Under Italian law, ‘financial product’ is an umbrella term including very different instruments, such as debentures, managed investment schemes or ordinary equities and certain derivatives. Both the market and the financial products are basically regulated by Legislative Decree No 58 of 24 February 1998, ie Consolidated Financial Act (the ‘Consolidated Financial Act’).
The Commissione Nazionale per le Società e la Borsa (‘Consob’) is the public authority responsible for regulating the Italian securities market.
The Stock Exchange, the primary market, is managed by Borsa Italiana SpA (the ‘Italian Stock Exchange Management Company’). There are 331 listed companies on the equity market, of which 27 are on the recently launched segment MTA International. Domestic Market capitalisation is approximately €777 billion, equivalent to 52.7 per cent of GNP.
The main Italian markets are the following: a) the Stock Exchange, divided into the following markets:
ABSs, foreign securities and other debt securities are traded; b) the MTAX market, divided into the following markets:
c) the Expandi market, for trading shares, convertible bonds, warrants and pre-emptive rights not admitted to official listing on the Stock Exchange. Mercato Espandi is specially designed for small cap companies operating in traditional sectors with established positions in their markets and a positive result record. It has less rigorous requirements than the Stock Exchange and an accelerated listing process;
d) the Derivatives market (IDEM) for trading futures and options contracts whose underlying assets are financial instruments, interest rates, foreign currencies, goods or related indexes; and
e) The Alternative Capital Market (MAC) which is the alternative trading system dedicated to small enterprises. Admission to the MAC market shall be restricted exclusively to ordinary shares that are not – and have not been in the past – subject to a public offering or traded on other alternative trading systems or on regulated markets.The issuer’s latest financial statements shall be audited by an auditing firm entered in the special register held by Consob. Admission to trading on the MAC market must be contemporaneous with an institutional placement carried out exclusively with professional investors. The institutional placement requirement shall not apply to companies whose shareholders have included, for at least 12 months at the date of submittal of the application for admission, at least one institutional investor or, alternatively, at least 20 professional investors. Trading will begin on 17 September 2007.
2. FINANCIAL SERVICES AND MARKETS
The provision of investment services to the public is reserved to investment firms (SIM, EU investment firms and non EU investment firms) and banks.
EU investment firms may provide services in Italy according to the principle of mutual recognition by acting cross-border without establishing branches in Italy, provided the Bank of Italy and Consob have been informed by the competent authority of the home country, or by setting up a branch in Italy. The establishment of the first branch by an EU investment firm shall be subject to prior notification to the Bank of Italy and Consob by the competent authority of the home country and the branch will be entitled to commence its business two months after the notification.
Similarly, non EU investment firms may provide investment services and non-core services without establishing branches in Italy or by means of a branch, subject to the fulfilment of the requirements of the Consolidated Financial Act for Italian investment firms and Consob authorisation.
In the Italian legal system and with regard to investment firms, Consob and Bank of Italy play a key role in ensuring the correct functioning of the market.
Consob is the supervisory authority over investment firms and listed companies. It is the public authority responsible for regulating the Italian securities market and for ensuring the compliance with the rules for transparency and proper conduct to protect investors. Consob aims to ensure:
As the central bank, Bank of Italy has broad powers of supervision not only on banks but also, inter alia, over non-bank financial intermediaries, mainly investment firms and collective investment undertakings. Its responsibilities include the supervision of the sound and prudent management of banking and financial institutions. The supervisory function is based on authorisation, regulation, analysis of companies’ situations, inspections, on-site controls and crisis management. The Bank lays down prudential rules on capital adequacy, risk limitation, permissible holdings and company organisation, especially as regards internal controls.
Because properly functioning money and financial markets are needed to limit systemic instability and for an effective monetary policy, the Bank of Italy has been vested with important supervisory powers, particularly with regard to the wholesale markets in government securities, the inter-bank market and trading support services (clearing and final settlement of transactions, central securities depositories, and guarantee systems) and payment systems (the instruments, operators and rules of money transfer).
The Italian Stock Exchange Management Company is the leading company of the Borsa Italiana Group and is responsible for the organisation and management of the Italian Stock Exchange. In particular, it is responsible for:
The Italian Stock Exchange Management Company aims at ensuring the development of managed markets, maximising liquidity, transparency and competitiveness while achieving high levels of efficiency and profitability. Its shareholders are listed companies as well as domestic and international intermediaries including major Italian banks. Its privatised structure gives it operational autonomy and flexibility. A fundamental principle is the separation of responsibility for supervision (which rests with Consob and Bank of Italy) from that of market management (Italian Stock Exchange Management Company).
