Acquisitions (M&A) in Italy: share deal or asset deal

25 septembre 2019

  • Italie
  • Entreprise
  • F&A
  • Capital-investissement

Summary – What can the owner (or licensee) of a trademark do if an unauthorized third party resells products with its trademark on an online platform? This issue was addressed in the judgment of C-567/18 of 2 April 2020, in which the Court of Justice of the European Union confirmed that platforms (Amazon Marketplace, in this case) storing goods which infringe trademark rights are not liable for such infringement, unless the platform puts them on the market or is aware of the infringement. Conversely, platforms (such as Amazon Retail) that contribute to the distribution or resell the products themselves may be liable.

Background

Coty – a German company, distributor of perfumes, holding a licence for the EU trademark “Davidoff” – noted that third-party sellers were offering on Amazon Marketplace perfumes bearing the « Davidoff Hot Water » brand, which had been put in the EU market without its consent.

After reaching an agreement with one of the sellers, Coty sued Amazon in order to prevent it from storing and shipping those perfumes unless they were placed on the EU market with Coty’s consent. Both the Court of First Instance and the Court of Appeal rejected Coty’s request, which brought an appeal before the German Court of Cassation, which in turn referred the matter to the Court of Justice of the EU.

What is the Exhaustion of the rights conferred by a trademark

The principle of exhaustion is envisaged by EU law, according to which, once a good is put on the EU market, the proprietor of the trademark right on that specific good can no longer limit its use by third parties.

This principle is effective only if the entry of the good (the reference is to the individual product) on the market is done directly by the right holder, or with its consent (e.g. through an operator holding a licence).

On the contrary, if the goods are placed on the market by third parties without the consent of the proprietor, the latter may – by exercising the trademark rights established by art. 9, par. 3 of EU Regulation 2017/1001 – prohibit the use of the trademark for the marketing of the products.

By the legal proceedings which ended before the Court of Justice of the EU, Coty sought to enforce that right also against Amazon, considering it to be a user of the trademark, and therefore liable for its infringement.

What is the role of Amazon?

The solution of the case revolves around the role of the web platform.

Although Amazon provides users with a unique search engine, it hosts two radically different sales channels. Through the Amazon Retail channel, the customer buys products directly from the Amazon company, which operates as a reseller of products previously purchased from third party suppliers.

The Amazon Marketplace, on the other hand, displays products owned by third-party vendors, so purchase agreements are concluded between the end customer and the vendor. Amazon gets a commission on these transactions, while the vendor assumes the responsibility for the sale and can manage the prices of the products independently.

According to the German courts which rejected Coty’s claims in the first and second instance, Amazon Marketplace essentially acts as a depository, without offering the goods for sale or putting them on the market.

Coty, vice versa, argues that Amazon Marketplace, by offering various marketing-services (including: communication with potential customers in order to sell the products; provision of the platform through which customers conclude the contract; and consistent promotion of the products, both on its website and through advertisements on Google), can be considered as a « user » of the trademark, within the meaning of Article 9, paragraph 3 of EU Regulation 2017/1001.

The decision of the Court of Justice of the European Union

Advocate General Campos Sanchez-Bordona, in the opinion delivered on 28 November 2019, had suggested to the Court to distinguish between: the mere depositaries of the goods, not to be considered as « users » of the trademark for the purposes of EU Regulation 2017/1001; and those who – in addition to providing the deposit service – actively participate in the distribution of the goods. These latter, in the light of art. 9, par. 3, letter b) of EU Regulation 2017/1001, should be considered as « users » of the trademark, and therefore directly responsible in case of infringements.

The Bundesgerichtshof (Federal Court of Justice of Germany), however, had already partially answered the question when it referred the matter to the European Court, stating that Amazon Marketplace “merely stored the goods concerned, without offering them for sale or putting them on the market”, both operations carried out solely by the vendor.

The EU Court of Justice ruled the case on the basis of some precedents, in which it had already stated that:

  • The expression “using” involves at the very least, the use of the sign in the commercial communication. A person may thus allow its clients to use signs which are identical or similar to trademarks without itself using those signs (see Google vs Louis Vuitton, Joined Cases C-236/08 to C-238/08, par. 56).
  • With regard to e-commerce platforms, the use of the sign identical or similar to a trademark is made by the sellers, and not by the platform operator (see L’Oréal vs eBay, C‑324/09, par. 103).
  • The service provider who simply performs a technical part of the production process cannot be qualified as a « user » of any signs on the final products. (see Frisdranken vs Red Bull, C‑119/10, par. 30. Frisdranken is an undertaking whose main activity is filling cans, supplied by a third party, already bearing signs similar to Redbull’s registered trademarks).

On the basis of that case-law and the qualification of Amazon Marketplace provided by the referring court, the European Court has ruled that a company which, on behalf of a third party, stores goods which infringe trademark rights, if it is not aware of that infringement and does not offer them for sale or place them on the market, is not making “use” of the trademark and, therefore, is not liable to the proprietor of the rights to that trademark.

Conclusion

After Coty had previously been the subject of a historic ruling on the matter (C-230/16 – link to the Legalmondo previous post), in this case the Court of Justice decision confirmed the status quo, but left the door open for change in the near future.

A few considerations on the judgement, before some practical tips:

  • The Court did not define in positive terms the criteria for assessing whether an online platform performs sufficient activity to be considered as a user of the sign (and therefore liable for any infringement of the registered trademark). This choice is probably dictated by the fact that the criteria laid down could have been applied (including to the various companies belonging to the Amazon group) in a non-homogeneous manner by the various Member States’ national courts, thus jeopardising the uniform application of European law.
  • If the Court of Justice had decided the case the other way around, the ruling would have had a disruptive impact not only on Amazon’s Marketplace, but on all online operators, because it would have made them directly responsible for infringements of IP rights by third parties.
  • If the perfumes in question had been sold through Amazon Retail, there would have been no doubt about Amazon’s responsibility: through this channel, sales are concluded directly between Amazon and the end customer.
  • The Court has not considered whether: (i) Amazon could be held indirectly liable within the meaning of Article 14(1) of EU Directive 2000/31, as a “host” which – although aware of the illegal activity – did not prevent it; (ii) under Article 11 of EU Directive 2004/48, Coty could have acted against Amazon as an intermediary whose services are used by third parties to infringe its IP right. Therefore, it cannot be excluded that Amazon may be held (indirectly) liable for the infringements committed, including on the Marketplace: this aspect will have to be examined in detail on a case-by-case basis.

Practical tips

What can the owner (or licensee) of a trademark do if an unauthorized third party resells products with its trademark on an online platform?

  1. Gather as much evidence as possible of the infringement in progress: the proof of the infringement is one of the most problematic aspects of IP litigation.
  2. Contact a specialized lawyer to send a cease-and-desist letter to the unauthorized seller, ordering the removal of the products from the platform and asking the compensation for damages suffered.
  3. If the products are not removed from the marketplace, the trademark owner might take legal action to obtain the removal of the products and compensation for damages.
  4. In light of the judgment in question, the online platforms not playing an active role in the resale of goods remain not directly responsible for IP violations. Nevertheless, it is suggested to consider sending the cease-and-desist letter to them as well, in order to put more pressure on the unauthorised seller.
  5. The sending of the cease-and-desist letter also to the platform – especially in the event of several infringements – may also be useful to demonstrate its (indirect) liability for lack of vigilance, as seen in point 4) of the above list.

One of the most tricky steps in any M&A operation is when the issue of « warranties », in particular with reference to the economic situation, the balance sheet and the financial position of the company or business (or of a branch), namely the so-called « business warranties« .

On one side, the buyer would like to « ironclad » his investment by reducing the risk of an unpleasant surprise to a minimum. The seller, by contrast, wishes to provide the least possible warranties, which often translate in a provisory restriction on the full enjoyment of the proceeds; the same may be essential for further investment.

It should be noted, first of all, that the term « warranties » is usually referred to, in a non-technical acceptation, to a complex set of contractual provisions containing:

  • any seller’s statements about the health of the company or business (or branch of business) being transferred;
  • any compensation obligations undertaken by the seller in case of « violation » (i.e. mistruth) of the assertions;
  • any remedies provided to ensure the effectiveness of the indemnity obligations entered into.

While there are several reasons why this set is necessary, the most significant one is that in M&A contracts, statutory sale warranties only apply to the good sold; therefore, if the good sold is an equity investment, the warranties do not cover any of the company’s underlying assets; and even as they exceptionally do apply, short terms and strict limitations still justify an ancillary obligation designed to ensure the economic success of the transaction.

As confirmed by current practice, there is not a single M&A agreement that does not include a set of warranties.

In particular, representations typically incorporate the buyer’s due diligence, which for its part usually follows a non-disclosure agreement (NDA) to protect any information disclosed.

Any criticalities identified should be properly mentioned. Clearly, wherever a criticality arises, it may not necessarily trigger an indemnity obligation. It will be up to the parties to lay down the rules, as they may also provide that any related risk is to be borne by the buyer; this may be offset by a reduction in the price.

Some aspects of the compensation obligation will have to be carefully negotiated. The main ones are certainly:

  • duration (e.g. longer for tax-related warranties);
  • who is entitled to compensation (the buyer or the company; one or the other as the case may be);
  • any deductions and/or limitations (e.g. tax losses);
  • compensation cap;
  • any possible deductible;
  • the compensation procedure (e.g. application deadlines, settlement procedure, particular circumstances).

These are highly relevant aspects and should by no means be underestimated. As an example, it is obvious that if the compensation procedure is poorly regulated, all the previous efforts are jeopardised.

Finally, suitable measures to ensure an effective protection of the buyer must be provided. Among these, the most conventional tools are:

  • the surety;
  • the “independent contract of guarantee”;
  • the escrow;
  • the deferment of payment;
  • the “earn-out”-scheme;
  • the “price adjustment”;
  • the letter of patronage;
  • the pledge and/or mortgage.

