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Newsletter Private Equity - 7/2012 EN
Preface
Acquisition of companies and clauses of limitation of liability of the resigned directors
Vendor due diligence
Opening the Capital Markets to Non-listed Companies
The Development Decree and the innovation in the Italian Bankruptcy Lawe
Notional interest deduction regime
Update of the definition of Permanent establishment
PrefaceAcquisition of companies and clauses of limitation of liability of the resigned directors
Vendor due diligence
Opening the Capital Markets to Non-listed Companies
The Development Decree and the innovation in the Italian Bankruptcy Lawe
Notional interest deduction regime
Update of the definition of Permanent establishment
This issue of our Private Equity Newsletter begins with a note on a recent decision of the Italian Supreme Court regarding the validity of release agreements for the benefit of resigning directors.
There follows a note on vendor due diligence and their advantages for sellers especially in the context of competitive M&A processes.
You will then find a brief survey of the main characteristics of debt securities which may be now issued by Italian non-listed companies under the so-called Decree for Growth of last June.
We provide you with some insight on the rules recently enacted regarding insolvency procedures and, in particular, concerning pre-insolvency workout agreements (concordato preventivo), restructuring agreements under Article 182-bis of the Italian Bankruptcy Law, and restructuring plans under Article 67 (3) (d) of the Italian Bankruptcy Law.
Finally, a couple of articles on tax matters. The first deals with the new rules recently introduced in order to promote the capitalization of companies. The second one highlights the definition of “permanent establishment” elaborated by the OECD.
As always, we hope that you may find this of interest to you. Please do not hesitate to contact any of us should you have any questions or suggestions. Thank you.
Franco Agopyan (Editor In-Chief)
(franco.agopyan@chiomenti.net)
Acquisition of companies and clauses of limitation of liability of the resigned directors
The court decision no. 10215 issued by the Italian Supreme Court on 28 April 2010 confirms the case law initiated by the same Court with the decision no. 7030 of 27 July 1994, pursuant to which “the agreement under which the shareholders [...] undertake towards a third party (exiting shareholder and former sole director of the company) not to resolve on the bringing an action for liability against such director, abdicating the exercise of the right to vote despite the presence of conditions allowing them to proceed with the mentioned action” is void.
The decision at issue is of considerable importance, especially with reference to the general practice, relatively common in Italian M&A, which provides for the inclusion, in the share purchase agreements, of clauses under which the purchaser of shares of the corporate capital of the target company undertakes not to resolve on bringing an action for liability against former directors of such company in connection with cases of mala gestio committed by those directors.
On the basis of the mandatory nature of the provisions under Articles 2392 and 2393 of the Italian Civil Code, the Supreme Court identifies a ground of invalidity of the above-mentioned clause of prior waiver by the purchaser to enforce the liability of former directors, in the unlawfulness of the purpose of such agreement, “as it creates a conflict of interest between the company and the shareholders, which undertake to act in the interest of a third party, and integrates a type of conduct which is contrary to the aim imposed by the company legal model”.
It is important to note that the Supreme Court also held that the nullity of provisions of prior waiver of liability in favour of former directors could overcome the whole share purchase agreement pursuant to Article 1419 of the Italian Civil Code, in the event it appears, from the examination of all the circumstances of the case, that without the mentioned agreement the parties would not have concluded the acquisition transaction as a whole. From a strictly drafting point of view, it would seem therefore prudent to clarify in the body of the share purchase agreement that the potential invalidity of such waiver of liability clause does not assume, as part of the overall undertakings among the parties, a such importance to overcome the whole transaction.
In light of the above-mentioned jurisprudence, which - despite being criticized by some scholars, not without merit – also obtains the approval of the prevailing doctrine and seems to have become consolidated, it would seem appropriate to also adopt other provisions in the acquisition agreements (in addition to, or more cautiously, as an alternative to the above-mentioned waiver of liability clause), in order to meet the traditional need for protection of the resigned management, often strictly joint to the selling shareholder.
In particular, the indemnification clauses, pursuant to which the purchasers undertake to indemnify the resigned directors from any harmful consequences that might arise from proceedings brought against them following the acquisition transaction.
These clauses have been generally accepted as valid by the prevailing jurisprudence and governing doctrine and, if on one hand they may effectively induce the purchaser to refrain from enforcing the liability of the resigned directors, to avoid incurring the related indemnification obligations, on the other hand they give the resigned directors a direct and greater protection, also including any negative consequences arising from the effective exercise of the same action.
Stefano Mazzotti
(stefano.mazzotti@chiomenti.net)
Vendor due diligence
1. Introduction. In the context of M&A transactions, due diligence activity plays a very significant role. In fact, only by investigating the assets and liabilities of the target business, prospective purchasers are in a position to understand the risks and opportunities of a potential transaction and come to a sound valuation of the target business.
2. The vendor due diligence. In certain cases, due diligence can also support a prospective seller which may be interested to provide prospective bidders with a framework of material information regarding the business. The expression “vendor due diligence” generally describes the investigation activity carried out by professionals (such as lawyers, accountants, business advisors, and others) engaged by the seller for the purpose of gathering material information which potential buyers could be interested to receive in order to assessing the business proposed to be divested. The due diligence typically ends with the preparation of a report which is made available to potential buyers (and possibly their lenders).