3. PUBLIC OFFERING
Companies planning a public offering must give notice to Consob, attaching a prospectus. This prospectus should contain information necessary for investors to make an informed assessment of the issuer’s assets and liabilities, profits and losses, financial position and prospects and of the financial products and related rights.
Issuers that have already published a prospectus or listing particulars may use the same document for any additional offerings made in the subsequent 12 months, updating the information in the document and supplementing it with a note on the features of the products involved in the new offering. With regard to non-equity securities issued by banks, the prospectus is valid until the securities concerned are no more issued in a continuous or repeated manner.
It is worth noting that, Article 100 of the Consolidated Financial Act, states that financial instruments offered only to institutional investors are exempted from the obligation to publish a prospectus. However, in order to prevent some form of circumvention of the obligation to publish a prospectus, Article 100-bis of the Consolidated Financial Act, as recently amended by Article 3 of Legislative Decree 51 of 28 March 2007, states that should the institutional investors resell such securities to the retail investors within one year from their issuance and without publishing a prospectus, the retail investor may challenge the nullity of the purchase and the institutional investors remain liable for damages vis-à-vis retail investors.
Under Article 98 the Consolidated Financial Act, as recently amended by Article 3 of Legislative Decree 51 of 28 March 2007, implementing in Italy the Directive 2003/71/CE on the prospectus to be published when securities are offered to the public or admitted to trading, the prospectus and any supplements approved by Consob are valid for the purposes of offering EU financial instruments in other EU member states (‘passport’). To this end, Consob shall issue notice in compliance with the procedure pursuant to EU provisions. Where the offer of EU financial instruments is provided for in Italy, the host member state, the prospectus and any supplements approved by authority of the member state of origin may be published in Italy, as long as they observe the notification procedures pursuant to European provisions. Consob may inform the competent authority of the member state of origin of the need to supply new information. On 11 April 2007 d’Amico International Shipping SA was the first company admitted to listing only on the Italian market (MTA, Star Segment) on the basis of a prospectus passported in another EU country (Luxembourg).
Pursuant to the article 14 of the Consob Regulation 11971/1999, the persons who usually prepare the offering document are: the offeror, the issuer and the person entrusted with the placement (distributor). These persons shall observe principles of proper conduct and transparency and equal treatment of the addressees of the offering and shall abstain from disseminating information conflicting with the prospectus or likely to influence acceptances.
Under Article 94 of the Consolidated Financial Act, as recently amended by Article 3 of Legislative Decree 51 of 28 March 2007, the issuer, offeror and any guarantor, depending on the case, as well as the person responsible for the information contained in the prospectus answer, each in relation to the parts of pertinence, for damages endured by the investor who has reasonably relied on the truthful and complete nature of the information contained in the prospectus, unless he is able to present proof that he took every precaution to ensure that the information in question was conformant with the facts and there were no omissions such as to alter the meaning. The responsibility for false information or for omissions such as to influence the decisions of a reasonable investor is held by the intermediary responsible for placement, unless he is able to present proof that he took every precaution, as indicated above. No one may be called upon to answer exclusively on the basis of the summary, including any translations, unless the summary is misleading, imprecise or inconsistent when read along with other parts of the prospectus. Claims for compensation must be made within five years of publication of the prospectus, unless the investor can prove the false nature of the information or omissions within the two years prior to the exercise of such claim.
With respect to the liability deriving from a false or incorrect prospectus, article 173-bis of the Consolidated Financial Act establishes that whoever, with a view to obtaining an undue profit for himself or for others, in prospectuses required for public offerings or for admission to trading on regulated markets, with the intention of deceiving the recipients of the prospectus, includes false information or conceals data or news in a way that is likely to mislead such recipients, shall be punished by imprisonment for between one and five years. In addition, according to the general principles of Italian civil law, there are two other types of responsibilities for an incomplete, incorrect, false or misleading prospectus:
Since the prospectus is signed by the issuer, the offeror and the placer, liability will fall on them according to their respective roles in providing defective information. The limited case law on this issue indicates that liability for a false prospectus shall be subject to general rules governing the violation of the duty to behave in good faith between the parties to a contract. Damages may include lost profits.
In addition, case law establishes that Consob may be held liable if it does not accurately exercise its control over the prospectus and is negligent in verifying the completeness and correctness of the information provided.
