The European Lawyer

Italy Banking/Finance

11 Mar 2010

International Acquisition Finance - Italy

Editors: Bonelli Erede Pappalardo LLP - Riccardo Sallustio and Andrea De Tomas

1. MARKET
The Italian acquisition senior and mezzanine debt market is quite developed and all large local banks and international players are present. BNP Paribas, The Royal Bank of Scotland, JP Morgan and Calyon are particularly active among international banks while Intesa Sanpaolo, Unicredit and Mediobanca are the local banks involved in large ticket deals. Banks like Centrobanca, Interbanca, MPS and Banco Popolare have acquired a predominant position in small and medium sized deals. Because of the gap in senior debt due to the credit crunch, mezzanine financing is becoming increasingly common as a feature of Italian LBO and MBO transactions.

2. DOCUMENTATION
2.1 What type of documentation would generally be used in acquisition finance transactions? What would be the governing law for facilities agreement and security documents? And what language should be used in drafting the financing documentation?
In the context of an acquisition finance transaction standard documentation, such as LMA standard documents, can be used for drafting and negotiating facilities agreements. Although such agreements may be governed by English law, it is usually necessary to re-draft parts of the document in order to deal with specific Italian-law related issues. To address this, it is not unusual to apply Italian law as governing for the facilities agreement. As for creation, perfection and recognition of security interests, the law of the jurisdiction in which the security asset is located is generally applied or, in case of assignment of receivables by way of security, the law governing the assigned receivables applies, therefore, in the context of Italian transactions Italian law is predominantly applied. As far as the language of the documents is concerned, a loan document governed by Italian law could be drafted in Italian as well as in English although some additional formalities would be required for enforcement purposes.

3. ACQUISITION/FINANCING STRUCTURES
3.1 What is the typical acquisition financing structure?
The traditional and most commonly referred to form of structure used in acquisition finance deals is the merger leveraged buy-out. Leveraged deals in which the repayment of the acquisition debt is effectively guaranteed/secured by the assets owned by the target company (the “Target”) and by the revenues generated by its business have raised concerns in Italy in relation to possible violation of financial assistance rules set out in Articles 2358 and 2474 of the Italian civil code. To address these concerns, deals have been commonly structured in the past by implementing a two-tier structure. In particular, a new company (“Newco”) borrows acquisition funds from a bank or a syndicate of banks and uses the proceeds to inject equity into a debt-free subsidiary (“Bidco”), which will in turn acquire the share of Target. Target will then be merged into Bidco and the surviving entity (“New Target”) will borrow medium/long-term facilities. The acquisition debt will be repaid with a dividend that New Target will pay to Newco from the proceeds of the medium/long-term borrowed facilities.

Following the enactment of Article 2501-bis of the Italian Civil Code, pursuant to Legislative Decree No. 6 of 17 January 2003 (the “2003 Decree”), a more simplified merger leveraged buy-out structure is often implemented. Article 2501-bis of the Italian Civil Code  sets out certain rules to be followed in the merger between Target and its acquiring entity which borrowed acquisition debt, impliedly recognising that such merger does not violate the financial assistance rule. As far as market practice is concerned, the 2003 Decree eliminates any incentive to use the two-tier structure described above where the rules set out in the provision may be applied. However, as under the previous regime, any illegality issue must be assessed on a case-by-case basis looking at the transaction as a whole.   

3.2 Is it conceptually possible to give one category of lender priority over another on the insolvent liquidation of the borrower through contractual or structural subordination? How is subordination of debt effectively achieved?
According to Article 2741 of the Italian civil code, the general principle is that, in borrower’s insolvency proceeding, all creditors benefit of equal treatment and have the same priority (the so-called “par condicio creditorum”).

 The parties, i.e. the obligors, the senior creditors and the junior creditors may provide for the subordination in an intercreditor agreement or similar document. However, it is still matter of dispute whether an agreement by which the lenders agree priority among themselves might be enforceable against a third party and/or the receiver of an insolvent Italian obligor. As a consequence, such third party/receiver may ignore the contractual subordination and pay all obligations when due. In this case, the possibility for the senior creditors to be satisfied with priority over the junior creditors would effectively depend on whether the intercreditor agreement provides for some sort of pro-rata sharing mechanism among the various creditors and for turnover of proceeds. As to security interests, the subordination of the junior creditors could effectively be achieved every time it is possible to have different ranking of the security (e.g. in case of a mortgage). In all other cases, however, it would be left to the contractual arrangements among the creditors to provide for the actual satisfaction of the senior creditors’ claims in full with priority over the junior creditors. In a typical Italian merger leveraged buy-out structural subordination is achieved by ensuring that junior creditors lend at a debtor level which is higher than Target post-merger.

4.1. REGULATED TARGETS
4.2 Is a company required under local law or regulation to notify or seek the consent of the local regulators to acquire a material shareholding in an Italian bank?
Pursuant to article 19 of the Legislative Decree No. 385/1993 (the “Italian Banking Law”), prior authorisation by the Bank of Italy shall be required for the acquisition of material holdings in an Italian bank and in any case for the acquisition of shares that would result, taking account of shares already held, in a holding that exceeds 5 % of the voting capital of the bank and subsequent multiples of 5% and for the control of the voting capital of the bank. The authorisation application should be submitted to the Bank of Italy as soon as possible after the the competent bodies of the acquiring entity have resolved to acquire the relevant participation. The Bank of Italy grants its approval or rejects the authorisation application (once completed with all the necessary information) within 60 days from its filing. This term may be suspended in the following cases: (i) should the Bank of Italy deem the authorisation application (or the information and/or the documents attached thereto) missing or incomplete; or (ii) should the Bank of Italy deem it necessary to acquire further information from the requesting entities or from the competent authorities. 