3. The vendor due diligence in the context of competitive auctions. Vendor due diligence is especially important and is mostly used in the context of auctions or similar competitive processes. In such cases, potential buyers are put in a position to assess the health of the target business at a first stage of the transaction without (at least initially) having their own consultants access the target business and without incurring significant costs.
The preparation of the report provides a number of advantages to the seller. Firstly, it enables it to identify and highlight to a prospective buyer in a clear manner the particular opportunities offered by the target business as well as any issues which may be material for the potential transaction or the financing thereof (which would then be factored into the valuation). Secondly, it may be used by the seller to limit its liability in the negotiations of the sale and purchase agreement.
From the prospective of the purchaser, vendor due diligence reports can be a valid resource but should (and generally are) approached cautiously. In fact, it is our experience that prospective purchasers usually conduct their own due diligence review in order to assess the validity and credibility of the vendor due diligence report and to conduct a deeper analysis of at least certain specified areas or items.
4. The reliance letter. Generally, at the initial stage of a transaction, vendor due diligence reports are made available to prospective purchasers on a non-reliance basis (often memorialized in one or more hold harmless or release letters). Only on the date of signing of the sale and purchase agreement, the preferred ultimate bidder will receive a reliance letter which will enable it to rely on the content of the vendor report, even though the consultants which prepared such report do not have any contractual relationship or privity with it. Often reliance letters will contain provisions limiting the liability of professionals involved in the transaction (such as a cap and time limitations for bringing a claim).
5. Conclusions. In the appropriate circumstances, if done correctly and at an earlier stage, vendor due diligence can provide significant opportunities for a seller, not only enabling it to identify potential (and perhaps unknown) issues of the target business and take appropriate remedy well in advance of the transaction, but also ensuring a smooth transaction process and helping it achieving the best possible price and terms.
Franco Agopyan
(franco.agopyan@chiomenti.net)
Michele Cera
(michele.cera@chiomenti.net)
Damiano Battaglia
(damiano.battaglia@chiomenti.net)
Opening the Capital Markets to Non-listed Companies
1. Introduction
On 15 June 2012, the Cabinet approved a law decree introducing urgent measures for the growth of the country (hereinafter “Decree for Growth”). The Decree for Growth is being published in the Official Gazette and should be converted into law, with or without amendments, within 60 days from the date of it being published.
Article 32 (Financing Instruments for Business Undertakings) of such Decree for Growth introduces significant regulatory changes aimed at expanding the opportunities of Italian non-listed companies to access the capital market by removing the existing fiscal and corporate limitations that penalised such companies in comparison to listed companies and companies of equivalent status in other European countries.
2. The innovations and the rationale of the changes
The Decree for Growth removes the unequal treatment of listed companies and non-listed companies in the issue of debt obligations currently existing in the Italian market.
In particular, under the regime previously in force, the non-listed companies (in contrary to companies with shares listed in the capital markets) encountered stringent quantitative limitations applicable to the issue of debt; and the fiscal treatment – of the bond as well as of the issuer – was penalising so that obtaining financing by issuing debt was extremely onerous. As a result, this led to a high concentration of the sources of financing of such companies and strong dependency from bank credit.
On the basis of the measures introduced by the Decree for Growth, Italian non-listed companies, including small and medium enterprises but excluding banks and micro-enterprises, will be allowed to issue debt instruments whether short-term debt (finance bills) or medium and long-term debt (bonds and similar instruments and subordinated hybrid debt instruments (obbligazioni partecipative subordinate)) without a particular penalisation compared to listed companies.
Subject to the exceptions set out below, such issues will be permissible with the support by a sponsor that assists the issuer and acts as market- maker, guaranteeing the liquidity of the instruments.
In a nutshell, the main changes with regard to this topic introduced by the Decree for Growth are:
(a)the modification – and in some cases the overcoming – of Article 2412 (Limitations on Issue) of the Italian civil code which set the quantitative limitations to the issue of corporate bonds;
(b)the elimination of the differences in the fiscal treatment of the debt instruments issued by non-listed company compared to debt instruments issued by a company with listed shares and the elimination of the penalising treatment regarding the deductibility of the interest due with respect to such instruments;
(c)the change of the duration of the finance bills which should have a duration of not less than 1 month and not more than 18 months and the substantial assimilation of these instruments to the so-called commercial papers that are already being used as a tool for short-term financing by larger players;
(d)the introduction of the possibility to dematerialise such instruments to favour their circulation in the market; and
(e)the extension of the most favourable fiscal treatment applicable to bonds also to finance bills.
3. The companies positively affected by the changes
The innovations introduced by the Decree for Growth apply to companies that do not issue financial instruments traded on regulated markets or multilateral trading facilities, other than banks or micro-enterprises.
Therefore, addressees of such measures are, in addition to larger non-listed companies, small and medium enterprises (SMEs), issuers of non-listed instruments that fall within the definition provided for in Recommendation of the European Commission 2003/361/EC, namely, enterprises that (a) employ fewer than 250 persons, (b) have an annual turnover not exceeding Euro 50 million, or (c) whose total balance sheet does not exceed Euro 43 million.
Excluded, however, are the banks and companies that employ less than 10 persons and have a total annual turnover or total annual balance sheet of up to Euro 2 million (micro-enterprises).
4. Issuable Instrumentsi
Under the Decree for Growth, companies governed by it may, therefore, issue:
(a)bonds, as regulated by the Italian civil code;
(b)finance bills, which, following the changes introduced by the Decree for Growth itself, are now defined as "debt instruments to order issued in series and having a maturity of not less than one month and not exceeding eighteen months from the date of issue"; the finance bills can also be issued in materialised form through a central depository in accordance with the provisions of the Decree for Growth.
