In brief: guarantees and collateral for acquisition financing in Italy

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Guarantees must be documented in writing and are usually included directly in the loan agreements. The availability of guarantees is generally restricted by financial assistance rules and corporate benefit but must also be permitted by the articles of association of the relevant company. Directors of an Italian company are under a duty to promote the success of the company itself, as opposed to the group’s success, and this is why it is generally more difficult to establish that a company obtains a corporate benefit from providing an upstream or cross-stream guarantee or security.

Generally, any transaction to be entered into by an Italian company must:

• not be ultra vires (ie, outside the powers of the company); and
• be instrumental in achieving the concrete business purpose of the company itself (ie, there must be some direct or indirect benefit to the company).

The existence of some real benefit is ultimately a matter of fact to be addressed and evaluated by the directors on a case-by-case basis. The directors of an Italian company are, therefore, under a duty to carefully analyse a transaction in order to determine the overall benefit to the company (if any), if that is adequate to the obligations and risk assumed by the company thereunder (for that purpose a monetary cap to the guarantee can be introduced) and whether there might be an actual or potential prejudice to the company or its creditors by entering into such a transaction. Generally, resolutions passed by the board of directors in violation of the applicable law and the articles of association of the company can be challenged within 90 days by internal auditors, the directors who did not cast their vote in favour of the resolutions passed and, if the resolutions result in a damage to their rights, the shareholders (in such a case, representing at least 0.001 per cent of the corporate capital for public companies or 5 per cent of the corporate capital for the other companies). However, any challenge is without prejudice to rights acquired by bona fide third parties.

Although the Italian Civil Code recognises that parent companies may exercise ‘guidance and coordination activities’ over their subsidiaries, from a practical perspective:

• all instructions given by parent companies must be reflected in all resolutions (whether of the board of directors or of the shareholders of the company) and properly substantiated; and
• the reasons for the instructions must be reasonably detailed and not result in a prejudice for the company or its creditors.

Any shareholder found to be exercising undue influence may be held liable in relation to the company, its creditors and the other shareholders if the undue influence results in a prejudice for any of them. In any case, directors of Italian companies are never exonerated from liability in relation to the company, its creditors and third parties, including minority shareholders, in the case of failure to comply with the fiduciary duties they owe to the company.

In order to prevent undue influence from third parties, particularly holding companies, there is a specific set of provisions under Italian law addressing the conflict of interest of directors. Slightly different rules apply depending on whether the Italian company is incorporated as a società per azioni (SpA) or as a società a responsabilità limitata (Srl), or whether there is a board of directors or a sole director.

Guarantees are vulnerable to challenge when the guaranteed debt is amended, rescheduled or otherwise extended without the consent of the guarantor. Provisions are usually inserted into guarantees to provide advance consent to such amendments, but the effect of such provisions is limited and a prudent approach is to obtain guarantee confirmations whenever material amendments are made to the guaranteed debt.

Guarantees documented by a document signed in Italy are subject to registration tax unless exempt. The registration tax (if applicable) is equal to 0.5 per cent of the amount guaranteed.

There are no particular Italian-law limitations on the ability of foreign-registered related companies to provide guarantees in an Italian-law document (see question 33 regarding situations where guaranteed claims would be voidable).

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

The Italian Civil Code prohibits an Italian company from, either directly or indirectly, granting loans, guarantees or security for the purchase or the subscription of its own shares. The rule is widely interpreted to cover the acquisition of any company directly or indirectly controlling the relevant Italian company and any subsequent refinancing of the acquisition debt. With the exception of circumstances where the assistance granted is for an amount not exceeding the profits payable and the reserves available for distribution that is applicable only to a company that is incorporated as an SpA, there is no exemption available. Any agreement in direct or indirect violation of the provision is invalid and unenforceable.

The issue is usually addressed by way of a debt push-down through the merger of the acquisition vehicle (SPV) with the target. In that scenario, the acquisition facilities are advanced to the SPV under a bridge loan, while the refinancing lines (if any) can be advanced directly to the target under a medium-term loan, in relation to which security and guarantees can be taken on day one. Before the maturity of the bridge loan (generally within 18 months from the closing of the acquisition) the SPV and the target merge and the acquisition facilities are refinanced under a new medium-term loan, or the one used for the refinancing lines (if any). The security package will now extend to the new refinanced acquisition facilities. The described structure cannot, however, be used where the acquisition is entirely funded through a high-yield bond issuance, as bonds usually have a medium- to long-term maturity profile. As a result, this limitation makes the bonds, to a certain extent, a less suitable instrument to fund acquisitions of Italian targets, requiring a specific analysis and creative solutions to properly address potential financial assistance issues and structure the push-down of the debt.

