Editor: Filippo, please tell us about your background.
Troisi: I graduated from law school in Naples in 1988. I also received an LL.M. from New York University in Comparative Jurisprudence and passed the New York bar. I have been working with the firm since 1991, the year I started working in the New York office. I was there until 1993 and then came back to Rome and am now the co-head of our M&A practice which is the core business of our firm. We have over 300 attorneys in seven offices around the world. Last year we were awarded the Italian Law Firm of the Year designation by several international organizations, such as the IFLR and others. Our firm has been actively involved in all major Italian M&A transactions, and I was lucky enough to be involved in most of those transactions.
Editor: M&A covers a number of disciplines.
Troisi: M&A covers acquisitions by way of merger, share purchase, asset deals, including acquisitions of public companies as well as private companies. We do not have specializations in terms of industry.The M&A group works overall on all matters while our specialists cover specific areas of law. The only exception to this is public M&A because only a few of us act in connection with these transactions. Another group handles acquisitions in the real estate market which has been quite active.
Crosio: Private equity firms are now a major player in the Italian market.
Troisi: Absolutely. If you look through the newspapers today, you may see that some large potential transactions in the Italian market are being conducted by private equity firms.
Editor: And the private equity firms may be international, U.S. based as well as British, etc.?
Troisi: They are U.S., UK as well as two or three Italian private equity firms which are also active and successful.
Editor: Stefano, perhaps you can give us a bit of your background.
Crosio: I graduated from law school in Genoa in 1993 and was admitted to the Italian bar. I started to practice with Gianni Origoni in 1994 in the Rome office. Since then, I have been working in the Rome office, except for the year that I spent in New York interning with a U.S. law firm and the two years in Milan as the acting general counsel for Italy of an American listed company. I became a partner in Gianni Origoni in 2003 and have been in New York since last year. I will probably be here for the next four years or so. The firm has had a New York office for 16 years which shows that we have deep roots in the New York market.
Editor: Would you define the cross-border mergers among U.S. and Italian companies as a frequent phenomenon in the Italian deals landscape?
Crosio: This is not a common phenomenon, as many U.S. companies tend to carry out a straight share acquisition of an Italian company rather than going through a merger. This is primarily because there is a belief that cross-border mergers are not feasible because of the differences in the two legal systems. We proved that despite these differences it is possible to perform successful cross-Atlantic mergers. In this respect our firm, specifically Filippo, has advised two U.S. biotech companies engaged in mergers with Italian companies in two different situations. The two U.S. companies were publicly traded on the NASDAQ and the two Italian companies were listed on the Nuovo Mercato , which is the stock market where high tech companies trade. This made things more interesting and more complicated, as Filippo will tell you in detail.
Editor: What are the advantages of doing a merger rather than an acquisition?
Crosio: There are not only tax benefits but one of the primary advantages for a U.S. company is that they are not required to pay a consideration to the Italian shareholders. A merger is an all-stock deal wherethe surviving entity issues shares to the shareholders of the entity acquired, which ceases to exist. Moreover, an acquisition deal is often financed by debt while a merger, per se , allows a U.S. company to avoid increasing its indebtedness. Another advantage of a merger structure for a U.S. company is that most of the time a stock acquisition requires a rather cumbersome structure to be set up in order to maximize the efficiency of the transaction. This is particularly true in those instances where a U.S. company acquires the shares of an Italian company through a leveraged buyout structure. This requires that the U.S. company set up one or two subsidiaries in Europe to borrow the funds to finance the transaction and acquire the shares of the Italian target company. The subsidiaries eventually merge with the acquired Italian company, thus pushing the debt down to the target.
If you carry out an acquisition through a merger, you do not need those structures because you merge the Italian company directly into the U.S. entity. Once the deal is completed, the Italian company no longer exists, and the U.S. company is the surviving entity which succeeds to all assets, liabilities, rights and obligations of the Italian company. The consideration for the shareholders of the Italian company is shares of the U.S. company.
Editor: I would think that a great deal of due diligence would have to be done.
Crosio:Due diligence is key, especially in the case of mergers between two listed companies. As a firm, we have conducted a great amount of research because in these situations due diligence poses many significant questions in terms of compliance with market regulations, especially those concerning transparency and equal access to information. From the perspective of the Italian target's management, granting the U.S. company access to data and information which may be confidential and non-public clearly raises issues and concerns in terms of compliance with market regulations. Does the target need to issue a press release to re-establish equal access to information? The answer depends on a number of circumstances.
Troisi: Due diligence in a merger is even more important than in a normal acquisition where you usually have a set of representations and warranties and indemnification provisions that come into play in the case of a breach of such representations and warranties. In a merger, instead,due diligence is important in order to decide whether or not to do the deal, but once the deal is done, there is no indemnification remedy, since seller and purchaser are now the same entity.
