Italian private equity fund managers are anticipating significant changes in their investing environment, for better and in some cases for worse, on the back of the Italian corporate law reform which came into effect on January 1, 2004.
“The impact of the corporate law reform as it has evolved will both positively and negatively affect private equity in Italy,” says Francesco Portolano of law firm Portolano Colella Cavallo Prosperetti. He cites certain new rules on the duration of shareholders’ agreements, appraisal rights and minority shareholders’ rights that may, in certain scenarios, create some problems. On the other hand, the new rules on directors’ duties, LBOs, shares and new tax regimes may greatly benefit funds and their transactions.
A major issue following the reform is the introduction of a five-year maximum duration for shareholders’ agreements. Previously the time frame was unspecified. Portolano explains this five-year limit may be a problem if the investor takes over five years to exit, as has been the case with some private equity funds in recent years.
Another concern for private equity managers is that minority shareholder rights have become broader. This means minority shareholders will have more protection and will have more say in the running of a company. For example, now minority shareholders holding at least 20% of the capital may bring a suit for liability directly against the majority shareholders. Previously this was not possible.
There are also new rules governing the acquisition of groups of companies. A majority shareholder in a company may be liable, in certain cases, vis-à-vis minority shareholders, and even creditors, of the company. For example, if a fund owns over 50% of a company the fund could be held liable for certain intra group transactions such as transactions with other portfolio companies. This new regulation may incur extra costs for private equity funds.
On the plus side, a modification in the rules applicable to the structuring, rights and features of a company’s shares will provide much greater flexibility and firms will now be able to tailor their equity, stock and financial structure to their needs. The new corporate rules will allow firms to issue shares with different voting and/or dividend rights, shares with veto powers, no-par value shares, tracking stock and non-share instruments etc.
The reform will facilitate transactions for VCs taking a minority shareholding where the investor might want some sort of dividend preference with a guaranteed minimum return each year. It is now possible to grant a dividend preference to a VC where before this was controversial in Italy. The reform will also enable VCs to more clearly define the rights of minority shareholders such as managers and other investors.
In addition, an investor is now able to receive shares belonging to a class of shares with special rights. For example, an investor may not want to be involved in the day-to-day management of a company, but may want to be informed of any major decisions taken by the management. The by-laws can specify, for example, that Class B shares (those belonging to the investor) have some form of veto power over the distribution of dividends.
Another major improvement Portolano underlines is that now a director appointed by a private equity fund will have a much narrower liability, providing he does not take an operational role. “Non- executive directors are in a much safer position than before and will be less inhibited to do deals and sit on the board of directors,” says Portolano.
Changes to tax legislation will also benefit private equity funds and are seen as a significant improvement. There are also some innovations that could have an effect on fund structuring such as the tax transparency of structures, which should make it simpler to structure funds in Italy.
Portolano is optimistic the changes are for the better: “My impression, based on the law, and from the fund managers is that there’s going to be a significant improvement in operating environment and this will help private equity in Italy.”