Italy – capital increases: a new rule complicates the position of minority shareholders

24 Outubro 2020

Itália

Empresa
Capital de risco

Summary

By means of Legislative Decree No. 198 of November 8^th, 2021, Italy implemented Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain. The Italian legislator introduced stricter rules than those provided for in the directive. Moreover, it has provided for some mandatory contractual requirements, within the framework of Article 168 of Regulation (EC) 1308/2013, but more restrictive than those of the Regulation. The new provisions shall apply irrespective of the law applicable to the contract and the country of the buyer, hence they concern cross-border relationships as well. They significantly impact contractual relationships related to the chain of fresh and processed food products, including wine, and certain non-food agricultural products, and require companies in the concerned sectors to review their contracts and business practices with respect to their relationships with customers and suppliers.

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022.

Introduction

With Directive (EU) 2019/633, the EU legislator introduced a detailed set of unfair trading practices in business-to-business relationships in the agricultural and food supply chain, in order to tackle unbalanced trading practices imposed by strong contractual parties. The directive has been transposed in Italy by Legislative Decree No. 198 of November 8^th, 2021 (it came into force on December 15^th, 2021), which introduced a long list of provisions qualified as unfair trading practices in the context of business-to-business relationships in the agricultural and food supply chain. The list of unfair practices is broader than the one provided for in the EU directive.

The transposition of the directive was also the opportunity to introduce some mandatory requirements to contracts for the supply of goods falling within the scope of the decree. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those provided for in Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019.

Scope of application

The legislation applies to commercial relationships between buyers (including the public administration) and suppliers of agricultural and food products and in particular to B2B contracts having as object the transfer of such products.

It does not apply to agreements in which a consumer is party, to transfers with simultaneous payment and delivery of the goods and transfers of products to cooperatives or producer organisations within the meaning of Legislative Decree 102/2005.

It applies, inter alia, to sale, supply and distribution agreements.

Agricultural and food products means the goods listed in Annex I of the Treaty on the Functioning of the European Union, as well as those not listed in that Annex but processed for use as food using listed products. This includes all products of the agri-food chain, fresh and processed, including wine, as well as certain agricultural products outside the food chain, including animal feed not intended for human consumption and floricultural products.

The rules apply to sales made by suppliers based in Italy, whilst the country where the buyer is based is not relevant. It applies irrespective of the law applicable to the relationship between the parties. Therefore, the new rules also apply in case of international contractual relationships subject to the law of another country.

In transposing the directive, the Italian legislator decided not to take into consideration the “size of the parties”: while the directive provides for turnover thresholds and applies to contractual relations in which the buyer has a turnover equal to or greater than the supplier, the Italian rules apply irrespective of the turnover of the parties.

Contractual requirements

Article 3 of the decree introduced some mandatory requirements for contracts for the supply or transfer of agricultural and food products. These requirements, adopted in the framework of Article 168 of Regulation (EC) 1308/2013, replaced and extended those established by Article 62 of Decree-Law 1/2012 and Article 10-quater of Decree-Law 27/2019 (which had been repealed).

Contracts must comply with the principles of transparency, fairness, proportionality and mutual consideration of performance.

Contracts must be in writing. Equivalent forms (transport documents, invoices and purchase orders) are only allowed if a framework agreement containing the essential terms of future supply agreements has been entered into between supplier and buyer.

Of great impact is the requirement for contracts to have a duration of at least 12 months (contracts with a shorter duration are automatically extended to the minimum duration). The legislator requires companies in the supply chain (with some exceptions) to operate not with individual purchases but with continuous supply agreements, which shall indicate the quantity and characteristics of the products, the price, the delivery and payment method.

A considerable operational change is required due to the need to plan and contract quantities and prices of supplies. As far as the price is concerned, it no longer seems possible to agree on it from time to time during the relationship on the basis of orders or new price lists from the supplier. The price may be fixed or determinable according to the criteria laid down in the contract. Therefore, companies not intending to operate at a fixed price will have to draft contractual clauses containing the criteria for determining the price (e.g. linking it to stock exchange quotations, fluctuations in raw material or energy prices).