Editor: On two occasions your firm provided assistance to two different U.S. biotech/pharmaceutical companies in mergers with Italian pharmaceutical companies. In both cases the companies involved in the mergers were listed on their domestic stock exchanges. How has this been factored in the transactions?
Troisi: The fact that the merging companies were listed on their domestic stock exchanges represented one of the most challenging aspects of the deal from a legal standpoint; also, our legal analysis had to focus on the regulations that our clients had to comply with to mantain the dual listing after the merger. In other words, we had to make sure that the shares of the surviving U.S. company were admitted to listing on the Italian exchange, as was the case with the Italian shares, prior to the merger, whichpost merger ceased to exist. To achieve such result, the shares of the non-Italian company had to be fully transferable and satisfy the so-called "adequate distribution requirement," whereby at least 20 percent of the outstanding ordinary shares must be held by the public or professional investors. However, with regard to this latter requirement, in transactions like the ones we dealt with, aiming at a multiple listing, compliance with the full threshold rule has been assessed by the agency in charge of the Italian stock exchange by taking into account the amount of shares listed in all of the markets involved. Additional rules, concerning the U.S. company, had to be met to obtain the listing of its shares also in Italy. For example, the company had to carry on a business activity capable of generating revenue and had to file and publish at least one set of financial statements on a solo, and where applicable, on a consolidated basis,accompanied by an auditing firm's opinion drawn up in accordance with Italian regulations.
A further requirement that had to be met for the listing was obtaining the favorable opinion of CONSOB, the regulator of the Italian securities market: the regulator, indeed, needs to make sure that there are no rules provided by the other markets involved that will prevent the company from complying with Italian disclosure requirements.
Finally, the company had also to certify that there are no impediments to the exercise by the shareholders of all the rights pertaining to the shares.
Editor: Were there any conflicts with respect to the two sets of listing requirements?
Troisi: Mostly disclosure requirements.As far as we are concerned, we have always found the Italian stock exchange authorities flexible enough to make sure that all Italian rules and regulations are complied with while understanding the need to abide by the regulations from the other jurisdiction.
Editor: What specific advantages in the biotech industry would you foresee as a result of a cross-border merger?
Troisi: In the cases we dealt with, the mergers were approved by the boards of directors after taking into account several benefits. For example, a factor considered by the Italian company was that the merger would allow it to commercialize its products in the most important world markets, gaining access to U.S. capital markets. This would expand its ability to create a more advanced biotech company. In addition, the merger would accelerate the discovery of new molecules by integrating the companies' technological platforms. On the other hand, the U.S. entity had expectations of achieving substantial advantages as a result of the merger - in particular, the unification of ownership rights to certain pharmaceutical products, a broader pipeline of new products, no more payment of royalties or manufacturing fees to the Italian company and a better ability to conduct important clinical trials. The merger was also considered by both companies as a key step to a common goal of establishing a more advanced pharmaceutical company.
Editor: What other regulatory issues did your firm face in those transactions?
Troisi: The preliminary issue we had to face was the law governing the different steps involved in a cross-border merger. Considering that two different jurisdictions were involved, there were certain hurdles we had to cross. The U.S. entity was obliged to comply with certain formalities exclusively required by the Italian regulations, such as the execution of a merger deed in a notarial form. This is not required under U.S. law. Thus, we had to explain to our U.S. counterparts the need to go through this procedure.
Another issue regarded the European Community and Italian Government grants obtained by the Italian company in order to finance its projects which were still pending at the time of the merger. Focusing on one of the cases we dealt with, it was necessary to investigate whether the merger could affect the financial projects and the connected interests of the Italian Government and European Community, which conferred the grants - and whether the surviving entity could continue to benefit from the grants. In fact,because of the merger, the Italian company would have ceased to exist while the U.S. surviving company would have assumed all rights and obligations of that company. However, also considering that the research sites were going to remain in Italy, we believed that the transaction would have not affected any of the projects nor the interests of the financing authorities. Anyway, we advised the client to inform the financing authorities about the merger and, having done so, we obtained confirmation that the projects could be carried out according to the existing agreements. It was important to achieve this result because losing the grants could have been a deal breaker.
Editor: Why is it a benefit for U.S. companies contemplating such a merger to engage a firm that has experience?
Troisi: When I was called for the second cross-border merger, we were told that our firm had been selected because the client did not want to reinvent the wheel. There have only been two cross-border mergers involving a U.S. listed company and an Italian listed company. Having acted in both mergers, we have already tested (and solved) all of the issues related to the transaction. A law firm that has not been involved in this process may reach the same results but its lack of hands-on experience is likely to lead to longer time and higher costs.