(c)subordinated hybrid debt instruments, being financial instruments with a maturity equal to or exceeding 60 months, which may provide for subordination and participation in the profits of the company.
5. Applicable Fiscal Regime
The Decree Growth has changed the tax regime applicable to the securities in question, to align it - under certain conditions - to the more favorable tax regime for securities issued by larger issuers (i.e. banks and listed companies). To this extent, finance bills are being treated as securities similar to bonds. In particular, the introduction of the following provisions should be noted:
(i)Exemption from withholding: non-listed companies will benefit from the exemption of withholding tax (tax rate 20%) on interest and other income attributable to foreign investors on bonds and similar debt instruments traded on regulated markets or multilateral trading facilities. Such exemption is currently applicable to apply to bonds and similar instruments issued by larger issuers (i.e. banks and listed companies). The conditions set out in Decree no. 239 of 1 April 1996 relating to the identification of foreign investors who are entitled to such exemption remain unchanged;
(ii)Deductibility of interest expense: the non-listed companies may deduct the interest payable with respect to the bonds and similar instruments in accordance with the same rules applicable to listed companies (about 30% gross operative profits from the respective management). In particular, when the bonds or similar instruments are initially subscribed by, and subsequently be traded between, qualified investors that are not, whether directly or indirectly, partners of the issuing company, the specific rules relating to the partial non-deductibility from the income of the issuer of the interest due with respect to such bonds issued by companies that are neither a bank nor a listed company are not applied;
(iii)Deductibility of the expenses of the issue: the non-listed companies may deduct the expenses relating to the issue, independently from the criterion of its attribution in the balance sheet;
(iv)Exemption from stamp duty: the finance bills issued pursuant to the Decree for Growth shall be exempt from stamp duty notwithstanding the enforceability of the instrument.
The tax provisions further provide that the issuer shall disclose the data relating to the issue of bonds and similar instruments not traded on regulated markets to the Italian Tax Authority (Agenzia delle Entrate) within 30 days to allow for adequate anti-evasion monitoring. In this respect, the enactment of further measures with regard to any further formalities is envisaged.
6. Quantitative Limits on Issue
As mentioned before, the Decree for Growth modifies the fifth paragraph of Article 2412 (Limitations on Issue) of the Italian civil code with regard to the quantitative limitations to the issue of bonds.
In particular and pursuant to such article, (a) the companies may issue bonds for an aggregate amount of up to twice the corporate capital, legal reserves and any reserve available in accordance with the last approved balance sheet, provided that (b) such limit may be exceeded if the bonds issued in excess are destined to be subscribed by professional investors subject to prudential supervision in accordance with specific laws (in the event of a subsequent circulation of the bonds, the party that transferred will respond, nonetheless, to buyers who are not professional investors for the solvency of the issuing company)
Pursuant to the previous rules, the limits provided for by above referenced the first and second paragraph of Article 2412 of the Italian civil code, did not apply to bonds issued by listed companies with regard to bonds destined to be listed on the same or other regulated markets.
By virtue of the interventions made by the Decree for Growth, this exemption was extended to bond issues intended to be traded on regulated markets or multilateral trading facilities, or to corporate bonds convertible into shares. Therefore, following the Decree for Growth, the quantitative limits described above will apply neither to listed companies nor non-listed companies, provided that the bonds are intended to be traded on regulated markets or multilateral trading facilities. In addition, they will not apply to any convertible bond.
With regard to, finally, the finance bills, the Decree for Growth provides that the maximum outstanding amount of these instruments shall be equal to the total current assets - being the amount of assets in the balance sheet to mature within one year from date of such financial statements – of the issuer as set out in the last approved balance sheet. In the event that the issuer is obliged to prepare consolidated financial statements or is controlled by a company or an institution, the limit shall be the amount so identified in the last approved financial statements.
7. Conditions for the issue and the role of the Sponsor
The legal framework intended by the Decree for Growth provides that the companies may issue finance bills, bonds and similar instruments subject to the following conditions:
(a)The issue shall be assisted by a sponsor, it being understood that companies other than small and medium enterprises (as defined above) may refrain from nominating a sponsor or waive the performance obligations of such;
(b)The last balance sheet shall be audited by an auditor or a company of auditors registered in the Register of statutory auditors or companies of auditors;
(c)The instruments are: (a) placed exclusively with qualified investors that are neither directly nor indirectly partners of the issuing company; (b) destined to be traded only between qualified investors.
To this extent, the role of the sponsor may be exercised by the banks, investment companies, asset management companies, harmonised management companies, SICAV, financial intermediaries registered in the register pursuant to Article 107 of the Italian banking law, and by banks authorized to provide investment services that may have their registered office in a non-EU country, but are authorized to provide such services in the territory of the Republic of Italy.
The sponsor has the following tasks:
(i)provide support to the company during the issue and the placement of the instruments;
(ii)subscribe and, up to the natural maturity of the instrument, maintain in its own dossier a certain percentage of such instrument, which may not be less than: (a) 5% of the value of the issue for an issue for up to Euro 5 million, (b) 3% of the value of the issue for an issue of more than Euro 5 million and up to Euro 10 million, in addition to the quota under (a); and (c) 2% of the value of issue for any issue exceeding Euro 10 million, in addition to the quota mentioned under (a) and (b) above;
(iii)insure the liquidity, at least at predetermined intervals, of the instruments for the entire life of the issue (market making activities).
