability companies are prevented without any exception from giving financial assistance for the acquisition or subscription of their own participation interests (“quote“) either by way of making loans or giving guarantees or security in relation to the acquisition debt except that, for limited liability companies that are SMEs, financial assistance for the acquisition or subscription of their quotas is permitted if the relevant transaction is made pursuant to incentive plans to the benefit of the company’s employees, contractors, members of the management body or third-party service providers (article 26.6, Legislative Decree 179/2012). 

Joint stock companies may not, directly or indirectly, grant loans, guarantees or security for the acquisition or subscription of their own shares except under the “whitewash procedure“, subject to which financial assistance may be validly provided (as better detailed under question 14 below), and (subject to certain conditions) where the purchaser or subscriber of own shares is an employee of the company, its holding company or any of its subsidiaries. 

Financial assistance in relation to a sister company is not expressly prohibited by Italian legislation but compliance of the envisaged transaction shall be carefully assessed having regard to the whole transaction. 

It is worth noting that the “whitewash procedure” is not commonly used in acquisition financing deals and the financial assistance constraints are normally addressed for both the limited liability companies and the joint stock companies through the merger (and therefore the debt push-down) between the newly incorporated acquisition vehicle and the target company, which usually has to be completed within 12 months of the acquisition closing date under penalty of default or mandatory prepayment of the loan. The merger shall be compliant with the provisions of article 2501-bis of the Italian Civil Code, that states the merger of companies one of which incurred debt to take control of the other is subject to specific requirements where the relevant lenders have recourse against the assets of the combined entity, or where such assets are to be used for repayment of the loan. In particular: (i) the merger plan shall identify the financial sources to be used by the combined entity for payment of debt obligations; (ii) the report of the board of directors shall identify the reasons of the merger and shall include a financial and economic model indicating the financial resources and a description of the objectives indented to be achieved; (iii) an independent expert shall confirm the reasonableness of the merger plan; and (iv) auditors of the companies taking part to the merger shall provide a report on the merger plan. 

Article 2358 of the Italian Civil Code (as amended in implementing Directive 2006/68/EC) sets a special procedure (so-called “whitewash procedure“) under which Italian joint stock companies (“società per azioni“) are allowed to overcome the prohibition of financial assistance to support the acquisition or subscription of their own shares. The main steps of the procedure are the followings:

1. Report of the directors: the directors of the company draft a report to describe the legal aspects and economics of the transaction, its business rationale, the company’s interest, the liquidity and solvency risks and the agreed consideration for the purchase or subscription of the shares of the company (the “Report“). The directors must declare in the Report that the transaction (and specifically the agreed guarantees/security or rate of interest of the loan) is undertaken at arm’s length terms and that the creditworthiness of the acquiring/subscribing party was assessed.
2. Deposit of the Report: the Report is to be deposited at the company’s registered office for 30 days before the date of the extraordinary shareholders’ meeting to be convened for the approval of the transaction.
3. Approval by the extraordinary shareholders’ meeting: the transaction can be executed subject to prior approval of the extraordinary shareholders’ meeting of the company (to be held in front of a notary public).
4. Filing with the Companies’ Register: the Report and the minutes of the extraordinary shareholders’ meeting authorising the transaction are to be filed with the competent companies’ register within 30 days of the date of the shareholders’ meeting.

The amount of loans, security and guarantees provided by the company to support the acquisition or subscription of its own shares must not exceed in aggregate the distributable profits and available reserves as shown in the last approved financial statements, and that a dedicated non-distributable reserve for an amount corresponding to the aggregate of amount of loans, security and guarantees granted for the purposes of financial assistance must be recorded in the company’s financial statements.

Considering the broad interpretation of financial assistance legislation, refinancing of acquisition debt is considered subject to the same rules outlined above. On the contrary, refinancing the debt of the target company and its subsidiaries does not raise particular issues and is usually carried out by making available to the target (which usually accedes to the facilities agreement as an additional borrower) refinancing facilities which may also be guaranteed by, and secured by assets of, members of the target group (subject to corporate benefit assessment). The same rules also apply in relation to security and guarantees by members of a target group for any other facility which is not made available for acquisition purposes in respect of such target.

