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Special powers of the Italian Government in the defense, homeland security, communications, energy and transportation sectors
In June this year, the Italian Government brought forward the implementation process of the so-called “Special Powers” that the Italian Prime Minister may exercise in relation to certain strategic assets and activities in the sectors of defense and homeland security, communications, energy, and transportation.
The Special Powers originate from, and have now replaced, the so-called “golden share” of the Italian Government, which was introduced in the mid-Nineties in the wake of the Italian privatization process.
In 1994, through Law Decree No. 332, the Italian legislature vested the Ministry of Economy and Finance (“MEF”) with a broad set of powers over certain State-owned companies which were active in strategic sectors, namely: defense, transportation, communications, energy and other public utilities. In relation to such strategic companies, the MEF could:
(i) Block the purchase of participations exceeding certain percentages of the voting share capital (at least 5% or a lower percentage set forth by the MEF);
(ii) Block shareholders’ agreements pertaining to said percentages of voting shares (at least 5% or a lower percentage set forth by the MEF);
(iii) Veto ex ante certain corporate resolutions, including those approving mergers, spin-offs, transfers of assets, transfers of the corporate seat outside of Italy, particular amendments to the articles of association, winding up, etc;
(iv) Appoint a non-voting director to the board of said companies.
The powers under (i), (ii) and (iii) above were to be exercised only to avoid “harm to the vital interests of the State”. However, their pervasive nature raised concerns at the EU level which resulted in the opening of infringement procedures against Italy followed by a
number of decisions of the Court of Justice of the European Union (see, for instance, ECJ Decision No. C-326/2007 of 26 March 2009) which found the “golden share” in breach of the principles of the freedom of establishment and free movement of capital set forth by the Treaty on the Functioning of the European Union.
In order to address such concerns, the Italian Government changed its approach to investments in these strategic sectors, shifting from the “golden share” model to the Special Powers paradigm, as outlined below.
2. The Special Powers in the defense and homeland security sectors
Pursuant to Law Decree No. 21 dated 15 March 2012 as converted into Law No. 56 dated 11 May 2012 (“Law 56/2012”), the Italian Prime Minister (“PM”) may exercise certain powers with regard to transactions entailing the “threat of a serious harm to the essential interests of the national defense and homeland security”. More specifically, the Special Powers consist of:
(i) An ex ante veto on board or shareholder resolutions approving mergers, spin-offs, transfers of assets or controlled entities, transfers of the corporate seat outside of Italy, certain amendments to the articles of association (including changes in the corporate purpose), winding up, transfers of ownership or of rights of use over tangibles or intangibles and the assumption of obligations that affect their utilization;
(ii) The imposition of specific conditions for security in procurement or information, technology transfers, and export controls when participations are acquired in enterprises which carry out activities of strategic importance for the national defense and homeland security system;
(iii) The blocking of purchases of participations in said enterprises by an entity different from the Italian State or State-controlled entities, if the purchaser would end up holding a participation with voting rights that could jeopardize the national defense or homeland security interests.
As to (i) above, any company which carries out strategic activities in the defense and homeland security sectors must notify the PM in advance about any of the above-mentioned resolutions and deeds. The PM may veto or impose conditions within 15 days from the notification. This term may be extended once if additional information is needed. Upon expiry of the (possibly extended) term, the transaction at stake is deemed to have been vetted and the deal may go ahead.
Resolutions or deeds approved in breach of a veto are null and void. Furthermore, the strategic entity and its contractual counterparty acting in breach of a veto are subject to an administrative pecuniary sanction of up to twice the value of the transaction, and in any event no less than 1% of the turnover generated by the two concerned entities as shown in their last approved financial statements. Such entities may also be ordered to reinstate the circumstances ante factum at their cost and expense.
As to (ii) and (iii) above, any EU or non-EU entity acquiring the above-mentioned participations in Italian companies that carry out strategic activities in the defense and homeland security sectors must notify the acquisition to the PM within 10 days. If the target is a listed company, then the notification obligation arises if the purchaser would end up holding a participation in excess of 2% (and, subsequently, in excess of 3%, 5%, 10%, 15%, 20% and 25%) of the voting share capital of the target.
