Acquisition finance in Italy: overview
A Q&A guide to acquisition finance in Italy.
This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.
Market overview and methods of acquisition
Acquisition finance market
The Italian acquisition finance market is relatively developed. On the lending side, banks are still the main players on the Italian market. To date, funds and insurance companies have not yet played any substantial role due to certain restrictions provided under Italian financial regulations, which have only recently been partially disapplied. See Question 17 for detail on the regulatory changes that have broadened the lenders' category.
Methods of acquisition
This method is generally used when the transaction relates to a specific asset of a target company or a business unit. Asset acquisition is particularly advantageous in structuring the security package of the financing, as security interests can be granted directly over the acquired asset.
A possible disadvantage is the need to transfer licences, authorisations, permits and certificates (if any) related to the acquired asset or business unit.
This method is used when the transaction relates to the share capital (or a part of it) in a company, rather than a specific asset or business unit. If the acquisition refers to a company's share capital, the security interests of the financing cannot be granted directly over the asset of the acquired company, due to the restrictions on financial assistance (see Question 10). One advantage is the possibility to acquire all licences, authorisations and permits relating to the business (if any) without the need to carry out any transfer formalities (except in particular cases, where the shareholder's identity is relevant for acquiring these licences, authorisations and permits).
This method is not commonly used in Italy to acquire a company or a going concern. However, mergers are used when companies are acquired under the leveraged buy-out scheme, which is regulated by Article 2501bis of the Italian Civil Code. In these cases, a merger is usually the last step of the leveraged buy-out procedure.
There are no other methods used for acquiring business entities in Italy.
Structure and procedure
Both parties are usually involved in drafting the documents, although the financing party bears most of the responsibility for providing a first draft of all finance documents. Seller financing is used in the Italian market, specifically in the form of vendor loans. Vendor finance usually takes the form of subordinated deferred loans from the vendor and can be secured or unsecured. Buyers usually commit to an acquisition subject to them being able to arrange suitable financing. Therefore, a commitment letter is normally required to proceed with a binding offer, particularly in the context of auction sale procedures.
In an acquisition finance transaction, standard Loan Market Association forms can be used for drafting and negotiating facilities agreements. If the acquisition finance transaction is local and both the acquiring company and the lenders are Italian, the documentation is commonly regulated by Italian law. However, if the transaction involves an international purchaser, a private equity fund or international lenders, or if the size of the deal is significant, the finance documents tend to be governed by English law.
If the finance documents are governed by English law, it is necessary to re-draft certain sections of the documents to address specific Italian law-related issues. Security interests are normally governed by either:
The law of the jurisdiction in which the security asset is located.
If receivables are assigned by way of security, the law governing the assigned receivables.
A loan document governed by Italian law can be negotiated and executed in either the Italian or English language.
Acquisition finance transactions often involve the incorporation of a new company to be used as the vehicle that will acquire the target company or business assets, particularly if a private equity fund plays a role in the transaction or if several investors are involved. Typically, the vehicle is a limited liability company or equivalent, and the interests in that vehicle are subdivided into shares or quotas held by investors. Banks do not usually participate in the equity structure of the vehicle.
There are two categories of Italian limited liability companies used in acquisition transactions:
Joint stock companies (società per azioni) (SpA).
Limited liability companies (società a responsabilità limitata) (Srl).
The share capital of an SpA is usually represented by share certificates. The corporate capital of an Srl is divided into quotas, and each quotaholder owns a quota corresponding to its holding in the company's corporate capital.
However, if the purchaser is an Italian company and the target is incorporated in Italy, the incorporation of a vehicle for the acquisition may not be necessary.
Structures and documentation
Debt financing structures
The structure of an acquisition finance transaction can vary depending on the size of the deal and on the parties involved. For example:
Senior debt is typically used in corporate acquisition finance.
Leverage finance transactions can include a senior and a junior component.
Mezzanine debt is not frequently used in Italian acquisition deals, although it can be used in multi-jurisdictional deals.
In recent years, a few acquisition deals have been financed with the proceeds from the issuance of high yield bonds (combined with a revolving credit facility).
