ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism A fixed price with a locked-box mechanism and com - pletion accounts with price adjustment are the most common types of consideration structures utilised in PE transactions in Italy. Locked-box mechanism is preferred by the selling PE fund as it facilitates clean exit with no ties for price adjustments. A buying PE fund is sometimes receptive to a completion accounts mechanism if the target’s financial position at signing does not offer full confidence. In the locked-box structure a recent “locked-box date” balance sheet is used to determine the price. The buyer takes on the target’s economic risk and benefits as of the locked-box financial statements date. The seller is liable for any “leakage” of value (ie, value transfer in favour of the selling shareholders or their related parties) that takes place during the locked-box period outside the company’s ordinary business activities. Earn-outs and deferred consideration are also com - mon features, particularly when there is a significant valuation difference between the buyer and seller. Earn-out ties a portion of the purchase price to the tar - get’s future performance and is paid at a later stage. 6.2 Locked-Box Consideration Structures Interest (ticking-fee) is frequently charged on the price in Italian PE transactions that use a locked-box con - sideration structure in order to compensate the seller for the time value of the money since the buyer only pays the price at closing, even though it will acquire a right to the value of the business from the locked-box date. Interest is computed from the date of the locked- box balance sheet until the closing date. The interest rate is typically determined by adding a margin to a commercial benchmark rate like EURI - BOR. It is not common practice to charge “reverse- interest” on any amount that leaks during the locked- box period. A specific indemnity from the seller to the buyer is the main remedy to deal with leakage (eg, dividends, management fees, related parties’ pay -
ments, etc) in order to prevent value from being taken out of the target company for the benefit of the seller or its affiliated parties. 6.3 Dispute Resolution for Consideration Structures Disputes on consideration structures employing com - pletion accounts are generally settled by a dedicated expert (eg, accounting firm) acting as an impartial third party using the accounting rules and guidelines out - lined in the sale and purchase agreement (SPA). This solution is preferred over litigation because the expert deploys, in a quicker fashion, the required specialised knowledge in accounting issues. The requirement for an expert is less frequent for transactions that use a locked-box mechanism as there are no completion accounts to dispute. Disputes on locked-box structure relate mainly to “leakages” – ie, the seller’s improper extraction of value – and usually an expert does not handle these disputes (which are litigated in court or before an arbi - tration panel); and also because they do not merely depend on the application of technical and accounting rules, but rather on an assessment of facts and rules. 6.4 Conditionality in Acquisition Documentation Only mandatory and suspensory regulatory approvals and clearances (eg, merger control and foreign direct investments, so-called golden power) are typical con - ditions precedent to closing in Italian PE transactions. Non-regulatory conditions are less frequent. In particular, PE transactions are usually not contin - gent upon financing as this is usually committed at signing through for buyers backed by PE. Conditions pertaining to third-party consents from crucial contractual counterparties are frequent, but they are not standard as such consents are sought on a best-efforts basis between signing and closing. In Italian private transactions, material adverse change (MAC) or material adverse effect (MAE) clauses are also quite uncommon.
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