This document summarizes the legal regime for leveraged buyout (LBO) transactions under Italian company law. It discusses how LBOs were initially viewed as incompatible with acquisition financing prohibitions, but are now permitted if they pursue legitimate business interests. The 2003 company law reform introduced Article 2501-bis to regulate LBOs executed through a merger between the acquiring and target companies. This article imposes disclosure obligations regarding financing plans, cash flow projections, and expert reports to ensure the transaction's financial sustainability. Non-compliance can allow members and creditors to challenge approved resolutions or seek damages. The interaction between this article and rules against financial assistance is still unclear under Italian case law.

1. The regime for LBO under
Italian Company Law
Dr Michele Giannino
Italian qualified lawyer, LLM, PhD, Dip(ITM), ICSA Graduate Candidate

2. The structure of LBO operations
• A newco is created, whose capital structure is made up mostly by
debts and some equity
• Newco acquires target
• The cash flow and/or the assets of target are applied as guarantee for
or the repayment of debts contracted by newco
• Key legal question: Do the LBO operations comply with the
prohibition of acquisition financing in Article 23 of the EU Second
Company Law Directive?

3. The initial position under Italian law
• LBO operations were hold to be incompatible with the prohibition of
acquisition financing in Article 2358 of Civil Code, which implemented
Article 23 of the EU Second Company Law Directive
• LBO operations implemented via a merger between newco and target
(MLBO) may be found to be fraudulent transactions aimed at
circumventing the financial assistance law in Article 2358
• Trial judges considered LBO, in whichever form they were executed, as
lawful if based on reliable business plans and sound financial budgeting
• With its only decision on this issue, the Italian Court of Cassation held that
the LBO are lawful if they pursue legitimate business interests because they
are suitable to generate positive economic effects

4. The 2003 Company Law Reform
• In 2003 the Italian legislator introduced Article 2501-bis of Civil Code
that only regulates MLBO, setting out a procedure for the execution
of this type of transactions, but says nothing about the other forms of
MLBO
• The Article 2501-bis procedure should provide for a safe harbour for
MLBO meeting the required conditions
• The strategy chosen by the 2003 Company Law Reform Italian to
regulate LBO is:
• -Imposing additional disclosure obligations compared to those that generally
apply to mergers
• - Requiring corporate governance arrangements to mitigate agency problems

5. The scope of application of Article 2501-bis
• It applies to all forms of companies and partnerships provided for by Italian
company law
• Constitutive elements of the operations regulated by Article 2501-bis are as
follows:
• - Newco contracts debts to gain control of target: these debts are repayble
funding generally granted by banks.
• - Debts contracted to gain control of target: majority of voting rights or de
facto control (Article 2359 civil code).
• - Newco acquisition of target. The links between debts and acquisition can be
formalized in contracts or inferred from indicia and presumptions
• - Merger between newco and target resulting in mergerco
• - The assets of target are used as guarantee for/repay the obligations
undertaken by newco to finance the acquisition

6. The disclosure obligations in Article 2501-bis
• 1-The draft merger agreement contains:
• - Indication of financial resources needed to repay the debts of mergerco
• These resources include the present and future assets (expected cash flow) of
mergerco
• The notion of debts includes acquisition financing and other financial obligations
of mergerco (preexistent debts of newco and target)
• The agreement must then show the financial sustainability of the operation
• This requirement is in the interest of:
• - Members of the merging companies so that they can take a informed
decision on the transaction
• - Creditors of the merging companies so that they assess whether mergerco
will generate a sufficient cash-flow to pay interests and repay principal

7. The disclosure obligations in Article 2501-bis
• 2-The report of the directors of the merging companies includes:
• - Reasons that justify the operation (to be meant as the whole MLBO
transaction);
• - An economic and financial plan ( the plan must provide an insight
into the probable future financial performances of mergerco, which is
a key factor for the success of the MLBO). It deals with the amount of
debts and its repayment (financial risk), ensuring that the operation is
financially sustainable
• - Description of the planned objectives (commercial and business
factors underlying the operation, such as symergies, economies of
scale).

