In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World – Starting and Growing a Business. It is the result of collective work with the accountants’ firms network EuraAudit. This article aims to introduce the legal environment of Italy for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with Cajola & Associati’s firm on the issues arising from starting and running a business in Italy.
Registered Companies and Partnerships
Types of business associations may be classified in two categories, created by the law depending on the circumstance that they are organised on a stock capital basis (“società di capitali” or capital companies) or on a personal basis (“società di persone” or partnerships).
The difference between the two categories is that only the capital companies are regarded as having a legal entity entirely separate and distinct from the individuals who compose it. Capital companies have the capacity of continuous existence or succession and have the capacity to take, hold and convey property.
A capital company’s liability is normally limited to its assets and the stock or quota holders are protected against personal liability in connection with the business of the company.
Partnerships are not legal entities distinct from its members, although they may acquire property and assume obligations in their own trade name.
There is an exception to the above distinction that is represented by a rarely used business association structure, the so called “società in accomandita per azioni” or Partnership Limited by Shares. This is a form of company organised on a stock capital basis, where two categories of shareholders exist: Those who enjoy the shield of corporate privilege of this business association and do not respond on a personal basis for the obligations of the limited share partnership (“soci accomandanti”) and those who are instead entrusted with the management of the company and are as well personally liable for the obligations (“soci accomandatari”).
Only the Corporation (Società per Azioni) and the Limited Liability Company (Società a Responsabilità Limitata) possess full and separate legal identity. Foreign investors usually choose one of these two structures to minimise potential liability exposure. Società per Azioni and Società a Responsabilità Limitata may be deemed respectively close to the Public and Private Companies in United Kingdom, as well as to the Corporation and Limited Liability Companies in the United States of America.
The main types of registered capital companies provided for in the Civil Code are the following:
Limited Liability Company
(“Società a Responsabilità Limitata – S.r.l.”)
Small or medium-sized enterprises may adopt the limited liability company form to run their businesses in Italy.
This form of business association enjoys a great degree of internal flexibility in terms of management and control that makes it attractive to closely held enterprises. This flexibility leaves the stockholders free to develop their organisational structure and to some extent their own management rules and principles.
Stockholders are not personally liable for debts of a Limited Liability Company, unless the following circumstances concur altogether: Sole Stockholder Company; Insolvency of the company; Stock contributions have not been fully paid in, rules concerning payment of the stock or rules regarding duty of legal publicity have not been observed.
In the above circumstances, the stockholder is personally liable for debt of the company.
The contribution of a stockholder may be cash, property or services as long as a contribution can be financially evaluated. Participation of a member is a quota that cannot be represented by shares.
(“Società per Azioni – S.p.a.”)
In a Corporation, the capital holdings of members are represented by shares. The Corporation has the same major features as the corporate form in most other countries.
A Corporation is governed by the shareholders at the general meeting, by the directors and the board of statutory auditors. Its statutory regulation provides that circulation of corporate capital is a relevant factor in order to classify companies without outstanding shares held by public investors (Closely Held Corporations) and companies with outstanding shares held by public investors. Namely, companies issuing stock shares that are traded on regulated markets or circulating in the market on a relevant scale that means circulating among Italian issuers with net capital not less than €5 million and with a number of shareholders or bondholders greater than 200). Specific rules are provided for these public companies.
Partnership Limited by Shares (“Società in Accomandita per Azioni – S.a.p.a.”). Very rarely used, this structure has the same features of Limited partnerships and stock companies.
The share capital consists of stocks and shareholders which are divided into two groups, general partners, who manage the company and have unlimited, collective and contingent liability and limited partners, whose exposure to debt is limited to the shares each underwrote, and who cannot carry out management activities within the company.
The appointment of a new director is subject to the approval of the other directors.
Any capital companies with shared capital (i.e. limited companies, “società di capitali”), including cooperatives, whose capital shares, or equivalent, are neither listed on a regulated market nor on a multilateral negotiation system. These enterprises must also comply with the following requirements. They must be newly incorporated or have been operational for less than 5 years (in any case, not before 18 December 2012), have their headquarters in Italy or in another EU country, (but with at least a production site branch in Italy), have a yearly turnover lower than €5 million and must not distribute profits. They must also have an exclusive or prevalent company object, as stated in the deeds of incorporation, the production, development and commercialisation of innovative goods or services of high technological value are not the result of a merger, split-up or selling-off of a company or branch.
The innovative character of these enterprises is identified if at least 15% of the company’s expenses can be attributed to R&D activities, at least 1/3 of the total workforce are PhD students, the holders of a PhD or researchers, alternatively 2/3 of the total workforce must hold a Master’s degree or the enterprise is the holder, depositary or licensee of a registered patent (industrial property), or the owner and author of a registered software.
Among other benefits, they enjoy incorporation and following statutory modifications by means of a standard model with digital signature, cuts to red tape and fees, flexible corporate management, extension of terms for covering losses, flexible remuneration system, tax incentives and the possibility to collect capital through equity crowdfunding authorised online portals.