4. LISTING
General requirements
In order to go public on the Stock Exchange, companies must fulfil both regulatory requirements set down by Consob and market requirements set forth by the Italian Stock Exchange Management Company. The market requirements relate both to the issuer and the shares.
The issuer must have:
Companies must also fulfil disclosure and transparency obligations, such as periodic and price sensitive information, dividends calendar and information concerning extraordinary operations; and corporate governance requirements, which basically entails acceptance of the Code of Conduct containing the Corporate Governance Rules of Listed Companies.
Further market requirements are based on real growth and business prospects and include:
It is mandatory to appoint a sponsor to assist the company with the listing process. The sponsor shall also support the listing for at least one year producing research reports and organising meetings with investors.
Admission and listing costs for a medium size company can be roughly estimated at between four and five per cent of the value of the global offer and include:
Annual fees to the Italian Stock Exchange Management Company include a fee equal to €11 every six months for every €500,000 of market capitalisation, calculated on the basis of the average for the six preceding months (with a floor of €6,500 and a cap of €250,000 per half-year). There are different fees for Italian and foreign companies already listed on other stock exchange markets.
5. CONTINUING COMPLIANCE REQUIREMENTS
Issuers of financial instruments and entities controlling them shall promptly inform the public and the market of certain facts. Moreover, they must prepare financial reports for each financial year. Communications with the market shall comply with criteria of correctness, clarity and equal access to information. Issuers of shares must prepare half-year and quarterly financial reports. They shall also make certain information regarding a merger or a division available to the public and to the market.
Issuers of financial instruments, within one day of the approval of the company annual accounts, shall make the following information available to the public at their registered office:
Issuers of shares, within 45 days of the end of each quarter of the financial year, shall make a quarterly report prepared by the board of directors available to the public at the company’s registered office and the Italian Stock Exchange Management Company.
Pursuant to article 114 of the Consolidated Financial Act: “listed issuers and the persons that control them shall inform the public of events occurring in their or their subsidiaries’ sphere of activity that have not been made public and that if made public would be likely to have a significant effect on the price of the listed financial instruments”. This concerns both the activities of such persons and the listed financial instruments.
Such information should be disclosed by issuing a press release to the Italian Stock Exchange Management Company, which shall immediately make it available to the public, to at least two news agencies and to the Consob. In particular, listed companies should disclose
(i) accounting data that will be reported in their company or consolidated annual accounts, half-yearly reports or quarterly reports when such data has been communicated to third parties and in any case as soon as the information is sufficiently certain; and (ii) resolutions whereby the competent body approves the draft company annual accounts, the proposed dividend, the consolidated accounts, the half-yearly report, and the quarterly reports.
Italian listed companies that are also listed on a foreign stock exchange should ensure that Italian investors have equal access to any information disclosed to the foreign exchange, even where it goes beyond Italian market requirements.
6. PROHIBITED CONDUCT
Insider trading can be defined as unauthorised use of inside information.This conduct is unlawful and mainly regulated by articles 180-184, 186-187-bis and 187-quater-187-septies of the Consolidated Financial Act. Insiders, ie, those who possess inside information by virtue of holding an interest in a company’s capital or exercising public or other duties, a profession or an office are prohibited from:
Law no 62 of 18 April 2004 (the 2004 Community Law) has depenalised any conduct of tippees. As a result, any tippee cannot be punished with imprisonment, even if he committed the offence prior to the depenalisation of the relevant rule (that is to say, 12 May 2005). However, according to article 187-bis, paragraph 4, of the Consolidated Financial Act, the conduct of tippees remains subject to pecuniary administrative sanctions of between €20,000 and €3 million.
Article 181 of the Consolidated Financial Act defines inside information as ‘any information having a precise content concerning financial instruments or issuers of financial instruments that has not been made public and that, if made public, would be likely to have a significant effect on the price of such instruments’. The offence is committed by virtue of the use of such particular information and through its simple possession. In particular, paragraph 3, of article 181 of the Consolidated Financial Act specifies that information shall be deemed to be of a precise nature if:
In addition, the following paragraph 4 clarifies that information which, if made public, would be likely to have a significant effect on the prices of financial instruments, shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions.
As to the scope of application of the provision, article 182 of the Consolidated Financial Act establishes that the offence is committed where the trading is carried out: (i) in Italy, in respect of financial instruments admitted, or for which an application has been made for admission, to trading on an Italian regulated market; (ii) in Italy, in respect of financial instruments admitted to trading on an Italian regulated market, even if the instruments are traded in EU regulated markets; and (iii) abroad, provided that the instruments are traded in any Italian regulated market. According to Principle No 3 of the ‘Guidelines on Information to the Market’ issued in June 2002 by the Italian Stock Exchange Management Company, certain items of information, such as letters of intent, negotiations, are disclosed to the market where both the following events occur:
According to the Guidelines, there is no breach of the confidentiality duty if the issuers disclose inside information, by virtue of their office duty, to third parties legally or contractually bound to keep them confidential.