Even though by ratifying the Hague Convention on the Law Applicable to Trusts and on their Recognition, Italy recognised trusts disciplined pursuant to a law that regulates trusts, Italian law itself does not discipline trusts. Therefore, the concept of security trustee is not recognised under Italian law.

Each creditor has to intervene in the security deed and each registration to be made to perfect a security is to be made in favour of each creditor.

Parallel debt schemes are not frequently applied in Italy since untested in Italian Courts and so they present a notable risk for those creditors that do not act as security agents. Lenders do not usually accept to bear such risk.

Ordinarily, in the context of syndicated loans, the appointment of an agent is included in the relevant facilities agreement or security agreement or intercreditor agreement. The agent will act on the basis of a mandate (“mandato con rappresentanza“) granted by all lenders. However, the agent’s powers do not usually include enforcement, that must be undertaken by each creditor individually.

As an exception to the foregoing, (i) in 2014, article 2414-bis of the Italian Civil Code (relating to the issuance of bonds by joint-stock companies) was integrated in order to provide that all kinds of security and guarantees which assist bonds can be granted not only in favour of all subscribers, but also to a representative of the subscribers who will be entitled to exercise in their name and on their behalf all rights relating to such security/guarantee, including enforcement, and (ii) in 2016, an analogous provision was laid down with specific reference to project bonds (article 185.5, Legislative Decree 50/2016). These appear to be the only scenarios in which Italian law expressly recognises the role of the security agent.

Within the limits concerning the role of the security agent under Italian law, as detailed under question 16 above, no other significant restrictions are provided under Italian law, regardless of the fact that the security agent is a national or foreign entity.

A loan may be transferred either by way of assignment of rights and benefits (“cessione del credito“) or by way of transfer, in full or in part, of rights, benefits and obligations (“cessione totale o parziale del contratto“). The assignment or transfer shall be notified to, or accepted by, the debtors in a way that ensure undisputable date (“data certa“) under Italian law. Pursuant to the provisions of the Italian Civil Code the assignment or transfer of the loan includes the relevant security and guarantees given in respect of such loan, but appropriate perfection formalities shall be carried out in order for the assignment or transfer to be effective vis-à-vis third parties. No perfection formalities (other than the publication in the Italian Official Journal) are required where the assignment is carried out (i) as an assignment of portfolio receivables under the provisions of the Consolidated Banking Act, or (ii) as an a assignment of receivables in favour of an Italian securitisation vehicle under the provisions Law 130/1999.

Priority rules and security interests (“privilegi“) are set by law (e. security interests cannot be contractually created).

Priority rules may be varied contractually with the consent of all secured creditors but any contractual subordination provision is effective between the parties to the relevant agreement but is not enforceable in an insolvency scenario and the in-court restructuring proceedings.

Under the provisions of the Italian Civil Code, the repayment of shareholders’ loans in favour of limited liability companies (“società a responsabilità limitata“), in whatever form they were made, is subordinated to the satisfaction of all other creditors if the shareholder loans were extended when the company, considering its type of business (i) had a debt/equity material imbalance or (ii) was in a financial situation in which a capital contribution would have been more reasonable. In an insolvency scenario this rule is generally applied also to joint stock companies (“società per azioni“).

The Italian jurisdiction generally recognises and enforces clauses regarding:

1. the choice of a foreign law as the governing law of the contract, under the 1980 Rome Convention, EU Regulation 593/2008 and Law 218/1995. However, there are some rules of Italian law that may not be waived even if the parties have chosen a foreign law: provisions that protect significant interests of the Italian State (even in contractual matters) and the public order;
2. the submission to a foreign jurisdiction under EU Regulation 1215/2012 and Law 218/1995, if it is proven in writing and the case concerns rights that are within the availability of the parties. The choice is ineffective if the arbitrator or the foreign court conventionally designated by the parties does not hear the case or declines the jurisdiction; and
3. the waiver of immunity under the New York Convention of 2004 only when a State acts in the exercise of typical functions of government (iure imperii). The immunity does not apply to a State that enters into commercial transactions that fall under the jurisdiction of another State.