Furthermore, the sponsor is required to effect a periodic valuation, at least semi-annually (and in any event upon the occurrence of an extraordinary event which may alter the judgement) of the value of the instrument. In particular, the sponsor shall establish a rating of the creditworthiness of the issuer and with respect of secured transactions, the quality of the security, whereby such ratings shall be made public.
The limitations specified in this paragraph shall not apply, in addition to issues made by companies not issuing listed financial instruments, to financial instruments being offered to the public pursuant to Article 1, paragraph 1, lett. t) of the Italian Financial Law and admitted to trading on a regulated market or an Italian multilateral trading facility or that of another European Union member state.
Moreover, as mentioned above, larger companies (i.e. companies other than SMEs) that do not have listed securities may waive the assistance of a sponsor or any of the services provided by the same.
8. Subordinated Hybrid Bonds
Another novelty is the introduction of the possibility to issue bonds with a maturity of not less than sixty months, which may include provisions for participation in company profits and subordination.
The subordination clause, contained in the bond, defines the terms of the subordination of the holder of the credit vis-à-vis the other creditors of the company (with the express exception of the subscribers of the corporate capital).
The subordinated bonds, issued under the Decree for Growth, however, are to be considered corporate bonds as provided for by Italian civil code and are subject to the quantitative limits set by law.
Moreover, with regard to the terms of the instrument, it is possible to define that part of the return on the investment - and not the right to the repayment of principal - is linked to the economic results of the company, the percentage of which shall be identified in the terms of the instrument. In particular, the company issuing the securities will be obliged to pay annually to the holder of the instrument an amount linked to the economic result, in a percentage as set in the terms of the issue (being the variable part of the consideration). The law also sets a limit on the discretion of the parties, providing that the sum payable by the issuer shall be proportionate to the ratio of hybrid bonds outstanding and the corporate capital, increased by an amount of legal reserves and reserves reported in the last approved budget.
The rules for calculating the variable part of remuneration are fixed on the issue: (a) they cannot be changed for the duration of the issue, (b) are dependent on objective measures, and (c) cannot be reduced, in whole or in part, by corporate decisions taken in each accounting year.
The variable part of the consideration represents a cost and, for the purposes of income tax, can therefore be deducted from the income during the accenting year.
Francesco Ago
(francesco.ago@chiomenti.net)
Gregorio Consoli
(gregorio.consoli@chiomenti.net)
The Development Decree and the innovation in the Italian Bankruptcy Law
On 15 June 2012 the Italian Cabinet (Consiglio dei Ministri) approved a law decree introducing certain urgent measures aimed at the growth and development of the Country (the “Development Decree”). The Development Decree has been published on the Official Gazette of the Italian Republic (Gazzetta Ufficiale) on 26 June 2012 (Law Decree No. 83 of 22 June 2012) and will have to be subsequently converted into law, with or without any amendments, within 60 days from the date of its publication.
Article 33 (Amendments to the Italian Bankruptcy Law in order to support the going concern) of the Development Decree significantly amends the Royal Decree n. 267 of 16 March 1942 (the “Italian Bankruptcy Law”) and, in particular, its provisions regarding pre-insolvency workout agreements (concordato preventivo), restructuring agreements pursuant to article 182-bis of the Italian Bankruptcy Law and restructuring plans pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law. Not only did the Development Decree amend the existing provisions but it also introduced new provisions in the Italian Bankruptcy Law itself.
As a preliminary remark, it is worth noting that the provisions amended and introduced by the Development Decree in the Italian Bankruptcy Law will only apply to pre-insolvency workout agreements and restructuring agreements pursuant to article 182-bis of the Italian Bankruptcy Law in relation to which filing with the Court occurs after the thirtieth day from the entry into force of the law converting the Development Decree and to restructuring plans pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law drafted after such date. In the meanwhile the Italian Bankruptcy Law will continue to apply as it is to pre-insolvency workout agreements, restructuring agreements and restructuring plans elaborated and filed before the aforementioned date.
1. Restructuring plans and prerequisites of the third party expert
As to the restructuring plans pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law, the reform carried out by the Development Decree introduced a new and more specific set of rules about the prerequisites and the duties of the third party expert as well as the possibility to publish the restructuring plan in the competent Companies’ Register upon request of the debtor.
As to the first point, it shall be underlined that, after the reform, the scope of work of the expert’s certification will not be anymore the reasonableness of the plan but, indeed, the “truthfulness of the accounting data (“dati aziendali”) and the feasibility” of the plan, in line with the provisions governing the pre-insolvency workout agreements.
New article 67 para. 3 (d), moreover, expressly states that the expert shall be appointed by the debtor (thus sorting out the debate on the competence over such an appointment) and that its independency shall be assessed pursuant to the following prerequisites:
(i) absence of any professional or personal relationship with the company or with those bearing an interest in the restructuring such as to compromise its independency of judgment;
(ii) possession of the requisites provided by the Italian Civil Code for the eligibility as internal auditor (sindaco) (see article 2399 of the Italian Civil Code);
(iii) absence, during the last five years, of any performance of work (whether as an employee or as a consultant, also through professionals with whom the expert is associated) in favour of the debtor or absence of any participation in the governing or auditing bodies of the debtor.
