The process of acquisition is identified as the acquisition of control or, at least, of the majority of the capital of a company or of its assets (or a portion of the company’s assets which form an independent business unit).
This process consists of different phases and requires, in particular, the completion of a proper due diligence, to be intended as the detailed examination of the company subject to attention (the “Target Company”) in term of its corporate structure, economic and financial data, tax and legal aspects and potential risks (in other words financial due diligence, legal due diligence, tax due diligence, operational due diligence, environmental due diligence, etc).
In the text here below we’ve identified the main issues that shall be identified and addressed by a foreign investor who intends to face the process and engage into a legal due diligence in Italy.
1. What are the main stages of an acquisition process in Italy?
Each acquisition process goes through three main phases: 1) preliminary phase of expression of interest, 2) analysis and evaluation of the company or of the target business unit and 2) negotiation and closing. The modalities with which each phase shall develop are oriented by the specific case.
The consultants involved may be receive the assignment by “buyer side” or “seller side”.
2. Key issues of the preliminary phase
A prospective acquisition derives from the interest that a foreign company may have into the business or into a business unit of an Italian company. Such interest is usually required to be expressed in writing, even if within a non binding notice of interest.
In this regard, foreign investors shall be aware that, even if a contract is not signed yet, the general principle of good faith shall apply under the Italian Civil Code, and breach of such principle is sanctioned by law. To enter into a negotiation, acquiring key information about a company and then interrupt the negotiation without reason, could lead to civil responsibilities for the damages caused, in case such behaviour may be qualified as in breach of the principle of good faith.
WARNING – Special attention shall thus be paid upon writing of the expression of interest in order to clarify the non binding nature of the statement, and the discretionary choice that shall in any case be left to the prospective purchaser to decide or not in favour of the acquisition.
The expression of interest may be drafted as a letter of intent. The same comments above shall apply to a letter of intent, where the intent shall be specified as non binding. Civil responsibility shall still apply, under the Italian Civil Code for bad faith conduct.
It is suggested to specify, in the letter of intent, the exclusivity of the transaction, at least for the duration of the letter of intent, in order to avoid that the seller conducts more than one negotiation at a time.
WARNING – a “standstill clause” shall thus be added in the letter of intent, providing that for a certain period of time both parties shall not negotiate with other parties on the same or similar transaction.
The expression of interest and / or letter of intent is always followed by the request by the seller to the prospective purchaser to enter into a confidentiality agreement, in order to compel the latter to keep confidential any information obtained and utilization thereof for any purpose which is not strictly related to evaluation of the transaction by the prospective purchaser. It is common to include such confidentiality commitment within the letter of intent.
WARNING – the confidentiality commitment shall be reciprocal, binding not only the prospective purchaser, accessing the confidential information of seller, but also the seller, in order to ensure confidentiality of the information disclosed by the prospective purchaser about is business, financial situation and investment plans.
Following execution of the letter of intent and / or of the confidentiality commitment, the prospective purchaser may usually access the business information of the company.
3. What are the goals of the second phase of “analysis and evaluation”?
The second phase aims at understanding the target company or, in many cases, at identifying the business or business unit to be the object of the acquisition.
The first object of the acquisition could, in fact, be the company and shall be completed by means of an equity / share acquisition or could be the assets of the company or parts thereof (asset deal). In both cases, identifying the assets of the company could be useful to exclude the purchase of certain assets, in which case the seller may be required to dispose of them before the acquisition or to reorganize them within the different business units of the company, so that they do not enter within the scope of the acquisition.
The second key purpose of the analysis phase is to reach a consensus between the parties about the assets to be transferred and their accounting value, in order to identify the prospective transfer price.
This analysis and verification process involves the following steps:
- external analysis of the sector and of the competition;
- internal analysis, i.e. the due diligence of the target company.
4. What does the due diligence activity consist of?
This analysis can be carried out internally or by a consultancy company with the aim of achieving the following objectives to:
- identify the legal, economic and fiscal aspects to be considered for the conclusion of the purchase contract;
- verify the actual value of the company’s assets;
- verify the profitability of the company, its capital situation and financial solidity;
- identify the item which shall contribute to form the final price.
5. How is the due diligence process structured?
The due diligence process is normally structured in the following phases.
- A preliminary session for the definition of the objectives and the determination of the investigation areas.
- The request for documents to be examined.
- Contacts with the consultants of the Target Company for clarifications.
- The real and actual verification phase thorough a deep examination of the documents.
- The final draft report to be discussed with the client.
- The drafting of a final document delivered only to the client.
