ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
6.5 “Hell or High Water” Undertakings It is uncommon for a PE-backed buyer in Italy to agree to a full-fledged “hell or high water” clause (eg, forc - ing the buyer to take all necessary actions, such as selling off specific assets, in order to obtain regulatory approval) in transactions where there are regulatory requirements, whilst PE-backed buyers are generally willing to undertake reasonable efforts to obtain clear - ance (which, however, does not encompass manda - tory divestures, etc) from merger control authorities. A far more cautious approach is adopted in relation to foreign investment clearances as it is a less predict - able and more uncertain area of law, often influenced by political sensitivities and government agendas and the EU’s Foreign Subsidies Regulation (FSR) regime, which is new, mainly untested and not a straightfor - ward merger control review. 6.6 Break Fees In Italian PE deals, it is uncommon in conditional deals with a buyer backed by PE for the seller to be awarded a break fee (which in other jurisdictions is aimed at compensating the seller for expenses incurred and missed opportunities in the event that the buyer backs out of the transaction for non-seller-related reasons). If a break fee is agreed (especially in the form of an obligation to incur transaction costs and expenses in case of no deal), the triggers are very specific and linked to the buyer’s failure to complete the transac - tion (eg, defaulted undertakings to fulfil a “hell or high water” commitment previously accepted). The amount of these break fees normally varies between 1% and 3% of the deal value. However, under Italian law, if the beak fee is subsequently deemed as a penalty, it may be lowered or declared unenforceable by a court. On the other hand, reverse break fees (which are meant to give the seller a predefined financial remedy in the event that a conditional agreement falls through for a buyer-related reason, such as not being able to secure financing) are rare.
6.7 Termination Rights in Acquisition Documentation
Italian PE deals have a limited number of triggers (eg, condition precedent not being met by a certain long stop date – normally two to six months following clos - ing; breach of warranty occurred before closing, caus - ing damage in excess of a certain value) entitling either party to terminate the sale and purchase agreement. 6.8 Allocation of Risk A PE fund’s main goal when it exits is to make a clean break and give the money to its investors as quickly as possible, with as little or no liability left over. Accord - ingly, a PE fund acting as seller in Italian transactions only offers a few “fundamental” warranties (eg, owner - ship of shares, capacity and authority). Accordingly, the buyer is required to do its own due diligence investigations and protect its risk through management warranties (provided that management is a seller too and/or it rolls-over) and warranty and indemnity (W&I) insurance. On the other hand, a PE fund acting as buyer will do a thorough due diligence and require a wide range of business warranties, specific tax and other indemni - ties, and a strong liability system with a higher cap and a longer claims period. 6.9 Warranty and Indemnity Protection When a PE fund sells a portfolio company on the Ital - ian market, it usually gives fundamental warranties capped at the price and time-barred after a period extending up to statute of limitations. These warranties are generally supplemented by management business warranties (including tax war - ranties, financial accounts, compliance with the law, material contracts, employment matters, litigation, etc), especially if the members of the PE portfolio company’s management team are sellers too or are rolling over their equity. Management warranties are given at no financial risk for the management, except in case of fraud, as they are intended to allow for the buyer to secure a war - ranty and indemnity insurance protection should the
286 CHAMBERS.COM
Powered by FlippingBook