Italian Reforms Add Flexibility For Cross-Border Transactions

Thursday, April 1, 2004 - 01:00
Gianni, Origoni, Grippo & Partners
Stefano Crosio

Editor: How does your background reflect your firm's international focus?

A native of Genoa, I graduated with honors from the University of Genoa in 1993 and joined Gianni, Origoni the following year. Working in the firm's M&A department, I have advised a number of U.S. corporations and investment banks. For two years, I served as Starwood's in-house counsel in Italy. I also worked in New York one year as an international associate for Simpson Thacher.

Editor: Please tell us about your firm's history.

From its earliest days, our firm has demonstrated a strong international focus. In 1988 our founding partners opened offices in Rome, Milan and New York. The opening of our London office in 1997 reflected our expanding international presence. Our firm has grown rapidly and now employs over 270 lawyers in seven offices, topping the Italian legal advisers' charts. We provide clients with a wide range of services spanning corporate, M&A, labor, banking, finance, capital markets, litigation, bankruptcy, EU, competition, tax and most other areas of the law.

Our recruiting and training policies reinforce our strong international vocation. English is a prerequisite for all candidates seeking a position in our firm. Once recruited, we encourage our new associates to attend either an LL.M. program in a U.S. university or to participate in exchange programs with U.S. law firms. This gives our team a good grasp of the U.S. legal system and enhances our understanding of the U.S. culture and way of doing business.

Editor: How does a NY office benefit your clients and your firm?

Having had a NY office for more than 16 years demonstrates our commitment to our U.S. clients. Our NY presence keeps us in close contact with our existing U.S. clients and helps us promote the services we can render to prospective clients. It also strengthens our relationship with our U.S. friends with whom we have worked on prior cross-border transactions. For example, earlier in the year, we were contacted by the general counsel of a major U.S. corporation engaged in a due diligence exercise for a worldwide transaction. The relevant documents, located in the offices of an important law firm in Manhattan, needed immediate review by an Italian legal counsel. The time constraints were immediate because the data room was going to be closed at the end of the day. We were able to send Italian attorneys from our NY office right away, which made the client very happy.

Editor: On January 1, 2004 two major reforms of the Italian corporate and tax rules came into effect. What is their impact?

Both reforms have introduced a new and more flexible system, which increases Italy's integration with the other countries in the EU and with the U.S. The enhanced compatibility of the rules should encourage investment in the Italian market. (The chart below refers to articles in The Metropolitan Corporate Counsel where we discussed these changes in more detail.) I believe that these reforms cannot be ignored by anyone who already has a presence in Italy or who is considering investing in Italy.
(A) The corporate law reform changed the functioning of the two main models of the Italian limited liability companies, namely "S.p.A.s" and "S.r.l.s". In a nutshell, the S.p.A.s should be best suited for larger companies with an ampler shareholder base, and the S.r.l.s for smaller companies with a narrower base.

Other important new rules enable Italian companies to issue new classes of shares. In some instances, they mirror instruments that come from the U.S. market, such as tracking shares and redeemable shares that had not previously been contemplated in the Italian legal system. Others provide their holders with administrative and economic rights that can be customized.

The rules governing groups of companies have also been reformed. They now (a) govern the disclosure requirements applicable to groups of companies, (b) entitle the minority shareholders of the group's subsidiaries to withdraw from the relevant subsidiary under certain circumstances and (c) introduce the liability of the holding company for damages caused to the minority shareholders and creditors of any subsidiary as a consequence of the implementation of directives given by the holding company to its subsidiaries.

Changes to corporate governance rules have introduced new possibilities that in certain instances resemble the governance rules generally used in the U.S.

(B) Another significant reform has deeply changed the Italian tax rules since last year. The main aim was to create a tax environment more competitive with those in other EU countries. The reform enables corporations to benefit from certain tax regimes which can provide a great degree of flexibility such as group taxation applicable to resident and non-resident companies. In addition, the new check-the-box rules should be useful for American investors.

The tax reform will make the use of Italian holding companies attractive for carrying out acquisitions of both domestic and foreign companies. The Italian holding company will benefit from the participation exemption regime with respect to transfers of shares in either domestic or foreign companies (with no-minimum shareholding being required) so that the capital gains made in these transfers shall be, subject to certain conditions, tax free. In addition, companies belonging to the same group may apply for group taxation, in which case, intra-group dividends and capital gains would be tax free. Otherwise, subject to certain conditions, domestic dividends and inbound dividends received by the Italian holding company would be 95 percent tax exempt.