The PM may impose conditions or block the acquisition within 15 days from the notification. Again, the 15-day term may be extended once if additional information is needed. Upon expiry of the (possibly extended) term, the transaction at stake is deemed to have been vetted and the deal may go ahead. Voting rights attached to the shares representing the acquired participation are frozen until expiry of the this term.
Resolutions or deeds approved in breach of such conditions or blocking orders are null and void. The purchaser is subject to an administrative pecuniary sanction of up to twice the value of the transaction, and in any event no less than 1% of its turnover. Also, the purchaser may not exercise the voting rights attached to the shares so acquired and it must sell such acquired shares within one year.
3. The Special Powers in the energy, transportation and communications sectors
In the energy, transportation and communications sectors, the PM may exercise powers that are equivalent to those outlined in paragraph 2 above with respect to defense and homeland security. There are certain differences, though.
For instance, for the exercise of the PM’s veto power (see para. 2(i) above), an Italian company which holds strategic assets in the energy, transportation or communications sectors must notify the PM about resolutions, deeds or transactions resulting in a change of ownership, control or use of said assets as well as about specific corporate resolutions such as those approving mergers, spin-offs, transfers of assets, transfers of the corporate seat outside of Italy, certain amendments to the articles of association, winding up, etc. However, while the notification pertaining to strategic companies
operating in the defense and homeland security sectors must be given before the resolution is passed, the wording of the law seems to suggest that in the energy, transportation and communications fields the resolutions, deeds or transactions may validly be notified to the PM within 10 days from approval. This is somewhat watered-down by the rule that requires the notification to be effected, in any event, “before implementation” of the resolution, deed or transaction.
The PM may veto the deal or impose conditions within 15 days from said notification if the resolutions, deeds or transactions would result in “an exceptional situation of threat of a serious harm to the public interests concerning the security and the functioning of networks and equipment as well as to their continued procurement, unless such situation of threat is addressed by sector-specific regulations”. Also here, the 15-day term may be extended once if additional information is needed. Upon expiry of the (possibly extended) term, the transaction is deemed to have been vetted and the deal may go ahead.
In the energy, transportation and communications sectors the sanctions imposed in the case of a breach of a veto are equivalent to those provided for the defense and homeland security sectors.
As to the powers to impose conditions or to block the deal, such powers seem only to be exercisable by the PM when the purchaser is a non-EU or non-EEA entity. However, Law 56/2012 confirms a general “reciprocity principle” whereby, without prejudice to the applicability of the Special Powers, a non-EU or non-EEA investor may acquire Italian companies that hold strategic assets in the defense/homeland security sectors and in the communications/energy/transportation sectors if, vice-versa, an Italian investor would be allowed to acquire the same in the country of origin of the said non-EU or non-EEA investor – all in compliance with international treaties subscribed to by Italy or by the European Union.
4. Implementing rules for the exercise of the Special Powers
Once the main features of the Special Powers were set forth by the Italian legislature through Law 56/2012, implementing legislation was needed to specifically identify the assets and activities considered “strategic” and, therefore, subject to scrutiny in light of the Special Powers.
In 2012, Prime Minister Decree No. 253 (“Decree 253/2012”) identified the strategic activities in the national defense and homeland security sectors subject to the Special Powers. In particular, such activities consist essentially in the study, research, planning, development, manufacture, integration and life-cycle support, as related to certain systems and materials such as Command, Control, Communications, Computers, and Intelligence systems (C4I); advanced sensors integrated with C4I networks;
explosion protection systems; advanced weapons systems integrated with C4I networks; advance aeronautic systems; and air and naval military propulsion systems.
The Special Powers are not applicable in the context of intra-group transactions, provided that there is “no informative evidence of a threat of serious harm to essential defense and homeland security interests.” The obligation to notify the PM, though, still applies.