Payment-in-kind debt and equity kicker structures are not commonly used.
Standard documentation, such as Loan Market Association documentation, is generally used as a basis for drafting and negotiating acquisition finance documents.
While these documents can be governed by English law, certain sections must usually be re-drafted to deal with issues that specifically pertain to Italian law. Additionally, it is not unusual to apply Italian law to govern the facilities agreement. Finance documents governed by Italian law can be negotiated and executed both in the Italian and English language. If they are executed in English, an Italian sworn translation is required for admissibility in evidence before an Italian court.
The components of debt financing vary depending on the size of the deal. Larger financings can comprise a combination of the following:
Senior and junior debt.
Senior debt and high yield bonds.
Senior term and revolving debt.
First and second lien debt in the form of loans or notes.
Junior term debt.
Where multiple sources of debt are used, there will be a number of different types of creditors, each keen to protect their own interests. The main purpose of inter-creditor agreements is to contractually regulate the relationship between the different types of creditor through the following:
Establishment of priorities (payment subordination and/or security subordination).
If and when a lender can receive payments from the borrower (payment blockage).
If and when a lender can enforce its rights against the borrower (standstill periods).
Access to collateral.
These inter-creditor issues mostly arise in the case of large cross-border acquisition finance deals where there is a subordinated piece in the debt structure (that is, second lien, mezzanine debt, and so on). In these cases, the inter-creditor documentation is often based on Loan Market Association standards. Most deals in the Italian market (particularly domestic deals) are currently funded on a pari passu basis. Therefore, inter-creditor issues do not represent a major concern in most cases, or the inter-creditor documentation is relatively simple.
Contractual subordination is uncommon in Italian acquisition finance transactions, unless a shareholder loan or an intercompany loan is in place. In this case, the contractual subordination is commonly regulated in the inter-creditor agreement.
Structural subordination applies where the financing is allocated at the holding company level. In this case, lenders do not have access to the cash flow of the business and are paid only by distributions.
Payment of principal
When there are different categories of lenders, the inter-creditor agreement contains payment blockage provisions regarding principal, interest and fees. Restrictions on the payment of principal on the junior debt component until the full redemption of the senior debt are quite common and not controversial.
Restrictions on the payment of interest can vary significantly between agreements.
Restrictions on the payment of fees can vary significantly between agreements.
Security interests are usually ranked first and pari passu. The inter-creditor agreement regulates the sharing between different categories of creditors of the proceeds arising from the enforcement of security interests.
Subordination of equity/quasi-equity
Equity or quasi-equity is typically subordinated. In the case of shareholders' loans, the repayment of principal and interest is only allowed if the conditions for a distribution of dividends under the facilities agreement are satisfied (such as compliance with financial covenants, cash reserves, and so on).
Extent of security
If a new company is created to carry out an acquisition, it is standard practice for lenders to take security over both the:
Shares or quotas of the new company.
Shares or quotas of the target company.
Due to the restrictions on financial assistance, security interests over the assets of the target company are usually granted only after the "whitewash" merger between the target company and the acquiring entity is completed in accordance with Article 2501bis of the Italian Civil Code. If the merger is carried out in accordance with this provision, the merger plan must identify the financial resources to be used by the company resulting from the merger in order to meet its debt obligations, and an independent expert must certify that the assumptions and conclusions drawn in the merger plan are reasonable (see Question 16).
Lenders generally request to enter into security arrangements with all the group companies, while the borrower seeks to agree on security principles excluding non-material assets and setting out materiality thresholds and limitations of liability.
Types of security
Under Italian law, security can be taken mainly over:
Shares or quotas of a company.
Real estate property.
Equipment and machinery.
Receivables arising from contracts.
The methods of taking security over the above assets vary according to the type of asset concerned.
Shares or quotas. To grant a pledge over shares in a joint stock company or quotas in a limited liability company, a deed of pledge is required. To perfect a pledge over shares, a director of the company whose shares are pledged must annotate the pledge on the share certificates and in the company's shareholders' ledger. To perfect a pledge over quotas, the relevant deed must be notarised and filed with the competent companies' register (registro delle imprese). If the deed was executed before a foreign notary public, it must also be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation (if it is not drafted in Italian).