The minimum duration of at least 12 months may be waived. However, the derogation shall be justified, either by the seasonality of the products or other reasons (that are not specified in the decree). Other reasons could include the need for the buyer to meet an unforeseen increase in demand, or the need to replace a lost supply.

The provisions described above may also be derogated from by framework agreements concluded by the most representative business organisations.

Prohibited unfair trading practices and specific derogations

The decree provides for several cases qualified as unfair trading practices, some of which are additional to those provided for in the directive.

Article 4 contains two categories of prohibited practices, which transpose those of the directive.

The first concerns practices which are always prohibited, including, first of all, payment of the price after 30 days for perishable products and after 60 days for non-perishable products. This category also includes the cancellation of orders for perishable goods at short notice; unilateral amendments to certain contractual terms; requests for payments not related to the sale; contractual clauses obliging the supplier to bear the cost of deterioration or loss of the goods after delivery; refusal by the buyer to confirm the contractual terms in writing; the acquisition, use and disclosure of the supplier’s trade secrets; the threat of commercial retaliation by the buyer against the supplier who intends to exercise contractual rights; and the claim by the buyer for the costs incurred in examining customer complaints relating to the sale of the supplier’s products.

The second category relates to practices which are prohibited unless provided for in a written agreement between the parties: these include the return of unsold products without payment for them or for their disposal; requests to the supplier for payments for stoking, displaying or listing the products or making them available on the market; requests to the supplier to bear the costs of discounts, advertising, marketing and personnel of the buyer to fitting-out premises used for the sale of the products.

Article 5 provides for further practices always prohibited, in addition to those of the directive, such as the use of double-drop tenders and auctions (“gare ed aste a doppio ribasso”); the imposition of contractual conditions that are excessively burdensome for the supplier; the omission from the contract of the terms and conditions set out in Article 168(4) of Regulation (EU) 1308/2013 (among which price, quantity, quality, duration of the agreement); the direct or indirect imposition of contractual conditions that are unjustifiably burdensome for one of the parties; the application of different conditions for equivalent services; the imposition of ancillary services or services not related to the sale of the products; the exclusion of default interest to the detriment of the creditor or of the costs of debt collection; clauses imposing on the supplier a minimum time limit after delivery in order to be able to issue the invoice; the imposition of the unjustified transfer of economic risk on one of the parties; the imposition of an excessively short expiry date by the supplier of products, the maintenance of a certain assortment of products, the inclusion of new products in the assortment and privileged positions of certain products on the buyer’s premises.

A specific discipline is provided for sales below cost: Article 7 establishes that, as regards fresh and perishable products, this practice is allowed only in case of unsold products at risk of perishing or in case of commercial operations planned and agreed with the supplier in writing, while in the event of violation of this provision the price established by the parties is replaced by law.

Sanctioning system and supervisory authorities

The provisions introduced by the decree, as regards both contractual requirements and unfair trading practices, are backed up by a comprehensive system of sanctions.

Contractual clauses or agreements contrary to mandatory contractual requirements, those that constitute unfair trading practices and those contrary to the regulation of sales below cost are null and void.

The decree provides for specific financial penalties (one for each case) calculated between a fixed minimum (which, depending on the case, may be from 1,000 to 30,000 euros) and a variable maximum (between 3 and 5%) linked to the turnover of the offender; there are also certain cases in which the penalty is further increased.

In any event, without prejudice to claims for damages.

Supervision of compliance with the provisions of the decree is entrusted to the Central Inspectorate for the Protection of Quality and Fraud Repression of Agri-Food Products (ICQRF), which may conduct investigations, carry out unannounced on-site inspections, ascertain violations, require the offender to put an end to the prohibited practices and initiate proceedings for the imposition of administrative fines, without prejudice to the powers of the Competition and Market Authority (AGCM).