The Italian jurisdiction admits the enforcement of foreign judgments under the Law 218/1995, EU Regulation 1215/2012, Lugano Convention 200 If the judgment is issued (a) outside the EU, anyone who has an interest should ask the Italian ordinary judicial authority to verify that the judgment to be enforced meets certain requirements, (b) inside the EU, the judgment is enforceable without a declaration of enforceability being required.

Under Italian law, any breach of payment obligations under the finance documents entitles the secured creditor to enforce the security package.

The enforcement is mainly carried out through a judicial procedure but enforcement of a pledge may also be carried out through a private procedure, while receivables may be directly collected by the secured creditor. Some new rules impacting enforcement proceedings should entry into force in June 2023.

The procedure depends on the collateral and the secured assets. The main enforcement proceedings in relation to the assets are attachment of: (i) movable assets (“espropriazione mobiliare diretta“); (ii) debtor’s claims against third parties (“espropriazione presso terzi“); and (iii) real estate assets (“espropriazione immobiliare“).

Generally, to start an enforcement proceeding a creditor must have an enforceable title that can be judicial or non-judicial (g., a quittance deed).

The main steps, not necessarily common to all proceedings, are the followings: (i) service of the enforceable title and order of payment to debtor; (ii) service of the attachment by the court bailiff; (iii) filing of the motion for sale; (iv) appointment by the court of the expert for the valuation of the assets; (v) hearing to set the sale; (vi) the sale; and (vii) distributions.

In the distribution phase the Court must take into consideration the ranking of the claims, which is the following: (i) secured claims, (ii) mortgage lenders, (iii) certain unsecured claims, (iv) unsecured claims timely filed, and (v) late unsecured claims.

In certain circumstances and according to certain provisions, the assets may be assigned (“assegnati“) to the enforcing creditors in lieu of the sale process.

This assignation should not be confused with the transfer of the ownership of debtor’s asset to the secured creditor in performance of an agreement between the parties. Indeed, the mainly restriction relating to the enforcement is given by the prohibition to agree to the ownership of a debtor’s assets being transferred to the secured creditor in case of the debtor default, save a few exceptions provided for by the law.

The Consolidated Banking Act has even recognised to banks and financial intermediaries registered onto the roll under article 106 of Consolidated Banking Act the possibility to transfer to the creditor the ownership of a debtor’s real estate property if (i) the debtor’s default protracted for more than nine months, (ii) an appraisal survey is carried out on the asset, and (iii) the difference between the asset proceeds and the outstanding debt is paid-back to the debtor.

The Legislative Decree 170/2004 has recognised to secured creditors the right to appropriate or sell the secured asset (g. cash or financial instruments which have a market value), returning to the debtor any excess proceeds (the so-called “patto marciano“).

On 15 July 2022 the new Corporate Crisis and Insolvency Code came into force. This new body of legislation was drafted with the aim of creating an organic system for the management of all crisis and insolvencies replacing the fragmented system based on the previous bankruptcy law (the Royal Decree 267/1942).

Here below a brief overview of the insolvency and restructuring proceedings available under the Corporate Crisis and Insolvency Code.