WARNING – it is suggested to conduct the due diligence by means of a virtual data room: such mean allows the parties to track the documents which are shared between them and who has accessed to them, thus strongly limiting the unauthorized disclosure of information and tracking of access to and utilization of the information.
6. How do you identify the assets of the Target Company?
In the due diligence process, the individual assets of the company and their ownership situation must first be identified.
With regard to real estate, it is appropriate to request the Target Company not only to produce an exhaustive and orderly list of assets, but also to show the deeds of origin, the related cadastral certifications and the certificates of urban destination. It is further advisable to carry out investigations at the competent conservatories and at the real estate registers to verify the existence of mortgages or other constraints or charges on the properties themselves.
With regard to movable productive assets, the main machinery must be taken into consideration to identify the legitimate origin of such assets, the property status, whether any burden has been established on them and any other legal constraints or burdens.
With regard to production activities and production buildings, it is of utmost importance to identify any permits, authorizations which the specific production activities and / or products require under any respect, including, safety, environmental and health.
Under many circumstances, the assets of the target company might not be entirely at its premises, being them equipment or tools located at third parties suppliers. In this event, the assets and tools shall be specifically identified, in their actual status and location, while, at the same time, the relationship between the target company and the third party supplier shall be verified, to ascertain the right to easily recover actual control over such assets and tools.
With respect to intangible assets, a specific consultant shall be engaged to verify their origin and status in each countries where such rights came into existence or were acquired.
7. Which contracts should be examined during the legal DD?
Normally the analysis of the contracts has the purpose of verifying their legitimacy and the conformity of their clauses to civil code and the special laws applicable. The analysis is aimed at verifying the specific obligations assumed by the Target Company to ascertain the possible existence of clauses that impose excessively burdensome obligations or that may prevent or influence the success of the acquisition (for example clauses that impose exclusive rights or automatic renewals or express termination clauses or particularly serious liability clauses or non-competition clauses or clauses that provide for certain effects in case of change of control).
WARNING Given the detailed regulations existing within the Italian Civil Code and within a vast number of other laws and regulations about any kind of contracts, it is strongly suggested to involve an Italian lawyer in the analysis of the status of assets and contracts, so as to ensure that not only the written terms are taken into due consideration, but also the way the Italian laws integrate automatically such contracts or even replace their clause, being the relevant law provisions mandatory.
Under Italian law, the transfer of a business or of a business unit is specifically regulated, allowing the seller and the prospective purchaser to reach an agreement for the sale, which may or may not identify the specific object of the sale, thus what contracts are included in the business or business unit. In case the parties shall not identify the contracts, such contracts shall be transferred automatically with the business unit, provided that they are essential of the transferred business and they are not of personal nature. It is however to be noted that the other contractual parties have three months’ time to object to such transfer and to terminate the contract, but only in case a just cause exist (for example, in case the third contractual party considers that the purchaser of the business or of the business unit does not enjoy adequate financial solidity, which may materially impair performance of the contractual obligation by the business unit after the transfer to the prospective purchaser).
WARNING – it is of key importance to secure the written consent of the other contractual parties of the existing contracts or to require a specific analysis of prospective just causes of termination that such parties may trigger upon transfer of the business or of the business unit, in order to avoid the purchase of the business or of the business unit, where key contracts may be then terminated.
8. How to deal with personnel issues?
Italian law related to employees are extremely complex and require special attention.
It is worth noticing that the contracts with the personnel are transferred automatically, ope legis, in case of transfer of the company, of the business or of the business unit. However, under certain circumstances and after addressing the relevant matters with the labour union and relevant personnel, the prospective purchaser buyer may propose the employees of the company to accept termination of the existing contracts and signature of new labour contracts, in any case without affecting in any manner the employees’ accrued rights.
In case of transfer of the labour contract, jointly with the other contracts of the company. Specific attention shall be dedicated to:
- verifying the human resources used by the Target Company and the compliance with the applicable mandatory laws, national collective agreements and any supplementary company agreements.
- ensuring whether full payment of welfare contribution and mandatory insurance by the company during the employment relationship has been made; under this respect the target company may require to the competent Italian authorities a document proving compliance status (the so called DURC) or, in case of failure to comply to the relevant obligations, a statement issued by the competent Italian authorities. It is to be noted that, such documents often do not show the delay accumulated buy the company upon payment of welfare of its employees, in case in this regard an agreement has been reached with the competent authorities to pay the due amounts by instalments;
- ensuring the transfer, together with employees, to the purchaser of the TFR (trattamento di fine rapporto, a portion of the salary that the employer shall put aside for the whole duration of the employment relation, to remit such amount to the employee upon termination of the labour relationship);
- obtaining a clear understanding of the personnel’s position and work scope in order to ensure coherence of such position and work scope for the purchaser.
