ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
6.10 Other Protections in Acquisition Documentation
case management business warranties prove not to be true. On the Italian market, liability cap under the W&I pro - tection generally varies from 10% to 30% of the trans - action value (ie, target’s enterprise value), with basket usually set at 0.25% of the transaction value. Time limitations under W&I coverage are generally as follows: • five years for fundamental warranties; • seven years for tax liabilities; • five years for employment and social security mat - ters, as well as environmental issues; and • three years for the business warranties. Generally, W&I covers unknown risks. However, there are cases where known risks are covered too (eg, title-related risks or certain tax risks – eg, VAT and withholding issues, etc). The known risks insurance protection obviously comes at a higher premium. Although it is not a rule, corporate sellers tend to give a more comprehensive set of warranties comprising both legal and business warranties. Liabilities cap tends to range between 10% and 20% of the pur - chase price and time limitation tends to vary between 12 and 36 months for business warranties and stat- ute of limitations apply to fundamental, whilst tax and employment are generally time-barred after the fifth anniversary of the closing, just like environmental liabilities. Usually, data room disclosure is accepted, thus limit - ing the scope of protection of the warranties, provided that disclosures occur in a fair and transparent man - ner. The protection’s limitation is often mitigated by special indemnities or price adjustment mechanisms whereby the financial risks of issues which are disclosed (thus not being covered under the general unknown risks W&I protection) are allocated to the seller. However, this is more frequently accepted by corporate sell - ers, while PE funds often seek for known risks W&I insurance.
In Italian PE deals, warranty and indemnity (W&I) insurance taken up by the buyer is now the norm (especially when the PE fund is the seller and the sale occurs through an auction process) as W&I helps find an acceptable compromise between the buyer’s desire for full protection and the seller’s preference for a clean exit with little or no liability risk tail. It is not yet given practice in the Italian market to use the so-called synthetic W&I, where declarations (in lieu of the seller business warranties) on the desired con - dition of the target are given by the buyer. Escrow or retention account to fulfil indemnification obligations is rarely accepted by PE players. Non- compete arrangements is another form of protection and a non-compete is not usually given by the PE seller. But for the management team, a non-compete and non-solicitation clause is normal and is usually found in both the employment contract and the sharehold - ers’ agreement. 6.11 Commonly Litigated Provisions Disagreements in PE deals are preferably settled through out-of-court solutions, and namely expert determination as it is a quick and effective resolu - tion for disputes usually focusing on financial mat - ters which are more familiar to experts than judges. In particular: • completion accounts such as correct application of accounting principles, the inclusion or exclusion of certain items, the valuation of certain assets and liabilities, etc; • earn-outs such as calculation of performance metrics such as EBITDA, how events occurred following the closing date can affect the earn-out, or whether or not the buyer acted in good faith in order to decrease the earn-out payable to the sell - ers; and • leakages such as undue transfer of value outside the target when a locked-box mechanism has been applied.
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