For this structure to work, the statutory merger must comply with the following requirements:

• the merger plan must identify the financial resources to be used by the company resulting from the merger to meet its debt obligations;
• the report of the board of directors must explain, inter alia, the economic reason for the merger, the objectives it intends to achieve and the financial resources it intends to use;
• the independent experts (appointed by the court in the case of an SpA) must certify the reasonableness of the assumptions and conclusions drawn in the merger plan; and
• the independent auditors must provide a report on the merger plan.

It is generally accepted that a guarantee or security granted by an Italian company in order to guarantee or secure any part of the debt that is not used, either directly or indirectly, to acquire the target’s shares, is permitted. However, owing to the punitive nature and wide interpretation of the relevant provisions, it is advisable to rule out all upstream guarantees and security and to ensure that the non-acquisition debt to be guaranteed or secured is clearly distinguished and separated from the acquisition debt (eg, separate loan agreements or at least separate and independent facilities under the same loan agreement), in order to avoid any argument that any such guarantee or security is in fact indirect financial assistance (see question 14 regarding general limits to guarantees and security).

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Floating charges and all-asset security are not common under the Italian legal framework; however, a new floating charge has been recently introduced under Italian law. Separate instruments are required over different types of assets, each subject to a separate set of statutory provisions governing the creation, perfection, registration and enforcement of the relevant security. The most common forms of security are mortgages, pledges (which are governed by different rules depending on the type of assets subject to security), assignments by way of security and special privilege pursuant to article 46 of the Banking Act. With limited exceptions, security under Italian law generally covers existing and well-identified assets only. Security over future assets is generally not recognised and is re-characterised as an undertaking to grant security.

As a general rule, security over real estate assets and movable assets registered with public registries (such as cars, aircraft and ships) is usually granted by way of a mortgage, while security over all other movable assets (including personal property, shares, bank accounts, receivables and claims) is usually taken by way of a pledge. Security over claims and contractual rights can also be created by an assignment of security. Movable assets not registered with public registries and reserved for the running of a business, including:

• existing and future equipment, plant, machinery, concessions and instrumental assets;
• raw materials, work-in-progress, finished goods, livestock and merchandise;
• goods otherwise purchased with the proceeds of the relevant financing; and
• existing and future receivables arising from the sale of the assets and goods listed above can be subject to the special privilege.

The special privilege was the closest instrument to a floating charge that Italian law recognised as it covers classes of assets owned from time to time by the borrower or issuers, as opposed to specific assets owned by the grantor at the time the security is granted. However, the special privilege is only available in the limited circumstances where:

• the grantor is the borrower (ie, not available for guarantors) under a loan agreement (or the issuer of notes);
• the lender is a bank or financial institution duly authorised to carry out lending activity pursuant to the Banking Act (or the noteholders are qualified investors); and
• the financing has a maturity longer than 18 months.

Law Decree No. 59/2016 introduced to the Italian legal framework a new long-awaited security instrument, a floating charge over non-registered movable assets and a new security instrument for real estate financing, which entails secured creditors to satisfy their claims against the mortgaged assets without the need to go through a proper foreclosure proceeding, a sort of repossession agreement. The Italian floating charge differs from usual Italian pledges by not requiring the dispossession of the pledged items and it will extend over all non-registered movable assets that relate to the business of the grantor without the need of a specific list; however, such items must, in any case, be determinable and the floating charge must specify the maximum secured amount. The new floating charge represents an enhanced version of the special privilege and it can have a broader application that is not subject to the restrictions applicable to the special privilege (eg, the security can also be granted by a third-party provider and not limited to lenders that are a bank or a financial institution duly authorised to carry out lending activity pursuant to the Banking Act). However, this new instrument still requires the enactment of an implementing regulation through a ministerial decree to be fully operational.

With respect to the repossession agreement, such an instrument allows the parties to enter into an agreement providing for the automatic transfer of real estate assets to the secured creditor, or any of its affiliates, conditional upon a payment default by the debtor. The security can be given by the principal debtor or any third-party security provider. The secured creditor will be required to reimburse to the security provider any difference between the certified value of the real estate assets subject to transfer and the outstanding amount of the debt. However, the repossession will be allowed only in case of an outstanding ‘qualified’ default (eg, a certain number of unpaid instalments outstanding for a precise period of time) and subject to a precise notification procedure (see questions 17 and 18 regarding methods of creation, perfection and registration of the various types of security).

