Acquisitions (M&A) in Italy: share deal or asset deal

Acquisitions (M&A) in Italy are carried out in most cases through the purchase of shareholdings (‘share deal’) or business or business unit (‘asset deal’). For mainly tax reasons, share deals are more frequent than asset deals, despite the asset deal allows a better limitation of risks for the buyer. We will explain the main differences between share deal and asset deal in terms of risks, and in terms of relationships between seller and buyer.

**Preference for acquisitions through the purchase of shareholdings (‘share deal’) rather than the purchase of business or business unit (‘asset deal’) in the Italian market**

In Italy, acquisitions are carried out, in most cases, through the purchase of shareholdings (‘share deal’) or of business or business unit (‘asset deal’). Other structures, such as mergers, are less frequent.

By purchasing shareholdings of the target company (‘share deal‘), the buyer indirectly acquires all the company’s assets, liabilities and legal relationships. Therefore, the buyer bears all the risks relating to the previous management of the company.

With the purchase of the business or of a business unit of the target company (‘asset deal‘), the buyer acquires a set of assets and relationships organized for the operation of the business (real estate, machineries, patents, trademarks, employees, contracts, credits, debts, etc.). The advantage of the asset deal lies in the possibility for the parties to select the assets and liabilities included in the deal: hence the buyer can limit the legal risks of the transaction.

Despite this advantage, most acquisitions in Italy are made through the purchase of shareholdings. In 2018, there were approximately 78,400 purchases of shareholdings (shares or quotas), while there were approximately 35,900 sales of businesses or business units. (source: www.notariato.it/it/news/dati-statistici-notarili-anno-2018). It should be noted that the number of transfers of business also includes small or very small businesses owned by individual entrepreneurs, for whom the alternative of the share deal (though feasible, through the contribution of the business in a newco and the sale of the shares in the newco) is not viable in practice for cost reasons.

Taxation of share deal and asset deal in Italy

The main reason for the preference for share deal over asset deal lies in the tax costs of the transaction. Let’s see what they are.

In a share deal, the direct taxes borne by the seller are calculated on the capital gain, according to the following rates:

if the seller is a joint-stock company (società per azioni – s.p.a.; società a responsabilità limitata – r.l.; società in accomandita per azioni – s.a.p.a.), the corporate tax rate is 24% of the capital gain. However, under certain conditions, the so-called PEX (participation exemption) regime is applied with the application of the rate of 24% on 5% of the capital gain only.
If the seller is a partnership (società semplice – s.s.; società in nome collettivo – s.n.c..; società in accomandita semplice – s.a.s.) the capital gain is fully taxable. However, under certain conditions, the taxable amount is limited to 60% of the amount of the capital gain. In both cases, the taxable amount is attributed pro rata to each shareholder of the partnership, and added to the shareholders’ income (the tax rate depends on the shareholders’ income).
If the seller is a natural person, the rate on the capital gain is 26%.

A share deal is subject to a fixed registration tax of € 200,00, normally paid by the buyer.

In an asset deal, the direct taxes to be paid by the seller are calculated on the capital gain. If the seller is a joint-stock company, the corporate tax rate is 24% of the capital gain. If the seller is a partnership (with individual partners) or an individual entrepreneur, the rate depends on the seller’s income.

In an asset deal the transfer of the business or of the business unit is subject to registration tax, generally paid by the buyer. However both the seller and the buyer are jointly and severally liable for the payment of the registration tax. The tax is calculated on the part of the price attributable to the assets transferred. The price is the result of the transferred assets minus the transferred liabilities. The tax rate depends on the type of asset transferred. In general:

movable assets, including patents and trademarks: 3%;
goodwill: 3%;
buildings: 9%;
land: between 9% and 12% (depending on the buyer).

If the parties do not apportion the purchase price to the different assets in proportion to their values, the registration tax is applied to the entire purchase price at the highest rate of those applicable to the assets.

It should be noted that the tax authorities may assess the value attributed by the parties to real estate and goodwill, with the consequent risk of application of higher taxes.

Share deal and asset deal: risks and responsibilities towards third parties

In the purchase of shares or quotas (‘share deal‘), the purchaser bears, indirectly, all the risks relating to the previous management of the company.

In the purchase of business or business unit (‘asset deal‘), on the other hand, the parties can select which assets and liabilities will be transferred, hence establishing, among them, the risks that the buyer will bear.

However, there are some rules, which the parties cannot derogate from, relating to relationships with third parties, that have a significant impact on the risks for the seller and the buyer, and therefore on the negotiation of the purchase agreement. The main ones are as follows.