The carrying out of the acquisition in the absence of the authorisation by the Bank of Italy shall be punished by the following sanctions:

(a) a pecuniary administrative sanction of between €5,164 and €51,645;
(b) the prohibition to exercise the voting rights relating to the relevant participation. Should the voting rights be nonetheless exercised, the resolutions of the shareholders’ meetings that have been passed with such voting rights may be challenged by the Bank of Italy and by the other shareholders; and
(c) the sale of the holdings for which the authorisation have not been obtained within the deadline set forth by the Bank of Italy.

4.3 Is a company required under local law or regulation to notify or seek the consent of the local regulators to acquire a material shareholding in an Italian insurance company?
Pursuant to article 68, third paragraph, of Law no. 209/2005, any company or individual who intends to acquire the control of a company holding a relevant shareholding (i.e. exceeding 5% of the share capital) in an insurance company shall obtain prior authorisation by ISVAP (Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo, the Italian Authority for Insurance Companies). All participations indirectly held through controlling companies must be taken into account. A communication is to be given by the party that intends to acquire, albeit indirectly, such interest and a further authorisation request is to be filed prior to completion of the purchase offer. ISVAP grants its approval or rejects the authorisation application (once completed with all the necessary information) within 60 days from its filing; in case of incompleteness, the above period may be suspended and will start running again once the requesting entity will have supplied all information/documentation that ISVAP may request. In any case, the authorisation proceedings shall terminate within 120 days.

If the acquisition is carried out in the absence of authorisation by ISVAP, the following sanctions will apply:

(a) the prohibition to exercise the voting rights relating to the relevant participation. Should the voting rights be nonetheless exercised, the resolutions of the shareholders’ meetings passed with such voting rights may be challenged by ISVAP and by the other shareholders;
(b) the compulsory sale of the participation for which the authorisation has not been obtained within the deadline set forth by ISVAP;
(c) the prohibition to exercise and enforce any right arising from any relevant agreement.

5. LISTED TARGETS
5.1 What are the rules governing tender offers in Italy?
Italy has recently implemented the EU Directive on takeover bids (Directive 2004/25/EC) by means of Legislative Decree no. 229 of November 19, 2007 (the “Decree”) that  amended certain provisions of the Legislative Decree no. 58 of 24 February 1998 (the “Italian Financial Law”). Furthermore, Consob (the Italian stock regulatory authority) is currently amending Regulation no. 11971/1999 concerning issuers (the “Regulation”).  Only when the amended version of the Regulation will be approved and issued by Consob, it will be possible to have the full picture of the changes to Italian laws on tender offers deriving from the implementation of the Directive 2004/25/EC.

5.2. Mandatory tender offers
Pursuant to Article 106 of the Italian Financial Law and Article 46 of the Regulation, the obligation to launch a public offer on 100% of the offeree company’s securities is triggered whenever: (i) a person , as a result of his/her own acquisition, comes to own more than 30% of the securities of a listed company carrying voting rights to appoint or remove members of the board of directors or the supervisory board; (ii) a person who already owns more than 30% but less than 50% of a listed company’s securities carrying voting rights to appoint or remove members of the board of directors or the supervisory board acquires within a 12 month period a further shareholding of more than 3% of the target company; (iii) a person acquires a stake in a company whose assets are predominantly made of securities of a listed company which carry voting rights to appoint or remove members of the board of directors or the supervisory board.

The obligation to launch a public offer is triggered also if one or more parties “acting in concert” acquire a percentage of securities in the offeree company relevant to reach in the aggregate the thresholds set forth under numbers (i) and (ii) above. According to Article 101 bis of the Italian Financial Law, “parties acting in concert” shall mean: parties to a shareholders’ agreement; a company, its parent company and its subsidiaries; companies under common control; a company and its directors and general managers; any parties who cooperate for the purpose of gaining control over the offeree company.

The price shall be equal to the highest price paid for the offeree’s securities by the offeror or any person acting in concert with him/her over a period of 12 months prior to the announcement of the offer to Consob. Article 106, paragraph 3, of the Italian Financial Law, as amended by the Decree, sets out certain criteria according to which Consob may determine a consideration which is higher or lower than the highest price paid by the offeror or any person acting in concert with him/her. Such criteria basically relate to previous purchases and behaviors of the offeror and will be detailed by Consob in the amended version of the Regulation. The offeror may offer securities, cash or combination of both as consideration for the tender offer. However, it is provided that the offeror shall offer cash consideration as an alternative in the following events:

 (i) the consideration offered by the offeror does not consist of securities admitted to trading on a EU regulated market; or
 (ii) the offeror, or persons acting in concert with him/her, has purchased for cash securities carrying 5% or more of the voting rights in the offeree company, over a period beginning 12 months prior to the announcement of the offer to Consob and ending  when the offer closes for acceptance.

Article 106, paragraph 5, of the Italian Financial Law grants Consob the power to set out by regulation specific exemptions from the obligation to launch a mandatory tender offer when the acquisition of a shareholding exceeding the relevant threshold occurs in the presence of one or more majority shareholders or results from: a) transactions aimed at restructuring a company; b) transfer of securities carrying voting rights to appoint or remove members of the board of directors or the supervisory board among related parties; c) causes independent from the buyer’s intention; d) transactions of a temporary nature; e) mergers or spin-offs; f) purchases free of charge.
Article 49 of the Regulation, which details the above exemptions from mandatory offer requirement, is currently in the process of being amended by Consob.