These are more or less widely used instruments, each one with its pros and cons.

At this point, however, we would like to address a new tool with an insurance character, which has been being used recently: the so-called « Warranty & Indemnity Policies« .

With a W&I insurance policy, basically, the insurer assumes the risk resulting from breaches of warranties and indemnities included in an M&A contract upon payment of a premium.

It is obviously a key condition that the violation arose from facts preceding the closing and which were not known at that time (and, therefore, not highlighted by the due diligence carried out).

The insurance policy may be subscribed by the buyer (buyer side) or the seller (seller side). Usually the first option is preferred. These W&I insurance policies come with a number of advantages:

  • a warranty is given even when the seller has been unwilling to commit himself contractually;
  • the insurance policy usually does not provide for any recourse against the seller, other than in the case of malice, so that the seller is fully released;
  • it is also possible to achieve a higher ceiling than that provided for in a purchase agreement;
  • likewise, coverage may be provided for a longer period;
  • it is easier to deal with the seller, especially if there are several and some are still part of the company, perhaps as members of the Board of Directors;
  • compensation procedures become significantly easier, especially in cases where there are multiple sellers, including individuals;
  • the buyer gains a higher certainty of solvency.

The cost of the insurance policy may be shared between the parties, eventually by discounting the purchase price, which the seller may be more willing to grant, considering that he will not be required to issue other warranties and can immediately use the proceeds of the sale.

Premiums are usually set somewhere between 1% and 2% of the compensation limit (with a minimum premium).

Besides the price, which makes the tool mostly suitable for operations of not modest entity, currently, the main limitation seems to be the commonly required deductible, equal to 1% of the Enterprise Value of the Target, which may be reduced to 0.5% in case of higher premiums. Keep in mind that the W&I insurance policy implies a review of the due diligence by the insurance company, which can translate into an actual intervention in the negotiation of the warranties.

Beyond this, this tool needs to be carefully evaluated: facing highly complex scenarios, it could be the ideal solution to solve an impasse in negotiations and make relations between professional investors and SMEs easier.

Acquisitions (M&A) in Italy are carried out in most cases through the purchase of shareholdings (‘share deal’) or business or business unit (‘asset deal’). For mainly tax reasons, share deals are more frequent than asset deals, despite the asset deal allows a better limitation of risks for the buyer. We will explain the main differences between share deal and asset deal in terms of risks, and in terms of relationships between seller and buyer.

Preference for acquisitions through the purchase of shareholdings (‘share deal’) rather than the purchase of business or business unit (‘asset deal’) in the Italian market

In Italy, acquisitions are carried out, in most cases, through the purchase of shareholdings (‘share deal’) or of business or business unit (‘asset deal’). Other structures, such as mergers, are less frequent.

By purchasing shareholdings of the target company (‘share deal‘), the buyer indirectly acquires all the company’s assets, liabilities and legal relationships. Therefore, the buyer bears all the risks relating to the previous management of the company.

With the purchase of the business or of a business unit of the target company (‘asset deal‘), the buyer acquires a set of assets and relationships organized for the operation of the business (real estate, machineries, patents, trademarks, employees, contracts, credits, debts, etc.). The advantage of the asset deal lies in the possibility for the parties to select the assets and liabilities included in the deal: hence the buyer can limit the legal risks of the transaction.

Despite this advantage, most acquisitions in Italy are made through the purchase of shareholdings. In 2018, there were approximately 78,400 purchases of shareholdings (shares or quotas), while there were approximately 35,900 sales of businesses or business units. (source: www.notariato.it/it/news/dati-statistici-notarili-anno-2018). It should be noted that the number of transfers of business also includes small or very small businesses owned by individual entrepreneurs, for whom the alternative of the share deal (though feasible, through the contribution of the business in a newco and the sale of the shares in the newco) is not viable in practice for cost reasons.

Taxation of share deal and asset deal in Italy

The main reason for the preference for share deal over asset deal lies in the tax costs of the transaction. Let’s see what they are.

In a share deal, the direct taxes borne by the seller are calculated on the capital gain, according to the following rates:

  • if the seller is a joint-stock company (società per azioni – s.p.a.; società a responsabilità limitata – r.l.; società in accomandita per azioni – s.a.p.a.), the corporate tax rate is 24% of the capital gain. However, under certain conditions, the so-called PEX (participation exemption) regime is applied with the application of the rate of 24% on 5% of the capital gain only.
  • If the seller is a partnership (società semplice – s.s.; società in nome collettivo – s.n.c..; società in accomandita semplice – s.a.s.) the capital gain is fully taxable. However, under certain conditions, the taxable amount is limited to 60% of the amount of the capital gain. In both cases, the taxable amount is attributed pro rata to each shareholder of the partnership, and added to the shareholders’ income (the tax rate depends on the shareholders’ income).
  • If the seller is a natural person, the rate on the capital gain is 26%.

A share deal is subject to a fixed registration tax of € 200,00, normally paid by the buyer.

In an asset deal, the direct taxes to be paid by the seller are calculated on the capital gain. If the seller is a joint-stock company, the corporate tax rate is 24% of the capital gain. If the seller is a partnership (with individual partners) or an individual entrepreneur, the rate depends on the seller’s income.

In an asset deal the transfer of the business or of the business unit is subject to registration tax, generally paid by the buyer. However both the seller and the buyer are jointly and severally liable for the payment of the registration tax. The tax is calculated on the part of the price attributable to the assets transferred. The price is the result of the transferred assets minus the transferred liabilities. The tax rate depends on the type of asset transferred. In general:

  • movable assets, including patents and trademarks: 3%;
  • goodwill: 3%;
  • buildings: 9%;
  • land: between 9% and 12% (depending on the buyer).

If the parties do not apportion the purchase price to the different assets in proportion to their values, the registration tax is applied to the entire purchase price at the highest rate of those applicable to the assets.

It should be noted that the tax authorities may assess the value attributed by the parties to real estate and goodwill, with the consequent risk of application of higher taxes.

Share deal and asset deal: risks and responsibilities towards third parties

In the purchase of shares or quotas (‘share deal‘), the purchaser bears, indirectly, all the risks relating to the previous management of the company.

In the purchase of business or business unit (‘asset deal‘), on the other hand, the parties can select which assets and liabilities will be transferred, hence establishing, among them, the risks that the buyer will bear.

However, there are some rules, which the parties cannot derogate from, relating to relationships with third parties, that have a significant impact on the risks for the seller and the buyer, and therefore on the negotiation of the purchase agreement. The main ones are as follows.

  • Employees: the employment relationship continues with the buyer of the business. The seller and the buyer are jointly and severally liable for all the employee’s rights and claims at the time of transfer (art. 2112 of the Italian Civil Code).
  • Debts: the seller is obliged to pay all debts up to the date of transfer. The buyer is liable for the debts that are shown in the mandatory accounting books (art. 2560 of the Italian Civil Code).
  • Tax debts and liabilities: the seller is obliged to pay debts, taxes and tax penalties relating to the period up to the date of transfer. In addition to the liability for tax debts resulting from mandatory accounting books (Article 2560 of the Italian Civil Code), the buyer is liable for taxes and penalties, even if they are not shown in the accounting books, with the following limits (Article 14 of Legislative Decree 472/1997):
  • the buyer benefits from the prior enforcement of the seller;
  • the buyer is liable up to the value of the business or business unit;
  • for taxes and penalties not emerging from a tax audit by the tax authorities that has taken place before the date of transfer, the buyer is liable for those relating to the year of the sale of the business and the two preceding years only;
  • the tax authorities shall issue a certificate on the existence and amount of debts and ongoing tax audits. If the certificate is not issued within 40 days of the request, the buyer will be released from liability. If the certificate is issued, the buyer will be liable up to the amount resulting from the certificate.
  • Contracts: the parties can choose which contracts to transfer. With respect to the contracts transferred, the buyer takes over, even without the consent of the third contracting party, contracts for the operation of the business that are not of a personal nature. In addition, the third contracting party may withdraw from the contract within three months if there is a just cause (e.g. if the buyer does not guarantee to be able to fulfil the contract due to his financial situation or technical skills) (Art. 2558 of the Italian Civil Code).

Some ways to deal with the risks

To manage the risks arising from third party liability and the general risks associated with the acquisition, a number of negotiation and contractual tools can be used. Let’s see some of them.

In an asset deal:

Employees: it is possible to agree with the employee changes to the contractual terms and conditions, and waive of joint and several liability of the buyer and seller (pursuant to art. 2112 c.c.). In order to be valid, the agreement with the employee must be concluded with certain requirements (for example, with the assistance of the trade unions).

Debts:

  • transfer the debts to the buyer and reduce the price accordingly. The price reduction leads to a lower tax cost of the transaction as well. In case of transfer of debts, in order to protect the seller, a declaration of release of the seller from liability pursuant to art. 2560 of the Italian Civil Code can be obtained from the creditor; or, the parties can agree that the payment of the debt by the buyer will take place at the same time as the transfer of the business (‘closing‘).
  • For debts not transferred to the buyer, obtain from the creditor a declaration of release of the buyer from liability pursuant to art. 2560 of the Italian Civil Code.
  • For debts for which it is not possible to obtain a declaration of release from the creditor, agree on forms of security in favor of the seller (for debts transferred) or in favor of the buyer (for debts not transferred), such as, for example, the deferment of payment of part of the price; the escrow of part of the price; bank or shareholder guarantees.

Tax debts and tax liabilities:

  • obtain from the tax authorities the certificate pursuant to art. 14 of Legislative Decree 472/1997 on debts and tax liabilities;
  • transfer the debts to the buyer, and reduce the price accordingly;
  • agree on forms of guarantee in favor of the seller (for debts transferred) and in favour of the buyer (for debts not transferred or for tax liabilities), such as those set out above for debts in general.

Contracts: for those that will be transferred:

  • verify that the seller’s obligations up to the date of transfer have been properly performed, in order to avoid the risk of disputes by the third contracting party, that could stop the performance of the contract;
  • at least for the most important contracts, obtain in advance from the third contracting party the approval of transfer of the contract.