If the company whose shares are pledged is listed (or has opted to have dematerialised shares), no share certificates will be available and the pledge will be subject to:
The Italian Consolidated Financial Act (Legislative Decree no. 58 of 24 February 1998, as amended).
Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims (Collateral Directive) (where applicable) and the relevant Italian implementation law.
Inventory. In principle, a pledge over equipment and machinery (and raw materials) can be granted. However, in order for a pledge to be created, the pledged assets (or the document conferring the power to dispose of the asset) must be delivered to the lenders or to a third party designated as custodian by both the lenders and the grantor. As an alternative to a pledge, a form of floating charge (privilegio speciale) can be created if the financing has a term of more than 18 months (Article 46, Italian Banking Law).
Bank accounts. This type of security qualifies as security over receivables (namely, over the balance on the relevant bank accounts). In the case of security over the balance on bank accounts, the depositary bank must make an annotation in its books in accordance with the Collateral Directive.
Receivables. Receivables that can form the subject of a security interest include:
Receivables arising from share/asset purchase agreements.
Security over receivables can be granted in the form of an assignment by way of security or of a pledge. The perfection of the pledge requires the notification of the pledge to, or its acceptance by, the relevant debtor (with a document bearing a date certain at law). The debtor's notification or acceptance is also necessary for an assignment by way of security. With regard to insurance receivables, a loss payee clause (clausola di vincolo) can be included in the insurance policy.
Intellectual property rights. Security over Italian patents, designs, trade mark registrations and trade mark applications typically takes 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 Trade Mark Office. The deed of pledge must be notarised, and 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 must also be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation (if it is not drafted in Italian).
Real property. A deed of mortgage is required to grant a mortgage over land/property. The deed of mortgage must be notarised and registered in Italy. Therefore, it is usually executed in Italian before an Italian notary public. In principle, the deed can be executed before a foreign notary public, but he/she would not be able to carry out all the necessary title searches. The perfection of the mortgage requires registration with the competent land register (to be carried out by the Italian notary public).
Movable assets. Common forms of security over movable property include:
Special mortgages on registered movable property, such as aircraft and vessels.
Floating charges under Article 46 of the Italian Banking Law (only to secure claims under bank facilities with a term of more than 18 months).
Guarantees are a common form of credit support and are normally documented in a written undertaking executed by the guarantor for the benefit of the lender(s). A guarantee can be in the form of either a:
Surety, under which the guarantor personally guarantees the fulfilment of the debtor's obligation(s), jointly and severally with the debtor.
First demand guarantee, under which the guarantor pays the beneficiary a certain amount of money on first demand, regardless of any potential challenge by the debtor.
As a general rule, for an Italian company to provide a guarantee:
There must be a corporate benefit.
It is necessary to include adequate provisions in the company's articles of association, in particular the possibility to provide guarantees must be mentioned in the corporate object of the company.
While a corporate benefit for a downstream guarantee is usually self-evident, this may not always be true in the case of an upstream or cross-stream guarantee.
Generally, an Italian company can provide an upstream or cross-stream guarantee/security if there is an actual corporate benefit, such as a direct or indirect consideration for the provision of the guarantee/security. The company's directors must address and evaluate the existence of a corporate benefit. As the concept of "group benefit" is not sufficient per se to justify a guarantee under Italian law, the relevant board of directors must also carry out a careful analysis of the transaction when deciding whether there is a corporate benefit.
The provision of an upstream or cross-stream guarantee/security must be financially balanced. Therefore, a cap limiting the maximum guaranteed/secured amount must be inserted in the guarantee/security. This cap must be in line with both the:
Value of the company (for example, the net worth of the company).
Value of the benefit that the company is to receive or is likely to receive by providing the guarantee/security (for example, the amount directly borrowed by it or its subsidiaries and the amount of intercompany loans received by it or its subsidiaries with the proceeds of the financing).
