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Italian law to assist PE investors?

Italian private equity players may be taking a less cautious stance with investments in the light of a new law narrowing the number of criminal offences that a company’s director is liable for. The introduction of criminal liability for companies (231/2001) was introduced in June last year. An amendment to this law has recently been made by an Italian legislative decree Dlgs 61/2002. The decree also amends Title XI of the Italian Civil Code regulating management’s criminal liability.

Articles of most interest are 2621 to 2634 of the Italian Civil Code (so-called “corporate crimes”). Offences include certain breaches of a director’s duties, false corporate communications and wrongful distribution of profits. The new law has significantly modified the entire framework of the corporate crimes and may give rise to a significant reduction of the potential criminal liability of a company’s director.

Francesco Portolano of law firm Studio Prosperetti says, while even under the previous law not every false information gave rise to criminal liability, the new articles 2621 and 2622 introduce several conditions to be met and thresholds to be passed for a director to be criminally liable for “disclosure of false corporate information.” Now if a mistake or omission of information has an effect lower than a set percentage of the company revenues, net worth, etc., then the mistake or omission does not give rise to criminal liability.

Although most of the cases examined so far by the courts have been private companies, the same rules apply to publicly traded companies. Most importantly, Italian criminal law does not distinguish clearly between “inside” and “outside” directors. Therefore, if a director of a private equity firm sits on the board, he/she too could be liable as he/she is responsible, under the law, for the drafting of financial and corporate statements.

Portolano stresses that in any event a director will be liable only in those cases in which there is evidence of a director’s willful criminal intent. “It may be debatable as to whether the change in law is a good thing or not for the private equity industry. Certain criminal lawyers say it is a disaster, as according to them the new law practically erases corporate crimes entirely. Others say it is an important change to the principles of financially-omitted or wrong information because it clearly defines the scope of a director’s criminal liability.”

The new reform should encourage Italian private equity firms to step up their due diligence processes. Enforcement of the new law will also improve auditing control and management skills, says Massimiliano Talli of Rome-based law firm Monaco e Associati. Enrico Canu of Italian mid-market private equity player, PM & Partners agrees.

He says the long-term benefits of the new system will be invaluable. “Anything that can increase transparency will increase business confidence and so private equity funds should enjoy more opportunities.”

In the short term these amendments might cause a drop in private equity and M&A transactions in Italy as firms monitor their existing portfolio to comply with the new regulations, rather than making any new investments. However, in the long term, says Talli, private equity operators will enjoy a more favourable business environment that will reinforce creditors’ confidence, business safety and enhance value creation deals.

He adds that international investors will also have more confidence when investing in Italian businesses. He says: “In the long term this will have a positive effect and will provide better regulation and transparency of the Italian private equity market.”

Francesco Portolano concludes: “Overall the private equity industry should be happy. It all depends on how it is applied. In the short term, the directors that sit on the board should have less worries as they will be less likely involved in criminal proceedings.”

In the long term, if the legislation is not applied with rigour, it may have a negative impact, impairing the trust of the shareholders in existing companies and affecting valuations of portfolio companies. However, says Portolano, the system will most likely rectify any defect of the new law.

“There’s a lot of controversy now about how this applies and how it will be interpreted. It’s a tough one. But the general feeling is that both in the short and long term, this will narrow rather than broaden the scope of criminally-relevant behaviour in Italy.”