In a share deal some tools are:

  • Due diligence. Carry out a thorough legal, tax and accounting due diligence on the company, to assess the risks in advance and manage them in the negotiation and in the acquisition contract (‘share purchase agreement’).
  • Representations and warranties (‘R&W’) and indemnification. Provide in the acquisition contract (‘share purchase agreement’) a detailed set of representations and warranties – and obligations to indemnify in the event of non-compliance – to be borne by the seller in relation to the situation of the company (‘business warranties‘: balance sheet; contracts; litigation; compliance with environmental regulations; authorizations for the conduct of business; debts; receivables, etc.). Negotiations on representations and warranties normally are carried on taking into account the outcomes of due diligence. Contractual representations and warranties on the situation of the company (‘business warranties‘) and contractual obligation to indemnify, are necessary in share deals in Italy, as in the absence of such clauses the buyer cannot obtain from the seller (except in extraordinary circumstances) compensation or indemnity if the situation of the company is different from that considered at the time of purchase.
  • Guarantees for the buyer. Means of ensuring that the buyer will be indemnified in the event of breach of representations and warranties. Among them: (a) the deferment of payment of part of the price; (b) the payment of part of the price in an escrow account for the duration of the liabilities arising from the representations and warranties and, in case of disputes between the parties, until the dispute is settled; (c) bank guarantee; (d) W&I policy: insurance contract covering the risk of the buyer in case of breach of representations and warranties, up to a maximum amount (and excluding certain risks).

Other factors influencing the choice between share deal and asset deal

Of course, the choice to carry out an acquisition operation in Italy through a share deal or an asset deal also depends on other factors, in addition to the tax cost of the transaction. Here are some of them.

  • Purchase of part of the business. The parties chose the asset deal when the transaction does not involve the purchase of the entire business of the target company but only a part of it (a business unit).
  • Situation of the target company. The buyer prefers the asset deal when the situation of the target company is so problematic that the buyer is not willing to assume all the risks arising from the previous management, but only part of them.
  • Maintenance of a role by the seller. The share deal is a better option when the seller will keep a role in the target company. In this case, the seller frequently retains, in addition to a role as director, a minority shareholdings, with exit clauses (put and call rights) after a certain period of time. The exit clauses often link the price to future results and, therefore, in the interest of the buyer, motivate the seller in his/her role as director, and, in the interest of the seller, put a value on the company’s earnings potential, not yet achieved at the time of purchase.

According to the article 20 of the Italian Code of Intellectual Property, the owner of a trademark has the right to prevent third parties, unless consent is given, from using:

  1. any sign which is identical to the trademark for goods or services which are identical to those for which the trademark is registered;
  2. any sign that is identical or similar to the registered trademark, for goods or services that are identical or similar, where due to the identity or similarity between the goods or services, there exists a likelihood of confusion on the part of the public, that can also consist of a likelihood of association of the two signs;
  3. any sign which is identical with or similar to the registered trademark in relation to goods or services which are not similar, where the registered trademark has a reputation in the Country and where use of that sign without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trademark.

Similar provisions can be found in art. 9, n. 2 of the EU Regulation 2017/1001 on the European Union Trademark, even if in such a case the provision concerns trademarks that have a reputation.

The first two hypotheses concern the majority of the brands and the conflict between two signs that are identical for identical products or services (sub a), so-called double identity, or between two brands that are identical or similar for identical or similar products or services, if due to the identity or similarity between the signs and the identity or affinity between the products or services, there may be a risk of confusion for the public (sub b).

By « affinity » we mean a product similarity between the products or services (for example between socks and yarns) or a link between the needs that the products or services intended to satisfy (as often happens in the fashion sector, where it is usual for example that the same footwear manufacturer also offers belts for sale). It is not by chance that, although the relevance is administrative and the affinity is not defined, at the time of filing the application for registration of a trademark, the applicant must indicate the products and / or services for which he wants to obtain the protection choosing among assets and services present in the International Classification of Nice referred to the related Agreement of 1957 (today at the eleventh edition issued on 01.01.2019). Indeed, following the leading IP Translator case (Judgment of the EU Court of Justice of 19 June 2012, C-307/10), the applicant is required to identify, within each class, the each good or service for which he invokes the protection, so as to correctly delimit the protection of the brand.

Beyond the aforementioned ordinary marks, there are some signs that, over time, have acquired a certain notoriety for which, as envisaged by the hypothesis sub c), the protection also extends to the products and / or services that are not similar (even less identical) to those for which the trademark is registered.

The ratio underlying the aforementioned rule is to contrast the counterfeiting phenomenon due to the undue appropriation of merits. In the fashion sector, for example, we often see counterfeit behaviors aimed at exploiting parasitically the commercial start-up of the most famous brands in order to induce the consumer to purchase the product in light of the higher qualities – in the broad sense – of the product.

The protection granted by the regulation in question is therefore aimed at protecting the so-called « selling power » of the trademark, understood as a high sales capacity due to the evocative and suggestive function of the brand, also due to the huge advertising investments made by the owner of the brand itself, and able to go beyond the limits of the affinity of the product sector to which the brand belongs.

In fact, we talk about « ultra-market » protection – which is independent of the likelihood of confusion referred to in sub-letter b) – which can be invoked when certain conditions are met.

First of all, the owner has the burden of proving that his own sign is well-known, both at a territorial level and with reference to the interested public.

But what does reputation mean and what are the assumptions needed? In the silence of the law, the case law, with the famous General Motors ruling (EC Court of Justice, 14 September 1999, C-375/97) defined it as « the sign’s aptitude to communicate a message to which it is possible linking up also in the absence of a confusion on the origin », confirming that the protection can be granted if the trademark is known by a significant part of the public interested in the products or services it distinguishes. »

According to the Court, among the parameters that the national court must take into account in determining the degree of the reputation of a mark are market share, intensity, geographical scope and duration of its use, as well as the investments made by the company to promote it.

Of course, the greater the reputation of the brand, the greater the extension of the protection to include less and less similar product sectors.

The relevant public, the Court continues, « is that interested in this trademark, that is, according to the product or service placed on the market, the general public or a more specialized public, for example, a specific professional environment ».

Furthermore, the reputation must also have a certain territorial extension and, to this purpose, the aforesaid decision specified that the requirement met if the reputation is spread in a substantial part of the EU States, taking into account both the size of the area geographical area concerned as well as the number of persons present therein.

For the EU trademark, the Court of Justice, with the decision Pago International (EC Court of Justice, 6 October 2009, C ‑ 301/07) ruled that the mark must be known « by a significant part of the public interested in the products or services marked by the trademark, in a substantial part of the territory of the Community » and that, taking into account the circumstances of the specific case, « the entire territory of a Member State » – in this case it was Austria – « can be considered substantial part of the territory of the Community ». This interpretation, indeed, is a consequence of the fact that the protection of an EU trademark extends to the whole territory of the European Union.

In order to obtain the protection of the renowned brand, there is no need for the similarity between the signs to create a likelihood of confusion. However, there must be a connection (a concept taken up several times by European and national jurisprudence) between the two marks in the sense that the later mark must evoke the earlier one in the mind of the average consumer.

In order to be able to take advantage of the « cross-market » protection, the aforementioned rules require the trademark owner to be able to provide adequate evidence that the appropriation of the sign by third parties constitutes an unfair advantage for them or, alternatively, that damages the owner himself. Of course, the alleged infringer shall be able to prove his right reason that, as such, can constitute a suitable factor to win the protection granted.

Moreover, the owner of the trademark is not obliged to prove an actual injury, as it is sufficient, according to the case law, « future hypothetical risk of undue advantage or prejudice« , although serious and concrete.

The damage could concern the distinctiveness of the earlier trademark and occurs, « when the capability of the trademark to identify the products or services for which it was registered and is used is weakened due to the fact that the use of the later trademark causes the identity of the earlier trade mark and of the ‘corresponding enterprise in the public mind ».

Likewise, the prejudice could also concern the reputation and it occurs when the use for the products or services offered by the third party can be perceived by the public in such a way that the power of the well-known brand is compromised. This occurs both in the case of an obscene or degrading use of the earlier mark, and when the context in which the later mark is inserted is incompatible with the image that the renowned brand has built over time, perhaps through expensive marketing campaigns.

Finally, the unfair advantage occurs when the third party parasitically engages its trademark with the reputation or distinctiveness of the renowned brand, taking advantage of it.

One of the most recent examples of cross-market protection has involved Barilla and a textile company for having marketed it cushions that reproduced the shapes of some of the most famous biscuits, marking them with the same brands first and then, after a cease and desist letter, with the names of the same biscuits with the addition of the suffix « -oso » (« Abbraccioso », « Pandistelloso », etc.). Given the good reputation acquired by the brands of the well-known food company, its brands have been recognized as worthy of the aforementioned protection extended to non-related services and products. The Court of Milan, in fact, with a decision dated January 25, 2018, ruled, among other things, that the conduct perpetrated by the textile company, attributing to its products the merits of those of Barilla, has configured a hypothesis of unfair competition parasitic for the appropriation of merits, pursuant to art. 2598 c.c. The reputation of the word and figurative marks registered by Barilla, in essence, has allowed protecting even non-similar products, given the undue advantage deriving from the renown of the sign of others.

The author of this article is Giacomo Gori.

Put options on a fixed price are all clear: the Italian Supreme Court confirms the legitimacy of the repurchase agreements regarding company shares (i.e. the agreement by which the buyer undertakes to resell the shares at a later time, upon the occurrence of certain conditions, upon simple request of the seller) without any participation in the occurred losses, and admits that such cases may pass the test for the leonina societas (under Italian law a permanent and total exclusion of some partners from participation in profits and losses is prohibited).

Those who intend to invest, instead of opting for a funding, may become part of the company structure through the acquisition of a participation in the share capital and, at the same time, insure oneself a safe way out.