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Each form of security has its set of rules for creation, perfection, registration and enforcement, and sometimes even the same form of security is governed by different rules depending on the type of assets subject to security.

Mortgages must be signed before a notary public and registration of security with the competent land registry (or the asset-specific registers for vehicles, ships, aircraft etc) is required not only for the ranking of the security but as an essential requirement for the validity of the security. The mortgage is subject to registration tax (fixed or ad valorem) and mortgage tax (equal to 2 per cent of the amount secured).

As a general rule, pledges require a written agreement, an undisputable date of the agreement and delivery of the pledged assets to the pledgee (or a custodian) for security purposes. In order to obtain an undisputable date, the document is usually executed before a notary public, but other methods are available. The delivery of the pledged assets has the dual function of further strengthening the creditor’s right against the pledgor and ensuring the publicity of the security with regard to third parties. Depending on the nature of the assets subject to pledge, delivery can be achieved in different ways.

Italian limited liability companies mainly belong to two categories: an SpA or Srl. While the equity in SpAs is divided up into shares of equal par value, represented by registered share certificates (unless in dematerialised form), equity in Srls is not divided into shares and each equity holder is the owner of a percentage (quota) of the entire equity of the company. As a result, delivery of the pledged asset (and, therefore, perfection of security) is achieved through the transfer by way of security of the certificates representing the shares in an SpA or by registering the pledge in the competent companies’ registry in the case of quotas in an Srl. In each case, the pledge must be recorded in the company’s shareholders’ book (if any) in order for it to be enforceable against the company. Owing to the requirement for registration with the competent companies’ registry, a pledge over quotas in an Srl must be signed before a notary public and it is subject to registration tax (unless exempt). Registration of the pledge over the shares in an SpA is not required; therefore, registration tax is only applicable in certain circumstances.

Pledges over intellectual property rights (eg, patents, designs, trademark registrations and trademark applications) must be signed before a notary public and are subject to registration taxes (unless exempt). Delivery of the pledged asset or perfection of security is achieved by registration of the pledge with the competent intellectual property right registry and court offices.

For pledges over receivables, claims and bank accounts, delivery or perfection is achieved by notification of the pledge to the relevant debtor (or account bank) or acceptance of it by the latter. In both cases, an undisputable date of the notice or acceptance is required for enforceability against third parties (including the receiver or liquidator of the pledgor). An undisputable date of the notice is generally achieved by service of the notice by a court bailiff, through a piego raccomandato aperto or by certified email (PEC), an undisputable date of the acceptance is generally achieved by execution of the acceptance before a notary public. In relation to these classes of assets, registration of the pledge is not required; therefore, registration tax is only applicable in certain circumstances.

The assignment by way of security is an alternative to the pledge as a security in relation to receivables. On the one hand, similarly to the pledge over receivables, it also requires a written agreement bearing an undisputable date and that the security document clearly identifies the receivables subject to security. Contrary to the pledge, on the other hand, the notification to the assigned debtor (or its acceptance) is only a requirement for the enforceability of the assignment with regard to third parties, as opposed to a perfection requirement of the security. In other words, an assignment by way of security of receivables is a valid security between the parties from the date of the agreement, irrespective of the notification to or acceptance by the debtor. This difference makes the assignment a more flexible security and, as a result, it is more commonly used in the Italian market, as opposed to the pledge. In fact, for a number of commercial and practical reasons, in many circumstances the assignor or pledgor may not be willing to notify its debtors of the security and, with the assignment by way of security, the notice can be postponed to a later time (eg, event of default) in order to minimise the burden of the security for the company, without affecting the validity of the security interest. However, it must be stressed that the enforceability against third parties (including any receiver or liquidator of the company) requires notice of the assignment. The notice can be served at any time before the insolvency of the pledgor without jeopardising the security, since the relevant hardening period starts running from the date of the agreement, whereas, in the case of the pledge, the relevant hardening period only runs from the date of the notice.

Special privileges must be signed before a notary public. A list of all equipment, plant, machinery, raw materials, work-in-progress, finished goods, livestock, merchandise and any other goods and claims subject to security must be included in the security document, which must also specify the maximum amount secured thereunder. The security document must then be lodged with the specific registry held at the competent court. The special privilege is subject to a registration tax of €200.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Once an Italian law-governed security is created and perfected, there is no need to renew the security or the perfection requirements to preserve the validity of the security. However, certain events arising post-perfection will require further actions to be taken. For instance, amendments to existing secured documents might require a confirmation of security or new security to be granted depending on the scope of the amendment. Also, a change in the parties (eg, the grantor or the beneficiaries of the security) may require a confirmation of security or new security to be granted depending on the circumstances of the change. Although the grant of new security interests always means new perfection requirements must be satisfied, confirmations do not always require new perfection requirements to be carried out. It depends on the type of security and the reason for the confirmation.

