Investing in Italy: The Corporate Landscape

Italy offers a wide range of opportunities for foreign investors, especially those interested in acquiring Italian technologies, brands and distribution channels to secure a gateway to Europe.

In recent years the Italian Government has undertaken additional economic and legal reforms in a variety of areas in order to increase the country’s long-term growth, foster competitiveness worldwide and harmonise its domestic legal system with the rest of Europe.

This first article in a series of five delves into what investors such as private equity and venture capital firms need to know about the different company structures in Italy.

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Business operations can be carried out in Italy in a variety of ways.

Setting up a representative office is usually the first step to exploring the local market and business opportunities. To set up a representative office, it must be registered with the local registry of companies and the relevant employment offices must be informed in writing. Apart from this, no other legal registration formalities apply, no financial statements are required and no corporate tax is applicable. A representative office is not allowed to handle commercial or financial transactions of any kind nor to act as agent or distributor of the foreign company.

Foreign investors may conduct their business in Italy through a branch, which, in itself, does not represent a separate entity from a legal viewpoint and is treated for the purposes of Italian law as a “foreign company”^[1].

As a further alternative, foreign investors may decide to set up their local subsidiaries by establishing a company under Italian law. Most often the subsidiary incorporated in Italy will take the form of:

1. Società per Azioni or S.p.A. (commonly known as “Joint Stock Company”); or
2. Società a responsabilità limitata or S.r.l. (commonly known as “Limited Liability Company”)^[2]_.

Both types of companies are characterised by the limited liability of their share/quota holders, although they differ in the following ways:

1. Società per Azioni or S.p.A.. Is usually suitable for bigger companies that have a more widely distributed share capital or that intend to raise funds or to offer equity or debt instruments in the capital markets. Corporate capital is divided into shares. It requires a minimum capital equity investment of EUR 50,000 and is governed by a number of mandatory legal provisions. As a general rule, all shares must have an equal value and entitle shareholders to equal rights. However, the by-laws of the company can provide for the issuance of special categories of shares with different rights (g., priority rights in the distribution of dividends, multiple or limited voting rights, voting rights conditioned to the occurrence of certain events). In general terms, the overall legislative system governing the financial instruments (including shares) that can be issued by an S.p.A. is becoming more flexible and more aligned with the applicable European legal framework;
2. Società a responsabilità limitata or S.r.l.. Is usually more suitable for small and medium-sized businesses with a limited number of partners. Its minimum capital requirement is EUR 1,00, provided that certain covenants are met (g., the gradual creation of a capital reserve of at least EUR 10,000). Corporate capital is divided into quotas, which represent a percentage of the overall corporate capital. Each quota-holder owns only one quota, the value of which may vary depending on the portion of corporate capital to which it refers. There is greater flexibility in the governance of an S.r.l. because its quota-holders have wider autonomy in shaping the company according to their needs through the provision of different rules within the by-laws.

In both kinds of companies, there are no restrictions on foreign shareholders/quota-holders provided that the so-called “reciprocity condition” is met (i.e., foreigners enjoy civil rights under the same conditions granted to Italian citizens by the country of the foreigner).

The management structure can consist of a sole director or a board of directors and, as far as an S.r.l. is concerned, multiple directors acting separately or jointly. Directors and members of the management board can be non-Italian citizens and may reside outside Italy. The by-laws of both S.p.A. and S.r.l. can also permit foreign and domestic entities to be appointed as directors and members of their management boards. Furthermore, specific powers of representation for management can be delegated to special attorneys-in-fact who are not directors or members of the management board. In this case, non-Italian citizens can also be appointed as attorneys-in-fact. In order to ensure the enforceability against third parties of the powers granted to the attorneys-in-fact, the relevant powers of attorney are usually authenticated by a notary public and filed with the local companies’ registry. Moreover:

1. incorporation formalities are limited. The articles of incorporation must be signed before a notary public and filed with the local companies’ registry. Both S.p.A. and S.r.l. can be incorporated by a sole shareholder with limited liability, provided that capital contributions are fully paid-in and certain publicity requirements are adhered to. A company is considered to exist when the registration process, which usually takes about 5-10 days from the date of incorporation, is completed;
2. reporting requirements consist mainly of filing the annual financial statements and consolidated financial statements (where applicable), the quota-holders’/shareholders’ list, the appointment of directors, statutory auditors and auditors (where applicable), as well as deeds relating to extraordinary corporate transactions (amendment of by-laws, capital increase, merger, de-merger, etc.).