Recommended activities

The provisions introduced by the decree also apply to existing contracts, which shall be made compliant by 15 June 2022. Therefore:

the companies involved, both Italian and foreign, should carry out a review of their business practices, current contracts and general terms and conditions of supply and purchase, and then identify any gaps with respect to the new provisions and adopt the relevant corrective measures.
As the new legislation applies irrespective of the applicable law and is EU-derived, it will be important for companies doing business abroad to understand how the EU directive has been implemented in the countries where they operate and verify the compliance of contracts with these rules as well.

Summary: Article 44 of Decree Law No. 76 of July 16, 2020 (the so-called “Simplifications Decree“) provides that, until June 30, 2021, capital increases by joint stock companies (società per azioni), limited partnerships by shares (società in accomandita per azioni) and limited liability companies (società a responsabilità limitata) may be approved with the favorable vote of the majority of the share capital represented at the shareholders’ meeting, provided that at least half of the share capital is present, even if the bylaws establish higher majorities.

The rule has a significant impact on the position of minority shareholders (and investors) of unlisted Italian companies, the protection of which is frequently entrusted (also) to bylaws clauses establishing qualified majorities for the approval of capital increases.

After describing the new rule, some considerations will be made on the consequences and possible safeguards for minority shareholders, limited to unlisted companies.

Simplifications Decree: the reduction of majorities for the approval of capital increases in Italian joint stock companies, limited partnerships by shares and limited liability companies

Article 44 of Decree Law No. 76 of July 16, 2020 (the so-called ‘Simplifications Decree‘)[1] temporarily reduced, until 30.6.2021, the majorities for the approval by the extraordinary shareholders’ meeting of certain resolutions to increase the share capital.

The rule applies to all companies, including listed ones. It applies to resolutions of the extraordinary shareholders’ meeting on the following subjects:

capital increases through contributions in cash, in kind or in receivables, pursuant to Articles 2439, 2440 and 2441 (regarding joint stock companies and limited partnerships by shares), and to Articles 2480, 2481 and 2481-bis of the Italian Civil Code (regarding limited liability companies);
the attribution to the directors of the power to increase the share capital, pursuant to Article 2443 (regarding joint stock companies and limited partnerships by shares) and to Article 2480 of the Italian Civil Code (regarding limited liability companies).

The ordinary rules provide the following mayorities:

(a) for joint stock companies and limited partnerships by shares: (i) on first call a majority of more than half of the share capital (Art. 2368, second paragraph, Italian Civil Code); (ii) on second call a majority of two thirds of the share capital presented at the meeting (Art. 2369, third paragraph, Italian Civil Code);

(b) for limited liability companies, a majority of more than half of the share capital (Art. 2479-bis, third paragraph, Italian Civil Code);

(c) for listed companies, a majority of two thirds of the share capital represents-to in the shareholders’ meeting (Art. 2368, second paragraph and Art. 2369, third paragraph, Italian Civil Code).

Most importantly, the ordinary rules allow for qualified majorities (i.e., higher than those required by law) in the bylaws.

The temporary provisions of Article 44 of the Simplifications Decree provide that resolutions are approved with the favourable vote of the majority of the share capital represented at the shareholders’ meeting, provided that at least half of the share capital is present. This majority also applies if the bylaws provide for higher majorities.

Simplifications Decree: the impact of the decrease in majorities for the approval of capital increases on minority shareholders of unlisted Italian companies

The rule has a significant impact on the position of minority shareholders (and investors) in unlisted Italian companies. It can be strongly criticised, particularly because it allows derogations from the higher majorities established in the bylaws, thus affecting ongoing relationships and the governance agreed between shareholders and reflected in the bylaws.

Qualified majorities, higher than the legal ones, for the approval of capital increases are a fundamental protection for minority shareholders (and investors). They are frequently introduced in the bylaws: when the company is set up with several partners, in the context of aggregation transactions, in investment transactions, private equity and venture capital transactions.