To avoid suffering any negative outcomes, the silent partner may, through a shareholders’ agreement, agree with the founders of the company his exit through the sale of the equity investment at a given time, under certain circumstances and at the price of purchase. Indeed, there could be room for profit too: the put option, in fact, may include interests in the agreed price of repurchase.

Focus on this new corporate instrument is recommended. It could favour numerous strategic alliances between financiers and entrepreneurs looking for capital.

The author of this article is Giovannella Condò.

The majority principle, a pivotal aspect in limited companies, goes into crisis in situations where the share capital is equally divided between two opposing shareholders (50% each). In such hypotheses the approval of decisions is possible only with unanimity and this, obviously, frequently leads to deadlock situations that paralyze the management of the company.

The irreconcilable dissent among the shareholders can lead to the dissolution of the company. To avoid this, several strategies have been found, and one of these is the so-called “Russian Roulette Clause”.

The Shareholders may agree that, in deadlock situations, the Russian Roulette clause comes into play, with the effect of redistributing the shares and, consequently, starting again the business activity.

The clause provides that, upon the occurrence of certain trigger-event, one of the two shareholders (or both, if so agreed) has the power to determine the value of his/her 50% of the share capital. Consequently, he/she put the other shareholder in front of a simple choice: either buy the shares of the “offering” shareholder, at the price he/she has proposed, or sell his/her own share to the “offering” shareholder at the same price.

Who activates the Russian roulette determines the price, which remains fix. The unilateral determination of the price is balanced by the fact that the offeror does not know if she shall buy or sell at the established price: the final choice, in fact, is up to the offeree, who has not determined the price.

The author of this article is Giovannella Condò.

The Italian Budget Law for 2017 (Law No. 232 of 11 December 2016), with the specific purpose of attracting high net worth individuals to Italy, introduced the new article 24-bis in the Italian Income Tax Code (“ITC”) which regulates an elective tax regime for individuals who transfer their tax residence to Italy.

The special tax regime provides for the payment of an annual substitutive tax of EUR 100.000,00 and the exemption from:

  • any foreign income (except specific capital gains);
  • tax on foreign real estate properties (IVIE ) and tax on foreign financial assets (IVAFE);
  • the obligation to report foreign assets in the tax return;
  • inheritance and gift tax on foreign assets.

Eligibility

Persons entitled to opt for the special tax regime are individuals transferring their tax residence to Italy pursuant to the Italian law and who have not been resident in Italy for tax purposes for at least nine out of the ten years preceding the year in which the regime becomes effective.

According to art. 2 of the ITC, residents of Italy for income tax purposes are those persons who, for the greater part of the year, are registered within the Civil Registry of the Resident Population or have the residence or the domicile in Italy under the Italian Civil Code. About this, it is worth noting that persons who have moved to a black listed jurisdiction are considered to have their tax residence in Italy unless proof to the contrary is provided.

According to the Italian Civil Code, the residence is the place where a person has his/her habitual abode, whilst the domicile is the place where the person has the principal center of his businesses and interests.

Exemptions

The special tax regime exempts any foreign income from the Italian individual income tax (IRPEF).

In particular the exemption applies to:

  • income from self-employment generated from activities carried out abroad;
  • income from business activities carried out abroad through a permanent establishment;
  • income from employment carried out abroad;
  • income from a property owned abroad;
  • interests from foreign bank accounts;
  • capital gains from the sale of shares in foreign companies;

However, according to an anti-avoidance provision, the exemption does not apply to capital gains deriving from the sale of “substantial” participations that occur within the first five tax years of the validity of the special tax regime. “Substantial” participations are, in particular, those representing more than 2% of the voting rights or 5% of the capital of listed companies or 20% of the voting rights or 25% of the capital of non-listed companies.

Any Italian source income shall be subject to regular income taxation.

It must be underlined that, under the special tax regime no foreign tax credit will be granted for taxes paid abroad. However, the taxpayer is allowed to exclude income arising in one or more foreign jurisdictions from the application of the special regime. This income will then be subject to the ordinary tax rule and the foreign tax credit will be granted.

The special tax regime exempts the taxpayer also from the obligation to report foreign assets in the annual tax return and from the payment of the IVIE and the IVAFE.

Finally, the special tax regime provides for the exemption from the inheritance and gift tax with regard to transfers by inheritance or donations made during the period of validity of the regime. The exemption is limited to assets and rights existing in the Italian territory at the time of the donation or the inheritance.

Substitutive Tax and Family Members

The taxpayer must pay an annual substitutive tax of EUR 100,000 regardless of the amount of foreign income realised.

The special tax regime can be extended to family members by paying an additional EUR 25,000 substitutive tax for each person included in the regime, provided that the same conditions, applicable to the qualifying taxpayer, are met.

In particular, the extension is applicable to

  • spouses;
  • children and, in their absence, the direct relative in the descending line;
  • parents and, in their absence, the direct relative in the ascending line;
  • adopters;
  • sons–in-law and daughters-in-law;
  • fathers-in-law and mothers-in-law;
  • brothers and sisters.

How to apply

The option shall be made either in the tax return regarding the year in which the taxpayer becomes resident in Italy, or in the tax return of the following year.

Qualifying taxpayer may also submit a non-binding ruling request to the Italian Revenue Agency, in order to prove that all requirements to access the special regime are met. The ruling can be filed before the transfer of the tax residence to Italy.

The Revenue Agency shall respond within 120 days as from the receipt of the request. The reply is not binding for the taxpayer, but it is binding for the Revenue Agency.

If no ruling request is filed, the same information provided in the request must be provided together with the tax return where the election is made.

Termination

The option for the special tax regime is automatically renewed each year and it ends, in any case, after fifteen years from the first tax year of validity. However, the option can be revoked by the taxpayer at any time.

In case of termination or revocation, family members included in the election are also automatically excluded from the regime.

After the ordinary termination or revocation, it is no longer possible to apply for the special tax regime.

The author of this post is Valerio Cirimbilla.

On 25 May 2018, the EU Regulation 2016/679 came into force, concerning the « protection » of personal data (hereinafter the « Regulation » or « GDPR »). It is a Community legislative instrument aimed at strengthening the right of natural persons to have their personal data protected, which has been elevated to « fundamental right » in the Charter of Fundamental Rights of the European Union (Article 8 paragraph 1) and in the Treaty on the Functioning of the European Union (Article 16 paragraph 1).

The Regulation has a direct application in Italian law and does not require any implementation by the national legislator. These provisions prevail over national laws. From a practical standpoint, this means that, in the event of a conflict between a provision contained in the Regulations and one provided for in the « old » Legislative Decree 196/2003, the earlier would prevail over the latter.

The GDPR consists of 99 articles, of which only some constitute an in comparison with the preceding regime and bear specific relevance for the owners/managers of accommodation facilities.

Indeed, the first novelty concerns the « explicit consent » for the processing of « sensitive » data and the decisions based on automated processing (including profiling -Article 22- ). It is, in fact, necessary for the client to express his consent in relation to the processing of these data independently of that relating to other data. The consent obtained before 25 May 2018 remains valid only if it meets the requirements below.

It is required, for example, that the data owners modify their websites or promotional newsletters addressed to the customers. The latter need to be aware of the purposes for which the data is collected and of rights to which they are entitled. In order to subscribe to the newsletter, only the email address should be necessary, and if the owners request for more data, the purposes of such request ought to be specified. Before sending the subscription request, the customer must give his consent and accept the privacy policy. The privacy statement must be clearly accessible from the home page of the website. In particular, as to the newsletter, the privacy policy must also be indicated and linked in the relevant registration box.

Substantial changes were also introduced in relation to the duties of the Data Controller and the Data Processor. Both profiles are important in the hotel industry.

Now the Data Controller must (i) be able to prove that the data subject has consented to a specific processing, (ii) provide the contact details of the Data Protection Officer, (iii) declare the eventual transfer of the personal data towards third countries and, if so, through which means the transfer takes place, (iv) specify the retention period of the data or the criteria employed to establish the retention period, as well as the right to file a complaint with the supervisory authority; (v) indicate whether the processing involves automated decision-making processes (including profiling), and the expected consequences for the data subject concerned.

The Data Protection Officer (“DPO”), on the other hand, is a professional (who can be internal or external to the structure) who guarantees the observance of the rules of the GPDR and the management and processing of the data.

According to the new Regulation, the duties of this professional concern: (i) the keeping of the data processing reports (pursuant to Article 30, paragraph 2, of the Regulation), and (ii) the adoption of suitable technical and organisational measures to get the safety of the procedures (pursuant to Article 32 of the Regulation).

The name of the DPO must be indicated in the privacy policy to be delivered to the customer. The relationship between the data protection officer and the data controller is governed by a contract that must strictly regulate the subjects set forth in paragraph 3 of the article 28 in order to demonstrate that the manager provides « sufficient guarantees » for the correct management and processing of data. The Officer can appoint a « sub-manager » but only for limited processing activities, in compliance with the provisions of the contract, and responds to the non-compliance of the sub-manager.

In light of these provisions, the hotels will then have to make a more careful assessment of the risk deriving from data processing, prepare a detailed procedure as to enable the constant monitoring on, amongst others, the suitability of the treatment, and promptly notify a breach of the security procedure which involves the accidental disclosure of data, adapt its information to be delivered to the customer.

Finally, it is worth noting that the penalties for violations of the GDPR can be very significant and reach up to 4% of the company’s turnover. As such, they are far more severe than those previously specified. It is, therefore, necessary to pay close attention to compliance with the GDPR since an incorrect or defective application can cause severe prejudices to the company.

The author of this post is Giovanni Izzo.