By virtue of the cross-references contained in the Italian Bankruptcy Law the aforementioned requisites shall apply also in the context of pre-insolvency workout agreements and restructuring agreements.
2. Restructuring plans pursuant to article 182-bis of the Italian Bankruptcy Law: repayment in full of the creditors that are not parties to the agreement
Article 182-bis, as amended by the Development Decree, provides that the debtor shall ensure repayment in full (thus not just “regularly” as provided by the current wording) of the creditors who are not parties to the restructuring agreement and that such full repayment shall be made within the following terms:
(i) within 120 days from the Court’s approval (omologazione) in respect of any receivables due and payable on such a date; and
(ii) in respect of any receivables not yet due and payable on the aforementioned date, within 120 days from their respective due date.
Such provision seems to be in line with the most recent case law, according to which a restructuring agreement can be approved by the Court only provided that, as of the date on which the request for approval of the restructuring agreement is filed within the competent Court, financial resources are actually available so as to ensure the repayment of the creditors not joining the restructuring agreement.
Article 182-bis also provides that starting from the date on which the restructuring agreement is published and for the following 60 days, the creditors whose rights and claims are outstanding prior to such date not only, as already provided, cannot exercise any enforcement or conservative actions over the debtor’s assets but also cannot obtain any pre-emption rights (except if it was so agreed).
Finally, new article 182-bis allows the debtor, who has timely filed a proposal of restructuring agreement pursuant to the Italian Bankruptcy Law, to file a request for a pre-insolvency workout agreement within the term stated by the Court: in such a case, the debtor’s assets will continue to benefit from the protective effects granted by the Italian Bankruptcy Law.
3. The new pre-insolvency workout agreements
Provisions regulating pre-insolvency workout agreements have been significantly amended by the Development Decree.
3.1 Filing for admission to a pre-insolvency workout agreement
Significant changes have been made starting from the very first phase of the procedure leading to a pre-insolvency workout agreement, i.e. the filing for admission to the procedure.
Article 161 of the Italian Bankruptcy Law, as amended by the Development Decree, now states that – along with the documents already provided- a “plan containing an analytical description of the modalities and the timing for the performance of the proposal” shall be attached to the request. In addition to that, a relevant innovation has been provided for the debtor who can file with the competent Court just a simple request for admission to the pre-insolvency workout agreement (which shall be published by the Court’s clerk in the competent Companies’ Register within one day), provided that it shall file the proposal, the plan and the other necessary documents within a term established by the Judge and which shall be included between 60 and 120 days from the date of filing of the sole request.
As an alternative, and within the aforementioned term, the debtor will also be entitled to file request for approval of a restructuring agreement: in such a case, the debtor’s assets will continue to benefit from the protective effects granted by the Italian Bankruptcy Law up until the date on which the restructuring agreement is approved.
It has also been provided that in the period included between the date of filing of the request and the date of the decree of admission to the pre-insolvency workout agreement the debtor can execute not only acts of ordinary management but also urgent acts of extraordinary management provided that, in such a case, it has been duly authorized by the Court. All the third-party claims which may arise from any acts legally executed by the debtor will be deemed super-senior (prededucibili).
Finally, it is worth noting that the rules introduced by the Development Decree expressly provide for the possibility to make (even substantial) changes to the plan or the proposal: in such a case, the expert will have to draft a new certification.
3.2 Non effectiveness of judicial mortgages and rules governing pending contracts
The Development Decree modified the date starting from which the creditors cannot exercise enforcement and conservative actions against the debtor’s assets: instead of the date of filing of the request, such a date will be the one on which it is published in the Companies’ Register. It shall be noted that the judicial mortgages registered during the 90 days preceding such date will not be effective towards creditors whose claims arose before the pre-insolvency workout agreement.
The Development Decree also introduced a significant innovation as to the rules governing pending contracts. Newly introduced article 169-bis of the Italian Bankruptcy Law provides that the debtor, by means of the request for admission to the pre-insolvency workout procedure, is entitled to ask the Court - or, subsequently to the decree of admission, the delegated judge (giudice delegato)- for the authorization to withdraw from the pending contracts or to suspend their execution for no more than 60 days. In both cases, the counterparty will be indemnified against the damages suffered because of such a withdrawal and its credit will be satisfied as a claim arisen prior to the pre-insolvency workout agreement.
Article 169-bis does not apply to employment contracts, real estate lease agreements and to preliminary agreements for the sale of a real estate property designated to be the main house of the buyer or of its relatives (parenti e affini) within the third grade, provided that they have been registered in accordance with the Italian Civil Code.
3.3 Pre-insolvency workout agreements with going concern
The Development Decree introduced in the Italian Bankruptcy Law a specific provision (article 186-bis) dealing with the hypothesis in which the pre-insolvency workout plan provides for the continuation of the business activity, the sale or transfer of the active business-concern to one or more companies – also newly established. This is the hypothesis of the so-called “pre-insolvency workout agreement with going concern”.
In such a case, and provided that the plan may also provide for the liquidation of non-instrumental assets, the following requisites shall be verified:
(i) the documents to be attached to the request for admission to the pre-insolvency workout procedure shall contain a detailed forecast of the costs and proceeds arising from the continuation of the business activity provided by the plan, together with a specific indication of the financial resources and of their respective coverage; and
(ii) the expert shall certify, in its certification, that the continuation of the business activity is instrumental to a better satisfaction of the creditors.