Qualified majorities prevent majority shareholders from carrying out transactions without the consent of minority shareholders (or some of them), which have a significant impact on the company and the position of minority shareholders. In fact, capital increases through contributions of assets reduce the minority shareholder’s shareholding percentage and can significantly change the company’s business (e.g. through the contribution of a business). Capital increases in cash force the minority shareholder to choose between further investing in the company or reducing its shareholding.

The reduction in the percentage of participation may imply the loss of important protections, linked to the possession of a participation above a certain threshold. These are not only certain rights provided for by law in favour of minority shareholders[2], but – with even more serious effects – the protections deriving from the qualified majorities provided for in the bylaws to approve certain decisions. The most striking case is that of the qualified majority for resolutions amending the bylaws, so that the amendments cannot be approved without the consent of the minority shareholders (or some of them). This is a fundamental clause, in order to ensure stability for certain provisions of the bylaws, agreed between the shareholders, that protect the minority shareholders, such as: pre-emption and tag-along rights, list voting for the appointment of the board of directors, qualified majorities for the taking of decisions by the shareholders’ meeting or the board of directors, limits on the powers that can be delegated by the board of directors. Through the capital increase, the majority can obtain a percentage of the shareholding that allows it to amend the bylaws, unilaterally departing from the governance structure agreed with the other shareholders.

The legislator has disregarded all this and has introduced a rule that does not simplify. Rather, it fuels conflicts between the shareholders and undermines legal certainty, thus discouraging investments rather than encouraging them.

Simplifications Decree: checks and safeguards for minority shareholders with respect to the decrease in majorities for the approval of capital increases

In order to assess the situation and the protection of the minority shareholder it is necessary to examine any shareholders’ agreement in force between the shareholders. The existence of a shareholders’ agreement will be almost certain in private equity or venture capital transactions or by other professional investors. But outside of these cases there are many companies, especially among small and medium-sized enterprises, where the relationships between the shareholders are governed exclusively by the bylaws.

In the shareholders’ agreement it will have to be verified whether there are clauses binding the shareholders, as parties to the agreement, to approve capital increases by qualified majority, i.e. higher than those required by law. Or whether the agreement make reference to a text of the bylaws (attached or by specific reference) that provides for such a majority, so that compliance with the qualified majority can be considered as an obligation of the parties to the shareholders’ agreement.

In this case, the shareholders’ agreement will protect the minority shareholder(s), as Article 44 of the Simplifications Decree does not introduce an exception to the clauses of the shareholders’ agreement.

The protection offered by the shareholders’ agreement is strong, but lower than that of the bylaws. The clause in the bylaws requiring a qualified majority binds all shareholders and the company, so the capital increase cannot be validly approved in violation of the bylaws. The shareholders’ agreement, on the other hand, is only binding between the parties to the agreement, so it does not prevent the company from approving the capital increase, even if the shareholder’s vote violates the obligations of the shareholders’ agreement. In this case, the other shareholders will be entitled to compensation for the damage suffered as a result of the breach of the agreement.

In the absence of a shareholders’ agreement that binds the shareholders to respect a qualified majority for the approval of the capital increase, the minority shareholder has only the possibility of challenging the resolution to increase the capital, due to abuse of the majority, if the resolution is not justified in the interest of the company and the majority shareholder’s vote pursues a personal interest that is antithetical to the company’s interest, or if it is the instrument of fraudulent activity by the majority shareholders aimed at infringing the rights of minority shareholders[3]. A narrow escape, and a protection certainly insufficient.

[1] The Simplifications Decree was converted into law by Law no. 120 of September 11, 2020. The conversion law replaced art. 44 of the Simplifications Decree, extending the temporary discipline provided therein to capital increases in cash and to capital increases of limited liability companies.

[2] For example: the percentage of 10% (33% for limited liability companies) for the right of shareholders to obtain the call of the meeting (art. 2367; art. 2479 Italian Civil Code); the percentage of 20% (10% for limited liability companies) to prevent the waiver or settlement of the liability action against the directors (art. 2393, sixth paragraph; art. 2476, fifth paragraph, Italian Civil Code); the percentage of 20% for the exercise by the shareholder of the liability action against the directors (art. 2393-bis, Civil Code).