Italian corporate law also provides quota-holders/shareholders with the right to supervise and control the actions taken by the management of the company. In particular, the quota-holders/shareholders are entitled to:

1. consult the company’s books and records;
2. participate in and vote at the quota-holders’/shareholders’ meetings;
3. file complaints with the statutory auditors (when appointed);
4. bring actions before the competent court in the event of irregularities in the management of the company;
5. challenge resolutions passed at a quota-holders’/shareholders’ meeting, as well as the right to bring claims for liability against the directors of the company^[3]; and/or
6. withdraw from the company on the occurrence of certain events provided under the law or the by-laws of the company.

Italian law also protects quota-holders’/shareholders’ economic rights since, by means of a specific quota-holders’/shareholders’ resolution, each quota-holder/shareholder is entitled to a portion of the profits generated by the company proportional to its ownership of the company’s capital, unless the by-laws issue special classes of shares or grant special rights to certain quota-holders under which the profits are distributed among quota-holders/ shareholders on a non-proportional basis.

Finally, foreign investors wishing to set up joint ventures with local partners should be aware that Italian law does not provide specific regulations for joint ventures. Therefore, a newly set up joint venture will take the form of the most suitable contractual or corporate legal structure available under Italian law.

Under Italian law, there are no particular restrictions or limitations on the acquisition of an Italian company (or holding in an Italian company) by a foreign investor, with the exclusion of certain restrictions applying to investments in a number of specific sectors that are considered of national interest (see below).

An acquisition may either take place in the form of:

1. a share deal^[4]; or
2. an asset deal^[5].

The choice between an asset deal or a share deal is driven by, among other things, the different tax treatment of each such transaction under Italian law and has to be evaluated on a case-by-case basis.

Another transaction that, under certain circumstances, may facilitate an acquisition is a merger. Mergers among companies belonging to foreign jurisdictions and, therefore, regulated by different legal systems are expressly allowed and regulated under Italian law.

With regard to the transfer of quotas/shares, it is not mandatory for the seller and the purchaser to sign a sale and transfer agreement, although this is the standard practice. In larger transactions, along with the sale and transfer agreement, the procedure adopted in international M&A transactions is usually followed (i.e., legal, commercial, business, tax and technical due diligence in order to evaluate the possible risks; the seller gives a set of representations and warranties; and the seller guarantees to adequately indemnify the purchaser in case of breach of any such representations, warranties or other obligations). In the exceptional case where no sale and transfer agreement is signed, standard provisions of the Italian Civil Code on sale and purchase will automatically apply.

Regarding the transfer of a business, the purchaser is liable for the business debts incurred before the transfer, provided that these are recorded in the accounts. The parties may agree to deviate from this rule, but this has no effect against third parties. In other words, the agreement is only enforceable between the purchaser and the seller.

A merger takes place through a procedure consisting of a number of steps which involve the many corporate bodies of the merging companies (notably, the governing body, as well as the quota-holders/shareholders and, under certain circumstances, the creditors, who have the right to object to the merger on the basis that it may prejudice their rights).

An acquisition (as well as a merger) may trigger merger controls under European and Italian antitrust provisions. If certain turnover thresholds are exceeded, the transactions have to be cleared by the competent (European/Italian) antitrust authority. Similarly, an acquisition of a listed company may trigger disclosure covenants or, in case certain thresholds are reached, the obligation to launch a mandatory tender offer on the target company.

Investments in certain strategic sectors of public interest are subject to some limitations or restrictions.