5.3 Timing
The decision of the offeror to launch a tender offer shall be communicated to Consob  promptly after the resolution to make a public offer or after the obligation to launch a mandatory tender offer has been triggered. Within 20 days from the announcement of the offer, the offeror shall file with Consob  the offer document containing the necessary information to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid. In the event of voluntary tender offer, should the 20 days term not be met, the offer document shall be declared inadmissible and the offeror shall not be allowed to launch a further tender offer on the financial products of the same issuer in the twelve months thereafter. Within 15 days from the filing of the offer document (or 30 days if the offeree company’s securities or the offeror’s securities used as consideration are not listed), Consob may (i) approve it if the document enables the addressees to reach an informed decision on the offer or (ii) request further information. The offer document is deemed approved if Consob does not make any further information requests within the 15 days term. Once the offer document is published, the managing bodies of the offeror and the offeree shall communicate it to the representatives of the employees or directly to the employees.

5.4 Passivity rule
The board of directors of the offeree company should obtain the prior authorisation of the general meeting of shareholders before taking any action, which may result in the frustration of the tender offer (except for the seeking of alternative bids). The general meeting of the shareholders resolves with the favourable vote of at least 30% of the share capital of the company.

5.5 Neutrality rule
In addition to the provision on defensive measures, Article 104-bis of the Italian Financial Law provides, in the interests of the offeree’s shareholders, that upon a tender offer being made public, (i) any restrictions on the transfer of offeree’s securities set forth in the article of association of the offeree company, in contractual agreements between the offeree company and holders of its securities or among the latter, shall not apply vis-à-vis the offeror during the time allowed for acceptance of the bid; and (ii) any restrictions on voting rights set forth in the article of association of the offeree company, in contractual agreements between the offeree company and holders of its securities or among the latter, shall not have effect at the general shareholders’ meeting which resolves upon any defensive measure.

In the interests of the offeror, should the latter hold at least 75% of the capital holding voting rights in the offeree company following the completion of a bid:
 (a) any restrictions on the transfer of offeree’s securities, as well as any restrictions on voting rights indicated above shall not apply; and
 (b) any extraordinary rights of the shareholders of the offeree company concerning the appointment or removal of the board of directors set forth in the by-laws of the offeree company shall not apply. In case of a breach of any of the aforementioned restrictions, an equitable compensation for the removal of the above rights shall be paid by the offeror to the holders of the offeree’s securities.

6. MEZZANINE DEBT AND INTERCREDITOR ARRANGEMENTS
6.1 How is a mezzanine loan agreement normally structured?
In Italian acquisition financing structures, a mezzanine loan agreement will typically comprise a single term loan facility whose repayment will be subordinated to the repayment of the senior debt. Particularly when dealing with mezzanine loan agreements that often attract a high rate of interest to compensate for extra risk, certain issues related to usury law and to the prohibition of compounding of interests (divieto di anatocismo) shall be considered. Different structures are normally implemented to ensure compliance with laws on usury and prohibition of compounding of interests.

6.2 Is the issue of high yield bonds common in Italian acquisition finance transaction?
In large transactions, the mezzanine debt may be replaced by high yield bonds. However, mostly because of the size and costs involved in the issue, high yield bonds are not generally used in a typical domestic Italian acquisition finance transaction. Furthermore, even in transactions in which the issue of high yield bonds is contemplated, high yield bonds are normally issued by a special vehicle.

6.3 Is there any specific issue in relation to mezzanine agreement to keep in mind?
When drafting a mezzanine loan agreement, the parties should bear in mind that Italian Law no. 108 dated 7 March 2006 (the “Usury Law”) introduced legislation preventing lenders from applying interest rates equal to or higher than rates set every three months on the basis of a decree issued by the Italian Treasury to an Italian obligor. The Italian Treasury, in agreement with the Bank of Italy and the Italian Exchange Office (Ufficio Italiano Cambi), quarterly collects and publishes the average effective interest rates (Tassi di Interesse Effettivo Globale Medio) charged by banks and other financial institutions in the previous months and classifies them into nine different types of transactions according, inter alia, to their nature, duration and amount.

Pursuant to Usury Law, interest rates that are 50% higher than the average effective interest rates set for the reference quarter by the Italian Treasury are usurious and cannot be enforced. Normally, items such as taxes, costs, notary expenses and other fees are included in calculating the interest rate. Please note that Usury law provisions are of mandatory application and would apply in respect of amounts owed by an Italian obligor regardless of the law applicable to the relevant agreement. An additional issue that should be taken into consideration is related to compounding of interests (anatocismo). Pursuant to article 1283 of the Italian Civil Code, interest may only be capitalised on claims after a period of more than six months, or from the date when legal proceedings are commenced. 

6.4 Is there any specific issue in relation to high yield bonds to bear in mind?
Generally high yield bonds are directly sold to a great number of investors and this may create some problem with regard to the effectiveness of security granted in favour of an indefinite number of bondholders.

6.5 Is there any specific issue in relation to intercreditor agreements?
Contractual subordination has always raised a number of enforceability issues in Italy. The major issue is that it is uncertain whether the insolvency receiver will comply with the order of priority set out in the intercreditor agreement when the proceeds of the sale of an insolvency estate shall have to be distributed among creditors.

7. EQUITY KICKERS
7.1 Is it common to use warrants as equity kickers?
Although the use of warrants as instruments to provide the mezzanine lenders with some kind of performance related reward is generally recognized in Italy, such technique is not very common in Italian acquisition finance transactions.  

8. SECURITY
8.1 What type of security interests is available? How would you take security over different types of assets?
Under Italian law, security can be taken over (i) registered or bearer shares, (ii) real property, (iii), equipment and machinery, (iv) intellectual property, (iv) receivables arising from contracts and (v) bank accounts. The methods of taking security over such assets vary according to the type of asset concerned. In particular:

(i) Registered or bearer shares
Italian limited liability companies belong to two categories: società per azioni or S.p.A. and società a responsabilità limitata or S.r.l.. While the share capital of an S.p.A. is represented by share certificates, the corporate capital of an S.r.l. is divided up into quotas, which are dematerialised instruments (i.e. they cannot be represented by certificates) and each quotaholder owns a quota corresponding to its interests in the corporate capital of the company.

