Legislative Decree no. 142 of August 4, 2008 became effective on September 30, 2008 and materially changed the previous regulation of financial assistance and share buy-backs, providing greater flexibility to M&A players.
Credit support by an Italian company to enable a third party to purchase its shares (so called “financial assistance”), once forbidden, is now allowed; with the burden on the Board to satisfy shareholders that the transaction is in the best interest of the company, it appears likely that fairness opinions by financial advisors will become an essential part of this new picture. As to share buy-backs, the lifting of the 10% limit is likely to make a buy-back by the target a more viable exit strategy for private equity funds.
Prior to the law amendment, Article 2358, first paragraph, of the Italian Civil Code simply prohibited an Italian company from granting loans to or providing guarantees in favour of third parties for the acquisition or subscription of its own shares. The new language of Article 2358 permits financial assistance provided certain conditions are met, in particular:
Board report – At least 30 days prior to the shareholders meeting mentioned below, the board of directors of the company must provide a report which: (i) explains the legal and economic terms of the transaction including the price to be paid by the third party, the transaction’s rationale and the business purpose that justifies it, the specific benefit for the company, and the risks associated with the transaction with respect to the company’s liquidity and solvency; (ii) confirms that the transaction is being carried out on arms’ length terms, in particular with respect to the interest rate on the loan, and that the creditworthiness of the third party has been duly evaluated; and (iii) where financial assistance is being provided to the company’s directors or its parent, states that the transaction is in the best interest of the company itself.
Shareholder approval – The transaction must be approved by the extraordinary shareholders meeting, therefore with heightened quorum and majority requirements.
Cap – The aggregate amount of financing granted and guarantees provided in the transaction may not exceed the limit of distributable earnings and available reserves according to the latest approved financial statements. A non-distributable reserve equal to the amount of the financial assistance granted by the company must be set aside in the company’s financial statements.
Any financing or guarantee in violation of financial assistance rules continues to be null and void.
It is worth noting that Decree no. 142/2008 only affected the rules applying to corporations (società per azioni), while limited liability companies (società a responsabilità limitata) remain subject to Article 2474 of the Italian Civil Code, which prohibits financial assistance with respect to such companies.
Decree no. 142/2008 expressly left un-amended the regulation of merger leveraged buyouts provided by Article 2501 bis of the Italian Civil Code.
Art. 2357, paragraph 3, of the Italian Civil Code provided that the par value of shares bought by a company under a share buy-back programme could not exceed 1/10 of such company’s corporate capital (including shares held by the company’s subsidiaries). Decree no. 142/2008 amended paragraph 3 of Art. 2357 so that the 1/10 limit no longer applies to companies whose shares are not listed on a regulated exchange (share buy-backs by listed companies also need to comply with the provisions of Legislative Decree no. 58/1998, the Italian securities act).
Paragraphs 1 and 2 of Art. 2357 were not amended, therefore other conditions continue to apply to both listed and unlisted companies, in particular: the cap provided by the aggregate amount of distributable earnings and available reserves, the requirement for shareholder approval setting forth maximum number of shares and price range, and the maximum duration of 18 months.
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