Simone Rossi

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  • Entreprise
  • Contrats
  • Fusions et acquisitions
  • Insolvabilité
  • Fonds d'investissement privés
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    Italy – The « cross-market » protection of well-known brands

    7 mai 2019

    • Italie
    • Propriété intellectuelle
    • Marques et brevets

    Summary – What can the owner (or licensee) of a trademark do if an unauthorized third party resells products with its trademark on an online platform? This issue was addressed in the judgment of C-567/18 of 2 April 2020, in which the Court of Justice of the European Union confirmed that platforms (Amazon Marketplace, in this case) storing goods which infringe trademark rights are not liable for such infringement, unless the platform puts them on the market or is aware of the infringement. Conversely, platforms (such as Amazon Retail) that contribute to the distribution or resell the products themselves may be liable.

    Background

    Coty – a German company, distributor of perfumes, holding a licence for the EU trademark “Davidoff” – noted that third-party sellers were offering on Amazon Marketplace perfumes bearing the « Davidoff Hot Water » brand, which had been put in the EU market without its consent.

    After reaching an agreement with one of the sellers, Coty sued Amazon in order to prevent it from storing and shipping those perfumes unless they were placed on the EU market with Coty’s consent. Both the Court of First Instance and the Court of Appeal rejected Coty’s request, which brought an appeal before the German Court of Cassation, which in turn referred the matter to the Court of Justice of the EU.

    What is the Exhaustion of the rights conferred by a trademark

    The principle of exhaustion is envisaged by EU law, according to which, once a good is put on the EU market, the proprietor of the trademark right on that specific good can no longer limit its use by third parties.

    This principle is effective only if the entry of the good (the reference is to the individual product) on the market is done directly by the right holder, or with its consent (e.g. through an operator holding a licence).

    On the contrary, if the goods are placed on the market by third parties without the consent of the proprietor, the latter may – by exercising the trademark rights established by art. 9, par. 3 of EU Regulation 2017/1001 – prohibit the use of the trademark for the marketing of the products.

    By the legal proceedings which ended before the Court of Justice of the EU, Coty sought to enforce that right also against Amazon, considering it to be a user of the trademark, and therefore liable for its infringement.

    What is the role of Amazon?

    The solution of the case revolves around the role of the web platform.

    Although Amazon provides users with a unique search engine, it hosts two radically different sales channels. Through the Amazon Retail channel, the customer buys products directly from the Amazon company, which operates as a reseller of products previously purchased from third party suppliers.

    The Amazon Marketplace, on the other hand, displays products owned by third-party vendors, so purchase agreements are concluded between the end customer and the vendor. Amazon gets a commission on these transactions, while the vendor assumes the responsibility for the sale and can manage the prices of the products independently.

    According to the German courts which rejected Coty’s claims in the first and second instance, Amazon Marketplace essentially acts as a depository, without offering the goods for sale or putting them on the market.

    Coty, vice versa, argues that Amazon Marketplace, by offering various marketing-services (including: communication with potential customers in order to sell the products; provision of the platform through which customers conclude the contract; and consistent promotion of the products, both on its website and through advertisements on Google), can be considered as a « user » of the trademark, within the meaning of Article 9, paragraph 3 of EU Regulation 2017/1001.

    The decision of the Court of Justice of the European Union

    Advocate General Campos Sanchez-Bordona, in the opinion delivered on 28 November 2019, had suggested to the Court to distinguish between: the mere depositaries of the goods, not to be considered as « users » of the trademark for the purposes of EU Regulation 2017/1001; and those who – in addition to providing the deposit service – actively participate in the distribution of the goods. These latter, in the light of art. 9, par. 3, letter b) of EU Regulation 2017/1001, should be considered as « users » of the trademark, and therefore directly responsible in case of infringements.

    The Bundesgerichtshof (Federal Court of Justice of Germany), however, had already partially answered the question when it referred the matter to the European Court, stating that Amazon Marketplace “merely stored the goods concerned, without offering them for sale or putting them on the market”, both operations carried out solely by the vendor.

    The EU Court of Justice ruled the case on the basis of some precedents, in which it had already stated that:

    • The expression “using” involves at the very least, the use of the sign in the commercial communication. A person may thus allow its clients to use signs which are identical or similar to trademarks without itself using those signs (see Google vs Louis Vuitton, Joined Cases C-236/08 to C-238/08, par. 56).
    • With regard to e-commerce platforms, the use of the sign identical or similar to a trademark is made by the sellers, and not by the platform operator (see L’Oréal vs eBay, C‑324/09, par. 103).
    • The service provider who simply performs a technical part of the production process cannot be qualified as a « user » of any signs on the final products. (see Frisdranken vs Red Bull, C‑119/10, par. 30. Frisdranken is an undertaking whose main activity is filling cans, supplied by a third party, already bearing signs similar to Redbull’s registered trademarks).

    On the basis of that case-law and the qualification of Amazon Marketplace provided by the referring court, the European Court has ruled that a company which, on behalf of a third party, stores goods which infringe trademark rights, if it is not aware of that infringement and does not offer them for sale or place them on the market, is not making “use” of the trademark and, therefore, is not liable to the proprietor of the rights to that trademark.

    Conclusion

    After Coty had previously been the subject of a historic ruling on the matter (C-230/16 – link to the Legalmondo previous post), in this case the Court of Justice decision confirmed the status quo, but left the door open for change in the near future.

    A few considerations on the judgement, before some practical tips:

    • The Court did not define in positive terms the criteria for assessing whether an online platform performs sufficient activity to be considered as a user of the sign (and therefore liable for any infringement of the registered trademark). This choice is probably dictated by the fact that the criteria laid down could have been applied (including to the various companies belonging to the Amazon group) in a non-homogeneous manner by the various Member States’ national courts, thus jeopardising the uniform application of European law.
    • If the Court of Justice had decided the case the other way around, the ruling would have had a disruptive impact not only on Amazon’s Marketplace, but on all online operators, because it would have made them directly responsible for infringements of IP rights by third parties.
    • If the perfumes in question had been sold through Amazon Retail, there would have been no doubt about Amazon’s responsibility: through this channel, sales are concluded directly between Amazon and the end customer.
    • The Court has not considered whether: (i) Amazon could be held indirectly liable within the meaning of Article 14(1) of EU Directive 2000/31, as a “host” which – although aware of the illegal activity – did not prevent it; (ii) under Article 11 of EU Directive 2004/48, Coty could have acted against Amazon as an intermediary whose services are used by third parties to infringe its IP right. Therefore, it cannot be excluded that Amazon may be held (indirectly) liable for the infringements committed, including on the Marketplace: this aspect will have to be examined in detail on a case-by-case basis.

    Practical tips

    What can the owner (or licensee) of a trademark do if an unauthorized third party resells products with its trademark on an online platform?

    1. Gather as much evidence as possible of the infringement in progress: the proof of the infringement is one of the most problematic aspects of IP litigation.
    2. Contact a specialized lawyer to send a cease-and-desist letter to the unauthorized seller, ordering the removal of the products from the platform and asking the compensation for damages suffered.
    3. If the products are not removed from the marketplace, the trademark owner might take legal action to obtain the removal of the products and compensation for damages.
    4. In light of the judgment in question, the online platforms not playing an active role in the resale of goods remain not directly responsible for IP violations. Nevertheless, it is suggested to consider sending the cease-and-desist letter to them as well, in order to put more pressure on the unauthorised seller.
    5. The sending of the cease-and-desist letter also to the platform – especially in the event of several infringements – may also be useful to demonstrate its (indirect) liability for lack of vigilance, as seen in point 4) of the above list.

    One of the most tricky steps in any M&A operation is when the issue of « warranties », in particular with reference to the economic situation, the balance sheet and the financial position of the company or business (or of a branch), namely the so-called « business warranties« .

    On one side, the buyer would like to « ironclad » his investment by reducing the risk of an unpleasant surprise to a minimum. The seller, by contrast, wishes to provide the least possible warranties, which often translate in a provisory restriction on the full enjoyment of the proceeds; the same may be essential for further investment.

    It should be noted, first of all, that the term « warranties » is usually referred to, in a non-technical acceptation, to a complex set of contractual provisions containing:

    • any seller’s statements about the health of the company or business (or branch of business) being transferred;
    • any compensation obligations undertaken by the seller in case of « violation » (i.e. mistruth) of the assertions;
    • any remedies provided to ensure the effectiveness of the indemnity obligations entered into.

    While there are several reasons why this set is necessary, the most significant one is that in M&A contracts, statutory sale warranties only apply to the good sold; therefore, if the good sold is an equity investment, the warranties do not cover any of the company’s underlying assets; and even as they exceptionally do apply, short terms and strict limitations still justify an ancillary obligation designed to ensure the economic success of the transaction.

    As confirmed by current practice, there is not a single M&A agreement that does not include a set of warranties.

    In particular, representations typically incorporate the buyer’s due diligence, which for its part usually follows a non-disclosure agreement (NDA) to protect any information disclosed.

    Any criticalities identified should be properly mentioned. Clearly, wherever a criticality arises, it may not necessarily trigger an indemnity obligation. It will be up to the parties to lay down the rules, as they may also provide that any related risk is to be borne by the buyer; this may be offset by a reduction in the price.

    Some aspects of the compensation obligation will have to be carefully negotiated. The main ones are certainly:

    • duration (e.g. longer for tax-related warranties);
    • who is entitled to compensation (the buyer or the company; one or the other as the case may be);
    • any deductions and/or limitations (e.g. tax losses);
    • compensation cap;
    • any possible deductible;
    • the compensation procedure (e.g. application deadlines, settlement procedure, particular circumstances).

    These are highly relevant aspects and should by no means be underestimated. As an example, it is obvious that if the compensation procedure is poorly regulated, all the previous efforts are jeopardised.

    Finally, suitable measures to ensure an effective protection of the buyer must be provided. Among these, the most conventional tools are:

    • the surety;
    • the “independent contract of guarantee”;
    • the escrow;
    • the deferment of payment;
    • the “earn-out”-scheme;
    • the “price adjustment”;
    • the letter of patronage;
    • the pledge and/or mortgage.

    These are more or less widely used instruments, each one with its pros and cons.

