Statutory non-competes: Asset deals and share deals

1 Dicembre 2021
Thanks to Filippo Petracci for collaborating on this article

1. Introduction

Under Italian law, the seller of a business is subject to a statutory obligation not to compete with the business sold for a term of five years following the transfer. For example:

SELLER of Cupcake-Business-1 cannot (unless otherwise agreed with BUYER) for five years following the sale run a new Cupcake-Business-2 selling cupcakes in the same area as Cupcake Business 1.

The rationale behind this rule (which is expressly provided only for asset deals) is to protect the goodwill associated with a business for a limited time. As mentioned, the parties can always agree to opt out of the full statutory rule or reduce the term to fewer than five years.

A similar rule does not apply expressly to share deals. Accordingly:

SELLER of shares in Cupcake Inc. (the company running Cupcake-Business-1) is not subject to a statutory non-compete agreement and, absent a contractual non-compete agreement, immediately upon selling shares in Cupcake Inc. may open Cupcake-Business-2, which competes directly against Cupcake-Business-1.

The fact that different non-compete regimes are applicable to asset deals and share deals is justified by the fact that with a share deal there is typically no direct transfer of the business, so in the example immediately above, Cupcake-Business-1 continues to be run by Cupcake Inc., regardless of the change in ownership.

However, in certain scenarios the Italian courts have applied the statutory non-compete arrangement to both asset deals and share deals. It is important for both sellers and buyers of shares in Italian corporations to know when the non-compete rule might apply to a share deal.

2. Italian case law and applicability of statutory non-compete agreements

The most recent ruling on this matter was issued by the Italian Supreme Court of Cassation on July 7, 2021 (decision no. 19238), in connection with tax litigation. The Supreme Court of Cassation ruled that section 14 of Legislative Decree No. 472/1997, pursuant to which the transferee of a business (or business unit) may (under certain conditions) be jointly and severally liable with the transferor of the business for payment of certain business-related tax debts, should also apply to share deals.

The ruling applies in a scenario in which a share deal always triggers transfer of a business (or business unit). The underlying facts were critical to this particular ruling: the corporation sold had a sole owner who was very much involved in day-to-day operations of the business, and the court argued that since there was virtually no difference between the individual running the business and the corporation that owned the business, one could argue that an equity transfer to a different sole owner would actually trigger transfer of the business, and therefore should be subject to the rules provided for asset deals.

The case law reviewed above relates to tax matters; however, similar arguments have been used by several Italian civil courts in ruling on the application of non-compete arrangements provided for asset deals to share deals. The Italian Supreme Court of Cassation ruled in favor of such analogical application with decisions No. 27505 of November 19, 2008, No. 19430 of September 23, 2011, and No. 14471 of June 25, 2014, as well as No. 33229 of December 21, 2018.

The reasoning of the Italian Supreme Court of Cassation typically has been the following:

  • the statutory non-compete agreement provided for asset deals sets forth a general principle that could be applied to similar scenarios when certain conditions are met;
  • transfer of shares in a corporation could qualify as an asset deal based on factual circumstances and transaction features to be evaluated on a case-by-case basis; and thus
  • it may be demonstrated to the court that a transfer of shares results in a transfer of business, depending on the characteristics of the business and the structure of the deal.

Though case-by-case analysis is still needed, there are some notable signposts in the relevant case law: a very limited number of owners (generally one or two at most); the transferor holding corporate office; and the owner’s skills and knowledge beings used in business operations and directly and substantially contributing to the business’s goodwill. Analysis of the situation should provide de facto demonstration (insofar as the owner of the transferred business is, by law, the corporation and not its shareholders) that ownership of the business is in the hands of the seller of the shares rather than the corporation whose shares are being sold. Therefore, one could argue that the owner is indirectly transferring ownership of the business rather than shares in the corporation.

At the outcome of this in-depth investigation, the judge can assess whether the equity transfer may be construed as the transfer of a business.

To sum up, the non-compete agreement has been applied analogically when one or more shareholders transfer their quotas and facts and events unequivocally demonstrate that because they are substantially, albeit not formally, engaged in business ownership, they are transferring a business pursuant to section 2557 and must comply with the non-compete clause.

3. Conclusions

As indicated, the guidelines provided by the case law outlined above depend largely on the underlying facts, and although a general rule cannot be applied without factoring in the features of a given transaction, counsel (particularly counsel advising sellers) may want to exclude application of the statutory non-compete agreement provided by Italian law for asset deals expressly, even in a share-deal scenario, to avoid their clients being subject to an unanticipated restriction on operating a competing business. For their part, in some circumstances, including share-deal scenarios, buyers may want to invoke the statutory protection provided for asset deals, even if it is not expressly included in the relevant purchase agreement.

Seguici su