ASSET DEALS: AN ANALYSIS FROM A US BUYER’S PERSPECTIVE
Acquisitions are usually structured either as asset deals whereby a purchaser buys target assets from a selling corporation or as share deals whereby a purchaser buys equity in a target entity from a seller.
The choice between these two structures is usually driven by tax considerations and commercial needs e.g. in spin-off deals a purchaser might desire to buy only a division of the business; an asset deal might be the best solution to “design around” a regulatory obstacle.
In this analysis, we will focus only on asset deals governed by Italian law and in particular we will discuss the main differences between US federal/state law and Italian law applicable to asset deals which US buyers should keep in mind when contemplating an asset acquisition in Italy.
Acquisition of assets vs. acquisition of a going concern
Italian law classifies asset deals as either (i) purchases of assets; or (ii) purchases of a business enterprise (in Italian “azienda” or “ramo d’azienda” – defined in this document as a “going concern”).
The actual qualification of a transaction is particularly relevant, as under Italian law transactions targeting going concerns are subject to a set of rules stricter and more cumbersome than the law applicable to simple assets acquisitions. Generally speaking, successor liability and notices/consultation requirements applicable to transfers of going concerns are based on a “continuity of enterprise” doctrine pursuant to which the transfer of a business enterprise triggers the need to protect the interests of third parties such as corporate creditors and employees.
It is therefore paramount for prospective buyers to discuss with local counsels whether a contemplated assets acquisition qualifies under the Italian law as a “plain vanilla” purchase of assets or as a purchase of a going concern. The answer to this question will depend on a facts-intensive analysis and will require an investigation of the seller’s operations, the assets to-be-transferred and an analysis of the terms the parties are willing to apply to the transfer.
The Italian civil code defines a going concern as “the whole body of assets deployed by an entrepreneur to run a business enterprise.” By and large a judicially created doctrine finds an asset transaction to constitute a purchase of a going concern when the following elements are present:
- continuity of assets;
- continued production of the same products or continued offer of the same services;
- continued general business operations;
- retention of employees; and
- retention of clients.
It is important to stress that the above is not a comprehensive list of factors, and the courts might take into the account other factors to ultimately qualify an asset transaction as a transfer of a going concern under Italian law. Furthermore, it is worth noting that the Italian tax authority is usually somewhat aggressive in re-qualifying asset transactions as purchases of going concern even if very few of the factors listed above exists; this trend is due to the higher level of taxation applicable to purchases of going concerns.
In the paragraphs below we will focus on some of the Italian laws applicable only to transfers of going concerns which usually trigger the main concerns of US buyers. This discussion should not be regarded as a comprehensive analysis of all Italian law applicable to the transfer of a going concern, and prospective buyers should always seek advice from local counsels prior to entering into an asset transaction in Italy.
The general rule in asset deals in the US is that the purchaser is liable only for those liabilities it expressly assumes under the asset purchase agreement.
The same rule applies to purchases of assets governed by Italian law, but is different to transfers of a going concern, where pursuant to Italian law the purchaser assumes by operation of law certain liabilities of the seller vis-à-vis third parties. This legislatively engineered successor liability is designed to protect the sellers creditors and cannot be overruled by the agreement between the buyer and purchaser. The Italian law does not expressly rule on the “internal” allocation of liabilities amongst the buyer and the seller and Italian courts have issued conflicting rulings. In this respect, some courts have granted buyers, which paid third party creditors post-completion, with the right to seek indemnification from the seller whilst another argued that buyers would not have such a recovery right as they would purchase also the debts along with the going concern (accordingly these courts have granted sellers paying third party creditors post-closing with the right to seek the reimbursement of the amounts paid from the buyers). In light of this uncertainty, it is strongly advisable to clearly allocate the liabilities amongst the parties by means of proper representations and indemnification provisions in the transactional documentation. In addition, when due-diligence shows significant areas of risks and exposure to third parties, buyers might consider old-backs and escrow accounts to secure reimbursement from the seller of any amount paid by the buyer to third party creditors.
The buyer’s successor liability is subject to certain conditions: the buyer is severally liable with the seller vis-à-vis third parties for all liabilities underlying the going concern provided that these liabilities are recorded in the seller’s statutory accounting books . Furthermore, the scope of the buyer’s liability has been reduced by courts which have specified that buyers are not liable “for those debts which are recorded in the accounting books of the seller, but which cannot be indubitably associated to the sold business enterprise.” This is particularly relevant to carve-out transactions where buyers will not assume any liability with respect to pre-existing and duly recorded liabilities to the extent that these liabilities are not relevant to the transferred going concern.
Third party creditors could waive their rights vis-à-vis a purchaser of a going concern, but these waivers are obviously very hard to obtain and usually do not represent a viable solution to close an asset deal.
The above rule has two main consequences from a transactional perspective: (i) the buyer will often seek specific indemnification protection to cover payments made to third party creditors; and (ii) the buyer will normally engage an accounting firm to complete a financial due-diligence over the seller’s mandatory accounting books to identify and quantify the recorded liabilities which the buyer might assume towards third parties as a result of the transaction.
