Does the law lay down any rules which must be complied with before a corporate entity can give valid security over its real estate assets, for example 'financial assistance' rules and 'corporate benefit' rules?
Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.
Financial assistance by an Italian company for the acquisition or the subscription of its own shares, for a joint stock company (società per azioni), or quotas, for a limited liability company (società a responsabilità limitata), is prohibited by:
These articles prohibit an Italian company from, directly or indirectly, providing financial assistance (whether by granting loans, security, guarantees or credit support in other forms) for the purchase of (or subscription to), respectively, its own shares or quotas of its direct or indirect parent companies.
Any agreement in direct/indirect violation of financial assistance rules may be considered invalid and unenforceable and the directors of the company might face liability actions. Additionally, an Italian company, either directly or indirectly, may not grant loans or provide security for the subscription or the acquisition of its own shares/quotas by third parties, nor can it accept its own shares as a collateral security.
The prohibition on financial assistance, following a conservative approach, includes:
which are made in order to facilitate the purchase or subscription of the Italian company's own shares or quotas.
In relation to joint stock companies (S.p.A.) only, if the assistance is granted for an amount not exceeding the profits payable and the reserves available for distributions, a ‘whitewash’ procedure is in principle available through a shareholders’ resolution. In this respect, by virtue of Legislative Decree No. 142 of 4 August 2008, which came into force on 30 September 2008 enacting Directive 2006/68/CE, Article 2358 of the Italian Civil Code has been amended.
In particular, Article 2358 of the Civil Code now states that a company, either directly or indirectly, cannot make loans or provide security for the purchase or subscription of its own shares by third parties nor can it accept its own shares as a collateral security unless the following requirements are satisfied:
1. the transaction shall be approved by the extraordinary meeting of the shareholders;
2. the directors shall prepare a written report indicating:
3. the aggregate financial assistance granted to third parties shall not at any time exceed an amount equal to the profits payable and reserves available for distribution as resulting from the latest balance sheet approved by the company; and
4. the company shall include among the liabilities in the balance sheet a reserve unavailable for distribution equal to the amount of the aggregate financial assistance.
However, given its strict requirements which are normally not in line with leverage transactions, it is rarely (if at all) used in practice.
In leveraged finance transactions, the issue is addressed in practice by way of a debt push down which is achieved through the merger of the acquisition vehicle with the target. The merger shall comply with specific requirements provided for by Article 2501-bis of the Italian Civil Code.
Article 2501-bis of the Italian Civil Code remains applicable ‘in any case of merger between companies, one of which has incurred debt in order to acquire the control in the other, if, as a result of the merger, the assets of the latter company constitute general collateral (garanzia generica) securing, or source for, the repayment of such debt’ and this provision regulates mergers occurring, typically, in the course of leveraged buy-out transactions, where one company assumes financial indebtedness (‘leverage’) for the purposes of acquiring the shares of a target company.
One of the conditions for the application of Article 2501-bis of the Italian Civil Code is that the assets of the target company constitute:
In particular, the merger plan shall identify the financial resources to be used by MergeCo for the repayment of its debt and an independent expert shall certify the sustainability of the debt. In that scenario the acquisition loans are advanced to the acquisition vehicle (either by bridge and term loans) but until the merger is effective, target shall not guarantee or grant any security to secure the acquisition facility. Refinancing facilities or ‘RCF’ or capex can be granted to target for its corporate purposes (the relevant loans can be secured by target’s assets) in the bridge phase (ie before the merger). Generally, within 6-12 months from closing, the acquisition vehicle and target shall merge (both direct and indirect merger can be implemented) pursuant to Article 2501-bis of the Italian Civil Code and, after the merger is effective, it is generally deemed that MergeCo can provide securities over its assets without breaching the financial assistance rules.
To the extent that security or guarantees (downstream, upstream or cross-stream guarantees) are provided by companies belonging to a group, each Italian company must itself have a specific and economic interest in guaranteeing/securing the financial obligations of its parent company.
Such an interest must be:
Moreover, as the subsidiary must have an autonomous interest in granting a security, the granting of such security is limited to the subsidiary's net worth. This is measured in terms of the potential total payments under any guarantee and/or security not causing the net worth of the Italian grantor to fall below zero (leading to the Italian grantor’s insolvency).
From a corporate law perspective, the following should also be verified:
If there are any restrictions on the grant of security or guarantee, the security or guarantee must be limited accordingly.
Although Italian law recognizes the interest of the group taken as whole and that a parent company may exercise ‘direction and coordination activities’ (direzione e coordinamento) over its subsidiaries, Italian directors (and the parent company) are never exempted from liability towards third-party creditors and the company itself, in case of failure to comply with their fiduciary duties. In certain circumstances, also third parties lenders might be held jointly liable for unlawful influence.
Please note that in certain instances, the granting of a guarantee or related security may trigger the company's directors to be liable to the company and its creditors.
In addition, in a declaration of the company's bankruptcy, the directors could incur liability, and therefore be subject to criminal sanctions, if it is ascertained that they had wilfully caused the misuse of corporate assets to the detriment of the company's creditors.