Moreover, the plan may provide for a standstill of the payment to preferred creditors (creditori privilegiati) up to one year from the approval (omologazione) of the pre-insolvency workout agreement, exception made for the case of a liquidation of assets or rights on which a right of pre-emption exists.
The rules governing the pre-insolvency workout agreement with going concern contain specific provisions regarding the agreements which are pending as of the date on which the request for admission is filed- and which will not be automatically terminated as a consequence of the procedure- and also regarding contracts entered into with public entities.
Such public contracts may continue to be effective provided that the expert certifies that they are in conformity with the plan and that the debtor has a reasonable capacity to perform the contracts.
Finally, the newly introduced article 186-bis provides that a company admitted to a pre-insolvency workout agreement with going concern may take part in public procurement contracts, provided that, in the tender, it will exhibit the following documents:
(i) a report of an expert attesting the conformity with the plan and the reasonable capacity to perform the contract;
(ii) a declaration made by a different operator, which has the general, financial, technical and economical requisites, along with the certifications, requested for the award of the contract and which has undertaken towards the competitor and the contracting authority (stazione appaltante) to make the resources necessary for the execution of the contract available for all the duration of the contract and to replace the company in case it goes bankrupt during the tender or after the signing of the contract, or in case it becomes unable to regularly execute the contract for any reasons whatsoever. Rules contained in the Italian Code of Public Contracts governing the so called “avvalimento” will be applicable.
The company will also be entitled to compete also by means of a temporary joint-venture with other companies, provided that such companies are not experiencing any insolvency proceedings and that the company itself does not act as agent.
4. Provisions common to pre-insolvency workout agreements and restructuring agreements
The Development Decree introduced in the Italian Bankruptcy Law articles 182-quinquies and article 182-sexies, which apply both to restructuring agreements and pre-insolvency workout agreements.
4.1 Granting of new financial resources and going concern
Article 182-quinquies contains provisions regarding the granting of new financial resources and the so-called “going concern”.
As to the first point, this article provides that the debtor, when making request for admission to the pre-insolvency workout procedure or for the approval of a restructuring agreement (or of a proposal of restructuring agreement) may ask the Court for the authorization to execute new super-senior facility agreements, out of the scope and in addition to those provided by article 182-quater of the Italian Bankruptcy Law, provided that an expert (in possession of certain requisites), once it has verified the company’s financial needs up until the approval from the Court (omologazione), certifies that such facilities are aimed at a better satisfaction of the creditors. Such authorization may also concern facilities identified only by typology and amount and which have not yet been negotiated, as well as the granting of a pledge or mortgage in order to secure the facilities themselves.
As to the second point, article 182-quinquies provides that:
(i) a debtor that has filed request for admission to the pre-insolvency workout agreement with going concern is entitled to ask the Court to be authorized to pay credits for the supply of goods or services which have arisen prior to the pre-insolvency workout procedure, provided that it submits a specific certification made by an expert in possession of the requisites provided by the Italian Bankruptcy Law. Such a certification will not be necessary in case of payments made up to an amount equal to the one granted to the debtor as new financial resources, that are not to be repaid or that are subordinated to the other creditors’ claims.
(ii) a debtor that has filed for an approval of a restructuring agreement or a proposal of restructuring agreement pursuant to the Italian Bankruptcy Law is entitled to ask the Court to be authorized, provided that the conditions listed under para (i) above are satisfied, to pay credits for supply of goods or services that have arisen prior to filing. In such a case, these payments will not be subject to claw-back action pursuant to the Italian Bankruptcy Law.
4.2 Non applicability of rules governing the reduction and loss of share capital
According to the newly introduced article 182-sexies, the rules governing the loss and reduction of the share capital set forth in the Italian Civil Code do not apply to the Italian companies during the period included between the date of filing of the request for admission to the pre-insolvency workout agreement or for the approval of the restructuring agreement (or proposal of a restructuring agreement) and the date of their respective approval (omologazione). During such period, moreover, the rule according to which a company shall be wound up in case of reduction or loss of the share capital will not apply.
Nevertheless, during the period preceding the filing of the aforementioned requests or of the proposal of a restructuring plan, article 2486 of the Italian Civil Code – providing for the powers and duties of the directors after the company's winding up- will be applicable.
5. Criminal liability of the expert
The Development Decree also introduced a specific provision concerning the criminal liability of the expert in case of false certification and reports. Article 236-bis of the Italian Bankruptcy Law states that the expert who, in a report or certification to be provided in the context of a restructuring plan, pre-insolvency workout agreement or restructuring agreement, certifies false information or leaves out relevant information shall be punished by imprisonment for a term of two to five years and by payment of a fine for an amount included between Euro 50,000 and Euro 100,000. The punishment shall be increased in case the expert acted in order to procure an unfair profit to itself or someone else. If the creditors are suffering damages because of such a conduct of the expert, the punishment will be increased by half.
6. Further amendments to the Italian Bankruptcy Law: acts exempted from bankruptcy claw-back action
In addition to the amendments already outlined above it shall be noted that the reform also broadened the list of acts exempted from bankruptcy claw-back action. Article 67 para. 3 (e) of the Italian Bankruptcy Law, as amended by the Development Decree, provides that in addition to any act, payment and guarantee executed pursuant to a pre-insolvency workout agreement and a restructuring agreement, also any act, payment and guarantee legally executed after the filing of the request for admission to the pre-insolvency workout procedure shall be exempted from such an action.