Security interests governed by Italian law are generally granted to lenders individually. Therefore, security is not granted to one person for the benefits of the creditors, but instead each creditor must be the beneficiary of the security interest (and registered as such, if registration is a perfection requirement for that security). Generally, under Italian law, the trustee's role and function are replicated by appointing a security agent acting in name and on behalf of the other secured parties. This appointment is normally included in the loan agreement or in the inter-creditor agreement, which allows the security agent to:
Sign the security documents in name and on behalf of the other secured creditors.
Exercise their rights under the security documents.
However, this does not waive the requirement that the security must be granted and registered (if required) in favour of each lender individually.
The 2008 Finance Bill repealed thin capitalisation rules. Consequently, starting from 1 January 2008, the deductibility of interest paid by Italian companies on loans granted or guaranteed by qualified shareholders or related parties is no longer subject to thin capitalisation rules. However, there are new provisions regulating the deduction of interest expenses, which provide that (Article 96, Presidential Decree No. 917 of 1986, as amended by Article 1, paragraph 33, Finance Bill 2008):
Interest expenses accrued on loans and similar financial transactions are deductible for an amount corresponding to the interest income accrued on loans and similar financial transactions.
Any excess of interest expenses over interest income is deductible for an amount not exceeding 30% of the operating gross margin (relevant operating gross margin).
The operating gross margin is defined as the difference between the production value and the production costs, excluding the amortisation of intangible fixed assets, depreciation of tangible fixed assets and rent from financial leasing of fixed assets, as shown in the relevant profit and loss account.
The portion of non-deductible interest exceeding the above threshold (interest excess) cannot be deducted in the fiscal year in which it accrues. However, the interest excess can be carried forward without any time limit and deducted from the income realised in the following fiscal years, if the relevant operating gross margin is not entirely used to allow interest accrued in the same year to be deducted (operating gross margin excess). Additionally, the operating gross margin excess of a fiscal year can be carried forward, without any time limit. Specific rules apply to companies that opt for the domestic tax consolidation regime. More specifically, 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.
Joint stock companies
Italian joint stock companies cannot grant loans (or guarantees/security) to support the purchase or subscription of their own share capital, unless the following requirements are met (Article 2358, Italian Civil Code):
An extraordinary shareholders' meeting approves the transaction in advance.
The directors prepare a report, before the adoption of the above resolution, which describes the transaction from a legal and economic standpoint and outlines the:
terms and conditions of the transaction;
business purpose of the transaction;
company's interest in the transaction;
company's ability to sustain the relevant financial risk; and
price at which the company shares will be purchased or subscribed.
The directors attest in their report that the:
transaction will be carried out at market conditions; and
creditworthiness of the counterparty has been assessed and confirmed.
The directors' report attests that the transaction is in the company's best interest if financial assistance is to be provided to:
the directors of the company or its controlling company;
the controlling company; or
third parties acting on behalf of the directors.
The directors' report must be:
lodged at the company's registered office 30 days before the extraordinary shareholders' meeting; and
filed, together with the minutes of the shareholders' meeting authorising the transaction, with the competent companies' register (registro delle imprese) within 30 days after the date of the shareholders' meeting.
The aggregate amount of all loans and guarantees to be entered into by the company to support the purchase or subscription of its shares must not exceed the aggregate amount of distributable profits and reserves resulting from the company's last approved financial statements.
A special purpose non-distributable reserve for an amount corresponding to the aggregate of all the above loans and guarantees must be recorded in the company's financial statements.
The above procedure is rather cumbersome and requires the co-operation of the directors and shareholders of the company before its acquisition. Therefore, it is not commonly applied in an acquisition financing transaction. This issue is usually addressed by way of a debt push down through the merger of the acquisition vehicle (special purpose vehicle) with the target company (see Question 16).
Limited liability companies
Limited liability companies cannot grant any guarantee or security for the purchase or subscription of their own shares (Article 2474, Italian Civil Code).
Regulated and listed targets
The financial sector is the most important regulated industry in Italy, and includes:
Investment firms (società di intermediatione mobiliare) (SIMs).
Asset management firms (società di gestione del risparmio) (SGRs).
