1. Introduction
In the last couple of years, sales through the Amazon platform have increased significantly, in part due to the Covid-19 related restrictions imposed by governments around the world.
As a consequence, an already massive business has become central to the world’s economy and has become one of the few sources for people to purchase non-essential products during lockdown.
In Italy (as well as other European countries) there are several small businesses that have seen the majority of their revenues generated by sales on the Amazon platform, many of which use Fulfillment by Amazon (FBA) services (i.e., warehouse, shipping, and customer services provided by Amazon) to sell products through the platform, a system that offsets their small size and lack of organization.
Needless to say, the M&A market has started to focus its attention on this new trend and on the potential profits from business opportunities.
Specifically, (i) new entities have been incorporated and (ii) existing players have expanded their business and received significant investments to aggregate and scale up small e-commerce businesses whose business is conducted mainly through Amazon (“Amazon Aggregators”).
in this article, we would like to point out certain legal aspects of such transactions that should be taken into account both in general and in light of Italian regulation of asset deals.
2. Asset deal vs. share deal
In our experience, Amazon Aggregators usually push to structure these transactions as asset deals. There are several reasons for this:
- potential to cherry-pick assets and relationships involving the e-commerce line of the business (IP, agreements with local providers, and so on) and to exclude from the deal portions of business that are not of interest to the aggregator (other lines of business, insurance policies, and so on);
- limit DD investigations to the assets and relationships that are part of the deal;
- limit, from a contractual standpoint,[1] the aggregator’s liability for pre-closing liabilities;
- facilitate post-closing integration with the aggregator’s business organization, thereby avoiding having a new company to manage (appointment of directors and so on) for each deal completed.
On the other hand, sellers usually push to structure them as share deals, mainly for tax purposes.
3. Asset deal considerations under Italian law
Should the parties agree to structure the transaction as an asset deal, the prospective purchaser should consider certain aspects of Italian law, including the following:
- successor’s liability: pursuant to Italian law, the purchaser legally assumes certain liabilities of the seller vis-à-vis third parties. This legislatively engineered successor liability is designed to protect the seller’s creditors and cannot be overruled by the agreement between buyer and purchaser. 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;
- employees: under Italian law, in a purchase of a going concern, employee cherry-picking is not permitted. All employees dedicated (exclusively or predominantly) to a going concern transfer their employment agreements to the purchaser of the going concern under the law. One way to design around this automatic transfer is to negotiate packages with employees (and in some instances with unions) that 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;
- tax certificate: as for tax liabilities, a specific rule establishes that the purchaser is jointly and severally liable (within the limit of the value of the transferred assets) with the seller for tax liabilities relating to the year during which the transfer of assets occurs and the two preceding years. A tax certificate can be requested from the tax authority; in the case of a clean tax certificate, the prospective purchaser would be fully exempt from any tax liabilities under the law.
For more details on asset deals in Italy, please refer to one of our previous articles on the matter.
4. Payment structure and guarantees
For this type of transaction, payment is usually structed as follows:
- upfront payment which takes into account, among other things, the amount of stock transferred with the business/company;
- earn-out payments calculated based on performance of the business/company during a certain period.
In most cases the potential amount of the earn-out payments is quite significant and may exceed the value of the upfront payment.
This usually is in the interest of both seller and buyer: on the one hand, it eliminates any need for cumbersome guarantees to cover seller indemnity claims (e.g., escrow payments, bank guarantees, personal guarantees); and on the other, it represents a straightforward and easily enforceable buyer guarantee. Not only does this arrangement protect the buyer from unexpected poor performance by the purchased business, which is usually only a few years old, in this volatile market, but it may also be treated as a guarantee for seller’s indemnity payments (i.e., the purchase agreement may provide the right for the buyer to offset earn-out payments against indemnity payments due by the seller for breach of representations and warranties).
5. Contractual relationship with Amazon
One item that should be taken into account when the deal is structed as an asset deal is that products are sold through Amazon using a specific account (which prior to closing is in the name of the seller).
Amazon terms and conditions set forth a lengthy procedure to transfer an account registered in the name of one entity to another entity.
This aspect should be taken into consideration, since it affects both timing of the transaction and deal structuring.
The following can be done:
- provide a staggered signing/closing structure and treat successful transfer of seller’s Amazon account to buyer as a condition for closing the deal;
- treat full transfer of the Amazon account as a post-closing covenant on the seller’s part with the buyer’s cooperation (to the extent necessary).
In the second scenario above, management of the account during the interim period must be considered. This period would run from the signing to the actual transfer of the account. Among other things, criteria need to be set forth to determine how revenues from sales of products through the seller’s Amazon account are to be divided between seller and buyer during this time.
6. Post-closing covenants
In addition to traditional non-compete post-closing covenants on the seller’s part, it is common for purchase agreements that set forth the terms and conditions of acquisition of an Amazon seller to contain clauses that cover (with a reasonable degree of detail) the seller’s obligation to cooperate for a certain period of time to facilitate integration of the newly acquired business into the buyer’s organization.
7. Conclusions
We believe the aggregation trend will grow in the coming months and that there will be several acquisitions of Amazon sellers throughout Europe. Indeed, in recent months investment funds have made significant investments in Amazon aggregators.
Furthermore, acquisitions of Amazon sellers are usually quick and straightforward deals, given the size of the businesses acquired and that such businesses are usually at an early stage and do not present many complexities. This obviously attracts investors.
At the end of the day, not only do acquisitions by Amazon investors represent a great investment opportunity, but the funders of small businesses can benefit from them both financially and as new and international professional opportunities.
[1] Note that such limitation is not effective vis-à-vis third parties since a joint and several liability regime between seller and buyer for pre-closing liabilities is established by law (Section 2560 of the Italian Civil Code) and to exclude such liability for the benefit of the buyer it would be necessary to obtain waivers from said third parties. A special joint and several liability regime applies to pre-closing liabilities vis-à-vis employees of the seller and waivers must be signed before trade union representatives to exclude such liability.