Automatic assignment of underlying commercial agreements
The general rule applicable in asset deals in the US is that agreements are assigned to purchasers only to the extent the parties have expressly agreed in the asset purchase agreement.
On the contrary under Italian law, commercial agreements (such as agreements with clients and suppliers of a going concern) are assigned by operation of law  to the buyer. The parties can agree to carve out some agreements from the scope of an asset deal. In case of assignment the assigned contracting party is granted with the right to terminate the assigned agreement for cause, if the transfer can potentially jeopardize the third party’s rights or reliance on the agreement e.g. a third party could terminate the assigned agreement if the acquirer is more likely to default the agreement. If the buyer has identified an agreement which is key to the going concern, then the buyer might want to include as a closing delivery a waiver by the third party to terminate the agreement as described above.
Usually US buyers expect to be able to select the employees to take over with a purchased business and to have very little (or no) obligations with respect to those employed by the entity selling the assets .
This is an area where, in Italy and Europe, public policy concerns have dictated legislations protecting employee rights. For these reasons employment law considerations in Italian (and generally speaking European) asset deals usually raise US buyer’s eyebrows as the applicable rules significantly differ from the rules applicable to US asset deals and have a large impact on the scope of the deal, the deal’s mechanics and the risk allocation amongst the parties.
The first difference is that under Italian law in a purchase of a going concern, employee cherry-picking is not possible. All employees dedicated (exclusively or predominantly) to a going concern will transfer their employment agreements to the purchaser of the going concern by operation of law. Buyers and sellers have little (or no) flexibility in this respect and any contractual provision to carve-out employees from the scope of an asset acquisition is overruled by the automatic transfer rule. This legislation appears extremely restrictive to US buyers, especially in light of the fact that Italian law does not permit “employment at will” (i.e. employment agreements can be terminated only for cause) and the transfer of the going concern does not qualify itself as a valid cause to terminate employment agreements. For this reason, while evaluating an asset deal the prospective buyer should always discuss with local counsel any anticipated post-closing restructuring plan as it will most likely generate some additional acquisition costs. In this respect one could argue that asset deals are as a matter of fact subject to the same employment law restrictions that would apply to a share deal.
In order to avoid liabilities for unfair termination, workforce reorganization plans should be executed within a timeline agreed with employment counsels; a lay-off completed shortly after the transfer of a going concern will most likely be qualified as unfair by Italian employment courts based on the general rule that the acquisition itself does not qualify as grounds to terminate employees.
A way to “design around” this automatic transfer is to negotiate with employees (and in some instances with the unions) packages to terminate employment agreements prior to the transfer of the going concern; in order to ensure full enforceability, the relevant settlement agreements should be negotiated and executed with the unions, pursuant to the dedicated procedure set forth by Italian law.
In any case, it is advisable that during due-diligence buyers gather information on the workforce dedicated to the target going concern to quantify potential termination costs as well as potential liabilities towards employees. Indeed, pursuant to article 2112 of the Italian civil code the seller and buyer will be severally liable for all liabilities towards employees existing before transfer of the going concern.
Furthermore, and pursuant to the successor liability rule described above, buyers could also inherit liabilities towards public authorities, for example, social security contribution dues which have been recorded in the seller’s mandatory corporate books.
Another employment related rule which could potentially interfere with the buyer’s plans is described as the employees acquired rights protection, under which employees transferred along with a going concern shall retain the same rights and employment terms and conditions applicable to their employment prior to the transfer of the going concern. Accordingly, the buyer of a going concern cannot apply to the employees transferred with the assets contractual terms that are less favourable than those applied to the same employees prior to transfer. This rule could generate significant headaches for those willing to apply group policies to the workforce acquired along with a going concern.
Finally, if the target business employs more than 15 employees, the buyer and seller are required under the Italian law  to disclose, at least 25 days prior to closing, to the competent employee unions the anticipated date of closing and the expected effects the transfer will have on the employees working for the seller. Upon receipt of the notice the unions have the right to activate a negotiating table with the seller and buyer to gather further information on the prospected transfer. It is important to stress that, under Italian law unlike other European jurisdictions, unions have no veto rights over the completed acquisition and thus neither the unions nor the employees will have the right to block the transfer of the going concern, however some employment courts have declared invalid transfers of going concerns where the parties had failed to notify the unions of the prospective transfer.
The notification and potential consultation with the unions should be coordinated with the potential disclosure requirements which apply to US public companies entering into a significant asset transaction in Italy.
The large majority of the Italian asset deals qualify as transfers of going concerns and thus are subject to a specific set of laws which in several instances can impact significantly on the scope of an asset transaction governed by Italian law. Failure to comply with these laws or ignoring the relevant legal framework could result in buyers taking over undesired and unknown liabilities and could ultimately expose buyers to significant financial exposure. Thus, buyers should discuss with Italian counsels the benefits and drawbacks prior to entering into a purchase of a going concern.
 See article 2555 of the Italian civil code.
 See article 2560 of the Italian civil code.
 See article 2558 of the Italian civil code.
 Some exceptions apply under certain conditions to asset deals targeting a business with unionised employees where the buyer will have an obligation to recognise and bargain with the union representing the seller’s employees if the buyer is a “successor” employer.
 See article 47 of Law no. 428 of December 29th, 1990.