Collective investment companies, including:
investment companies with variable capital (società di investimento a capitale variabile) (SICAV); and
investment companies with fixed capital (società di investimento a capitale fisso) (SICAFs).
Payment and e-money institutions.
Effect on transaction
Since the single supervisory mechanism entered into force in 2014, the (direct or indirect) acquisition of any of the following stakes in Italian banks requires the authorisation of the European Central Bank, after the Bank of Italy's assessment:
A stake granting at least 10%, 20%, 30% or 50% of the voting rights in the bank.
A stake enabling the holder to exercise a significant influence over the bank's management.
A controlling stake.
The authorisation procedure takes 60 working days, unless the term is suspended due to information requests of the authority.
The same thresholds and term apply to acquisitions of qualifying and controlling stakes in:
Financial intermediaries, payment and e-money institutions, SGRs, SICAVs, SICAFs and SIMs, which must be authorised by the Bank of Italy.
Insurance undertakings, which must be authorised by the Italian Insurance Regulator.
In all the above cases, the competent authority can grant the authorisation if the sound and prudent management of the target is ensured and specific requirements are satisfied, namely:
The acquirer's good reputation, integrity and professionalism must be verified.
The acquirer must have a sound financial status in relation to the business envisaged in the target (specific evidence of the acquirer's financial situation and the funding sources for the acquisition is required).
The individuals to be appointed as directors, statutory auditors or general manager(s) within the target after acquisition must comply with specific "fit and proper" requirements.
The medium-long term business plan must ensure that the target will continue to comply with the applicable framework, including rules on corporate governance, prudential requirements, internal controls, and so on.
The group that the target will join and the relationship with the acquirer must allow effective supervision, exchange of information and clear allocation of responsibilities between the competent authorities.
The proposed acquisition must not entail risks of money laundering or terrorist financing.
Specific regulatory rules
In Italy, the provisions implementing Directive 2004/25/EC on takeover bids (Takeover Directive) are included in the:
Italian Consolidated Financial Act (Legislative Decree No. 58 of 24 February 1998 as amended).
Resolution No. 11971 of 19 May 1999 (Issuers Regulation), as amended, issued by the Italian National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa) (CONSOB).
Methods of acquisition
Takeover bids. The legal framework governing takeover bids is particularly complex and elaborate as it comprises several provisions and requirements, which apply differently depending on the specific cases. Takeover bids can be either voluntary or mandatory. Except for certain aspects (for example, price determination and the possibility to provide for conditions precedent), the procedure and information requirements are quite similar in both cases.
Relevant thresholds. Under the Takeover Directive, EU member states can decide on the thresholds that trigger mandatory takeover bids (MTOs). Italy opted for a "bright line rule", which provides that any of the following must launch a global takeover bid (that is, an offer to purchase addressed to all shareholders and for all the issuer's shares):
Any party that, as a result of purchases or an increase in voting rights, comes to hold a shareholding exceeding 30% of the voting share capital of a listed company.
Any party that, as a result of purchases and in relation to listed companies that do not qualify as small-medium enterprises, comes to hold a shareholding exceeding 25% of the voting share capital, provided that no other shareholders hold higher thresholds.
Any party that already holds a shareholding exceeding 30%, but less than 50% of the target's capital and one share (that is, the majority of voting rights which can be exercised at a general meeting, also known as de jure control), if it acquires or increases its voting rights by more than 5% of the issuer's capital in a 12-month period.
Issuers qualifying as small-medium enterprises can set different MTO thresholds (between 25% and 40%) in their articles of association.
Therefore, in Italy, the mere de facto control (that is, a situation where a party holds enough voting rights to change a company's board of directors and force it to act in accordance with its wishes) through a stake not exceeding the above thresholds does not trigger the obligation to launch a takeover bid.
The Italian Consolidated Financial Act and the Issuers Regulation provide for specific exemptions from the obligation to launch a takeover bid when the relevant thresholds are triggered.
For the purpose of calculating whether the MTO thresholds have been exceeded, Italian law also includes derivatives, both physically-settled and cash-settled (including, without limitation, swap, repos, futures, put and call options), which grant a long position on the securities.