An example of such a limitation involves the proposed acquisition of stock in an Italian bank exceeding a given threshold, where the proposed acquisition is subject to the prior authorisation of the Bank of Italy. Another example is represented by the so-called “Golden Power Rules”, which refer to certain special powers exercisable by the Italian government with regard to companies that own or operate strategic assets, irrespective of any shares held by the Italian government in the company concerned. These powers include:

1. the power to veto certain resolutions, deeds and/or transactions adopted by the company that owns or manages strategic assets;
2. the power to impose conditions and obligations upon the acquisition of shares of the company that owns or manages strategic assets, or upon the adoption of certain resolutions by that company; and
3. the power to oppose the acquisition of shares of the company that owns or manages strategic assets.

The Italian Government has recently strengthened the Golden Power Rules as a measure to avoid “predatory purchases” in Italy in the context of the COVID-19 crisis, by mainly:

1. broadening the perimeter of the industries subject to the scope of the Golden Power Rules, which today includes, in addition to defence, national security, 5G, energy, transport and communications, certain other industries identified by European law, such as the financial, credit and insurance sectors, critical technologies, food safety and the media; and
2. allowing the Government to exercise its control powers also on certain intra-EU transactions and on the acquisition of minority shareholdings by extra-EU investors, as well as to start the Golden Power procedure ex officio.

Relationships among quota-holders (in the case of an S.r.l.) or shareholders (in the case of an S.p.A.) and their respective rights and obligations are usually governed by the company’s by-laws. A company’s by-laws regulate a wide range of matters.

The matters usually dealt with in the by-laws relate to certain rights and obligations available to quota-holders/shareholders with regards to the following: the company’s governance, such as the right to designate and appoint certain corporate positions (e.g., the CEO, CFO, internal audit officer); exit strategies such as the provision of certain tag-along or drag-along rights; the exercise of voting rights, such as an undertaking to consult with one another before a quota-holders’/shareholders’ meeting; and the distribution of dividends or other distributions, such as the provision for certain quota- holders/shareholders to be prioritised in case of distribution.

It is also possible to regulate matters between quota-holders/shareholders through a quota- holders’/shareholders’ agreement. The difference is that the provisions of agreements are only enforceable between the parties to that agreement and not against third parties in general, while the provisions of the company’s by-laws are enforceable against third parties, including the company itself.

However, quota-holders/shareholders’ agreements are still widely used, in particular with respect to provisions which, although lawful under Italian law, cannot be inserted in a company’s by-laws or which the parties want to keep private. In fact, unless the target company is listed, quota-holders/shareholders’ agreements do not have to be published or shared with the target company and can remain confidential. Their duration (if any) is limited by law to five years for private companies and three years for listed companies and they can be renewed by the parties upon expiry. In the event that no duration is provided, each party has the right to withdraw from the quota-holders’/shareholders’ agreements by giving 6 months’ notice.

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Fabio Ilacqua is a Partner at Gianni & Origoni. Connect with him on LinkedIn here.

[1] From an Italian tax law perspective, a branch normally constitutes a permanent establishment which is treated as a separate tax entity subject to the same tax treatment provided for companies carrying on a business activity in Italy.

^[2] In addition to corporations, general partnerships (Società in nome collettivo, or S.n.c., and Società in accomandita semplice, or S.a.s.) can also be formed under Italian law to perform business activities. However, such partnerships are seldom used by foreign investors since they do not create a separate legal entity and, as a general rule, partners have unlimited liability.

^[3] This right can only be exercised by those shareholders of an S.p.A. holding a minimum percentage of the share capital. On the other hand, no such restriction applies to the quota-holders of an S.r.l., who can each bring this type of claim.

^[4] By the acquisition of the quotas (in the case of an S.r.l.) or shares (in the case of an S.p.A.) of the target entity.

^[5] By the sale/transfer of the assets (or part of the assets) of the seller/transferor to another entity. This transaction can be carried out in a number of different ways, the most important of which are spin-offs. I.e., the sale/transfer/contribution in kind of certain specific assets of a business (where, according to Italian law, the term “business” refers to an organised aggregate of goods and rights aimed at carrying out an entrepreneurial activity).