7. Tax provisions
7.1 Taxation of extraordinary income (“sopravvenienze attive”)
Article 33 para. 4 of the Development Decree modifies the rules governing the taxation of extraordinary income by amending article 88 para. 4 of Presidential Decree n. 917/1986 (“Tuir”) (the Italian taxation act). Such article, as amended by the Development Decree, provides that in case of a restructuring agreement approved pursuant to article 182-bis of the Italian Bankruptcy Law or of a restructuring plan published in the competent Companies’ Register pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law, the extraordinary income arising fromportion of the company’s debt-reduction exceeding the tax losses regulated by article 84 of the Tuir does not amount to a taxable extraordinary income for the portion exceeding the tax losses available to the company pursuant to article 84 of the Tuir (i.e., tax losses accrued in the relevant tax period and/or rolled-over from previous tax periods which can be used by the company to offset the its taxable income).
This new exemption applicable to extraordinary income shall be added to the ones already provided for by article 88 para. 4 of the Tuir prior to the reform, i.e. the ones relating to sinking-fund contributions or capital contributions made by the shareholders to the companies, as well as to their waiver to the respective receivables and to the company’s debt-reduction in the context of a post-insolvency workout agreement (“concordato fallimentare”) or of a pre-insolvency workout agreement.
These amendments are significantly relevant for the debtor because they allow it to benefit from the tax exemption on extraordinary income also in case of any company’s debt-reduction deriving from the application of the aforementioned restructuring procedures (which do not represent proper bankruptcy proceedings).
It shall be noted that the wording of the amended article 88 para. 4 of the Tuir provides that in case of a restructuring agreement pursuant to article 182-bis of the Italian Bankruptcy Law the debtor will be granted with the said tax exemption only after the restructuring agreement has been approved by the Court. In case of a restructuring plan pursuant to article 67 para. 3 (d), instead, the granting of the tax exemption is conditional upon the publication of the restructuring plan in the competent Companies’ Register.
It shall also be noted that such new tax-exemption cases do not apply in respect of the entire amount of the extraordinary income, but only in respect of the portion of such income exceeding the pre-existing tax-losses of the debtor. As a consequence, the only effect of the new provisions is that the debtor may suffer a reduction or offsetting of the available tax losses regulated by article 84 of the Tuir.
7.2 Deductibility of the credit losses
Article 33 para. 5 of the Development Decree also modifies the rules regarding the tax position of the creditors of a company facing a financial crisis, by amending article 101 para. 5 of the Tuir in respect of the deductibility of the credit losses. Article 101 para. 5 of the Tuir, as amended by the Development Decree, provides that the credit losses are deductible in case they result from clear and objective circumstances and, in any case, provided that the debtor is subject to any bankruptcy proceedings or that it executed a court-ratified restructuring agreement pursuant to article 182-bis of the Italian Bankruptcy Law.
Such a long-awaited amendment provides for the automatic deductibility of the credit losses – which prior to this reform was applicable only in case of certain bankruptcy proceedings (e.g. bankruptcy and “liquidazione coatta amministrativa”) – also in the context of a restructuring agreement pursuant to article 182-bis; this rule seems to be also in line with the position already expressed by the Italian tax authorities in respect of the interpretation and applicability of article 101 para. 5 of the Tuir in the context of a restructuring agreement pursuant to the Italian Bankruptcy Law.
According to the new wording of article 101 para. 5 of the Tuir, therefore, any creditor accepting the reduction of its credit as a consequence of a restructuring agreement will be entitled to automatically deduct the corresponding loss once the restructuring agreement has been approved.
Finally it shall be noted that, according to the amendments made by the Development Decree to article 88 and article 101 of the Tuir, the debtor and its respective creditors do not share the same position: while the tax exemption granted to the debtor on extraordinary income applies to both restructuring agreements and restructuring plans pursuant to the Italian Bankruptcy Law, the automatic deductibility of the credit losses applies only in case of a restructuring agreement.
Giulia Battaglia
(giulia.battaglia@chiomenti.net)
Antonio Tavella
(antonio.tavella@chiomenti.net)
Notional interest deduction regime
Article 1 of Decree No. 201 dated 6 December 2011, converted in Law No. 214 dated 22 December 2011, and implemented by Decree of Ministry of finance dated 14 March 2011 (“Decree”), has introduced in the Italian tax law, a new rule, named “ACE” (“Aiuto alla crescita economica”), aimed at encouraging the capitalization of the companies through contributions in cash and through setting aside of profits to reserves, providing a notional or sparing income tax deduction of such capital contributions.
Subjects
The “ACE” rules apply to (i) Italian resident companies (including consortiums and permanent establishments of foreign entities) subject to Corporate income tax (“IRES”), (ii) partnerships ( “società in nome collettivo”, and “società in accomandita semplice”), (iii) individual entrepreneurs. Companies subject to certain bankruptcy and mandatory liquidation procedures (“fallimento”, “liquidazione coatta amministrativa”, “amministrazione straordinaria delle grandi imprese in crisi”) are not entitled to benefit from the “ACE” regime.
Determinazione dell’agevolazione
In order to determine the amount of the notional return of the “new equity” deductible from income taxes as a result of ACE rules, it is necessary to calculate the increase of relevant adjustments.