A deed of pledge is required in order to grant a pledge over shares in an S.p.A. or over quotas in an S.r.l. In order to perfect a pledge over shares, the relevant deed has to be notarised and a director the company whose shares are pledged shall annotate the pledge over the shares certificates and in the company’s shareholders ledger. On the other hand, in order to perfect a pledge over quotas, the relevant deed has to be notarised and filed with the competent Companies’ Register. If it has been executed before a foreign notary public, the deed of pledge would also have to be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation if it is not drafted in Italian.

Please note that, should the company whose shares are pledged be listed (or should it have opted to have dematerialised shares), no share certificates would be available and the pledge would have to be subject to the provisions of Legislative Decree No. 213 of 24 June 1998 (the so-called Euro Decree), and the specific rules for the perfection of security in rem over dematerialised securities, and, where applicable, the EU Collateral Directive (Directive 2002/47/EC), and the relevant Italian implementation law. The same applies should security be granted over other dematerialised securities (e.g. dematerialised bonds).

(ii) Real property
A deed of mortgage is required to grant a mortgage over land/property. The deed of mortgage needs to be notarised and registered in Italy therefore, it is usually executed in Italian before an Italian notary public. In principle, it is possible to execute the deed before a foreign notary public but the latter would not be able to carry out all the necessary title searches. The perfection of the mortgage requires the registration of the mortgage with the competent Land Register (to be carried out by the Italian public notary). Under Italian law there is no concept of freehold and leasehold as title to property is absolute although third parties may be granted rights of enjoyment that may coexist with the property title. The owners of certain rights of enjoyment (e.g. usufruct - but not a mere tenancy) may only grant security over their enjoyment rights (hence, subject to their limits).

(iii) Equipment and machinery 
A pledge over equipment and machinery (as well as raw materials) may, in principle, be granted. However, due to the possessory nature of this type of security, in order for a pledge to be created, the pledged assets (or the document conferring the power to dispose of such asset) would have to be delivered to the Banks or to a third party designated by both banks and the grantor. As an alternative to the pledge, a privilegio speciale, a form of floating charge provided for by Article 46 of the Italian Banking Law may be created.

(iv) Intellectual property rights
Security over Italian patents, designs, trademark registrations and trademark applications is typically given in the form of a pledge. A deed of pledge is required for this purpose. The perfection of the pledge requires the filing of the deed of pledge with the Italian Patent and Trademark Office. Accordingly, the deed of pledge has to be notarised, hence, it is usually executed in Italian before an Italian notary public. It is in principle possible to execute it before a foreign notary public but, in this case, the deed would also have to be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation if it is not drafted in Italian.

(v) Receivables arising from contracts
Receivables shall be construed as including, inter alia, balance on bank accounts, rental income and insurance proceeds. Security over receivables may be granted in the form of an assignment by way of security or of a pledge. In both cases, a notarised deed is required. The perfection of the pledge requires the notification of the pledge to, or its (notarised) acceptance by, the relevant debtor. The debtor’s notification or notarised acceptance is also necessary in order for an assignment of receivables by way of security to be enforceable vis-à-vis third parties. In the case of insurance proceeds, as an alternative, a loss payee clause (clausola di vincolo) – providing, inter alia, that in the event of a payment being made under the insurance policy, such payment would have to be made to the secured creditors, may be included in the insurance policy. Should the rental income be assigned by way of security, the recordal of the assignment with the competent Land Register(s) may be required in certain circumstances.

(vi) Bank accounts
This type of security would be qualified as security over receivables (namely the balance on the relevant bank accounts). In case of security over the balance on bank accounts, an annotation is to be made by the depositary bank on its books in accordance with the EU Collateral Directive, if applicable.

8.2 Does the concept of “floating charge” exist under Italian law?
Article 46 of the Italian Banking Law provides for a security known as “privilegio speciale” or special privilege, which is similar to a floating charge in as much as it applies to certain classes of assets owned by the grantor at any particular time, but ceases to apply to those assets which are disposed of by the grantor. The following assets may be the subject of the “privilegio speciale”: (i) existing or future plant located on real property, concessions on real property and depreciable assets related to the carrying-on of the business, (ii) raw materials, work in progress, stock, finished goods and merchandise, (iii) goods bought with the proceeds of a medium or long term loan in respect of which the special privilege is intended to be granted, and (iv) present or future receivables arising from sales of the assets and goods listed under (i), (ii) and (iii) above. The perfection of a “privilegio speciale” requires the filing of the relevant deed with the competent court for the area where the grantor has its registered office, hence, it is usually executed in Italian before an Italian notary public. It is in principle possible to execute it before a foreign notary public but, in this case, the deed would also have to be apostilled where necessary and deposited with an Italian notary public together with an Italian translation if it is not drafted in Italian. The granting of a “privilegio speciale” is subject to stringent rules.

8.3 Are there any specific prohibition/limitation on companies giving guarantee/security in respect of obligations of other companies in the same group of companies?
Beside the corporate benefit limitation and financial assistance prohibition, there are no further specific prohibitions/limitations and the general principles of the Italian civil law would apply to guarantees given by an Italian company in respect of obligations of other companies of its group.