8. The disclosure obligations in Article 2501-bis
• 3-The experts’ report
• Only approved auditors are eligible for being appointed as experts to form
the report
• In addition to the fairness of the exchange of shares, the experts have to
assess the reasonableness of the merger draft agreement or, more
precisely, of the whole transaction.
• They assess the validity of the financial data and give an opinion on the
correctness of the assumptions and the financial plans made by the
directors
• They examine the provisions of the agreement seeking for discrepances
and weak points in the reimbursament plan prepared by directors that may
undermine the credibility of the transaction.
• Experts are liable to companies, members and third parties.

9. The disclosure obligations in Article 2501-bis
• 4-The report of the external auditor:
• If the annual accounts of the newco and/or target have to be audited,
a report from the external auditor is needed
• Article 2501-bis says nothing about what the report of external
auditors should focus on
• Arguably, the auditors should verify the reliability of the accounting
data on which the business plan of the MLBO transaction is based
• These data are crucially used to calculate the value of the merging
companies and the exchange ratio of shares

10. When things go wrong
• Article 2501-bis is infringed when:
• Lack of one or more stautorly required documents
• The submitted documents only partially disclose the required
information
• Lack of the on-going concern statement and the financial
sustainaibility statement for mergerco
• The expert’ report and/or the auditors’ opinion do not confirm the
statements in directors’report about the sustainability of the debts
for mergerco

11. Remedies for members and creditors
• Resolutions adopted by general meetings of the members of the
merging companies are unlawful
• Members can apply to court for setting the resolutions aside pursuant
to Articles 2377 and 2379 of Civil Code
• After the publication of the merger agreement on the company
register the mergers can be no longer reversed. Members are then
only allowed to damage claims
• Creditors of merging companies can file an opposition against the
planned merger

12. What is then the objective of Article 2501-
bis?
• The underlying rationale for Article 2501-bis is to prevent LBO that
are not based on reliable financially sound business considerations.
• Target might be burdened by excessive debts following the
transferring the financing acquisition debts contracted by newco from
the latter to target
• These debts are imposed by newco on target via the implementation
of the merger without the corporate bodies of target being able to
have a say on that
• Target, even if it had a strong financial position might go into
bankruptcy, harming the economic system

13. The 2008 revision of Article 2358 Civil Code
• The original strict prohibition of financial assistance in Article 2358 was revised
and mitigated in 2008 by Legislative Decree 142/2008
• Companies now can provide financial assistance for the purchase of their own
shares provided that the following conditions in Article 2358 are met:
• - Prior approval of EGM of the members of the company
• - Disclosure obligations: the directors’ report must indicate the economic and
legal grounds for the operations; a statement that the interest rates and
guarantees are at market conditions, risks and interests for the company
• - Financial thresholds: the overall amount of the provided funds and granted
guaranteed must not exceed the amount of available profits and reserves
resulting from the latest approved annual accounts
• Article 2358 only applies to SPA (joint-stock companies) but not to SRL (private
companies) that are subject to an absolute financial assistance ban

14. The interaction between Article 2358 and
2501-bis
• In the absence of case law, it is unclear whether companies engaging in LBO
operations have to comply with both Article 2501-bis and Article 2358
• Different approaches have been submitted:
• - Article 2501-bis is lex specialis and prevails over Article 2358
• - LBO operations are lawful if compliant with Article 2501-bis, regardless
whether they abide by Article 2358 as well
• - Genuine LBO operations that do not breach financial assistance rules as
they do not reduce capital are lawful and do not violate Article 2358. LBO
operations designed to violate the principle of capital maintenance, distributing
equity to shareholders breach Article 2358
• - Articles 2358 and 2501-bis have a different ratio: the former is designed to
subject directors’ acts to the prior approval of shareholders; the latter to avoid
unstainable financial risk being transferred from newco to target

15. The end
Many thanks for your attention