The positive equity adjustments are composed (i) by contributions in cash and (ii) by profits that are set aside to available reserves (excluding profits that are set aside to a not available reserve), net of any kind of assignment to the shareholders. All the mentioned events must occur after 2010 tax period.
It’ worth noting that in order to determine the relevant “new equity” for each tax period it is not possible to take into account only the adjustments occurred in that tax period, but it is necessary to consider the equity increase that corresponds to the algebraic sum of positive and negative adjustments triggered by the above mentioned events in any fiscal year starting from 2011 tax period. It has to clarify that the new equity applicable for a certain tax period can not exceed the equity resulting from the same year balance sheet, without considering any reserve for the purchase of a company’s own shares.
The notional return of the new equity is deductible from the net income and it is calculated by applying the percentage determined each year by a Decree of the Ministry of Finance. For the 2011, 2012 and 2013 tax periods, the deduction has been fixed at 3 per cent rate.
Any amount of the notional return that exceeds the net taxable income of the relevant year could be carried forward and then can be used to offset the net taxable income of the following tax periods without time limitation..
Anti-avoidance provisions
Article 10 of the Decree provides certain anti-avoidance provisions in order to avoid multiplier effects of ACE benefits, in particular in the context of consolidated tax group.
In particular, according to Article 10 of the Decree, the following transactions carried out after the end of 2010 tax period with controlled company or with related sister company shall be considered as granting an undue benefit: (i) cash contributions; (ii) acquisitions of participations and business; (iii) increase of financing.
These transactions imply a reduction of the notional return for the contributing company. This reduction is based in the facts that these transactions are deemed to trigger an undue duplication of the ACE benefit with respect of the same contribution.
Moreover, according to the Decree, the notional return is reduced by cash contributions made by: a) foreign entities domiciled in Countries allowing an adequate exchange of information if are controlled by an Italian resident company; b) foreign entities domiciled in Countries not allowing an adequate exchange of information. Contributions in cash made in favour of non-residents companies (or equivalent entities), even if made to Group companies, don’t imply penalties, as opposed to what happen in case of infra-group contribution in cash in favour of a resident corporation; for this reason, to prevent that the anti-avoidance provision related to contribution infra-group is violated, the contribution made by a non resident entities to a Italian company can not increase the ACE base of the resident entities.
Massimo Antonini
(massimo.antonini@chiomenti.net)
Raul Angelo Papotti
(raul.papotti@chiomenti.net)
Update of the definition of Permanent establishmente
On 12 October 2011, The OECD Committee on Fiscal Affairs, through a subgroup of its Party 1, released a discussion draft concerning the definition of “permanent establishment” in the OECD Model Tax Convention and on the application of that definition. This public discussion draft includes proposals for additions and changes to the Commentary on Article 5 of the OECD Model Tax Convention.
The Section 23 of the Discussion Draft addresses and elaborates certain issues described in the “Report of the Venture Capital Tax Expert Group on Removing Tax Obstacles to Cross-Border Venture Capital Investments” published by the European Venture Capital Association (“EVCA”) on 30 April 2010.
The Draft analyzed the application of Double Taxation Conventions to Venture Capital Funds organized as fiscally transparent partnerships, in relation to the definitions of “enterprise” and “permanent establishment”.
In addition, the Draft paid specific attention to the role and the tax treatment of the activities carried on by a local advisory company, and to the possibility that a fund manager or an advisory company established in the State in which investments of the venture capital fund are located (in the State in which the companies owned by a Venture Capital Fund are located), could be qualified as "independent agents" within the meaning of Article 5, paragraph 6 of the Model Convention, relating to the definition of personnel permanent establishment.
As regards to the definition of "enterprise" provided by Article 3 of the Model Convention, in case of a venture capital fund set up as a transparent limited liability partnership, it could therefore argue that the fund forms a separate enterprise carried on jointly by the partners (limited partners and the general partner), who all share in the profits of that joint separate enterprise (i.e. separate from the partners’ respective enterprises).
As regards to setting up permanent establishment of the fund - set up as a partnership - , it is necessary to evaluate the existence of the conditions provided by the Article 5 of the OECD Model Tax Convention. Thus, if the partnership has the characteristics provided by the Article 5, the partners will be considered to exercise a business activity through a permanent establishment.
This interpretation is also confirmed by the Commentary on Model Tax Convention, that provides that if the period spent on a site by the partners and the employees of the partnership exceeds twelve months, the enterprise carried on by the partnership will be considered to have a permanent establishment (Par. 19(1), Commentary on Article 5). Thus, each partner will be considered to have a permanent establishment for the share of the profit derived by the partnership regardless the time actually spent by himself on the site.
With respect to the definition of “personnel permanent establishment”, according to Paragraph 5 of the Commentary on Article 5, if a entity carries on business through an entity (agent)
having the power to conclude contracts in the name of the company (in this case, the fund), the entity (agent) shall be considered a permanent establishment. If the conditions of paragraph 5 are met, it is that enterprise that will be a considered to have a permanent establishment, and the result will be that an enterprise of each Contracting State in which a partner is a resident (in proportion to the share of the profits of that partner) will be considered to have a permanent establishment.
The analysis should be the same for the purposes of Article 5(6) and the independent status of a local fund manager should therefore be determined in relation to the limited partnership itself rather than by reference to each investor in that partnership.
Massimo Antonini
(massimo.antonini@chiomenti.net)
Raul Angelo Papotti
(raul.papotti@chiomenti.net)