Persons acting in concert. The obligation to launch a takeover bid is also triggered if one or more parties acting in concert acquire a percentage of voting rights in the target which is sufficient to reach in aggregate the thresholds referred to above. The Italian Consolidated Financial Act provides a broad definition of "persons acting in concert", according to which persons are presumed to be acting in concert when they co-operate in accordance with an agreement, either expressed or tacit, verbal or in writing, even invalid or without effect, for any of the following purposes:
Acquiring, maintaining or strengthening control over the issuer.
Counteracting the achievement of the aims of a takeover bid.
Exchanging tender offer.
The burden of proof lies with the person claiming that persons are acting in concert (for example, CONSOB or other shareholders). The presumption is rebuttable.
Under Italian law, the following persons are presumed to be acting in concert in four cases:
Parties to a shareholders' agreement, even void.
An entity, its parent company and its subsidiaries.
Companies that are subject to joint control by another company.
A company and its directors, the members of its management board or supervisory board or senior managers.
The Issuers Regulation specify the cases in which either:
The presumptions above apply unless the persons can prove that the relevant conditions are not met.
The co-operation does not qualify as acting in concert (safe harbours).
Under Italian law, persons acting in concert are jointly obliged to launch an MTO when, as a result of purchases made by any one of those persons, they come to hold an interest that exceeds in aggregate the thresholds for MTOs.
Price determination. The price of an MTO must correspond to either:
The highest price paid for the target's shares by the offeror (and any person acting in concert with it) over a period of 12 months before the offer is announced.
If no purchases were carried out, the average weighted market price of the issuer's shares in the 12-month period before the announcement.
In particular cases, CONSOB can determine a price that is higher or lower than the price referred to above, in accordance with certain criteria set out in the Issuers Regulation.
Additionally, an offeror can offer securities, cash, or a combination of both as consideration for the takeover bid. However, the offeror must offer cash consideration as an alternative if either:
The consideration offered does not consist of securities admitted to trading on an EU regulated market.
The offeror, or persons acting in concert with the offeror, have purchased for cash a number of shares representing 5% or more of the voting rights in the target, over a period of 12 months before the offer was announced and until the offer was settled.
An offeror can launch a takeover bid only if it can fully comply with its payment obligations under the offer. Consistently, offers in exchange for financial products can only be launched if the corporate body responsible for the issuance of financial products has already been convened to authorise the issuance. Additionally, a cash confirmation (or a copy of the resolution concerning the issuance of the financial products to be offered in exchange) must be filed with CONSOB immediately before the offer is launched.
Sell- out. A party that comes to hold a shareholding corresponding to more than 90% of an Italian listed company's voting capital (whether following a public tender offer or otherwise) must purchase the residual shares from any holder so requesting, unless the 90% shareholder restores, within 90 days, a float sufficient to ensure regular trading of the shares.
After the sell-out procedure is completed, the issuer's shares will be de-listed by means of a resolution adopted by Borsa Italiana SpA, regardless of the shares acquired under the sell-out procedure.
Squeeze- out. The right of squeeze-out applies whenever a party comes to hold a number of shares corresponding to at least 95% of the issuer's share capital exclusively following a public tender offer for all of the issuer's shares (either an MTO or a voluntary offer). In this case, the offeror has the right to purchase, and the remaining shareholders have an obligation to sell, all the remaining shares if the offeror declared its intention to exercise this right in the offer document that was published in relation to the previous tender offer.
The issuer's shares will in any case be de-listed when the squeeze-out threshold is exceeded.
Under Italian law, a lender can in principle be liable to the borrower for:
Unlawful withdrawal of financing (interruzione abusiva di credito).
Unlawful refusal of financing (ingiustificato rifiuto di credito).
Mismanagement of the borrower (gestione di fatto).
Management and co-ordination of the borrower (direzione e coordinamento).
Aiding and abetting a borrower's director in breaching his/her fiduciary duty (concorso nell'inadempimento dell'amministratore).
A lender can also be liable to the borrower's creditors for unlawful financing (concessione abusiva di credito).