In addition, under Italian law any change or substitution of the secured assets generally requires new security with new perfection requirements to be carried out. There are very limited exceptions to this general rule, such as the special privilege and pledge over balances of bank accounts, which because of the specific nature of the security and the assets are subject to it. However, with respect to the pledge over balances of bank accounts, the periodical perfection of the pledge is required to ensure that the pledge on the balance standing from time to time on the account is effective against third parties. A periodic confirmation of security (with the need for new perfection requirements to be carried out) is, however, strongly advisable in order to preserve the security, even with reference to these exemptions. In all other circumstances the inclusion of new assets requires new security to be taken, with new perfection requirements, even in cases where this was foreseen from the beginning. Future assets are not subject to security, but only the subject of an undertaking to grant security.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

In the absence of any express agreements with unions or other employee representative bodies, which may oblige the employer to obtain consent or consult on this subject (which in practice are likely to be extremely rare), there is no obligation to obtain consents from or consult with a works council, trade union or other employee representative body for the provision by an Italian company of guarantees or security over its assets.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Italian law-governed security interests are commonly granted to lenders individually. As discussed, although trusts governed by foreign law should be recognised by Italian courts, there are no trusts available under Italian law. As a result, security is not granted to one person only for the benefit of others, but instead, each creditor must be the beneficiary of the security interest (and registered as such, if registration is a perfection requirement to that security). In other words, only the persons specifically identified in the security documents as beneficiaries of the security (and if this is the case, registered or notified to the relevant debtor as such) generally have the rights purported to be created under the security (including enforcement rights). This results in the need for a confirmation of security (and new registrations are required, if the security is subject to registration) upon any assignment or transfer of the interests of any lender of record. Sub-participations are excluded from any renewal or confirmation process as the lenders of record (and the beneficial owners of security) remain the same entities. However, in the context of a high-yield bond issuance, the notes trustee may be appointed in the indenture as agent (rappresentante) of the holders of the notes pursuant to article 2414-bis, paragraph 3, of the Italian Civil Code. Under this provision (introduced by Law No. 164 of 11 November 2014), security interests and guarantees can be validly created in favour of an agent of the holders of the notes, who will then be entitled to exercise in the name, and on behalf of, the holders all their rights (including any rights before any court and judicial proceedings) relating to the security interests and guarantees. However, there is no guidance or available case law on how the newly introduced provision may be applied to security created in accordance with it in connection with a bond issuance made by an Italian entity.

Generally, the trustee’s role and functions are replicated by appointing the collateral agent or trustee as agent acting in the name and on behalf of the other secured parties pursuant to Italian law. Such an appointment is normally included in the loan agreement or the intercreditor agreement and allows the collateral agent to sign the security documents (including the security confirmations upon a change of lender) on behalf of the other secured creditors, exercise their rights thereunder and enforce security. This, however, does not exempt from the requirement that the security be granted, registered (if required) and enforced in favour of each lender individually.

Sub-participation structures, where only one bank (eg, the agent) is the lender of record and all other lenders are sub-participants, are sometimes implemented in order to structure around this requirement. However, sub-participants are not recognised as secured creditors and have no rights under the security. They rely only on the sharing and turnaround provisions included in the intercreditor agreements and bear the risk of the insolvency of the lender of record.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

Although all security interests governed by Italian law are automatically extinguished by statutory law with the repayment of the secured debt, security documents typically require a specific deed of release to confirm release of security, and in Italian deals it is also customary to require that the person extinguishing the secured obligations provides certain documents (the comfort documents) to prove that it is not in a distressed situation. The delivery of the comfort documents is a condition for the release of the security. Therefore, release can only occur upon confirmation from each lender, since Italian law-governed security is granted to all lenders individually. However, because of the Italian law, power of attorney is usually granted to the collateral agent from each lender in relation to the Italian law security documents, and the collateral agent might be entitled to release security on behalf of all the lenders. However, if that is the case, the relevant authorisation must be expressly included in the loan or intercreditor agreement, and it generally includes the conditions for any release of security.

Describe the fraudulent transfer laws in your jurisdiction.

See question 33 regarding voidable transactions.

Law stated date

Please state the date on which the law stated here is accurate.