    At this point, however, we would like to address a new tool with an insurance character, which has been being used recently: the so-called « Warranty & Indemnity Policies« .

    With a W&I insurance policy, basically, the insurer assumes the risk resulting from breaches of warranties and indemnities included in an M&A contract upon payment of a premium.

    It is obviously a key condition that the violation arose from facts preceding the closing and which were not known at that time (and, therefore, not highlighted by the due diligence carried out).

    The insurance policy may be subscribed by the buyer (buyer side) or the seller (seller side). Usually the first option is preferred. These W&I insurance policies come with a number of advantages:

    • a warranty is given even when the seller has been unwilling to commit himself contractually;
    • the insurance policy usually does not provide for any recourse against the seller, other than in the case of malice, so that the seller is fully released;
    • it is also possible to achieve a higher ceiling than that provided for in a purchase agreement;
    • likewise, coverage may be provided for a longer period;
    • it is easier to deal with the seller, especially if there are several and some are still part of the company, perhaps as members of the Board of Directors;
    • compensation procedures become significantly easier, especially in cases where there are multiple sellers, including individuals;
    • the buyer gains a higher certainty of solvency.

    The cost of the insurance policy may be shared between the parties, eventually by discounting the purchase price, which the seller may be more willing to grant, considering that he will not be required to issue other warranties and can immediately use the proceeds of the sale.

    Premiums are usually set somewhere between 1% and 2% of the compensation limit (with a minimum premium).

    Besides the price, which makes the tool mostly suitable for operations of not modest entity, currently, the main limitation seems to be the commonly required deductible, equal to 1% of the Enterprise Value of the Target, which may be reduced to 0.5% in case of higher premiums. Keep in mind that the W&I insurance policy implies a review of the due diligence by the insurance company, which can translate into an actual intervention in the negotiation of the warranties.

    Beyond this, this tool needs to be carefully evaluated: facing highly complex scenarios, it could be the ideal solution to solve an impasse in negotiations and make relations between professional investors and SMEs easier.

    Acquisitions (M&A) in Italy are carried out in most cases through the purchase of shareholdings (‘share deal’) or business or business unit (‘asset deal’). For mainly tax reasons, share deals are more frequent than asset deals, despite the asset deal allows a better limitation of risks for the buyer. We will explain the main differences between share deal and asset deal in terms of risks, and in terms of relationships between seller and buyer.

    Preference for acquisitions through the purchase of shareholdings (‘share deal’) rather than the purchase of business or business unit (‘asset deal’) in the Italian market

    In Italy, acquisitions are carried out, in most cases, through the purchase of shareholdings (‘share deal’) or of business or business unit (‘asset deal’). Other structures, such as mergers, are less frequent.

    By purchasing shareholdings of the target company (‘share deal‘), the buyer indirectly acquires all the company’s assets, liabilities and legal relationships. Therefore, the buyer bears all the risks relating to the previous management of the company.

    With the purchase of the business or of a business unit of the target company (‘asset deal‘), the buyer acquires a set of assets and relationships organized for the operation of the business (real estate, machineries, patents, trademarks, employees, contracts, credits, debts, etc.). The advantage of the asset deal lies in the possibility for the parties to select the assets and liabilities included in the deal: hence the buyer can limit the legal risks of the transaction.

    Despite this advantage, most acquisitions in Italy are made through the purchase of shareholdings. In 2018, there were approximately 78,400 purchases of shareholdings (shares or quotas), while there were approximately 35,900 sales of businesses or business units. (source: www.notariato.it/it/news/dati-statistici-notarili-anno-2018). It should be noted that the number of transfers of business also includes small or very small businesses owned by individual entrepreneurs, for whom the alternative of the share deal (though feasible, through the contribution of the business in a newco and the sale of the shares in the newco) is not viable in practice for cost reasons.

    Taxation of share deal and asset deal in Italy

    The main reason for the preference for share deal over asset deal lies in the tax costs of the transaction. Let’s see what they are.

    In a share deal, the direct taxes borne by the seller are calculated on the capital gain, according to the following rates:

    • if the seller is a joint-stock company (società per azioni – s.p.a.; società a responsabilità limitata – r.l.; società in accomandita per azioni – s.a.p.a.), the corporate tax rate is 24% of the capital gain. However, under certain conditions, the so-called PEX (participation exemption) regime is applied with the application of the rate of 24% on 5% of the capital gain only.
    • If the seller is a partnership (società semplice – s.s.; società in nome collettivo – s.n.c..; società in accomandita semplice – s.a.s.) the capital gain is fully taxable. However, under certain conditions, the taxable amount is limited to 60% of the amount of the capital gain. In both cases, the taxable amount is attributed pro rata to each shareholder of the partnership, and added to the shareholders’ income (the tax rate depends on the shareholders’ income).
    • If the seller is a natural person, the rate on the capital gain is 26%.

    A share deal is subject to a fixed registration tax of € 200,00, normally paid by the buyer.

    In an asset deal, the direct taxes to be paid by the seller are calculated on the capital gain. If the seller is a joint-stock company, the corporate tax rate is 24% of the capital gain. If the seller is a partnership (with individual partners) or an individual entrepreneur, the rate depends on the seller’s income.

    In an asset deal the transfer of the business or of the business unit is subject to registration tax, generally paid by the buyer. However both the seller and the buyer are jointly and severally liable for the payment of the registration tax. The tax is calculated on the part of the price attributable to the assets transferred. The price is the result of the transferred assets minus the transferred liabilities. The tax rate depends on the type of asset transferred. In general:

    • movable assets, including patents and trademarks: 3%;
    • goodwill: 3%;
    • buildings: 9%;
    • land: between 9% and 12% (depending on the buyer).

    If the parties do not apportion the purchase price to the different assets in proportion to their values, the registration tax is applied to the entire purchase price at the highest rate of those applicable to the assets.

    It should be noted that the tax authorities may assess the value attributed by the parties to real estate and goodwill, with the consequent risk of application of higher taxes.

    Share deal and asset deal: risks and responsibilities towards third parties

    In the purchase of shares or quotas (‘share deal‘), the purchaser bears, indirectly, all the risks relating to the previous management of the company.

    In the purchase of business or business unit (‘asset deal‘), on the other hand, the parties can select which assets and liabilities will be transferred, hence establishing, among them, the risks that the buyer will bear.

    However, there are some rules, which the parties cannot derogate from, relating to relationships with third parties, that have a significant impact on the risks for the seller and the buyer, and therefore on the negotiation of the purchase agreement. The main ones are as follows.

    • Employees: the employment relationship continues with the buyer of the business. The seller and the buyer are jointly and severally liable for all the employee’s rights and claims at the time of transfer (art. 2112 of the Italian Civil Code).
    • Debts: the seller is obliged to pay all debts up to the date of transfer. The buyer is liable for the debts that are shown in the mandatory accounting books (art. 2560 of the Italian Civil Code).
    • Tax debts and liabilities: the seller is obliged to pay debts, taxes and tax penalties relating to the period up to the date of transfer. In addition to the liability for tax debts resulting from mandatory accounting books (Article 2560 of the Italian Civil Code), the buyer is liable for taxes and penalties, even if they are not shown in the accounting books, with the following limits (Article 14 of Legislative Decree 472/1997):
    • the buyer benefits from the prior enforcement of the seller;
    • the buyer is liable up to the value of the business or business unit;
    • for taxes and penalties not emerging from a tax audit by the tax authorities that has taken place before the date of transfer, the buyer is liable for those relating to the year of the sale of the business and the two preceding years only;
    • the tax authorities shall issue a certificate on the existence and amount of debts and ongoing tax audits. If the certificate is not issued within 40 days of the request, the buyer will be released from liability. If the certificate is issued, the buyer will be liable up to the amount resulting from the certificate.
    • Contracts: the parties can choose which contracts to transfer. With respect to the contracts transferred, the buyer takes over, even without the consent of the third contracting party, contracts for the operation of the business that are not of a personal nature. In addition, the third contracting party may withdraw from the contract within three months if there is a just cause (e.g. if the buyer does not guarantee to be able to fulfil the contract due to his financial situation or technical skills) (Art. 2558 of the Italian Civil Code).

    Some ways to deal with the risks

    To manage the risks arising from third party liability and the general risks associated with the acquisition, a number of negotiation and contractual tools can be used. Let’s see some of them.

    In an asset deal:

    Employees: it is possible to agree with the employee changes to the contractual terms and conditions, and waive of joint and several liability of the buyer and seller (pursuant to art. 2112 c.c.). In order to be valid, the agreement with the employee must be concluded with certain requirements (for example, with the assistance of the trade unions).

    Debts:

    • transfer the debts to the buyer and reduce the price accordingly. The price reduction leads to a lower tax cost of the transaction as well. In case of transfer of debts, in order to protect the seller, a declaration of release of the seller from liability pursuant to art. 2560 of the Italian Civil Code can be obtained from the creditor; or, the parties can agree that the payment of the debt by the buyer will take place at the same time as the transfer of the business (‘closing‘).
    • For debts not transferred to the buyer, obtain from the creditor a declaration of release of the buyer from liability pursuant to art. 2560 of the Italian Civil Code.
    • For debts for which it is not possible to obtain a declaration of release from the creditor, agree on forms of security in favor of the seller (for debts transferred) or in favor of the buyer (for debts not transferred), such as, for example, the deferment of payment of part of the price; the escrow of part of the price; bank or shareholder guarantees.

    Tax debts and tax liabilities:

    • obtain from the tax authorities the certificate pursuant to art. 14 of Legislative Decree 472/1997 on debts and tax liabilities;
    • transfer the debts to the buyer, and reduce the price accordingly;
    • agree on forms of guarantee in favor of the seller (for debts transferred) and in favour of the buyer (for debts not transferred or for tax liabilities), such as those set out above for debts in general.