1. The judicial liquidationThe judicial liquidation (“liquidazione giudiziale“) is the ordinary insolvency proceeding addressing irreversible insolvency. Judicial liquidation does not apply to “small enterprises“.It is an in-court liquidation procedure run by a trustee under the supervision of a creditors’ committee and a delegated judge. The debtor is deprived of its assets that are liquidated by the trustee in the context of competitive sale processes. Liquidation proceeds are distributed by the trustee to creditors based on priority rules set by the law.The commencement of a judicial liquidation triggers an automatic stay on any enforcement action (other than for some kind of security) and entitles the trustee to claw-back certain actions and transactions carried out by the debtor prior to insolvency.
2. Restructuring proceedingsThe Corporate Crisis and Insolvency Code makes available to the distressed entrepreneur several proceedings to restructure its indebtedness and overcome the crisis or insolvency, among which the most relevant are: (a) negotiated corporate crisis resolution proceedings (“composizione negoziata della crisi d’impresa“); (b) the certified recovery plan (“piano attestato di risanamento“); (c) the restructuring plan subject to approval (“piano di ristrutturazione soggetto a omologazione“); (d) the debt restructuring agreements (“accordo di ristrutturazione dei debiti“); (e) simplified composition for the liquidation of assets (“concordato semplificato per la liquidazione del patrimonio“); (f) settlement with creditors (“concordato preventivo“).The proceedings range from consensual instruments to arrangements based on creditors majority-vote and may run out-of-court or in whole or in part in-court. Under these proceedings: (a) the debtor may apply for an in-court standstill preventing creditors from taking enforcement actions (other than in a certified recovery plan scenario); (b) payments made and guarantees granted by the debtor during the proceedings and/or in execution of the relevant restructuring plan, are exempt from claw-back (both insolvency and insolvency claw-back) and certain insolvency-related crimes (i.e. preferential payments (“bancarotta preferenziale“) and delayed insolvency (“bancarotta semplice“) crimes).

The judicial liquidation proceedings trigger the acceleration of all loans and a standstill on enforcement actions for the entire duration of the proceedings other than for certain guarantees.

The restructuring proceedings (other than the certified recovery plan) enable the debtor to file for an in-court standstill preventing enforcement actions that must be approved by the court on a case-by-case basis.

Some restructuring proceedings prevent lenders from accelerating their loans as a consequence of the simple opening of the proceedings (i.e. the negotiated corporate crisis resolution, the composition with creditors).

In an insolvency scenario the absolute priority rule applies, which means that a senior class of claims must be paid in full before a junior class is. The applicable priority order is the following:

1. super-senior claims: these claims include costs and expenses incurred by the trustee and the Bankruptcy Court during the proceedings, fees of professionals engaged by the trustee/Bankruptcy Court and super-senior new money authorised by the Bankruptcy Court;
2. secured claims: these are claims secured by mortgages, pledges or special liens (“privilegi speciali“);
3. unsecured claims: this is a residual category including all claims that are neither super-senior nor secured;
4. subordinated claims: these claims include consensually and legally subordinated claims;
5. shareholders’ equity: distributions to equity holders are not envisaged in insolvency proceedings. Upon completion of the proceedings the company is cancelled from the Register of Companies, unless available assets exceeded the liabilities acknowledged by the Bankruptcy Court in which case the company is returned to shareholders.

Under article 166 of the Corporate Crisis and Insolvency Code the trustee in bankruptcy can claw-back a multitude of transactions carried out by the company prior to insolvency, provided that two conditions are met: (i) the relevant transaction falls within the so called “claw-back period“, which ranges from 6 months to 1 year prior to insolvency; and (ii) the third party was aware of the insolvency status of the debtor.

As to the kind of transactions which can be clawed-back, they go from “dodgy” conveyances (one year of hardening period) to simple payments or security granted at the time the relevant debts are created (six months of hardening period).

Exempt from claw-back are:

1. payments of goods or services made by the debtor in the ordinary course of business;
2. payments made and security granted by the debtor pursuant to a composition with creditors (“concordato preventivo“), a debt restructuring agreement (“accordi di ristrutturazione“) or a certified recovery plan (“piano attestato di risanamento“);
3. payments to employees;
4. payments of fees due in connection with the filing of a composition with creditors (“concordato preventivo“);
5. overdrafts repayments (unless such repayments have materially reduced the exposure of the debtor vis-à-vis the bank).

Finally, the opening of the insolvency procedure triggers the automatic ineffectiveness of the following transactions:

1. ratuitous transactions executed by the debtor in the two-year period prior to insolvency;
2. payments made by the debtor in the two-year period prior to insolvency with respect to debts falling due after the opening of the insolvency proceeding;
3. transactions between spouses executed while the debtor was running the business and gratuitous transaction between spouses executed in the two-year period prior to insolvency, unless the spouse proves to have been unaware of the insolvency of the debtor.