Employees: the employment relationship continues with the buyer of the business. The seller and the buyer are jointly and severally liable for all the employee’s rights and claims at the time of transfer (art. 2112 of the Italian Civil Code).
Debts: the seller is obliged to pay all debts up to the date of transfer. The buyer is liable for the debts that are shown in the mandatory accounting books (art. 2560 of the Italian Civil Code).
Tax debts and liabilities: the seller is obliged to pay debts, taxes and tax penalties relating to the period up to the date of transfer. In addition to the liability for tax debts resulting from mandatory accounting books (Article 2560 of the Italian Civil Code), the buyer is liable for taxes and penalties, even if they are not shown in the accounting books, with the following limits (Article 14 of Legislative Decree 472/1997):
the buyer benefits from the prior enforcement of the seller;
the buyer is liable up to the value of the business or business unit;
for taxes and penalties not emerging from a tax audit by the tax authorities that has taken place before the date of transfer, the buyer is liable for those relating to the year of the sale of the business and the two preceding years only;
the tax authorities shall issue a certificate on the existence and amount of debts and ongoing tax audits. If the certificate is not issued within 40 days of the request, the buyer will be released from liability. If the certificate is issued, the buyer will be liable up to the amount resulting from the certificate.
Contracts: the parties can choose which contracts to transfer. With respect to the contracts transferred, the buyer takes over, even without the consent of the third contracting party, contracts for the operation of the business that are not of a personal nature. In addition, the third contracting party may withdraw from the contract within three months if there is a just cause (e.g. if the buyer does not guarantee to be able to fulfil the contract due to his financial situation or technical skills) (Art. 2558 of the Italian Civil Code).

Some ways to deal with the risks

To manage the risks arising from third party liability and the general risks associated with the acquisition, a number of negotiation and contractual tools can be used. Let’s see some of them.

In an asset deal:

Employees: it is possible to agree with the employee changes to the contractual terms and conditions, and waive of joint and several liability of the buyer and seller (pursuant to art. 2112 c.c.). In order to be valid, the agreement with the employee must be concluded with certain requirements (for example, with the assistance of the trade unions).

Debts:

transfer the debts to the buyer and reduce the price accordingly. The price reduction leads to a lower tax cost of the transaction as well. In case of transfer of debts, in order to protect the seller, a declaration of release of the seller from liability pursuant to art. 2560 of the Italian Civil Code can be obtained from the creditor; or, the parties can agree that the payment of the debt by the buyer will take place at the same time as the transfer of the business (‘closing‘).
For debts not transferred to the buyer, obtain from the creditor a declaration of release of the buyer from liability pursuant to art. 2560 of the Italian Civil Code.
For debts for which it is not possible to obtain a declaration of release from the creditor, agree on forms of security in favor of the seller (for debts transferred) or in favor of the buyer (for debts not transferred), such as, for example, the deferment of payment of part of the price; the escrow of part of the price; bank or shareholder guarantees.

Tax debts and tax liabilities:

obtain from the tax authorities the certificate pursuant to art. 14 of Legislative Decree 472/1997 on debts and tax liabilities;
transfer the debts to the buyer, and reduce the price accordingly;
agree on forms of guarantee in favor of the seller (for debts transferred) and in favour of the buyer (for debts not transferred or for tax liabilities), such as those set out above for debts in general.

Contracts: for those that will be transferred:

verify that the seller’s obligations up to the date of transfer have been properly performed, in order to avoid the risk of disputes by the third contracting party, that could stop the performance of the contract;
at least for the most important contracts, obtain in advance from the third contracting party the approval of transfer of the contract.

In a share deal some tools are:

Due diligence. Carry out a thorough legal, tax and accounting due diligence on the company, to assess the risks in advance and manage them in the negotiation and in the acquisition contract (‘share purchase agreement’).
Representations and warranties (‘R&W’) and indemnification. Provide in the acquisition contract (‘share purchase agreement’) a detailed set of representations and warranties – and obligations to indemnify in the event of non-compliance – to be borne by the seller in relation to the situation of the company (‘business warranties‘: balance sheet; contracts; litigation; compliance with environmental regulations; authorizations for the conduct of business; debts; receivables, etc.). Negotiations on representations and warranties normally are carried on taking into account the outcomes of due diligence. Contractual representations and warranties on the situation of the company (‘business warranties‘) and contractual obligation to indemnify, are necessary in share deals in Italy, as in the absence of such clauses the buyer cannot obtain from the seller (except in extraordinary circumstances) compensation or indemnity if the situation of the company is different from that considered at the time of purchase.
Guarantees for the buyer. Means of ensuring that the buyer will be indemnified in the event of breach of representations and warranties. Among them: (a) the deferment of payment of part of the price; (b) the payment of part of the price in an escrow account for the duration of the liabilities arising from the representations and warranties and, in case of disputes between the parties, until the dispute is settled; (c) bank guarantee; (d) W&I policy: insurance contract covering the risk of the buyer in case of breach of representations and warranties, up to a maximum amount (and excluding certain risks).

Other factors influencing the choice between share deal and asset deal

Of course, the choice to carry out an acquisition operation in Italy through a share deal or an asset deal also depends on other factors, in addition to the tax cost of the transaction. Here are some of them.

Purchase of part of the business. The parties chose the asset deal when the transaction does not involve the purchase of the entire business of the target company but only a part of it (a business unit).
Situation of the target company. The buyer prefers the asset deal when the situation of the target company is so problematic that the buyer is not willing to assume all the risks arising from the previous management, but only part of them.
Maintenance of a role by the seller. The share deal is a better option when the seller will keep a role in the target company. In this case, the seller frequently retains, in addition to a role as director, a minority shareholdings, with exit clauses (put and call rights) after a certain period of time. The exit clauses often link the price to future results and, therefore, in the interest of the buyer, motivate the seller in his/her role as director, and, in the interest of the seller, put a value on the company’s earnings potential, not yet achieved at the time of purchase.