[3] Cass. Civ., 12 December 2005, no. 27387; Trib. Roma, 31 March 2017, no. 6452.

In 2019 the Private Equity and Venture Capital players have invested Euro 7,223 million in 370 transactions in the Italian Market, 26% less than 2018; these are the outcomes released on March 24^th by AIFI (Italian Association of Private Equity, Venture Capital e Private Debt).

In this slowing down scenario the spreading of Covid-19 is impacting Private Equity and Venture Capital transactions currently in progress, thus raising implications and alerts that will considerably affect both further capital investments and the legal approach to investments themselves.

Companies spanning a wide range of industries are concerned by Covid-19 health emergency, with diverse impacts on businesses depending on the industry. In this scenario, product companies, direct-to-consumer companies, and retail-oriented businesses appear to be more affected than service, digital, and hi-tech companies. Firms and investors will both need to batten down the hatches, as to minimize the effects of the economic contraction on the on-going investment transactions. In this scenario, investors hypothetically backing off from funding processes represent an issue of paramount concern for start-ups, as these companies are targeted by for VC and PE investments. In that event, the extent of the risk would be dependent upon the investment agreements and share purchase agreements (SPAs) entered into and the term sheets approved by the parties.

MAC/MAE clauses

The right of investors to withdrawal (way out) from a transaction is generally secured by the so-called MAC or MAE clauses – respectively, material adverse change clause or material adverse effect. These clauses, as the case may be and in the event of unforeseeable circumstances, upon the subscription of the agreements, which significantly impact the business or particular variables of the investment, allow investors to decide not to proceed to closing, not to proceed to the subscription and the payment of the share capital increase, when previously resolved, to modify/renegotiate the enterprise value, or to split the proposed investment/acquisition into multiple tranches.

These estimates, in terms of type and potential methods of application of the clauses, usually depend on a number of factors, including the governing law for the agreements – if other than Italian – with this circumstance possibly applying in the case of foreign investors imposing the existing law in their jurisdiction, as the result of their position in the negotiation.

When the enforcement of MAC/MAE clauses leads to the modification/renegotiation of the enterprise value – that is to be lowered – it is advisable to provide for specific contract terms covering calculating mechanisms allowing for smoothly redefining the start-up valuation in the venture capital deals, with the purpose of avoiding any gridlocks that would require further involvement of experts or arbitrators.

In the absence of MAC/MAE clauses and in the case of agreements governed by the Italian law, the Civil Code provides for a contractual clause called ‘supervenient burdensomeness’ (eccessiva onerosità sopravvenuta) of a specific performance (i.e. the investment), with the consequent right for the party whose performance has become excessively burdensome to terminate the contract or to make changes to the contract, with a view to fair and balanced conditions – this solution however implies an inherent degree of complexity and cannot be instantly implemented. In case of agreements governed by foreign laws, it shall be checked whether or not the applicable provisions allow the investor to exit the transaction.

Interim Period clauses

MAC/MAE are generally negotiated when the time expected to closing is medium or long. Similarly, time factors underpin the concept of the Interim Period clauses regulating the business operation in the period between signing and closing, by re-shaping the company’s ordinary scope of business, i.e. introducing maximum expenditure thresholds and providing for the prohibition to execute a variety of transactions, such as capital-related transactions, except when the investors, which shall be entitled to remove these restrictions from time to time, agree otherwise.

It is recommended to ascertain that the Interim Period clauses provide for a possibility to derogate from these restrictions, following prior authorization from the investors, and that said clauses do not require, where this possibility is lacking, for an explicit modification to the provision because of the occurrence of any operational need due to the Covid-19 emergency.