Articles of Association and By-Laws
The main constitutional document for a company is its articles of association, a simple document, which provides basic information. For instance, the articles provide information about the trade name of the company, its stated capital and initial shareholders. All registered companies must also have their By-Laws, which provides the rules for the life and governance of a company. A company must register the By-Laws with the Companies’ Register.
(Minimum and Minimum paid in amount)
The minimum amount required of stated capital in corporations (s.p.a.) is €50,000. As a condition of the incorporation, shareholders must subscribe the entire stated capital. Shareholders shall pay upon subscription at least 25% of the stated capita (if there is a sole shareholder, deposit of the stated capital as a whole is required). The term for restitution to the company of the percentage deposited in the bank for subscription of the shares has been reduced to 90 days. If the shares have not been entirely paid in, it is not possible for the company to increase its stated capital.
The minimum amount required of stated capital in limited liability companies (s.r.l.) is €10,000. In case of simplified or reduced capital S.r.l. companies, the minimum amount upon their inception can be between € 1 and €9,999, however each year 20% of the profit achieved must be accounted for in a specific statutory reserve until an amount of €10,000.
The same rules apply concerning the entire subscription of the stated capital, the payment of the 25% of the stated capital and the eventual contributions in kind. In contrast to corporations, contributions of a quota-holder may also be intellectual property and labour services, as long as the contribution can be economically appraised.
Contributions by members of limited liability companies cannot be represented by shares, nor can they be publicly traded. If the Articles of incorporation do not provide differently, participation of the members is determined in proportion with the contribution. The Articles of incorporation may provide for granting special rights to single members in relation to the management of the company or the distribution of profit.
Public Offer of Shares
The exchanges for IPOs in Italy consist of regulated and of non-regulated markets, organised and managed by Borsa Italiana. The regulated markets of the Italian Stock Exchange for IPOs are the Main Market (MTA) and the Market for Investment Vehicles (MIV).
Non-regulated markets for IPOs are AIM and GEM.
There are several complex listing requirements for free floating on the main Italian stock markets. For instance having audited financial statements for last 3 years prior to filing the application and a foreseeable market capitalisation of at least €40 million in some instances not exceeding €1 billion.
The duration of the listing procedure may be influenced by many factors, such as the size of the issuer, its corporate and organisational structure, the sector in which it operates, the structure of the offer and the level of complexity of the due diligence process. However, the average duration of the entire listing process is usually around 24-30 weeks.
Unless the By-laws provide otherwise, the General Meeting may be called at any place within the municipality where the company has its registered office.
The General Meeting must take place once a year, within the 120th day after closing of the corporation’s fiscal year. By-laws may set a longer period of time, not exceeding 180 days for companies required to file a consolidated tax return and when there is a specific need in connection with structure and business activity of the company. In the latter case, directors have to make mention of the deferral in their report.
Companies without outstanding shares held by public investors may avoid formalities and requirements established for the call of the meeting (notice on the Official Gazette 15 days before the meeting).
By-laws may allow calls through means of communication that guarantee the effective knowledge of the call at least 8 days in advance of the scheduled date (certified letter with receipt and fax are proper means, however, there are some doubts about e-mails with automated reading receipt messages).
Upon petition by 10% of the shareholders, the Tribunal may also call the General Meeting, but only if the management did not call it without justification.
Quorum and majorities for the resolution of the Shareholders Meetings are different among closely held and publicly traded corporations.
In Limited Liability companies, the By-Laws may contain a provision that management is undertaken by a sole director or a Board of Directors, whose members exercise their actions jointly. In this case statutory rules regulating management of partnerships apply to Limited Liability Companies. Therefore, unanimous consent of all the Directors is required for company’s actions and single directors cannot carry out any action on their own, save when there is necessity to avoid damage to the company.
Board of Directors, whose members may act individually. In this case, each director may exercise her/his office individually and the power to manage the company belongs to any stockholder with unlimited liability.
Certain company’s actions (annual financial reports drafting, merger or de-merger plan and capital increase plan drafting) may only be exercised by the Directors altogether, by way of majority quorum or the different quorum that the By-Laws of the company may set forth.
In Corporations, different models of corporate governance may be adopted. By-Laws may regulate more freely the internal organisation of the board competent for management, its functioning, the circulation of information among its members and the members of the Board of Auditors. Unless By-Laws provide otherwise, the model of corporate governance and control is still represented by the traditional system.
If the reference model is the traditional system (General Shareholders’ Meeting, Board of Directors, Executive Committee, Board of Auditors and external auditing when required by the Law). Under this system, the accounting control previously attributed to the Board of Auditors is attributed to an external Auditor or an Auditing Company.
If it is the dualistic system (German tradition), it may be established on By-Laws that governance of the company is exercised by the Management Board, which is appointed by the Supervisory Board (with the exception of the first election resulting from the certificate of incorporation). Management Board can assign specific executive powers to one or more of its members.
If the reference model is the monistic system (British tradition), the By-Laws may set forth that a Board of Directors have the duty of corporate management, but a Committee appointed internally will be appointed for the purpose of supervising the management.