Specific rules apply to certain transactions (for example securitisation transactions, invoice financing (factoring) and certain mortgage loans (“mutui fondiari“)).

Enforcement of security (pledges or mortgages) forces the lender to notify the debtor of the imminent enforcement and consequently exposes the lender to the possible opposition in court by the debtor that may delay enforcement for some time.

Exempt from such prior notice obligation is the enforcement of a financial collateral (“garanzie finanziarie“) that is very efficient but available only to banks and intermediaries subject to supervision and in relation to cash or financial instruments which have a market value.

A further efficient security is the assignment of receivables by way of security because under such agreement the receivables become property of the lender as soon as they originate and practically the lender “appropriates” the collateral from the outset and must only return any excess proceeds from the collection of the assigned receivables.

Finally, in an insolvency or restructuring context:

1. judicial liquidation prevents enforcement of any security other than financial collaterals, pledges and certain kind of mortgages at different conditions;
2. an in-court standstill authorised by the Bankruptcy Court in restructuring proceedings stays usually any enforcement action (including financial collaterals and special mortgages).

The main Italian taxes relevant for lenders making loans to (or taking security and guarantees from) entities in the context of acquisition financing are:

1. Withholding tax: pursuant to article 26, paragraph 5, of Presidential Decree 600/1973, interest and other proceeds (e., fees) arising from a loan paid to a non-Italian resident entity are generally subject to a 26% Italian withholding tax. The withholding tax is usually operated and paid by the borrower, in its capacity as the person paying the interest and being qualified as withholding agent. No withholding applies to interest due on medium to long-term financing (defined as exceeding 18 months) granted by EU banks, insurance companies, investment funds and white-listed institutional investors, provided that no certain regulatory constraints are breached. If all requirements of Directive 2003/49/EC (EU Interest and Royalty Directive) are met, interest paid to an EU corporate entity is free from withholding in Italy. Provided the relevant conditions set forth therein are met, some double taxation treaties may foresee a reduction of the outbound withholding taxation.
2. “Substitutive” tax: medium to long-term financing granted by banks and other qualified financial institutions may benefit from the application of an optional Imposta Sostitutiva regime provided for by article 15 et seq. of Presidential Decree 601/1973, generally levied at a rate of 0.25% of the total amount of the loan requested, instead of the levying of indirect taxes, such as registration tax, mortgage and cadastral taxes and stamp duty otherwise applicable.
3. Registration tax: to the extent that the documents relating to the financing transaction (g., the loan, the security package etc.) are executed by means of exchange of letters in Italy or a private deed executed abroad, no Italian registration tax is payable in connection with their execution and entry into force unless upon use (“caso d’uso“), enunciation (“enunciazione“) or voluntary registration of such deeds. Upon the occurrence of caso d’uso, enunciazione or voluntary registration, the taxation would apply as follows: (A) a fixed stamp duty (“imposta di bollo“) amounting to euro 16 per four pages of each deed; (B) a registration tax of euro 200 up to 3% of the relevant taxable base. However, only the registration tax of euro 200 and no ad valorem registration tax would apply to a relevant document to the extent that it is deemed to be subject to VAT pursuant to article 40 of Italian Presidential Decree 131/1986. In case of a judgement rendered by an Italian court, the amount awarded, if any, may be subject to a registration tax up to 3% (excluding, however, the part of such amount corresponding to the payment of a consideration or to a supply subject to VAT pursuant to the Italian registration tax rules). The registration of a judgement could also trigger the registration of a document referred to in such judgment pursuant to the enunciazione rule and, therefore, the payment of the applicable registration tax on such document in addition to the one applicable on the judgment. In case guarantees are provided, additional registration taxes, as well as mortgage and cadastral taxes if real estate is involved, might also be applicable.

A financing transaction such as a loan may fall within the scope of value-added tax (VAT), although exempted (e., 0% VAT). If not subject to VAT (e.g., because the financing is a no-interest loan), the financing is subject to registration tax at 3%, unless it is executed by exchange of letters in Italy or a private deed executed abroad.