- checking whether there exist any pending or threatened dispute, which could be very long and burdensome on the employers.
The examination must concern not only those who are bound to the target company by a subordinate work contract but also all those who are connected to the company of contractual relationships of different nature and who in any case perform their activities in favor of it in a continuous and organic way, with the risk of being ascertained as employees of the company.
9. How to deal with accounting, tax and financial issues?
The financial due diligence shall be conducted by experienced Italian auditors, checking;
- the economic situation and assets and liabilities, through examination of the balance sheet and P&L;
- compliance of the accounting system to the applicable law;
- compliance of the company to the relevant tax laws and timely payment of the relevant due amounts; the prospective buyer shall verify whether specific agreements have been reached by the target company with respect to overdue taxes;
- financing, from banks (including credit lines), shareholders or other institutions; banks may issue specific documents showing the position of the company with Italian banks (the so called, centrale rischi)
- existing credits, their origins and status (whether any dispute exist), whether they may be actually collected or not, whether adequate funds have been put aside for bad debts, what is the actual timing of payment by the clients and which clients are sued to timely fulfil their payment obligations and which clients are not;
- existing debts and prospective hidden liabilities;
- guarantees obtained or granted by the target company (including performance bond, etc.).
In case the company has engaged an auditor, specific attention shall be paid to the relation the auditor is called to issue with respect to the yearly financial statements of the company.
10. Addressing litigation
Within the due diligence, the prospective purchase shall verify the existence of civil, tax and administrative labor lawsuits in which the company has been involved, is likely to be involved and could be involved, and from which liabilities may arise. The Target Company must therefore provide all useful information and essential documentation in relation to all pending legal disputes, arbitration proceedings or any other proceedings in Italy or abroad of any nature. Generally it is requested to provide a brief information report on each of the disputes with a judgment on the probabilities of a favourable outcome by the professionals in charge of the dispute by the Target Company.
11. Have privacy laws any relevance in an acquisition?
The prospective purchase must verify such aspects and, in particular, compliance to the applicable Italia and European law by the Target Company. Verifying these aspects is mainly justified by the large sanctioning framework envisaged in the applicable legal framework, by virtue of which failure to comply with these provisions is sanctioned not only administratively but also, in the most serious cases, criminally.
12. What constitutes the second phase of “negotiation and closing”?
Upon conclusion of the due diligence, the prospective purchaser shall express its intention either to proceed to the acquisition or to stop any further activities. In case the acquisition process shall continue, the second phase is characterized by the drafting, negotiating and signing the Equity Purchase Contract or the Assets Purchase Contract.
With such contract both parties punctually define a binding way for all economic-financial and legal aspects of the transaction, including the overall price of the sale, the indication of any down payment for the price as well as the methods for the final payment, the delimitation of the assets included (usually a detailed list of assets and contracts is identified), the guarantees to be borne by each party, the non-competition obligations, any contracts connected with key managerial, etc.
The parties may also agree upon a mechanism of price adjustment, which shall apply during an agreed period of time, to guarantee the purchase from discovery of hidden liabilities.
Alternatively, or concurrently, the Equity Transfer Agreement or Assets Transfer Agreement may provide for a bank guarantee to be issued by the seller to guarantee that the assets shall be actually transferred in the same conditions identified in the relevant transfer contract. Another solution often used in order to protect the prospective purchaser is the payment of a portion of the price in an escrow account, to be freed upon expiry of a given period of time and upon achievement of a number of conditions.
In many cases the actual transfer of equity, share or assets is subject to achievement of a number of preconditions, such as securing the consent of those parties whose consent is necessary to complete the transfer (including antitrust authorities, banks, creditors of the company, etc.).
WARNING – The actual transfer of equity share or assets shall occur by means of a notary deed, i.e. a contract signed in front of an Italian notary, producing its effects upon signing. Therefore, the actual transfer of the title of the object to the acquisition (including transfer of property title over assets, the transfer of all contracts, etc.) occurs upon execution of this contract in front of the notary.
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This article shall not be intended as legal advice rendered by this firm or by the authors. Should you consider any such information useful, we invite you to contact the authors in order to obtain further advice, tailored on your specific requirements. This firm and the authors do not take any responsibility for any consequences deriving from using in any manner any of the above information.