This system of governance must be explicitly set out in By-Laws. There is a close connection between the Board of Directors and the Committee for supervision of the management. Only those who have been previously elected members of the Board of Directors may serve as members of the Committee.
Financing of a Company
Companies are financed through capital contribution from shareholders, loan, debt and bank finance, equity investment from private equity funds and grants.
Corporations may dedicate and link a proportion of their stock (not more than 10% of the stock capital) to the results of a determined area of business (with the exclusion of business activities with a reserved statutory regulation). To that extent, a corporation may set up one or more assets specifically dedicated to the realisation of a specific business (a single business or an entire business activity to be carried out along with the main business activity of the company).
Additionally, a corporation may establish that financial resources necessary for carrying on the activity have to come from the specific business itself
The purpose of this regulation is to allow for split management and to enable different activities and businesses to be valued independently
Corporations are also allowed to issue debt securities offered to the market for subscription. The decision to issue debt securities as a financial instrument, may be led by the preference of raising financial resources without granting new subjects the right to vote and without altering corporate control, the necessity of financing projects or operations, which only need a temporary financing or the circumstance that the purchase of equity stock is not a sound investment during a particular period of time.
Issuance of equity security is convenient for raising permanent resources, acquiring new resources without paying additional financial costs, or financing the stock capital without being subject to statutory limitations provided for the issuance of debt securities.
Commencement of Business
Several requirements must be fulfilled before a company may commence a business and most of them depend on its corporate object and business activity. A simple company formation will generally take a week to register. The basic requirements are to open a bank account, to notarise the Articles of association and to register with the tax authority and the Companies’ Register.
There are not specific statutory regulations in Italy providing limitations on foreign investment in the Country. In principle, foreign investments as well as domestic investments can be forbidden only for reasons of public order, public health or other general principles of law.
In accordance with the general principles of EU, foreign EU citizens and EU companies enjoy the same treatment and protection of law as domestic ones.
As long as the reciprocity of treatment with another Country is observed, foreign companies are generally allowed to operate, to maintain representative offices or permanent establishments, to incorporate subsidiaries and to participate to domestic business concerns in Italy.
Mergers and Acquisitions
In terms of structure, merger and acquisition transactions can come in the form of acquisitions of companies through share (and quota) deals, asset deals, leveraged buyouts, tender offers, turnarounds, equity carve outs, mergers and demergers, or combinations of the above.
The main forms of transactions covered by Italian law are asset deals, share and quota deals, mergers and demergers. The choice of one structure over the others entails different consequences in terms of legal implications and tax consequences.
The rules applicable to listed companies are set forth in the Civil Code and in the Italian Securities Act, and implemented by secondary regulations adopted by the Italian Securities and Exchange Commission, the public overseeing authority of mergers and takeovers; and the Italian Stock Exchange (Borsa Italiana), the private company in charge of the management of the Italian securities market.
Certain transactions are subject to merger control clearance, which, depending on the nature of the companies involved and the sector in which they operate, is issued by the Bank of Italy, the Italian Antitrust Authority or the Insurance Regulation Authority.
Italy has fully implemented the EU Merger Directive regarding the tax ramifications arising from mergers, divisions, transfers of assets and exchange of shares between EU-resident corporations. In line with the EU Merger Directive, Italian tax law specifies the conditions under which income, profits and capital gains from the above indicated business reorganisations – occurring between Italian and other EU-resident corporations – are deferrable.
Italian insolvency law provides for several out-of-court and court-sanctioned insolvency proceedings, some dedicated to winding up and liquidation, others permitting restructuring and turnaround. These proceedings include bankruptcy, winding up, turnaround plans, debt restructuring agreements, preventive creditor’s settlements and extraordinary administration.
The turnaround and restructuring of a company can be achieved through four different procedures which apply to different crisis levels. They are turnaround plans, debt restructuring agreements, preventive creditors’ settlement or judicial composition with creditors and extraordinary administration.
As an example, a debt restructuring agreement must be proposed by a debtor and approved by at least 60% of the secured and unsecured creditors. The agreement is based on a plan assessed by an expert who must certify its «feasibility». The plan must provide full satisfaction to all creditors who do not take part in it. Although it is private, the agreement must be filed with the court and then published in the company’s register.
Winding up of Companies
Liquidation of companies can be either voluntary or compulsory. The Italian Civil Code provides for specific reasons upon occurrence of which the company must be liquidated. In general terms, the expiration of its duration time, the reduction of the corporate capital for losses below the minimum required by the law, or the impossibility of governance functioning (i.e. a deadlock situation), require the directors to call a shareholders’ meeting to resolve upon the liquidation if no corrective action is taken (such as the extension of time, a further injection of funds to cover the losses and the like).
During the liquidation phase, the liquidator cannot take any new business transactions for and on behalf of the company. This prohibition does not include transactions specifically aimed at liquidating the company’s assets. The liquidators also may, and indeed must, continue to fulfil existing contractual obligations of the company until cancellation, appear in court and enter into judicial settlements.
For more details, please contact Riccardo Cajola, Cajola & Associati, firstname.lastname@example.org