In addition, by virtue of paragraph 4 of article 184 of the Consolidated Financial Act, which includes in the definition of financial instruments also non-listed financial instruments whose value depends on a listed financial instrument, it seems that the criminal offence of insider trading has been extended to this type of non-listed financial instruments.
Consob has the power to investigate insider trading. Article 187-octies of the Consolidated Financial Act establishes that Consob may require information, data or documents from and hear anyone who appears to be acquainted with the facts, and set time limits for the fulfillment of these requirements. Consob can avail itself of the cooperation of governmental bodies and have access to the information system of the taxpayer register. Article 3.4.2 of the market regulation adopted on 21 December 2005 by the Italian Stock Exchange Management Company, approved by CONSOB on 8 February 2006, establishes that the authority must immediately report to Consob any evidence of insider trading.
Insider trading may result in both criminal and civil liability. It can be penalised by imprisonment for up to six years and a fine of between €20,000 and €3 million, which may be tripled depending on the seriousness of the offence. The means used to commit the offence and profits may be confiscated under article 187 of the Consolidated Financial Act.
Market manipulation is considered an offence under Italian law. The new article 2637 of the Italian Civil Code provides that ‘any person who disseminates false information, or sets up sham transactions or other devices concretely likely to produce a significant alteration in the price of financial instruments not admitted, or for which an application has not been made for admission, to trading or to significantly undermine the public’s confidence in the soundness of banks or banking groups shall be punished by a term of imprisonment from one to five years.’ The aim of the prohibition is to avoid artificial securities prices.
The same prohibition applies where listed securities are concerned; in which case the sanctions set forth under article 185 of the Consolidated Financial Act are more severe (imprisonment from one to six years and fines from €20,000 to €5 million.
7. TAKEOVERS
Public takeovers in Italy are regulated by the Consolidated Financial Act. In addition, Law 287 of 10 October 1990 (the Antitrust law) regulates merger control in Italy in cases not governed by the EU Merger Regulation. The Italian Antitrust Authority examines the effects of takeovers and mergers on competition.
It is worth noting that takeover rules and procedure are about to change as a result of the implementation of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.
In Italy, takeovers formally start when an offer document is lodged with Consob. The bidder is bound to disclose to the public the essential terms of the offer immediately, even before the publication of the offer document. Simultaneously with the lodging of the draft offer document, the bidder is required to send a communication to the market and the target company. The communication must contain the essential elements of the offer, the purposes of the offer, details of how the offer will be financed, the guarantees, if any, and the offer conditions.
The offer document must include:
Consob has 15 days from the filing of the draft document to comment upon it and approve the offer document. The acceptance period cannot start until the bidder has delivered to Consob the appropriate documentation confirming that the bid, if any, is fully guaranteed. Following Consob’s approval, the offer document is published by sending it to the target company and making it available to the market through publication in the press and by Consob. The bidder must agree with the stock exchange the start of the acceptance period and its duration. If the offer is for 100 per cent of the target’s shares, the period shall be between 25 and 40 market days. Otherwise, the period will range between 15 and 25 market days.
Once the offer plan is publicly announced, the target company becomes subject to the ‘passivity rule’, which prevents it from taking any action that may hinder the achievement of the objectives of the offer, unless the shareholders’ meeting of the target company resolves otherwise with the favourable votes of at least 30 per cent of the corporate capital.
The transaction is essentially between a bidder and target shareholders. Negotiations with target shareholders are possible and may lead to the execution of an irrevocable undertaking to sell at a certain price. However, the Consolidated Financial Act makes clear that where a competing offer is launched, shareholders who have already accepted an offer may withdraw their acceptances and accept the competing bid instead. Therefore, if during the offer period (ie, from the filing of the draft offer document with Consob until the payment date) the bidder purchases target shares, or acquires the right to purchase them after the offer closes, at a higher price than the offer price, the offer price will have to be increased to this higher price (best price rule).
Shareholders accept the offer by signing an acceptance form made available at the bidder’s offices. Such acceptance is irrevocable unless a competing bid is announced. From the bidder’s side, Italian law provides that a takeover offer is irrevocable and any clause to the contrary is void.