8.4 Is it necessary that a target or a target subsidiary obtain some demonstrable “corporate benefit” when either of them shall give a guarantee or grant a security over their assets?
As a general rule, a corporate benefit must exist and adequate provisions within the by-laws of the relevant company are necessary, in order for an Italian company to provide an upstream or cross-stream guarantee/security. Indeed, whilst a corporate benefit for a downstream guarantee/security is usually self-evident, the same may not apply to an upstream or cross-stream guarantee/security, which could jeopardise the interests of creditors and minority shareholders.

Before the Decree came into force and major changes to Italian corporate law occurred, the most common basis for challenging a security given or a guarantee granted by an Italian obligor was article 2384-bis of the Italian Civil Code (or article 2487 of the Italian Civil Code if the obligor was a società a responsabilità limitata). According to those provisions, any transaction that was outside the company’s corporate purpose was not binding on the company unless the other party to the transaction was acting in good faith. The Decree repealed the provisions of article 2384-bis and 2487 of the Italian Civil Code but it has been argued that the above mentioned principles continue to operate pursuant to article 2384 and 2475-bis of the Italian Civil Code (i.e. the articles governing the representative powers of società per azioni and società a responsabilità limitata). Generally, an upstream or cross-stream guarantee/security can be provided by an Italian company to the extent that an actual benefit as direct or indirect consideration for the provision of the guarantee/security exists (e.g. future financial resources, R&D, etc), such existence being a matter of fact to be addressed and evaluated by the directors of such company. As the concept of “benefit of the group” per se is not sufficient under Italian law, a careful analysis of the transaction would have to be carried out by the relevant board of directors when resolving upon it.

Finally, the provision of an upstream or cross-stream guarantee/security must be financially balanced. Therefore, a cap - limiting the maximum guaranteed/secured amount - should be inserted in the guarantee/security. This cap should be in line both with the “value” of the company (e.g. the net worth of the company, the amount directly borrowed by it or its subsidiaries, the amount of intercompany loans received by it or its subsidiaries with the proceeds of the financing) and the “value” of the benefit that the company is to receive or is likely to receive by providing the guarantee/security.

9. THIN CAPITALISATION
9.1 What are the typical concerns regarding thin capitalisation rules and how are they generally dealt with?
The Finance Bill for 2008 repealed thin capitalisation rules. As a consequence, starting from 1st January 2008, the deductibility of interest paid by Italian companies on loans granted or guaranteed by “qualified shareholders” or by “related parties” is no longer subject to thin capitalisation rules.

However, Article 96 of the Presidential Decree No. 917 of 1986, as amended by Article 1, paragraph 33, of the Finance Bill for 2008, provides for new provisions regulating the deduction of interest expenses.
In particular, the new rule provides that:
 (i) interest expenses accrued on loans and similar financial transactions are deductible for an amount equal to the amount of interest income accrued on loans and similar financial transactions;
 (ii) any excess of interest expenses over interest income is deductible for an amount not exceeding 30% of the operating gross margin (the “Relevant Operating Gross Margin”).

The operating gross margin is defined as the difference between the value of production (as referred to in article 2425, first paragraph, letter A, of the Italian civil code) and the costs of production (as referred to in article 2425, first paragraph, letter B, of the Italian civil code), excluding amortisation of intangible fixed assets, depreciation of tangible fixed assets and rents from financial leasing of fixed assets, as shown in the relevant profit and loss account.

Please note that for the purpose of calculating the interest tax deduction allowed, for the taxable year 2008 and 2009, the Relevant Operating Gross Margin shall be increased by €10,000 and €5,000, respectively.

The portion of non-deductible interest exceeding the above mentioned threshold (the “Interest Excess”) shall not be deducted in the fiscal year in which such interest accrues. However, the Interest Excess may be carried forward without any time limit and deducted from the income realised in the following fiscal years, if and to the extent in the following years the Relevant Operating Gross Margin is not entirely used to allow interest deduction accrued in the same year (“Operating Gross Margin Excess”).
Moreover, starting from 2010, the Operating Gross Margin Excess of a fiscal year can be carried forward to the following fiscal years, without any time limit.

Specific rules apply to companies that elect for the domestic tax consolidation regime. In particular, the Operating Gross Margin Excess of companies included in a tax unit can be used to allow the deduction of the Interest Excess of other companies included in the same tax unit.

10. FINANCIAL ASSISTANCE
10.1 Are target or target subsidiary prohibited from giving a guarantee of, or providing a security for, the purchaser’s borrowing made for the purpose of, or in connection with, the acquisition of shares in the target?
Article 2358 of the Italian civil code prohibits a società per azioni from giving guarantees or security for the purchase of or the subscription to its own shares (a similar prohibition applies to società a responsabilità limitata under article 2474 of the Italian civil code). The prohibition covers any type of structure or arrangement whereby the company provides financial assistance in connection with the purchase of or the subscription to its own shares. Refinancing of the acquisition debt is also prohibited. In relation to merger leveraged buy-outs, there are certain procedures to be followed if, following the merger between the buyer and the target company, the target’s assets stand as security for the acquisition of debt incurred by the buyer. Pursuant to Article 2501 of the Italian civil code, the directors of the companies involved are required to prepare a merger plan outlining how the obligations of the new company resulting from the merger will be fulfilled. They are also required to prepare a document explaining the reasons behind the merger, to draft an economic and financial plan indicating the objectives to be achieved and the financial resources to be used. In addition, an independent expert auditor shall evaluate the reasonableness of the statements contained in the merger plan on the obligations of the new entity resulting from the merger and, in the event that the buyer or the target company are subject to mandatory auditing, the buyer or target’s auditing firm shall draft a report on the merger plan. No exemptions, waivers or procedures (like whitewash) are available.