Conditions for closing

The Government actions providing for measures to contain coronavirus have caused several slowdowns that may impact on the facts or events that are considered as preliminary conditions which, when occurring, allow to proceed to closing. Types of such conditions range from authorisations to public entities (i.e. IPs jointly owned with a university), to the achievement of turnover objectives or the completion of precise milestones, that may be negatively affected by the present standstill of companies and bodies. Where these conditions were in fact jeopardised by the events triggered by the Covid-19 outbreak, this would pose important challenges to closing, except where expressly provided that the investor can renounce, with consent to proceed to the investment in all cases. This is without prejudice to the possibility of renegotiating the conditions, in agreement with all the parties.

Future investments: best practice

Covid-19 virus related emergency calls for a change in the best practice of Private Equity and Venture Capital transactions: these should carry out detailed Due diligences on aspects which so far have been under-examined.

This is particularly true for insurance policies covering cases of business interruption resulting from extraordinary and unpredictable events; health insurance plans for employees; risk management procedures in supply chain contracts, especially with foreign counterparts; procedures for smart working and relevant GDPR compliance issues in case of targeted companies based in EU and UK; contingency plans, workplace safety, also in connection with the protocols that ensure ad-hoc policies for in-house work.

Investment protection should therefore also involve MAC/MAE clauses and relevant price adjustment mechanisms, including for the negotiation of contract-related warranties (representation & warranties). A special focus shall be given now, with a different approach, to the companies’ ability to tackle and minimize the risks that may arise from unpredictable events of the same scope as Covid-19, which is now affecting privacy systems, the workforce, the management of supply chain contracts, and the creditworthiness of financing agreements.

This emergency will lead investors to value the investments with even greater attention to information, other than financial ones, about targeted companies.

Indeed, it is mandatory today to gain overview on the resilience of businesses, in terms of structure and capability, when these are challenged by the exogenous variables of the market on the one side, and by the endogenous variables on the other side – to be now understood as part of the global economy.

There is however good news: Venture Capital and Private Equity, like any other ecosystem, will have its own response capacity and manage to gain momentum, as it happened in 2019 when Italy witnessed an unprecedented increase in investments. The relevant stakeholders are already developing coping strategies. Transactions currently in progress are not halted – though slowed down. Indeed, the quarantine does not preclude negotiations or shareholders’ meetings, which are held remotely or by videoconference. This also helps dispel the notion that meetings can only be conducted by getting the parties concerned round the same table.

The author of this post is Milena Prisco.

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?

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.
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.
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.
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.
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.

Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

Topics covered

The impact of Coronavirus (Covid-19) on the international Supply chain
What is Force Majeure?
The Force Majeure Contract Clause
What is Hardship?
Is the Coronavirus a Force Majeure or Hardship event?
What is the event reported by the Supplier?
Did the Supplier provide evidence of Force Majeure?
Does the contract establish a Force Majeure or Hardship clause?
What does the law applicable to the Contract establish?
How to limit supply chain risks?

The impact of Coronavirus (Covid-19) on the international Supply chain

Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

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What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

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If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

What is Force Majeure?

At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

The Force Majeure Contract Clause

The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

Give prompt notice to the other parties of the impediment;
In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
In the event of termination of the contract, return any service received or an amount of equivalent value.

Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

What is Hardship?

Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

Is the Coronavirus a Force Majeure or Hardship event?

Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

The factual situation: what is the event reported by the Supplier?
Has the party invoking Force Majeure proven that the requirements exist?
What does the Contract (and/or the General Conditions of Contract) provide for?
What does the law applicable to the Contract establish?
What are the consequences on the obligations of the Parties?

What is the event reported by the Supplier?

As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

Did the Supplier provide evidence of Force Majeure?

The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

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Does the contract establish a Force Majeure or Hardship clause?

The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

Finally, it is still necessary to verify what is established by the law applicable to the contract.

What does the law applicable to the Contract establish?

The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

How to limit supply chain risks?

The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

Finally, it is important to remember that most laws establish a responsibility of the non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

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:

any sign which is identical to the trademark for goods or services which are identical to those for which the trademark is registered;
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;
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.

Simone Rossi

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