The following applies in relation to claw back (Articles 67 and 65, Royal Decree No. 267 of 16 March 1942 (Italian Bankruptcy Law)):
Security granted in relation to a debt simultaneously created (including a third party's debt) can be clawed back by the insolvency trustee if it was granted within a hardening period of six months before the declaration of bankruptcy, if the insolvency trustee can prove that the relevant secured creditor was aware of the security provider's insolvency at the time the security was granted.
Security granted in relation to a pre-existing debt (that is, a debt already existing at the time the security was granted) can be clawed back by the insolvency trustee if it was granted within a hardening period of one year before the declaration of bankruptcy, unless the relevant secured creditor can prove that, at the time the security was granted, it was not aware of the security provider's insolvency.
Payments of amounts due and payable can be clawed back by the debtor's insolvency trustee within a hardening period of six months before the declaration of bankruptcy, if the insolvency trustee can prove that the creditor was aware that the debtor was insolvent at the time of the payment.
Payments of amounts that fall due on or after the date the bankruptcy was declared are ineffective against the bankruptcy estate and other creditors, if made in the two years before the declaration of bankruptcy. Therefore, if a debtor prepays amounts that are not due and payable at the time of payment, and is declared bankrupt in the following two years, the creditor will be exposed to a declaration of ineffectiveness of the payment received, and to the related obligation to reimburse the relevant amounts to the insolvency estate. To obtain a declaration of ineffectiveness of payments, the insolvency trustee does not need to provide any evidence that the creditor was aware of the debtor's insolvency, and the creditor cannot object that it was unaware of the insolvency.
Debt buy-back is not common in acquisition finance transactions. Indeed, as a general rule under Italian law, when the capacity as lender and borrower fall on the same person, the underlying debt is extinguished together with all ancillary rights (including security). Therefore, there is a risk of a court either:
Reclassifying the loan purchase as a prepayment, which may be in breach of prepayment provisions.
Subjecting the loan purchase to the pro rata sharing provisions in the loan agreement.
To overcome this, a buy-back can be structured as a purchase of the debt by the borrower's holding company.
A common form of post-acquisition restructuring in the Italian acquisition finance market is linked to the leveraged buy-out scheme, and is implemented by way of a debt push down through the merger of the acquisition vehicle (special purpose vehicle) with the target company.
The transaction must comply with the following main requirements:
The merger plan must identify the financial resources to be used by the company resulting from the merger in order to meet its debt obligations.
A board of directors' report must explain, among other things, the:
economic reason for the merger;
objectives it intends to achieve; and
financial resources that will be used.
An independent expert must certify that the assumptions and conclusions drawn in the merger plan are reasonable.
Independent auditors must provide a report on the merger plan.
In reaction to the credit crunch, in the last two years the Italian Government has introduced several changes to the Italian regulatory and tax framework, with the aim of making new financing options (alternatives to the traditional bank financing model) available to Italian companies.
Law Decree No. 91 of 24 June 2014 (Competitiveness Decree) has made it possible for Italian insurance companies and Italian securitisation vehicles (that is, companies incorporated in accordance with the Italian securitisation law) to engage in direct lending to Italian borrowers.
Additionally, Legislative Decree No. 44 of 4 March 2014, which implemented Directive 2011/61/EU on alternative investment fund managers (AIFM Directive), has made it possible for Italian AIFs to invest in credit by granting facilities. Law Decree No. 18 of 14 February 2016 has also authorised European AIFs to invest in credit in Italy (including in the form of direct lending) subject to certain conditions and without requiring funds to set up a permanent establishment. These measures must be enacted through specific implementation regulations to be issued by the competent Italian authorities.
