Mergers and Acquisitions in Italy: What to know about
Are you planning to acquire a business or a participation in a company in Italy? If so, it is important to know how to successfully structure the process and to consider all the legal, tax and financial aspects related to the transaction. In this article, we will provide a simple explanation of what M&A entails, how the process works in Italy, and the main steps involved. Mergers and acquisitions (M&A) are a critical aspect of modern business strategy. Whether a company seeks to expand its market presence, gain a competitive advantage, or streamline its operations, M&A transactions offer a powerful tool to achieve these goals. However, for those unfamiliar with the process, M&A can seem complex and confusing, especially in countries like Italy, where different legal, regulatory, and cultural factors come into play.
What are Mergers and Acquisitions?
• Merger: A merger occurs when two companies combine to form one entity. Typically they merge one into the other or both companies voluntarily agree to merge their operations and share ownership into a new entity.
• Acquisition: In an acquisition, one company purchases another. The acquired company may either cease to exist as a separate entity or continue to operate under its own name.
In both cases, the goal is to create value for shareholders by generating growth, creating synergies and improving business performance.
M&A deals in Italy, especially involving privately-owned companies or assets, can be structured in several ways:
• Share Deal: The buyer acquires the shares of the target company.
• Asset Deal: Specific assets or business units or line thereof are transferred to the buyer.
• Carve-Out: A new entity is created by the seller to hold certain assets, which are then transferred to the buyer.
• Capital Increase: An investor may enter the company by receiving new shares through a capital increase.
Negotiations between buyers and sellers often involve advisors (financial advisors, tax advisors, lawyers and accountants) and can range from private discussions to competitive auction processes where multiple bidders are involved. Typically, the whole process takes six months, though more complex deals may take a year or longer to finalize.
Legal Framework in Italian M&A
In Italy, most M&A transactions are between private companies, and parties are usually free to choose the governing law, although Italian law is commonly applied. Italy follows the consensual principle, where ownership is transferred once the parties reach an agreement, but specific formalities, like notary involvement, are required for asset or share transfers. However, company by-laws or shareholders' agreements may include specific rules on share transfers, such as pre-emption rights (giving existing shareholders first refusal) or drag-along rights, allowing majority shareholders to compel minority shareholders to sell during a company sale. The transfer must be registered with the Company Register with the relevant Chamber of Commerce where the company has its legal seat, often involving minimal fees. For joint-stock companies, share transfer requires registering the new shareholders in the company ledger. For limited liability companies, a notarial deed is necessary. These formalities ensure the buyer gains full ownership and rights, with the seller guaranteeing the title of ownership. To prevent antitrust issues, certain transfers may also need to be reported to Italian and European antitrust authorities if they exceed specified turnover thresholds, updated annually. Additionally, Italy enforces the Golden Power Act, which allows the government to review or block deals in key industries (e.g. defense, telecommunications, energy) to protect national interests. Transactions in regulated sectors, such as finance and insurance, may also need approval from regulatory authorities like the Bank of Italy.
Typical stages of an M&A deal
Precontractual phase
• Good Faith Negotiation: Italian law requires that parties negotiate in good faith, with Article 1337 of the Civil Code allowing for claims for damages in case of breach.
• Letter of Intent: It is common for parties to sign a letter of intent or a memorandum of understanding before negotiations, establishing a commitment to negotiate in good faith. A non-disclosure agreement may accompany the letter of intent.
• Due Diligence: In a mergers and acquisitions process, it is crucial to cover legal, labor, tax, and financial aspects, as well as compliance issues (environmental, data protection). Due diligence is usually conducted through a systematic review of the target company's financial records, legal documents, operational processes, and compliance practices. Such information is usually made available by the seller to the buyer via a virtual data room. Buyers can access important information about the target company through the Companies' Register (share details, registered shareholders, past transfers, articles of association, and financial statements).
Contractual phase
• Acquisition agreement: Once due diligence is completed or sometimes during the last part of the due diligence process, the parties negotiate the acquisition documents, namely the so-called SPA (Sale and Purchase Agreement) which often includes a certain set of contractual clauses such as i.a. the price mechanism, condition precedents, interim period, closing regulation, representations and warranties made by the seller regarding the business of the company and the related indemnities. If the seller breaches these warranties, the buyer may be entitled to compensation. To limit risk, agreements often set up caps on indemnities and define specific timeframes for the validity of warranties.
Pricing and Financing in M&A
The pricing of a transaction is typically based on the enterprise value, which may be calculated according to several mechanisms among which, probably the most popular is EBITDA multiple (Earnings Before Interest, Taxes, Depreciation, and Amortization). Enterprise Value is then bridged to equity value (the actual price paid by the purchaser) after certain adjustments. The most common adjustments are to the Net Financial Position and to the (adjusted) Net Working Capital as of the closing date. To ensure an accurate and fair valuation, companies often engage experts such as chartered accountants. Payment is usually made in cash at Closing, but payment terms can vary, with earn-out clauses allowing sellers to receive additional payments based on the company’s future performance. Escrows are common in cross-border deals to hold part of the purchase price until certain conditions are met. Financing options include cash, deferred payments (vendor’s loan), or bank financing. However, there are limitations on the target company’s involvement in financing its own acquisition, the so called ban on financial assistance. An alternative structure to finance the acquisition of a target by using its own cash flows is the so called leverage buy out – LBO or MLBO as it is followed by a merger of the target and the acquisition vehicle.
Finalizing the Deal
The final stage of an M&A transaction is the closing, when ownership officially transfers. In Italy, closing procedures require notary involvement to ensure that all documents are legally binding. Italian law recognizes electronic signature, when used properly, making it easier to finalize agreements remotely. However, in certain cases, physical documents and signatures may still be required. Post-closing covenants may also be agreed upon and may include non-compete clauses for sellers, preventing them from setting up a competing business for a specified period (a five-year limit under Article 2557 of the Italian Civil Code). Sellers may also be required to remain with the company for a transitional period to ensure a smooth handover of the business.
In summary, successfully navigating the legal, tax, financial and cultural complexities of the Italian market requires meticulous planning and expert advice. If you are a strategic buyer, a private equity firm or a private investor who plans to acquire a business or plans to purchase a participation in a company in Italy, please don’t hesitate to contact us. We can provide you with 360° assistance during every phase of an M&A transaction in Italy, including the business valuation of your target company and the organization/coordination of the whole M&A process.