20 features of Italian M&A agreements…

….that foreign investors should know.

RomaWhile M&A agreements are facing an increasing standardization around the globe, civil law countries, and, notably, Italy, present peculiar features that should not be overlooked. Here is a list of certain features of doing M&A in Italy, most of them stemming from the Italian Civil Code (the “ICC”) and its interpretation.


1. Loyalty matters (pre-contractual liability). The ICC imposes the duty to negotiate in good faith, failing which may result in pre-contractual liability, occurring, for example, when key information is hidden or negotiations are broken without just cause. To be considered also when managing M&A tenders.

2. The last resort (material adverse change). Contracts may be terminated occurring extraordinary and unforeseeable events resulting in an excessive burden being placed on one of the parties. This ICC rule also applies to cases where termination was sought due to the non-occurrence of implied conditions.

3. When sleeping dogs wake up (long-dormant claims). In addition to environmental and tax claims, the Italian legal systems provide for long statutes of limitation also for labour-related claims, including claims by social security authorities. This influences the construction of surviving provisions in R&W clauses.

4. Buying more than you can afford (financial assistance). Joint-stock companies are allowed to grant financial assistance (loans or guarantees) to the Buyer if certain requirements are met, including a directors’ report evidencing the company’s ability to sustain the financial risk and the booking of a non-distributable reserve in the financial statements. Similar principles apply to merger leveraged buy-outs.

5. Sometimes they claw-back (avoidance actions). The Buyer should consider extending its due diligence investigation to the financial conditions of the Seller, since the acquisition could be clawed-back by a receiver in case of insolvency of the Seller, also in the absence of fraud.

6. Beyond the broken glass (indirect damages). Compensation of the damage includes both costs and lost revenues/profits, to the extent they were direct consequence of the damage and fairly foreseeable, and, in case of fraud, also indirect/consequential damages.

7. Floors and ceilings (limitation of liability). A party’s liability cannot be limited in case of gross negligence, willful misconduct or violation of public policy rules. This impacts on the construction of indemnities for violation of R&W and should drive the Seller towards a higher level of disclosure.


8. A package deal (automatic effects). As an alternative to share deals, Buyers can acquire the business or a business line of a company, i.e. a set of assets, liabilities and legal relationships. Business agreements (including employment agreements) are automatically assigned to the Buyer if they have no personal nature (and no specific restrictions to the assignment). However, the other contracting parties may oppose such assignment for just cause.

9. Who pays the bill? (joint liability). The Buyer of a business becomes jointly and severally liable with the Seller for all liabilities of the business recorded on the books of the company at the time of the transfer, as well as any tax liabilities of the Seller in respect of the business up to the value of the business. The Buyer may limit its tax liability by requesting a certificate from the tax authority.

10. United they stand (labour unions). If the Seller of the business employs more than 15 employees, before closing the Seller and the Buyer have to complete a consulting procedure with the labour unions.

11. Brand new (warranty on defects). Under the ICC, the Seller of a business provides to the Buyer a legal 1 year warranty on the absence of hidden defects on the assets comprised in the business.

12. Looking for a new job (non-competition). According to the ICC, the Seller of a business or line of business is automatically restricted from competing with the Buyer for 5 years after the sale. According to some literature, such obligation would also apply to share deals.


13. Nothing lasts forever (term). Under the ICC, the term of shareholders’ agreements cannot exceed five years for joint-stock companies and three years for listed companies. Exceptions apply to joint venture agreements. Open-term agreements are valid but either party can terminate for convenience with a suitable notice. Specific time restrictions apply to lock-in covenants.

14. The articles always win (real effects). Articles of association have so-called real effects and, therefore, in order for a covenant to be enforceable against a shareholder by way of specific performance, it has to be reflected in the articles. Besides, the articles always prevail on the shareholders’ agreements. Not all private covenants, however, can be transferred in the articles of association.

15. The lion’s share (leonina societas). Under the ICC, by contract a shareholder cannot be excluded from sharing profits or liabilities. The principles underlying this rule have been extended to put option rights and drag along rights, so that the conditions at which such rights could be exercised could never materially limit the liability of a shareholder (e.g. put option at a fixed price) or undermine the rights of a “dragged” shareholder (e.g. strike price way below the fair market value of the company at the strike date).

16. Mummy told me to do it (parent company liability). According to the ICC, parent and holding companies (and their directors) can be held liable for damages suffered by their subsidiaries as a result of their activity of direction and coordination if acting in violation of the principle of sound administration.

17. The good, the bad and the neutral (management agreements). Good, bad and neutral leaver arrangements for managers have to be consistent with the interpretation of the Italian labour courts on the definition of just cause of termination of employment relationships. Also non-competition covenants with managers (or employees in general) have to meet certain requirements to be valid.

18. Good faith strikes back (abuse of rights). The principle of good faith set out in the ICC not only governs the creation and interpretation of contractual obligations, but also their performance. Accordingly, the exercise of a right is not valid when the predominant motive is to obtain an unfair advantage or if the right is exercised for a purpose other than that for which it was granted. This applies also to relationships between majority and minority shareholders.


19. Good bureaucracy (public registries). The most relevant information relating to companies’ life, from its incorporation to its dissolution or bankruptcy, is registered with the Register of the Companies. Transfer of shares, quotas and businesses, as well as encumbrances on such assets, have to be registered there with. Likewise, the establishment and transfers of real estate rights are registered with the land registries.

20. The man with the last word (notary public). Acquisition contracts of almost all kind of assets (shares, quotas, properties, businesses) and certain corporate documents (deeds of incorporation) have to be executed in Italian before a notary public, who has the duty to check their compliance with the law as well as to attest the identity of the parties and to certify the relevant execution date.

Copyright Giorgio Mariani 2016 – All rights reserved.

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