    Contracts: for those that will be transferred:

    • verify that the seller’s obligations up to the date of transfer have been properly performed, in order to avoid the risk of disputes by the third contracting party, that could stop the performance of the contract;
    • at least for the most important contracts, obtain in advance from the third contracting party the approval of transfer of the contract.

    In a share deal some tools are:

    • Due diligence. Carry out a thorough legal, tax and accounting due diligence on the company, to assess the risks in advance and manage them in the negotiation and in the acquisition contract (‘share purchase agreement’).
    • Representations and warranties (‘R&W’) and indemnification. Provide in the acquisition contract (‘share purchase agreement’) a detailed set of representations and warranties – and obligations to indemnify in the event of non-compliance – to be borne by the seller in relation to the situation of the company (‘business warranties‘: balance sheet; contracts; litigation; compliance with environmental regulations; authorizations for the conduct of business; debts; receivables, etc.). Negotiations on representations and warranties normally are carried on taking into account the outcomes of due diligence. Contractual representations and warranties on the situation of the company (‘business warranties‘) and contractual obligation to indemnify, are necessary in share deals in Italy, as in the absence of such clauses the buyer cannot obtain from the seller (except in extraordinary circumstances) compensation or indemnity if the situation of the company is different from that considered at the time of purchase.
    • Guarantees for the buyer. Means of ensuring that the buyer will be indemnified in the event of breach of representations and warranties. Among them: (a) the deferment of payment of part of the price; (b) the payment of part of the price in an escrow account for the duration of the liabilities arising from the representations and warranties and, in case of disputes between the parties, until the dispute is settled; (c) bank guarantee; (d) W&I policy: insurance contract covering the risk of the buyer in case of breach of representations and warranties, up to a maximum amount (and excluding certain risks).

    Other factors influencing the choice between share deal and asset deal

    Of course, the choice to carry out an acquisition operation in Italy through a share deal or an asset deal also depends on other factors, in addition to the tax cost of the transaction. Here are some of them.

    • Purchase of part of the business. The parties chose the asset deal when the transaction does not involve the purchase of the entire business of the target company but only a part of it (a business unit).
    • Situation of the target company. The buyer prefers the asset deal when the situation of the target company is so problematic that the buyer is not willing to assume all the risks arising from the previous management, but only part of them.
    • Maintenance of a role by the seller. The share deal is a better option when the seller will keep a role in the target company. In this case, the seller frequently retains, in addition to a role as director, a minority shareholdings, with exit clauses (put and call rights) after a certain period of time. The exit clauses often link the price to future results and, therefore, in the interest of the buyer, motivate the seller in his/her role as director, and, in the interest of the seller, put a value on the company’s earnings potential, not yet achieved at the time of purchase.

    According to the article 20 of the Italian Code of Intellectual Property, the owner of a trademark has the right to prevent third parties, unless consent is given, from using:

    1. any sign which is identical to the trademark for goods or services which are identical to those for which the trademark is registered;
    2. any sign that is identical or similar to the registered trademark, for goods or services that are identical or similar, where due to the identity or similarity between the goods or services, there exists a likelihood of confusion on the part of the public, that can also consist of a likelihood of association of the two signs;
    3. any sign which is identical with or similar to the registered trademark in relation to goods or services which are not similar, where the registered trademark has a reputation in the Country and where use of that sign without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trademark.

    Similar provisions can be found in art. 9, n. 2 of the EU Regulation 2017/1001 on the European Union Trademark, even if in such a case the provision concerns trademarks that have a reputation.

    The first two hypotheses concern the majority of the brands and the conflict between two signs that are identical for identical products or services (sub a), so-called double identity, or between two brands that are identical or similar for identical or similar products or services, if due to the identity or similarity between the signs and the identity or affinity between the products or services, there may be a risk of confusion for the public (sub b).

    By « affinity » we mean a product similarity between the products or services (for example between socks and yarns) or a link between the needs that the products or services intended to satisfy (as often happens in the fashion sector, where it is usual for example that the same footwear manufacturer also offers belts for sale). It is not by chance that, although the relevance is administrative and the affinity is not defined, at the time of filing the application for registration of a trademark, the applicant must indicate the products and / or services for which he wants to obtain the protection choosing among assets and services present in the International Classification of Nice referred to the related Agreement of 1957 (today at the eleventh edition issued on 01.01.2019). Indeed, following the leading IP Translator case (Judgment of the EU Court of Justice of 19 June 2012, C-307/10), the applicant is required to identify, within each class, the each good or service for which he invokes the protection, so as to correctly delimit the protection of the brand.

    Beyond the aforementioned ordinary marks, there are some signs that, over time, have acquired a certain notoriety for which, as envisaged by the hypothesis sub c), the protection also extends to the products and / or services that are not similar (even less identical) to those for which the trademark is registered.

    The ratio underlying the aforementioned rule is to contrast the counterfeiting phenomenon due to the undue appropriation of merits. In the fashion sector, for example, we often see counterfeit behaviors aimed at exploiting parasitically the commercial start-up of the most famous brands in order to induce the consumer to purchase the product in light of the higher qualities – in the broad sense – of the product.

    The protection granted by the regulation in question is therefore aimed at protecting the so-called « selling power » of the trademark, understood as a high sales capacity due to the evocative and suggestive function of the brand, also due to the huge advertising investments made by the owner of the brand itself, and able to go beyond the limits of the affinity of the product sector to which the brand belongs.

    In fact, we talk about « ultra-market » protection – which is independent of the likelihood of confusion referred to in sub-letter b) – which can be invoked when certain conditions are met.

    First of all, the owner has the burden of proving that his own sign is well-known, both at a territorial level and with reference to the interested public.

    But what does reputation mean and what are the assumptions needed? In the silence of the law, the case law, with the famous General Motors ruling (EC Court of Justice, 14 September 1999, C-375/97) defined it as « the sign’s aptitude to communicate a message to which it is possible linking up also in the absence of a confusion on the origin », confirming that the protection can be granted if the trademark is known by a significant part of the public interested in the products or services it distinguishes. »

    According to the Court, among the parameters that the national court must take into account in determining the degree of the reputation of a mark are market share, intensity, geographical scope and duration of its use, as well as the investments made by the company to promote it.

    Of course, the greater the reputation of the brand, the greater the extension of the protection to include less and less similar product sectors.

    The relevant public, the Court continues, « is that interested in this trademark, that is, according to the product or service placed on the market, the general public or a more specialized public, for example, a specific professional environment ».

    Furthermore, the reputation must also have a certain territorial extension and, to this purpose, the aforesaid decision specified that the requirement met if the reputation is spread in a substantial part of the EU States, taking into account both the size of the area geographical area concerned as well as the number of persons present therein.

    For the EU trademark, the Court of Justice, with the decision Pago International (EC Court of Justice, 6 October 2009, C ‑ 301/07) ruled that the mark must be known « by a significant part of the public interested in the products or services marked by the trademark, in a substantial part of the territory of the Community » and that, taking into account the circumstances of the specific case, « the entire territory of a Member State » – in this case it was Austria – « can be considered substantial part of the territory of the Community ». This interpretation, indeed, is a consequence of the fact that the protection of an EU trademark extends to the whole territory of the European Union.

    In order to obtain the protection of the renowned brand, there is no need for the similarity between the signs to create a likelihood of confusion. However, there must be a connection (a concept taken up several times by European and national jurisprudence) between the two marks in the sense that the later mark must evoke the earlier one in the mind of the average consumer.

    In order to be able to take advantage of the « cross-market » protection, the aforementioned rules require the trademark owner to be able to provide adequate evidence that the appropriation of the sign by third parties constitutes an unfair advantage for them or, alternatively, that damages the owner himself. Of course, the alleged infringer shall be able to prove his right reason that, as such, can constitute a suitable factor to win the protection granted.

    Moreover, the owner of the trademark is not obliged to prove an actual injury, as it is sufficient, according to the case law, « future hypothetical risk of undue advantage or prejudice« , although serious and concrete.

    The damage could concern the distinctiveness of the earlier trademark and occurs, « when the capability of the trademark to identify the products or services for which it was registered and is used is weakened due to the fact that the use of the later trademark causes the identity of the earlier trade mark and of the ‘corresponding enterprise in the public mind ».

    Likewise, the prejudice could also concern the reputation and it occurs when the use for the products or services offered by the third party can be perceived by the public in such a way that the power of the well-known brand is compromised. This occurs both in the case of an obscene or degrading use of the earlier mark, and when the context in which the later mark is inserted is incompatible with the image that the renowned brand has built over time, perhaps through expensive marketing campaigns.

    Finally, the unfair advantage occurs when the third party parasitically engages its trademark with the reputation or distinctiveness of the renowned brand, taking advantage of it.

    One of the most recent examples of cross-market protection has involved Barilla and a textile company for having marketed it cushions that reproduced the shapes of some of the most famous biscuits, marking them with the same brands first and then, after a cease and desist letter, with the names of the same biscuits with the addition of the suffix « -oso » (« Abbraccioso », « Pandistelloso », etc.). Given the good reputation acquired by the brands of the well-known food company, its brands have been recognized as worthy of the aforementioned protection extended to non-related services and products. The Court of Milan, in fact, with a decision dated January 25, 2018, ruled, among other things, that the conduct perpetrated by the textile company, attributing to its products the merits of those of Barilla, has configured a hypothesis of unfair competition parasitic for the appropriation of merits, pursuant to art. 2598 c.c. The reputation of the word and figurative marks registered by Barilla, in essence, has allowed protecting even non-similar products, given the undue advantage deriving from the renown of the sign of others.

    The author of this article is Giacomo Gori.

    Put options on a fixed price are all clear: the Italian Supreme Court confirms the legitimacy of the repurchase agreements regarding company shares (i.e. the agreement by which the buyer undertakes to resell the shares at a later time, upon the occurrence of certain conditions, upon simple request of the seller) without any participation in the occurred losses, and admits that such cases may pass the test for the leonina societas (under Italian law a permanent and total exclusion of some partners from participation in profits and losses is prohibited).

