ITALY Law and Practice Contributed by: Alessandro Corno, Luca Magrini, Pasquale Mosella and Rocco Pugliese, Alma LED
• the right to appoint board members; • the right to veto certain resolutions; and • the right to obtain all the information it needs. The fund will usually appoint a mix of its own partners and outside industry experts on the board as well as the CEO. Shareholder approval is needed for reserved matters, which normally include the following. • Financial matters – Approval of the annual budget, business plan, major capital expenditures above a certain threshold, and the incurrence of significant new debt. • Corporate actions – Approval of any changes to the company’s articles of association, issuing new shares, and any mergers, acquisitions or disposal of strategic assets. • Important appointments – The hiring and removal of key executives, like the CFO, may also be a reserved matter. Finally, the PE fund will have com - prehensive information rights. These rights go beyond what Italian corporate law requires. They usually include the right to get regular financial reports (like monthly management accounts and quarterly financial statements) and a detailed business plan. The PE fund will also have the right to inspect the company’s books and records and to have regular and periodic management meetings to review and discuss the company’s performance. 9.2 Shareholder Liability Under Italian law, the PE fund backing the majority shareholder can be held responsible for the actions of its portfolio company in very limited situations as the general legal principle is that the portfolio company is solely responsible, with its own assets and means, for its obligations. Indeed, if the PE fund is found to have acted as a “de facto director” because it has and exerts power over the company’s daily operations and strategic choices, a court may regard the fund as a de facto director and the PE fund would be exposed to the liabilities of a director. This is difficult to demonstrate as the fund’s control and oversight would need to go well beyond what a majority shareholder would normally do and directly interfere with the management’s duties. Italian
law additionally provides for a specific rule regarding when a “controlling company”/a company exercising guidance and co-ordination over another company is in breach of the principle of sound business manage - ment and as such it can possibly be held liable for the damages incurred by the controlled company. If a PE fund exerts significant power and influence over a portfolio company and that power causes dam - age to the company, the fund and the portfolio com - pany’s directors can be held liable for the damage caused to the company by minority shareholders and/ or creditors. This could happen if the fund directs the company to do things that are possibly beneficial for the fund but not so for the company, like a fraudulent transfer of assets or a risky deal (like highly leveraged dividend recaps) that is clearly not beneficial for the company. To reduce these risks, PE funds normally make sure to clearly document in the portfolio com - pany’s corporate documents that they are mere share - holders and not indirect managers (and accordingly act so as not to be perceived as if they were not just shareholders). In the past year, PE divested from their Italian portfo - lio companies not only via private sales to other PE- backed investors or companies and IPOs but also through other innovative solutions. One interesting trend is the secondary buyout, in which investors in a PE fund sell their whole interest in a PE fund to another fund. This is typically driven by the selling PE house, and it is more often not specific to a single portfolio company. If the PE fund intends to make a specific divestment rather than a portfolio one, continuation vehicles are also used. The continuation fund structure offers a certain degree of flexibility as it allows for co-invest - ment with other PE funds as well as with one or more investors of the first PE fund. Through the continuation fund structure, the PE fund retains an interest in the portfolio company on the assumption that the portfo - lio company will be able to increase its value. 10. Exits 10.1 Types of Exit
293 CHAMBERS.COM
Powered by FlippingBook