Thin capitalization rules have also been introduced in the context of the tax reform. Like most EU jurisdictions, they limit, subject to certain exceptions, the possibility of leveraging companies by means of loans granted or secured by qualified shareholders to a 4:1 debt-to-equity ratio.

Editor: Please give an example of where U.S. corporations with Italian subsidiaries should focus their analysis of the reform of the corporate law system.

One new obligation is that all Italian companies and their subsidiaries formed before January of this year must amend their bylaws to ensure compliance with the new provisions of Italian corporate law. This obligation must be met by September 30. One bonus of amending the Italian subsidiary bylaws by the deadline is that it gives an opportunity for the U.S. parent to introduce a number of changes that are now allowed by the reform, such as those affecting the governance systems of their Italian subsidiaries or their capital structure. They should also focus on the reform's new regulation of shareholder agreements, which provide for limitations to their duration and, under certain circumstances, disclosure requirements.

Editor: What other reforms are of interest to U.S. corporations with Italian subsidiaries?

Until a few months ago, the Italian labor laws were far reaching, making it difficult to shape employment relationships in Italy in a way that was fully satisfactory for a U.S. investor. The Italian government recently passed a number of provisions that now make the Italian labor market much more flexible, particularly with respect to new hires. This means that employers now have the opportunity to hire employees under a high number of different schemes and not only through the scheme of indefinite term employment agreements. The labor law reform is expected to help U.S. corporations investing in Italy because it is now possible for them to be less worried about the drawbacks resulting from the former rigidity of the Italian labor system.

Editor: Please give an example of the transactions you handled over the past year.

Last year the most significant transaction that I advised on was the demerger of the telephone directories business of Seat Pagine Gialle (a company listed on the Milan stock exchange). Telecom Italia sold its majority interest to a group of private equity firms selected through an auction procedure. At 3 billion Euros, this has been one of the largest private equity deals ever done in Europe.

The complexities of this project began with organizing a fair and transparent auction process. Four groups of bidders were trying to acquire Telecom Italia's majority interest. One bidder was a telecommunications operator from a foreign country and all others were private equity funds from Europe and the U.S. We created a set of auction rules that met Telecom Italia's wish for a transparent process and were appreciated by the bidders.

We succeeded in completing the demerger of Seat in four months, which was remarkably fast, also because we had to coordinate the work with the non-Italian law firms who represented Seat's subsidiaries in a number of foreign countries, including two listed subsidiaries in France and Germany. The transfer of shares and the tender offer and disclosure requirements of these countries had to be analyzed, as well as a significant amount of activity had to be carried out in the U.S. because Seat was an SEC reporting company.

I think it is worth mentioning two other significant cross-border transactions that the firm advised on last year, even though I was not personally involved. They were the first two cases ever of cross-border mergers between an Italian-listed company and a U.S.-listed company (Biosearch Italia/Vicuron Pharmaceuticals and Novuspharma/Cell Therapeutics). Our firm has advised both on the merger procedure and the dual listing procedure for the surviving companies (in both cases, the U.S. company) which are now listed both on the NYSE and the Milan stock exchange.

These are just a few examples of the capabilities of our firm to advise clients in innovative structures and to work seamlessly with U.S. law firms in highly sophisticated transactions.


For more detailed information about the recent Italian corporate law reform, see the following articles published in previous issues of The Metropolitan Corporate Counsel.

"Groups Under Italian Corporate Law," Tomaso Cenci and Ruggero Gambarota, January 2004, pg. 24.

"New Rules For Shareholders Agreements In Italian Corporations," Tomaso Cenci and Ruggero Gambarota, October 2003, pg. 22.

"New Rules For Limited Liability Companies In Italy - Part II," Tomaso Cenci and Giovanni Marsili, June 2003, pg. 22.

"New Rules For Limited Liability Companies In Italy - Part I," Tomaso Cenci and Giovanni Marsili, May 2003, pg. 25.

"New Rules For The Function Of Management And Control In Italian Corporations," Tomaso Cenci and Giovanni Marsili, January 2003, pg. 23.

This interview is also intended to provide general information on the Italian reforms and is not intended to be legal advice applicable to specific matters. In case more specific information is needed, you may contact the New York office of Gianni, Origoni, Grippo & Partners at (212) 424-9170.We extend our best wishes to Tomaso Cenci, who after more than four years in New York returns to the Rome, Italy offices of Gianni, Origoni, Grippo & Partners. We welcome Stefano Crosio, who succeeds Mr. Cenci as the head of the firm's New York office.