However, pursuant to Law no. 34 of 25 February 2008, Italy has undertaken to implement Directive 2006/68/CE (on the formation of public limited liabilities companies and the maintenance and alteration of their capital) and, in particular, the possibility for Member States to allow, subject to certain conditions being met, a company to directly or indirectly make loans or provide security with a view to the acquisition of its own shares by a third party. The precise scope of the provisions is still unclear as Member States retain a certain margin of discretion and, although implementing legislation was supposed to be passed by the end of May 2008, no such legislation has yet been enacted.

11. DIRECTORS’ LIABILITY
11.1 What are the most common scenarios in which director’s liability may arise?
Corporate benefit
Directors of a company must, at all times, act for the sole benefit of that company. As stated above, generally, an upstream or cross-stream security/guarantee can be provided by an Italian company to the extent that an actual benefit as direct or indirect consideration for the provision of the security/guarantee exists, such existence being a matter of fact to be addressed and evaluated by the directors of such company. The effective direct or indirect overall benefit for the company providing the security/giving the guarantee would need to be considered. For these purposes, a careful analysis of the transaction would have to be carried out by the relevant company’s board of directors when resolving upon it.  In particular, the board of directors would have to adopt a resolution on the basis of: (i) a careful examination of the existence of a consideration or at least of a reasonable indirect corporate benefit to be obtained in exchange for the provision of the security/giving of the guarantee; (ii) whether a potential prejudice may be caused to the company and/or its creditors by providing the security/giving the guarantee; and (iii) the likelihood that the guarantee/security is enforced and the prejudice that such enforcement could cause to the company and to its creditors. Article 2497 of the Italian civil code recognises the legitimacy of guidance and coordination as well as the physiological interference of the holding company in the management of the subsidiaries of its group. From a practical perspective, the instructions given by the holding company to its subsidiaries should be reflected in all board and shareholders’ resolutions, which must be properly grounded and must explain the reasons behind a certain decision. This does not exonerate the directors of the company from their liability vis-à-vis that company, its creditors, and third parties, since the directors are not legally bound to implement the instructions received.

Conflict of interests
Articles 2391 and 2475-ter of the Italian civil code deal with the rules of conflict of interests of directors of, respectively, a limited liability company (società a responsabilità limitata or S.r.l.) and a joint stock company (società per azioni or a S.p.A.). Pursuant to Article 2391, a director of an S.p.A. with a conflict of interests has a duty to disclose the nature and the main features of the conflict to the other directors and to the auditors. Pursuant to Article 2475-ter, if a director with a conflict of interest has executed a contract on behalf of the company, the S.r.l. has the right to file a petition with the competent court for an order declaring the relevant contract void. However, for the petition to be successful, the S.r.l. must provide evidence that the other party to the contract was aware or ought to have been aware that the director has a conflict of interests.

12. LENDERS’ LIABILITY
12.1 Does Italian law recognise a borrower’s right to sue a lender alleging lender’s liability issues?
Under Italian law a lender may in principle be liable to the borrower for:

(a) unlawful withdrawal of financing (interruzione abusiva di credito);
(b) unlawful refusal of financing (ingiustificato rifiuto di credito);
(c) mismanagement of the borrower (gestione di fatto);
(d) guidance and coordination (direzione e coordinamento); and
(e) aiding and abetting a borrower’s director to breach its fiduciary duty (concorso nell’ inadempimento dell’amministratore).

A lender may also be liable to the borrower’s creditors for unlawful financing (concessione abusiva di credito).

12.2 What are the theories under which a lender might be sued for lender liability?
Unlawful withdrawal of financing: a lender must perform a loan agreement according to the principle of good faith (buona fede) and, accordingly, shall not withdraw from a loan agreement without a good reason to do so or without giving proper notice. In the event of unlawful withdrawal of financing, the lender may be liable for breach of contract (responsabilità contrattuale) and have to indemnify the losses of the borrower arising from such withdrawal such as the higher cost of a new financing and supplies due to the loss of confidence of banks/suppliers, the damages caused by the borrower for the failure to timely pay third parties and, possibly, the insolvency of the borrower.

Unlawful refusal of financing: a lender shall not unreasonably refuse to extend a financing to a borrower after having generated a serious expectation in the latter that the financing will be extended. Such liability constitutes a pre-contractual liability (responsabilità pre-contrattuale) and, generally, it arises when a lender decides to refuse the financing for no objective reason and after having positively completed the credit risk analysis of the potential borrower.

Mismanagement of a borrower: a lender may be liable towards a borrower whenever it acted as a de facto director (amministratore di fatto) of the borrower pursuing interest conflicting with those of the borrower (e.g. through the exercise of rights normally belonging to the shareholders such as voting rights at the shareholders’ meeting).

Guidance and coordination: a lender may in principle be liable towards the shareholders of a borrower for all damages caused to the value of their interest in the borrower (and towards the borrower’s creditors for all damages caused to the net worth of the company) by the exercise of “guidance and coordination” over the borrower in spite of the borrower’s interests and in violation of the principles of sound corporate and business management.

Aiding and abetting a borrower’s director to breach its fiduciary duty: in the event a director appointed by the lender pursues the interest of the lender (and not that of the borrower), a lender may be liable jointly and severally with the director towards the borrower for aiding and abetting a director to breach its fiduciary duty owed to the borrower.

Unlawful financing: a lender may also be liable for “unlawful financing” of a borrower in the event it extended new finance to an insolvent borrower, thus worsening its liabilities.  Under the “unlawful financing” doctrine, the lender is liable in tort (responsabilità extracontrattuale) for the losses caused to the creditors of the borrower that dealt with the insolvent borrower after the granting of the financing on the basis that the Lender was (or should have been) aware of the insolvency status of the borrower. According to the prevailing court interpretation, in the event of admission of the borrower to an insolvency proceeding, the receiver is not entitled to bring such action as only the creditors that were actually damaged by the granting of the unlawful financing are entitled to do so.