    Those who intend to invest, instead of opting for a funding, may become part of the company structure through the acquisition of a participation in the share capital and, at the same time, insure oneself a safe way out.

    To avoid suffering any negative outcomes, the silent partner may, through a shareholders’ agreement, agree with the founders of the company his exit through the sale of the equity investment at a given time, under certain circumstances and at the price of purchase. Indeed, there could be room for profit too: the put option, in fact, may include interests in the agreed price of repurchase.

    Focus on this new corporate instrument is recommended. It could favour numerous strategic alliances between financiers and entrepreneurs looking for capital.

    The author of this article is Giovannella Condò.

    The majority principle, a pivotal aspect in limited companies, goes into crisis in situations where the share capital is equally divided between two opposing shareholders (50% each). In such hypotheses the approval of decisions is possible only with unanimity and this, obviously, frequently leads to deadlock situations that paralyze the management of the company.

    The irreconcilable dissent among the shareholders can lead to the dissolution of the company. To avoid this, several strategies have been found, and one of these is the so-called “Russian Roulette Clause”.

    The Shareholders may agree that, in deadlock situations, the Russian Roulette clause comes into play, with the effect of redistributing the shares and, consequently, starting again the business activity.

    The clause provides that, upon the occurrence of certain trigger-event, one of the two shareholders (or both, if so agreed) has the power to determine the value of his/her 50% of the share capital. Consequently, he/she put the other shareholder in front of a simple choice: either buy the shares of the “offering” shareholder, at the price he/she has proposed, or sell his/her own share to the “offering” shareholder at the same price.

    Who activates the Russian roulette determines the price, which remains fix. The unilateral determination of the price is balanced by the fact that the offeror does not know if she shall buy or sell at the established price: the final choice, in fact, is up to the offeree, who has not determined the price.

    The author of this article is Giovannella Condò.

    The Italian Budget Law for 2017 (Law No. 232 of 11 December 2016), with the specific purpose of attracting high net worth individuals to Italy, introduced the new article 24-bis in the Italian Income Tax Code (“ITC”) which regulates an elective tax regime for individuals who transfer their tax residence to Italy.

    The special tax regime provides for the payment of an annual substitutive tax of EUR 100.000,00 and the exemption from:

    • any foreign income (except specific capital gains);
    • tax on foreign real estate properties (IVIE ) and tax on foreign financial assets (IVAFE);
    • the obligation to report foreign assets in the tax return;
    • inheritance and gift tax on foreign assets.

    Eligibility

    Persons entitled to opt for the special tax regime are individuals transferring their tax residence to Italy pursuant to the Italian law and who have not been resident in Italy for tax purposes for at least nine out of the ten years preceding the year in which the regime becomes effective.

    According to art. 2 of the ITC, residents of Italy for income tax purposes are those persons who, for the greater part of the year, are registered within the Civil Registry of the Resident Population or have the residence or the domicile in Italy under the Italian Civil Code. About this, it is worth noting that persons who have moved to a black listed jurisdiction are considered to have their tax residence in Italy unless proof to the contrary is provided.

    According to the Italian Civil Code, the residence is the place where a person has his/her habitual abode, whilst the domicile is the place where the person has the principal center of his businesses and interests.

    Exemptions

    The special tax regime exempts any foreign income from the Italian individual income tax (IRPEF).

    In particular the exemption applies to:

    • income from self-employment generated from activities carried out abroad;
    • income from business activities carried out abroad through a permanent establishment;
    • income from employment carried out abroad;
    • income from a property owned abroad;
    • interests from foreign bank accounts;
    • capital gains from the sale of shares in foreign companies;

    However, according to an anti-avoidance provision, the exemption does not apply to capital gains deriving from the sale of “substantial” participations that occur within the first five tax years of the validity of the special tax regime. “Substantial” participations are, in particular, those representing more than 2% of the voting rights or 5% of the capital of listed companies or 20% of the voting rights or 25% of the capital of non-listed companies.

    Any Italian source income shall be subject to regular income taxation.

    It must be underlined that, under the special tax regime no foreign tax credit will be granted for taxes paid abroad. However, the taxpayer is allowed to exclude income arising in one or more foreign jurisdictions from the application of the special regime. This income will then be subject to the ordinary tax rule and the foreign tax credit will be granted.

    The special tax regime exempts the taxpayer also from the obligation to report foreign assets in the annual tax return and from the payment of the IVIE and the IVAFE.

    Finally, the special tax regime provides for the exemption from the inheritance and gift tax with regard to transfers by inheritance or donations made during the period of validity of the regime. The exemption is limited to assets and rights existing in the Italian territory at the time of the donation or the inheritance.

    Substitutive Tax and Family Members

    The taxpayer must pay an annual substitutive tax of EUR 100,000 regardless of the amount of foreign income realised.

    The special tax regime can be extended to family members by paying an additional EUR 25,000 substitutive tax for each person included in the regime, provided that the same conditions, applicable to the qualifying taxpayer, are met.

    In particular, the extension is applicable to

    • spouses;
    • children and, in their absence, the direct relative in the descending line;
    • parents and, in their absence, the direct relative in the ascending line;
    • adopters;
    • sons–in-law and daughters-in-law;
    • fathers-in-law and mothers-in-law;
    • brothers and sisters.

    How to apply

    The option shall be made either in the tax return regarding the year in which the taxpayer becomes resident in Italy, or in the tax return of the following year.

    Qualifying taxpayer may also submit a non-binding ruling request to the Italian Revenue Agency, in order to prove that all requirements to access the special regime are met. The ruling can be filed before the transfer of the tax residence to Italy.

    The Revenue Agency shall respond within 120 days as from the receipt of the request. The reply is not binding for the taxpayer, but it is binding for the Revenue Agency.

    If no ruling request is filed, the same information provided in the request must be provided together with the tax return where the election is made.

    Termination

    The option for the special tax regime is automatically renewed each year and it ends, in any case, after fifteen years from the first tax year of validity. However, the option can be revoked by the taxpayer at any time.

    In case of termination or revocation, family members included in the election are also automatically excluded from the regime.

    After the ordinary termination or revocation, it is no longer possible to apply for the special tax regime.

    The author of this post is Valerio Cirimbilla.

    On 25 May 2018, the EU Regulation 2016/679 came into force, concerning the « protection » of personal data (hereinafter the « Regulation » or « GDPR »). It is a Community legislative instrument aimed at strengthening the right of natural persons to have their personal data protected, which has been elevated to « fundamental right » in the Charter of Fundamental Rights of the European Union (Article 8 paragraph 1) and in the Treaty on the Functioning of the European Union (Article 16 paragraph 1).

    The Regulation has a direct application in Italian law and does not require any implementation by the national legislator. These provisions prevail over national laws. From a practical standpoint, this means that, in the event of a conflict between a provision contained in the Regulations and one provided for in the « old » Legislative Decree 196/2003, the earlier would prevail over the latter.

    The GDPR consists of 99 articles, of which only some constitute an in comparison with the preceding regime and bear specific relevance for the owners/managers of accommodation facilities.

    Indeed, the first novelty concerns the « explicit consent » for the processing of « sensitive » data and the decisions based on automated processing (including profiling -Article 22- ). It is, in fact, necessary for the client to express his consent in relation to the processing of these data independently of that relating to other data. The consent obtained before 25 May 2018 remains valid only if it meets the requirements below.

    It is required, for example, that the data owners modify their websites or promotional newsletters addressed to the customers. The latter need to be aware of the purposes for which the data is collected and of rights to which they are entitled. In order to subscribe to the newsletter, only the email address should be necessary, and if the owners request for more data, the purposes of such request ought to be specified. Before sending the subscription request, the customer must give his consent and accept the privacy policy. The privacy statement must be clearly accessible from the home page of the website. In particular, as to the newsletter, the privacy policy must also be indicated and linked in the relevant registration box.

    Substantial changes were also introduced in relation to the duties of the Data Controller and the Data Processor. Both profiles are important in the hotel industry.

    Now the Data Controller must (i) be able to prove that the data subject has consented to a specific processing, (ii) provide the contact details of the Data Protection Officer, (iii) declare the eventual transfer of the personal data towards third countries and, if so, through which means the transfer takes place, (iv) specify the retention period of the data or the criteria employed to establish the retention period, as well as the right to file a complaint with the supervisory authority; (v) indicate whether the processing involves automated decision-making processes (including profiling), and the expected consequences for the data subject concerned.

    The Data Protection Officer (“DPO”), on the other hand, is a professional (who can be internal or external to the structure) who guarantees the observance of the rules of the GPDR and the management and processing of the data.

    According to the new Regulation, the duties of this professional concern: (i) the keeping of the data processing reports (pursuant to Article 30, paragraph 2, of the Regulation), and (ii) the adoption of suitable technical and organisational measures to get the safety of the procedures (pursuant to Article 32 of the Regulation).

    The name of the DPO must be indicated in the privacy policy to be delivered to the customer. The relationship between the data protection officer and the data controller is governed by a contract that must strictly regulate the subjects set forth in paragraph 3 of the article 28 in order to demonstrate that the manager provides « sufficient guarantees » for the correct management and processing of data. The Officer can appoint a « sub-manager » but only for limited processing activities, in compliance with the provisions of the contract, and responds to the non-compliance of the sub-manager.

    In light of these provisions, the hotels will then have to make a more careful assessment of the risk deriving from data processing, prepare a detailed procedure as to enable the constant monitoring on, amongst others, the suitability of the treatment, and promptly notify a breach of the security procedure which involves the accidental disclosure of data, adapt its information to be delivered to the customer.

    Finally, it is worth noting that the penalties for violations of the GDPR can be very significant and reach up to 4% of the company’s turnover. As such, they are far more severe than those previously specified. It is, therefore, necessary to pay close attention to compliance with the GDPR since an incorrect or defective application can cause severe prejudices to the company.

    The author of this post is Giovanni Izzo.