In Italy, the main regulatory framework for acquisition of a public company derives from:

1. the Italian Civil Code, adopted by Royal Decree No. 262 of 16 March 1942, as further amended over the years;
2. Legislative Decree No. 58 of February 1998 (“Finance Consolidated Act”), Articles 101-bis – 112, introduced in order to ensure a smooth functioning of the capital markets and implemented with regulations issued by Consob (the Italian authority responsible for regulating the national securities market);
3. Consob Regulation No. 11971 of 14 May 1999, as amended over the years (“Issuers’ Regulations”), Articles 35-50 quinquies;
4. finally, a fundamental regulatory reference common to all European countries is the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004, which was issued to harmonize the rules of public takeover bids of the different Member States.

The Italian regulatory framework provides for a distinction between:

1. voluntary takeovers, that take place when the bidder discretionally takes the initiative, proposes the price and sets the number of shares he wants to buy;
2. mandatory takeovers, where the promotion of the offer is required by law.

The general provisions on takeovers are mainly aimed at ensuring transparency, equality of treatment and efficiency of the operations of the financial market.

The regulation on mandatory takeovers is structured around the general principle whereby any person (natural or legal) who, as a result of acquisitions, comes into possession of a shareholding exceeding 25% of the share capital or of the overall voting rights of a listed company – or 30% for small and medium-sized companies, as defined by Consob, which may set a higher threshold in their by-laws, in any case not greater than 40% –, shall launch a takeover bid addressed to all holders for all the securities in their possession and admitted to trading on a regulated market (Article 106 of the Finance Consolidated Act).

It is important to note that, for the purposes of the legal framework governing takeover bids in Italy, “shareholding” means securities carrying voting rights at shareholders’ meetings, on resolutions concerning the appointment, removal or liability of directors or members of the supervisory board: in short, securities that allow to control the company.

As a matter of fact, the acquisition of a 25% shareholding – or 30%, as the case may be – is generally regarded as triggering a change of control, which in turn makes it mandatory for the purchaser to file a bid on the totality of the remaining shares.

Notwithstanding the above, Article 106, Paragraph 5, of the Finance Consolidated Act – as supplemented by Article 49 of the Issuers’ Regulations – provides for some exceptions to this general principle, whereby even if the 25% (or 30%, as the case may be) threshold is exceeded, no obligation to file a takeover bid will arise on the investor. By way of example, this is generally the case when someone, other than the bidder, holds a controlling interest in the target company (which means that exceeding the 25% threshold – or the 30%, as the case may be – does not let the purchaser control the company).

Finally, it should also be noted that – according to Article 106, Paragraph 4, of the Finance Consolidated Act – triggering the above-mentioned mandatory takeover thresholds as a consequence of a voluntary takeover does not require the bidder to launch a mandatory takeover.

The takeover process will require on an average at least three months. However, it is important to consider that there may be several factors which can delay the process, such as the need of obtaining an antitrust clearance or regulatory authorisations by the competent Authorities prior to completion of the takeover.

Key milestones are the following:

1. announcement of the decision to launch a takeover bid;
2. launch of the bid by submitting to Consob the offering document drafted in accordance with the template and instructions provided by Consob, containing any relevant terms of the offer, including any conditions (permitted only for voluntary takeovers, as better detailed under question 35 below) – within 20 days from the abovementioned announcement;
3. Consob’s approval of the offering document – within 15 days from its submission;
4. publication of the offering document – immediately after its approval by Consob;
5. statement on the bid by the target’s board of directors. With such statement the target’s board of directors shall give its views on the appropriateness of the consideration offered by the bidder and the effects on the target of a successful completion of the takeover – within the day before the starting of the offering (or acceptance) period;
6. offering (or acceptance) period. The duration of the offering period is agreed upon between the bidder and Borsa Italiana S.p.A. (the entity responsible for the organisation and functioning of the Italian financial markets). However, upon specific circumstances, the term may be extended by Consob – as a general rule, from a minimum of 15 up to a maximum of 40 days.
7. closure of the offering (or acceptance) period and transfer of accepting shareholder’s shares upon the payment of the offer price – depending on the term agreed upon with Borsa Italiana;
8. if, following a global takeover bid, the bidder acquired a stake of at least 95% of the voting securities of the target company, a period of further 15 to 25 days (to be agreed upon between the bidder and Borsa Italiana will start for the exercise of the sell-out (article 108 of the Financial Act) and squeeze-out rights (article 111 of the Financial Act) respectively (see question 32 below).