Please note that, while many commentators have dealt with the lender liability issues described above, case law on the matter is still rather limited.

13. LEGAL OPINIONS
13.1 Are there any usual qualifications in Italian legal opinions?
General market standard qualification and specific qualifications on usury, compounding interest, corporate benefit, financial assistance and registration taxes are quite common in Italian legal opinions on validity and enforceability of facilities agreement and security documents.

14. POST-ACQUISITION RESTRUCTURINGS
14.1 Does Italian law provides for a “squeeze-out” right?
Pursuant to Article 111 of the Italian Financial Law, if - as a result of a takeover bid made to all holders of the offeree company’s securities - the offeror ends up holding at least 95% of the share capital represented by the offeree’s securities, the offeror is entitled to compel the holders of the remaining minority of the offeree company’s securities to sell their securities at a fair price, provided that it has declared to avail itself of such right under the offer document. Should the offeror wish to exercise the squeeze-out right, he/she shall do so within 3 months as from the end of the offer period.

14.2 Does Italian law provides for a “sell-out” right?
Pursuant to Article 108 of the Italian Financial Law, as amended by the Decree, the holders of the remaining minority of the offeree’s securities are entitled to compel the offeror to purchase their securities at a fair price, if one of the following two scenarios occurs:
 (i) as a result of a tender offer made to all the holders of the offeree company’s securities for all of their securities - the offeror ends up holding at least 95% of the share capital represented by the offeree’s securities; or
 (ii) any person comes to own more than 90% of the offeree company’s securities which are listed on a regulated market, unless such person restores a free float sufficient to enable regular trading in the securities within 90 days after becoming a 90% owner.

15. DEBT RESTRUCTURING
15.1 What are the types of in-court restructuring agreements available for companies in financial difficulties?
There are mainly two types of in-court restructuring agreements: the pre-bankruptcy composition (concordato preventivo) and the in-court debt restructuring agreement (accordo di ristrutturazione dei debiti).

Pre-bankruptcy composition: To avoid a bankruptcy proceeding, a debtor in a “state of crisis” (a larger concept than an “insolvent debtor”) may propose to enter with the creditors into a composition agreement usually providing for: the splitting of the creditors into different classes and different treatment for creditors who belong to different classes (no minimum level of payments is required by law); the restructuring of the debts and the payment of the creditors in any possible way including the assignment of the debtor’s assets to the creditors or the assignment of liabilities to a third party or any other corporate reorganisation such as the conversion of debt into equity, (convertible) notes or any other financial instruments; and the purchase of the assets/liabilities of the debtor by a pre-existing or newly created entity (assuntore), which will issue new shares to be distributed to creditors. Following the filing with the competent court of the debtor’s request for the pre-bankruptcy composition: the debtor is protected from the enforcement of the creditors’ claims; all debts are considered overdue; and the accrual of interest on the creditors’ claims and statutes of limitations are suspended.

After a formal verification of the request of the debtor, the court may admit the debtor to the pre-bankruptcy composition proceedings by way of decree, in which the court: appoints a judge presiding over the proceedings and a judicial commissioner; sets the date of the hearing at which the creditors will have to vote on the debtor’s proposal for the composition; and orders the debtor to deposit the amount necessary to pay the creditors on the basis of the proposal.

After the admission, the debtor maintains the management of the business under the supervision of the judicial commissioner and of the judge. Also, the judge will have to approve any transactions outside the ordinary course of the business. The pre-bankruptcy agreement will then need to be approved by the creditors (the approval requires specific majorities) and following the approval of the creditors, the bankruptcy court issues its final formal approval of the composition agreement (omologa), which must occur within six months - or a maximum of eight months in the case of an adjournment - from the date of the filing of the debtor’s request with the court. 

In-court debt restructuring agreements: A debtor may apply for an “in-court debt restructuring agreement” proceeding after having negotiated and executed an agreement with its creditors providing for the restructuring of its debt. The law expressly requires that the creditors representing at least 60% of the debtor’s total liabilities must approve the agreement but it is silent as to the content of such agreement. As a result, the terms of the agreement are freely negotiable. Then, the debtor has to file at the Court the agreement executed with its creditors and an expert’s opinion confirming the viability of the agreement and, in particular, the possibility of entirely satisfying the claims of the creditors who did not agree to the agreement. The agreement accepted by the required majority of the creditors becomes enforceable from the date of its publication in the register of companies and the debtor is protected from the enforcement of claims by any creditors for a period of 60 days thereafter. The opposition to the agreement does not suspend its enforceability. The Court will approve (omologa) the agreement provided that the agreement meets the formal requirements (favorable vote of the creditors representing at least 60% of debtors’ liabilities, authority of the signatories of the creditors, etc.) and - according to the prevailing opinion - the Court shares the expert opinion on the viability of the agreement. Following the court’s approval of the agreement, the payment and the acts carried out to implement the agreement are excluded from any risk of claw-back actions.

15.2 Is it common to achieve a restructuring outside a formal procedure?  In what circumstances might this be possible?
The Royal Decree no. 267 of 16 March 1942 (the “Italian Bankruptcy Law”) has been reformed in the past three years, with the aim of favouring the restructuring of distressed companies outside formal procedures or, at least, with a limited involvement of the bankruptcy court.  As a consequence, the debtor, who is in a state of crisis, may pursue its restructuring - other than by means of the typical formal procedures (see above) - also by means of:

 (a) A “restructuring plan” able to allow the recovery of the debtor: the main effect of the plan is to avoid the risk of claw-back actions with relation to acts and payments made in accordance with such plan, when its viability has been “certified” by an independent expert. The plan may also consist of an agreement entered into by the debtor and its creditors, whose terms and conditions are freely negotiable (e.g. such agreements usually provide for a moratorium and postponement of claims, partial or total waiver of claims, debt refinancing and undertaking from the creditors to refrain from requesting the beginning of any insolvency proceeding of the debtor). In this case, while acts and payments made in accordance with the plan cannot be clawed-back, the plan itself is binding only on creditors who have entered into it; and

 (b) agreements entered into by and between the debtor and its creditors different from the agreements above outlined sub-paragraph (a). Such agreements (i) are freely negotiable; (ii) are binding only on creditors who have entered into them; and (iii) in any case do not prevent acts or payment, made during their execution, from claw-back actions.

