ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
8.5 Minority Protection for Manager Shareholders
• “bad leaver” status (eg, quitting, being fired for cause, or breaking restrictive covenants). In these cases, the manager’s vested shares are usu - ally bought back at a lower price, usually at a nominal value or a small percentage of the fair market value. Managers lose all of their unvested shares. 8.4 Restrictions on Manager Shareholders Management shareholders in Italian PE deals normally agree to restrictive covenants intended to protect the portfolio company’s and the shareholders’ interest. The most common restrictive covenants are: • non-compete – prohibition to work for a business that competes with the portfolio company through - out the investment period and for a certain period of time after they leave; • non-solicitation – prevention from soliciting the company’s employees, clients or suppliers to enter new business throughout the investment period and for a certain period of time after they leave; and • non-disparagement – prohibition on damaging comments about the company or the PE fund in public or private. There are legal limitations on restrictive covenants. For instance, a non-compete clause must be reason - able in how long it lasts, where it applies, and what it covers. The employee must also be paid enough money for the restriction, and such payment shall be contracted after the relevant termination. A non-compete clause that does not include com - pensation is usually regarded as invalid. The typical duration for a non-compete is the entire investment term plus 12 to 24 months following exit. The compensation is a key factor, and it is usually a percentage of the manager’s salary during the restric - tion period.
In Italian PE deals, minority manager shareholders do not usually enjoy specific protection rights such as governance rights or anti-dilution protections. Unlike in other jurisdictions, in Italy, minority manag - ers do not often get board appointment rights or veto powers. Most of the time, the majority PE investor retains the right to take all strategic decisions con - cerning the management and development of the business as well as the exit. Anti-dilution protection in favour of the manager shareholders is rare, which implies that their equity stakes may be diluted proportionally during capital increases. Proportional pre-emptive rights to buy new shares exist by law, but they do not offer protection to managers who cannot afford to subscribe for any new rights issue. Tag-along rights (ie, right to sell together with the PE fund at the same terms and conditions, pro rata) are the more common minority protection when it comes to divesting. Minority managers’ shareholding is normally granted in furtherance to managers’ incentive plans. Accord - ingly, minority manager shareholders normally enjoy boosted financial rights if the PE fund achieves its target returns. A specific statutory protection for minority sharehold - ers in Italy consists in the withdrawal rights upon the adoption of certain specific major corporate deci - sions, but these are not specific or tailored protections for manager shareholders. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights In Italian PE transactions, if the PE fund is the main, or a large, shareholder of the relevant portfolio com - pany, it typically enjoys significant governance rights such as:
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