There is not a minimum acceptance condition required by law for the effectiveness of a takeover bid. However, as far as voluntary takeovers are concerned, the bidder is entitled to condition the successful conclusion of the takeover upon the meeting of a minimum floor of acceptances, which, if not reached, determines the withdrawal of the offer itself.

Squeeze-out

Under Italian law, the squeeze-out right consists of a call-option granted by the Financial Act to the majority shareholder of a listed company, which is therefore entitled, if certain conditions are met, to force the minority shareholders of the same company to sell their shares to it.

The squeeze-out right is set out in article 111 of the Financial Act, which states that a bidder coming into possession, following a takeover bid, of a shareholding of at least 95% of the capital represented by securities in a listed company, shall have the right to squeeze-out on remaining securities within 3 months from the expiry of the time limit for bid acceptance, if the intention to exercise said right was declared in the offering document.

Sell-out

Moreover, the Financial Act also provides for a sell-out right of the minority shareholders of the target. More precisely, article 108 of the Financial Act makes it mandatory, for whoever holds a shareholding representing almost the entire share capital of a listed company, to bid for buying all the remaining shares. This obligation arises in two sets of circumstances:

1. if, as a result of a global takeover bid, the bidder becomes holder of at least 95% of the capital represented by securities in an Italian listed company, it shall file another bid to buy all the remaining securities, should any other party so request;
2. besides this, any person who comes to own a shareholding exceeding 90% of the capital represented by listed securities shall file a bid to buy all the remaining listed securities from any holder thereof, unless a float sufficient to ensure regular trading performance is not restored within 90 days.

In both cases, the minority shareholders are given the chance to exit the company by forcing the majority shareholder to buy their shares.

Under Italian law, listed companies are not allowed to file a request for discretionary de-listing directly. The traditional scheme through which a company may be delisted is to launch and effect a takeover bid concerning the entirety of the target’s shares, without subsequently restoring the minimum free float (i.e. 25% of the share capital of the company) within 90 days. As a matter of fact, Borsa Italiana will be entitled to revoke the listing of the target’s securities if the required free float is not secured within such term. As an alternative, de-listing of a public company may also be effected by merging such company into a private company; as a matter of fact, in such a case, the listed company will cease to exist as a consequence of the merger, and the holders of previously listed securities will only hold non-listed ones issued by the non-listed bidder.

The squeeze-out right can be exercised once the bidder has acquired, as a consequence of the launching of the takeover, a stake of at least 95% of the target’s outstanding voting shares. For further details on granting of guarantees and security by target and on the squeeze-out procedure, see questions 11 and 13 and question 32 above respectively.

At least one market day prior to the date of publication of the offering document, the bidder will have to send to Consob proof of cash confirmation, providing documental evidence of the availability of sufficient funding in order to be effectively enabled to fully satisfy its payment obligations with reference to the offered price.

Under Italian law, a mandatory takeover bid cannot be subject to any conditions.

Conversely, a voluntary takeover bid may indeed be subject to certain conditions set out by the bidder, provided that such conditions do not purely depend on the bidder’s will and that the conditions are included – and, thus, disclosed – in the offering document. No further restrictions are provided for by the Italian law in this regard.

Typical examples of conditions included in the context of a voluntary takeover bid are the following:

1. reaching a minimum floor of acceptances;
2. obtaining the issuance of any necessary antitrust clearance or regulatory authorisations by the competent Authorities;
3. the non-occurrence of any fact that can cause a material adverse change in the economic and financial conditions of the target