Favourable tax regimes and exemptions from withholding tax on interest payments have also been made available to medium/long-term financings granted by banks and other entities established in an EU country. The Competitiveness Decree has significantly amended the tax rules applicable to medium/long-term loans, through the following measures:
A withholding tax exemption for interest payments made in relation to medium/long-term loans granted to companies by the following entities:
financial entities established in an EU member state;
entities listed under Article 1, paragraph 5, numbers 4) to 23) of EU Directive 2013/36/EU on capital requirements;
insurance companies incorporated and authorised to carry out their activity according to rules issued by an EU member state; and
institutional investors (that is, entities whose activity consists of making or managing investments on their own behalf or on behalf of other persons, as defined by Circular Letter No. 23/E of 1 March 2002, among others), even if they are not treated as taxpayers in their country of residence, but provided that they are resident in a country allowing an adequate exchange of information and subject to supervision in the country in which they are incorporated.
An extension of the circumstances in which the special substitute tax (imposta sostitutiva) regime applies. Loan agreements with a term of more than 18 months and one day can be subject to the special substitute tax regime if parties to the agreements expressly opt for the regime, and the loan is granted by (Article 15, Presidential Decree No 601 of 29 September 1973):
Italian or EU banks;
Italian securitisation vehicles incorporated in accordance with Law No. 130 of 1999;
insurance companies incorporated and authorised to carry on their business in accordance with rules issued by an EU member state; or
investment funds established in an EU member state or a European Economic Area state that has an adequate system for the exchange of information with Italy.
Before this reform, the regime only applied to loans with a term of more than 18 months and one day that were taken out in Italy and granted by Italian and EU banks. If the special substitute tax regime applies:
the relevant loan agreement will be subject to substitute tax at the flat rate of 0.25% calculated on the amount of the loan advanced to the borrower; and
the loan agreement (together with any related security and guarantee granted) will be exempt from registration tax (imposta di registro), stamp duty (imposta di bollo), cadastral and mortgage taxes (imposte ipotecarie e catastali) and government franchise tax (tassa sulle concessioni governative), which would otherwise apply.
Description. The website of the Italian Parliament contains the official and up-to-date texts of the laws approved by the Italian Parliament.
Bank of Italy
Description. The website of the Bank of Italy contains the official and up-to-date texts of the regulations issued by the Bank of Italy.
Italian National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa) (CONSOB)
Description. The website of CONSOB contains the official and up-to-date texts of the regulations issued by CONSOB.
Italian Insurance Regulator (Istituto per la vigilanza sulle assicurazioni) (IVASS)
Description. The website of IVASS contains the official and up-to-date texts of the regulations issued by IVASS.
Ministry of Economic and Financial Affairs
Description. The website of the Ministry of Economic and Financial Affairs contains the official and up-to-date texts of tax laws and regulations.
Description. EUR-Lex provides access, in the 24 official EU languages, to the official texts of EU legislation, including treaties, directives and regulations.
Emanuela Da Rin, Partner
Professional qualifications. Italy, Lawyer
Areas of practice. Banking and finance, with a particular focus on corporate finance operations, acquisition finance and real estate finance.
Assisted Salini-Impregilo in the credit facility arranged by a pool of banks to fund the acquisition of Lane Industries Incorporated (value: EUR400 million).
Assisted Clessidra SGR S.p.A., Advent International Corporation and Bain Capital Investors in the financing of the acquisition of Istituto di Credito delle Banche Popolari (value: more than EUR1 billion).
Assisted Terna in the revolving credit facility arranged by a pool of banks (value: EUR800 million).
Assisted Aareal Bank on Italian law matters related to the financing of the acquisition by a joint venture between Benson Elliot, Walton Street Capital and Algonquin of a pan-European hotel portfolio comprising eight prime hotels in seven major cities (value: about EUR420 million).
Languages. Italian, English
Professional associations/memberships. Member of the Italian Bar.
Alfonso Stanzione, Senior associate
Professional qualifications. Italy, Lawyer
Areas of practice. Banking and finance, with a particular focus on structuring and documentation of loan transactions and structured finance transactions.
Languages. Italian, English
Professional associations/memberships. Member of the Italian Bar.
Luigi Zagheno, Associate
Professional qualifications. Italy, Lawyer
Areas of practice. Banking and finance, with a particular focus on corporate finance operations, acquisition finance, real estate finance and debt restructuring transactions.
Languages. Italian, English
Professional associations/memberships. Member of the Italian Bar.