15.3 Is there any insolvency procedure in which creditors play a role in supervising the proceedings?
In a normal bankruptcy (fallimento), the creditors may play quite a significant role in the proceedings through the creditors committee.

The creditors committee is made of three to five creditors who shall adequately represent (the number and the type of) the creditors, taking into account also the actual possibility of satisfaction of the creditors. The creditors committee has wide and deep power of control and management. In particular, it controls the action of the receiver, expresses its vote in specific cases provided by the law or when requested by the bankruptcy judge and may request the bankruptcy court to replace the receiver. Furthermore, the creditors committee is asked to authorise (i) the continuation of the business of the bankrupt debtor after the declaration of bankruptcy; (ii) the lease of the business or part of it as going concern to third parties when the lease might be useful to the future sale of the business; (iii) the liquidation plan drafted by the receiver, (iv) the receiver to appoint some professionals to perform specific tasks; and (v) the receiver to perform specific actions such as waiving claims, executing settlement proposals, releasing security, continuing contract agreements.  These powers have been available to the creditors committee since 2006, after a substantial reform of the Italian Bankruptcy Law. Practice, however, shows that creditors are not effectively using these powers in bankruptcies as in Italy there is still a cultural gap to be filled in relation to the possibility for creditors to influence the steering of a bankruptcy proceeding.

16. ENFORCEMENT OF SECURITY
16.1 What are the typical routes of enforcement of security?
The rules on enforcement of security are provided by the Italian civil code and the Italian civil procedure code.

 (i) Pledge over shares/quotas
 Pursuant to article 2797 of the Italian civil code, the secured creditor/pledgee who intends to enforce a pledge over shares/quotas shall serve a notice on the debtor and the pledgor (if different) demanding payment of the amounts then due and warning them that, in case of failure to pay, the shares/quotas will be sold. Within 5 days from the date of receipt of the above-mentioned notice, if no objection is raised, or any objection raised is rejected, the pledgee is entitled to proceed with the sale of the pledged assets pursuant to the applicable provisions of the Italian civil procedure code. In the event of foreclosure, the pledged assets are typically sold through a public auction, or, if the collateral has a market value, it can be sold at the current market value through a person authorised to carry out such a sale. However, pursuant to the applicable Italian laws, the parties may agree on alternative procedures for the sale of the pledged assets.

 (ii) Mortgages
 A secured creditor having a valid title (titolo esecutivo) to enforce a mortgage shall: (a)  serve a notice on the debtor/mortgagor (pignoramento) informing the debtor of the enforcement action and prohibiting him to take any action that would affect the mortgaged property; and (b) have the notice registered in the competent Land Register, together with some other ancillary documents. With the pignoramento, the debtor/mortgagor is appointed custodian of the mortgaged property; however it is possible in certain circumstances to request the judge to appoint as custodian a person other than the debtor. In the event of foreclosure, the mortgaged assets may be sold through a public auction or as a private sale, through successive bids. The sale proceedings involve, inter alia, the assessment of the property value. Foreclosure proceedings must be started before the competent court (depending on the location of the property) and they are heavily regulated by the court. Sometimes the court may appoint a notary public, a lawyer or an accountant to carry out the sale proceeding, which involves, inter alia, assessment of the property value.

 (iii) Assignment of receivables by way of security
 Upon an event of default (or upon the occurrence of any other circumstance that would entitle, pursuant to the relevant deed, the assignee to enforce the rights deriving from the assignment of receivables), the assignee shall send a notice to the assigned debtors. The notice shall contain the instructions for the payment of the receivables directly to the assignee.

 (iv) Security over the balance on bank accounts
 The mechanism for the enforcement would in principle be the same as the one described in respect of the assignment of receivables by way of security. However, in case of a pledge over the balance on bank accounts, should the pledge also act as depositary bank, upon an event of default (or upon the occurrence of any other circumstance that would entitle, pursuant to the relevant deed, the pledgee to enforce the rights deriving from the pledge), the pledgee shall usually have the contractual right to utilise the balance on the bank accounts to discharge any amount due by way of set-off.

 (v) Privilegio speciale
 Upon an event of default (or upon the occurrence of any other circumstance that would entitle the secured creditor to enforce the rights deriving from the privilegio speciale), the secured creditor shall have the right to attach the assets subject to the privilegio speciale and proceed to their judicial sale or request the assignment of such assets up to the amount due to it.

16.2 What is the timing of the enforcement proceedings?
As to timing, there are important mandatory provisions of Italian law regarding the timing of an enforcement procedure. Indeed, while foreclosure on assigned receivables (including on balance of bank accounts) might be concluded in a brief timeframe, according to the provisions of the relevant deeds, foreclosure on assets subject to privilegio speciale or pledge (with the exception of balance on bank accounts) always requires court proceedings which might take up to several months (with the exception of security created pursuant to Law Decree No. 170 of 21 May 2004 (the Italian law implementing the Collateral Directive) in which case the assets might be assigned in an out-of-court proceedings). All foreclosures may take a longer period of time if the debtor/chargor raises objections.