The vitality of an economic system is also measured by its dynamism in M&A activities, which means by the number and value of transactions involving transfers of shareholdings and businesses. The transfer of shares, equity interests and businesses, is therefore one of the fundamental elements on which the competitiveness of a country is based. It is however clear that, in the absence of adequate protections for the purchaser, such element may become an obstacle to, rather than a stimulator of, economic growth.
However, the Italian legislative landscape evidences a grey area specifically with respect to purchaser protections. Indeed, a present purchaser of a shareholding or business unit in Italy risks, after one year of completing the purchase, no longer being able to seek indemnification from the seller for any inconsistencies between the seller’s warranties and the actual financial standing of the target, even where the purchase agreement includes a specific warranty for a longer period. This at least seems to be still the prevailing case law, which, rejecting the conclusions reached for some time now by both legal commentators and arbitral tribunals, continues to equate misrepresentations with imperfections in property sold or failure to satisfy promised quality standards and, consequently, to apply the one-year statute of limitations relating to warranties under Article 1495 of the Italian Civil Code.
This statute of limitations, relating to the general sales regime, was introduced by legislators in 1942 in connection with the sale of tangible and easily ‘verifiable’ goods, with a clear purpose to prevent transactional uncertainty for an extended period. Yet, it is clear that defects associated with the purchase of shareholdings or businesses are likely to reveal themselves in timeframes well in excess of the twelve months permitted by Article 1495 of the Italian Civil Code. If one were to consider, for example, tax liabilities: given that, by law, the term within which the competent authorities may conduct inquiries with respect to a target typically expires at the end of the fourth year following that in which a return is filed, or of the fifth year, in case of failure to file, it is all but impossible that any irregularities in the returns filed by a target in the year preceding the acquisition may be assessed (and therefore notified by the purchaser to the seller) within one year from the closing. Consequently, the purchaser will be devoid of any protection as a result of the cut-off imposed by the statute of limitations, without even having had time to become aware of any alleged defects.
It is therefore fully apparent that, due to the different nature of the goods purchased and sold, a purchaser of a shareholding (or a business) requires completely different protections than a purchaser of a horse or car.
Both legal commentators and arbitral tribunals have held that the limits imposed by Article 1495 of the Italian Civil Code may be overcome in many ways (for example, by classifying warranties as ancillary guarantees, the duration of which, in the context of the negotiation autonomy of the parties, may be extended as long as they deem appropriate). Nevertheless, as noted above, trial judges still hold the view that, in light of the mandatory nature of the statute of limitations under Article 2936 of the Italian Civil Code, the term of such provisions cannot exceed one year. An illustrative example of this view is the judgment of the Appeal Court of Milan of 17 September 2008 (unpublished, but still well known to specialists in the field) whereby the Court, declaring the nullity of an arbitral award supporting the thesis mentioned above, reaffirmed the principle according to which ‘business warranties’ should be deemed to fall within the legal warranty for sales, and thus subject to a one-year limitation period.
In any event, it is important to note that the issue is not confined to highly technical and niche forums, among specialists in the field. As previously stated, in fact, it affects the ability of our economic system to attract investment. In other words, if the rules are not reconsidered, Italian competitiveness itself may be placed at risk in the eyes of investors and, in particular, of those foreign investors who may be interested in acquiring corporate interests or businesses in the Italian market.
How can we intervene with respect to such a disincentivizing situation? A legislative initiative has been put in motion by those who operate in these markets everyday: in particular, NCTM Studio Legale Associato, with a strong base in Milan and offices in many cities around the world, is developing a proposal aimed at overcoming the current legislative impasse, to be submitted to the Italian Lower House Justice Committee.
There is no lack of expertise at the firm: Paolo Montironi (Senior Partner), Alberto Toffoletto (Departmental Coordinator and professor at the State University of Milan), Pietro Zanoni (Equity Partner) and Tommaso dalla Massara (Of Counsel and professor at the University of Verona) are just some of the professionals of the firm’s M&A Department working on potential scenarios.
The first option involves acting within the context of the corporate and business regime (with a focus on Articles 2355, 2469 and 2555 of the Italian Civil Code), to expressly provide for the possibility to agree on a term that deviates from the strict statute of limitations under the Italian Civil Code. Another scenario involves amending Article 1487 of the Italian Civil Code relating to the standard warranties for sales.
Regardless of what solution is adopted, what matters is that an important dialogue has now begun between the professionals and the politicians. In this case, a leading law firm (NCTM is among the leading independent law firms in Italy) has made available its expertise developed in this area for the competitiveness of Italy. This should not come as a surprise; in the Anglo-Saxon tradition, ‘civil commitment’ initiatives are anything but unusual. The current initiative embraces the idea of making a contribution to policy in its highest form: in fact, there is no partisan label attached to an initiative of this kind, it is simply aimed at recognizing adequate protections (also) for the purchaser of corporate interests or businesses, tailored to the particularities of the ‘goods’ purchased and sold.
On the part of the Italian Lower House Justice Committee, the parliamentarian Alessandra Moretti of the Democratic Party – who herself is a solicitor – is in charge of putting forward and introducing the content of the proposal in the debate underway at the Committee.
At this stage, we can only await the developments of a process that could bring a legislative change intended, in one way or another, to broaden the scope of private autonomy; and which would be no small measure if it is able to contribute to fostering investment.