The M&A process in Italy: the stages of a transaction
In Italy each M&A operation, whether it is on the “buy side” (ACQUISITION) or “sell side” (TOTAL OR PARTIAL SALE), can be standardized into a series of more or less structured processes depending on the deal’s size.
This contribution exclusively considers operations that involve “private negotiations,” so-called “one-to-one,” and excludes those deals structured through “competitive auctions or restricted auctions.”
Below, ILF corporate Italian lawyers list the stages of a Standard M&A process, and then briefly discuss each of them:
- Preliminary contacts
- Preparatory activities
- Non-Binding Offers (NBO)
- Selection of counterparties
- Letter of Intent (LOI)
- Due Diligence
- Signing the acquisition or sale contract (Signing)
This is the preliminary activity through which the TARGET COMPANY is selected using selection criteria that typically pertain to size, profitability, business model, market positioning, future potential, distribution and sales channels, and the presence or absence of brands.
Based on these selection criteria, lists are generally obtained, which can be of “Long List” type, comprising several dozen names, or “Short List,” typically containing five to ten candidates.
In this phase, it is necessary for the Target to have an anonymous profile, also referred to as a “Teaser,” which provides essential information quickly to those evaluating the various proposals.
Simultaneously, a confidentiality agreement, known as a “Non-Disclosure Agreement” (NDA), is signed, in which the parties commit not to transfer to third parties any confidential data and information received or known during the course of the operation. Typically, this agreement includes:
- Identifying the parties involved.
- Defining what is considered confidential material or information, including non-solicitation clauses, exceptions to confidentiality rules, terms of validity, and regulations in case of violation of the specified prohibitions.
In this phase, it is essential for the Target to have an Information Memorandum (InfoMemo) that includes a Business Plan and to possess a valuation, at least in the form of a value range, for their company.
During this phase of the process, additional preliminary information is requested/provided by the Target, upon the other party’s request.
This is a non-binding offer, almost indicative, that outlines the key terms of the agreement between the seller and the buyer without committing either party to continue or conclude the deal.
The main elements included in a non-binding offer are as follows:
- Identification of the parties.
- Object of the negotiation.
- Valuation criteria for determining the sale price.
- Proposed purchase price.
- Payment conditions.
- Other essential elements related to the operation (such as warranties, governance agreements, majority or minority protection clauses).
- Right to exclusivity.
Letter of intent (L.O.I.)
The Letter of Intent typically confirms the content of the non-binding offer. It serves as a kind of “preliminary contract” that commits the parties to conclude the transaction after conducting the necessary due diligence (binding letter of intent).
Technically, this involves analysis and verification related to the target company. The scope of analysis may vary from case to case, although in more complex and larger transactions, the analysis typically covers at least six different types:
- Financial analysis
- Market-product analysis
- Operational analysis
- Accounting and tax analysis
- Legal and labor analysis
- Environmental analysis
After the analyses conducted on the target company, negotiations take place to precisely define the terms of the transaction, especially the price and payment terms, based on the findings from due diligence.
Finally, the definitive acquisition or sale agreements are signed, which include:
- Identification of the contracting parties
- The structure of the transaction
- Price regulation in terms of conditions, timing, any other ancillary clauses (such as an “earn-out” clause), and payment methods
- Declarations and warranties for the parties
- Non-competition agreements
- Rules regarding the seller’s prohibition from making significant changes to the company or g. business to be sold before closing
- Suspensive and resolutive conditions
- Any ancillary contracts related to real estate or employment relationships
Often, important matters are also regulated, such as:
- Governance structure related to the composition of corporate bodies
- The veto rights of each of the partners or matters reserved for the Board of Directors or the shareholders’ meeting
- Decision-making deadlock provisions
- Non-competition agreements and potential stock option plans
- Additionally, the share circulation regime is often regulated with Lock-Up, Drag-Along, Tag-Along, Put and Call options.
In major transactions, where it involves majority or total share or ownership transactions of the target, the buyer may decide to use financial leverage to maximize the value of their investment or to secure additional resources to complete the transaction. Thus, the transaction can be completed through a combination of equity provided directly by the buyer and debt obtained from specific funds or banks.
Closing is the concluding act of an M&A transaction and is executed at a notary; in the case of the sale of shares, it involves the transfer of shares from the seller to the buyer and the payment of the price by the former. In the case of a capital increase, new shares or stakes are issued to the investor.
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