A subsequent piece of legislation - Presidential Decree No. 35 dated 19 February 2014 (“Decree 35/2014”) - illustrates the procedures and resources to be dedicated to the exercise of the Special Powers in the defense and homeland security sectors, based on the principles already set forth by Law 56/2012.
More recently, Presidential Decree No. 85 dated 25 March 2014 (“Decree 85/2014”), entered into force on 7 June 2014, identified the strategic activities and assets subject to the Special Powers in the communications, energy, and transportation sectors. In particular:
- In the communications sector, these are the “dedicated networks and the public access network for end users connected to the metropolitan networks, service routers, long distance networks as well as installations used for end users’ access to services under universal service obligations and to broadband and ultra-broadband services, including the relevant contractual relationships […], apparatuses dedicated to connectivity (voice, data and video), safety, control and management in relation to fixed telecommunications access networks.”; - In the energy sector, these are the “energy networks of national interest and relevant contractual relationships [including]: (a) the national network for natural gas transportation and relevant pressure stations and dispatch plants […], as well as gas storage plants; (b) infrastructures for electricity and gas procurement from other States, including onshore and offshore LNG re-gasification plants; (c) the national network for electricity transmission and relevant control and dispatch plants; (d) management activities connected with the utilization of the networks and infrastructures mentioned in the above letters (a), (b) and (c).”; - In the transportation sector, these are the “large networks and plants of national interest intended also to ensure the main European cross border connections and the relevant contractual relationships [including]: (a) ports of national interest, (b) airports of national interest, (c) the national railway networks of relevance for European cross
Similarly to the rules enacted for defense and homeland security, these Special Powers are not applicable in the context of intra-group transactions, provided that there is “no informative evidence of a threat of a serious harm to the public interests concerning the safety and functioning of networks and plants as well as their continued procurement”. Again, though, the obligation to notify the PM remains. Finally, by way of Presidential Decree No. 86 dated 25 March 2014 (“Decree 86/2014”), entered into force on 7 June 2014, the Italian legislature identified the procedures and resources to be dedicated to the exercise of the Special Powers in the above-listed strategic sectors. 5. Conclusions
Notwithstanding the significant efforts of the Italian lawmaker to define the purposes and boundaries of the Special Powers, certain areas still need to be clarified.
By way of example, while the recent Decree 85/2014 identifies the specific communications “strategic assets” and subjects them to the Special Powers according to the rules on communications, energy and transportation, the previous Decree 253/2012 applies the rules on defense and homeland security to communications “networks and installations used for end-users’ access to services under universal service obligations and to broadband and ultra-broadband services”, thus triggering more stringent requirements for certain electronic communications networks.
This overlap still needs to be settled, as both Decree 253/2012 and Decree 85/2014 are in force and seem to be applicable to at least some of the same strategic assets. A possible reconciliation of the rules could be based on arguments ranging from the implicit abrogation of one rule by another to the differentiation of the type of strategic telecommunications assets involved (e.g., telecoms networks and plants used for defense and homeland security versus those used for other purposes).
As a result, the final word on the Special Powers might remain yet to be said, and it would not be surprising if new implementing legislation or official interpretations were to be issued in the not-too-distant future. This is even more compelling because while the old “golden share” model was “name-centered” (i.e., applicable only to certain specifically identified State-controlled or public utility entities), the Special Powers framework is “assets/activities-centered” so that it may be evoked with respect to transactions concerning strategic enterprises regardless of whether they are owned/controlled by the Italian State or by privately held companies.
A crucial element, however, is already entrenched and well-
established, that is the need to address these issues in advance of any acquisition or deal involving assets in the sectors of defense, homeland security, communications, energy or transportation, possibly locking-in any endorsements, if and as necessary, at an early stage of the transaction.
This client newsletter is prepared for information purposes only. The information contained therein should not be relied on as legal advice and should, therefore, not be regarded as a substitute for detailed legal advice in the individual case. The advice of a qualified lawyer should always be sought in such cases. In the publishing of this Newsletter, we do not assume any liability in individual cases.