Subjective conditions (ie, ‘conditions which depend on the mere will of the offeror’) are not permitted. Therefore, a bid can not, for example, be conditional on financing. Nevertheless, conditions could include antitrust clearances, regulatory authorisations, no material adverse change in the target and no frustrating action by the target.
8. MANAGED INVESTMENTS SCHEMES (MUTUAL FUNDS)
In Italy, mutual funds shall mean OICR (acronym for organismi di investimento collettivo del risparmio, ie collective investment undertaking).
According to Consob, the most popular funds in Italy are open-ended. Harmonised funds (ie, EU investment funds falling within the scope of the directives on collective investment undertakings) that essentially invest in open-ended funds are by far the most common funds in the Italian market.
The regulation of mutual funds is basically contained in Chapter II of Title II of the Consolidated Financial Act, ie articles 34 to 40.
A mutual investment fund is validly established when two basic conditions are met:
Asset management companies are required to organise themselves in a way as to minimise the risk of conflict of interests, bearing in mind that conflict can also arise between portfolios under the same management.
In this respect article 40 TUF provides that Italian asset management companies must: • operate diligently, correctly and transparently in the interests of the unit-holders and the integrity of the market;
• organise themselves in such a way as to minimise the risk of conflicts of interest, including conflicts between the pools of assets under management and, where a conflict of interest exists, act in such a way as to ensure the fair treatment of the collective investment undertakings; and
• adopt measures to protect the rights of the unit-holders and have sufficient resources and suitable procedures for the efficient provision of services.
In Italy the custodian must be a bank. In addition, the depository bank must fulfil two kinds of requirements: • organisational requirements: the bank must be an Italian bank or a European one with, at least, one branch in Italy. The bank must have assets of not less than €100 million, adequate experience and an appropriate structure; and
• independence requirements: in order to guarantee the independence of the Italian management companies (SGR) the managing director, the chief executive and the members of the management committee of the SGR are not able to assume similar roles within the custodian bank.
Consob regulation No 11522 of 1 July 1998 (‘Consob Regulation’), implementing the provisions of article 40, requires management companies to be on the alert to conflict of interests, such as conflicts deriving from intra-group relationships or other business dealings of an asset management company or of group companies. Article 49 of the Consob Regulation states that asset management companies may carry out transactions where they directly or indirectly have a conflicting interest, provided they ensure an equal treatment of the collective investment undertakings they manage, taking into account the costs connected with the transactions. It has also to be noted that Law no 262 of 28 December 2005 (the so-called Law on Savings) has delegated the government to issue one or more decrees introducing a regime to prevent conflicts of interest, among others, in the management of investment funds and individual portfolios on behalf of third parties. So far, the government has still not issued any decree.
Public control of the funds is entrusted to Consob and the Bank of Italy. The Consob is responsible for ensuring compliance with conduct rules and transparency requirements. Every manager wanting to offer a mutual fund shall draft a prospectus containing the most relevant information to the public, such as the issue, the benchmark or the risk. This prospectus must be approved by the Consob.
The Bank of Italy, after consulting Consob, authorises the management company. In addition, the Bank of Italy shall approve the fund rules containing the main characteristics of the fund (ie, the name and duration of the fund; the manner of participating in the fund, the time limits and procedures for the issue and cancellation of certificates and for the subscription and redemption of units, as well as the procedures for winding up the fund; the bodies responsible for the selection of investments and the criteria for the apportionment of investments; the types of goods, financial instruments and other assets in which the fund’s assets may be invested; the methods for determining the fund’s operating income and profits and, where appropriate, the manner in which the latter are allocated and distributed; details of the expenses to be borne by the fund and those to be borne by the Italian management company; the amount of, or the methods for determining, the commissions due to the Italian management company and the charges to be borne by unit holders; and the manner of making public the value of units).
The rules for foreign collective investment schemes are different for EU and non EU entities. The marketing in Italy of the units of EU investment funds falling within the scope of the directives on collective investment undertakings must be notified in advance to the Bank of Italy and Consob. Marketing may begin following a two-month period running from the date of notification. Among the main requirements for such funds are that they cannot invest more than five per cent of their assets in securities offered by a single issuer.
The marketing in Italy of the units of investment funds not falling under the directives on collective investment undertakings shall be authorised by the Bank of Italy, after consulting Consob, provided the operating arrangements are compatible with those prescribed for Italian undertakings.
FOOTNOTES
(1) The authors express their gratitude to Barbara Pansadoro for her valuable assistance
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