ITALY Trends and Developments Contributed by: Michele Massironi, Maria Giulia Furlanetto, Fabio Dalmasso and Riccardo Siligardi, La Scala S.t.a.p.a.
soning of the Supreme Court is grounded upon the good faith principle and upon the reliability placed by the purchaser on the consistency of the target company’s actual assets with those set forth in the sale and purchase agreement. In light of the above, any eventual discrepancies between the target company’s actual assets and those set forth as reference at the time of execu - tion of the sale and purchase agreement would make it viable to terminate the agreement due to “lack of quality” , pursuant to Article 1497 of the Italian Civil Code. This means that such incon - sistency would concern the economic solidity of the company, thus affecting the value of the transferred interest, as a direct consequence. However, in further and more proximate deci - sions, the Italian Supreme Court (followed by other local courts) has diverged from this last interpretation. In decision no 19833, dated 18 August 2024, the Supreme Court confirmed the consolidated direction, stating that the trans - fer of a company’s interests (either quotas or shares) is a transaction that does not deal with the target company’s assets directly because the actual and transferred subject of the transac - tion is the interest itself, considered as the whole set of economic and administrative rights that certify the shareholder’s status. Consequently, any inconsistency in the target company’s assets does not impair the subject of the transaction nor the quality of the trans - ferred interest. Contingent liabilities or capital loss related to the target company’s assets can - not represent a defect (relevant for the purposes of terminating the agreement or decreasing the consideration) if the seller has not expressly agreed upon representations and warranties related to the consistency of the target com - pany’s assets.
In the absence of specific representations and warranties, therefore, the purchaser of an interest can claim the termination (or a decrease of the consideration) of the sale and purchase agree - ment only if the interest (and only the interest itself) is defective. This is the case, for example, if an interest is burdened by a seizure if it was sold as being free from any encumbrance, or if a non-voting interest is sold as a voting interest. Therefore, during a transaction dealing with an Italian target company, it is strongly recommend - ed to negotiate a proper mechanism of represen - tation and warranties and related indemnification duties, aimed at governing (and determining the consequences of) the emergence of contingent liabilities or of eventual previous circumstances that can affect the consistency of the target company’s assets. However, in order to avoid the application of the rules set forth by the Italian Civil Code and to secure the functioning of the indemnity clauses related to representation and warranties, it is very important to negotiate the “sole remedy” clause in connection with the indemnification clause. Indeed, the “sole remedy” clause states that the indemnification rights provided for in the sale and purchase agreement are the only post- closing relief available to either party in case of breach or, most often in the case of a seller’s warranty, a misrepresentation. Specifically, “sole remedy” clauses are purported to exclude the option of terminating the sale and purchase agreement pursuant to the respective Italian law provisions, thus avoiding the effect of title to the interest returning to the seller. Indeed, the effect of adding “sole remedy” clause is that the only consequence arising out of the breach of the agreement or misrepresentation will be the payment of a sum of money within the frame -
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