Golden powers during the Covid-19 emergency: impact on M&A and corporate activities

Back to Corporate and M&A Law Committee publications

Paolo Consales

Pirola Pennuto Zei e Associati, Rome

paolo.consales@studiopirola.com

Covid-19 has had – and is still having – a major impact on economies and on productive systems all around the world. One of the most significant adverse impacts is on the turnover of companies and on their cash needs, which have increased while cash has become harder to obtain on the market without the government’s support. These circumstances can easily decrease an enterprise’s value, exposing companies to M&A transactions which do not reflect their real value.

Also in response to this issue, the Italian government introduced Law Decree No 23 on 8 April 2020 (referred to as the 'Cash Decree') that, inter alia, included provisions purposed to protect Italian strategic assets against takeover by foreign companies (and other parties). Under the Cash Decree, the government must be notified of an M&A transaction related to certain sectors, giving the government the opportunity to decide whether there are reasons for vetoing the transaction or for imposing particular conditions (the so-called ‘Golden Power’). 

The Cash Decree has just been converted into law, but some provisions are still not fully clear. Careful investigation into the obligation to notify the government about an M&A transaction is necessary before agreeing on a relevant sale and purchase agreement, so that it can include all the appropriate clauses related to the Golden Power. In particular the consequences on the transaction should be clarified if and when the Golden Power is actually exercised by the government. 

This article summarises the key points about the Cash Decree related to obligation to notify the government, as well as its impact on the existing Golden Power rules.

The Cash Decree

With regard to the Golden Power, the Cash Decree follows and implements the European Commission’s Communication of 26 March 2020 which urged Member States to adopt restrictive measures against foreign investments, if said measures are justified for reasons of security or public order. It also invited the Member States to implement investment control mechanisms in order to respond to any economic impacts resulting from the spread of Covid-19.

TheGolden Power, being a limitation to the principle of free competition, must be carefully exercised by the government, which shall always rely on objective and non-discriminatory criteria.

The Sunset Rule

Pursuant to Article 15 of the Cash Decree, in order to face the Covid-19 emergency, from 9 April 2020 until 31 December 2020 (referred to as the 'Sunset Rule'), the obligation to notify certain transactions and investments is provided for transactions and investments in the following sectors, listed in Article 4, paragraph 1, letters from (a) to (e) of the EU Regulation 2019/452 (referred to as the Sectors) as well as any subsequently indicated sector in a decree of the Prime Minister’s Office. The Sectors are:

1. critical infrastructures, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;

2. critical technologies and dual-use items (as listed in the EU Regulation 452/2019, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies);

3. supply of critical inputs, including energy or raw materials, as well as food security;

4. access to sensitive information, including personal data, or the ability to control such information; and

5. the freedom and pluralism of the media.

Pursuant to the Sunset Rule, the transactions to be notified are:

• any resolutions, acts or transactions – including mergers, changes of the corporate scope, moving of the registered office abroad, winding up of the company etc… – that have the effect of changing the ownership, the control or availability of assets or the change of their destination in the Sectors;
• also domestic and intra-group transactions must be notified, even if, for these latter transactions, the procedure for taking a decision by the government is simplified and the possibility for the government to veto or to indicate further conditions is restricted; and
• the purchase of a controlling shareholding in companies operating in the Sectors made by foreign companies. Transactions concerning energy, transportation and communications sectors are included among those to be notified.

Under the Sunset Rule, the obligation to previously notify these acquisitions of shareholding is applicable both to purchases made by EU companies and by non-EU companies. For the transaction made by a non-EU company, the Golden Power rules applies also to non-controlling investments, since the obligation to notify the transaction by non-EU companies is triggered when they achieve the ten per cent of the voting rights and/or of the corporate capital (considering also the shareholding already owned and provided that the value of the investment is no lower than €1m), as well as if they intend to overcome any of the thresholds of 15 per cent, 20 per cent, 25 per cent and 50 per cent of the corporate capital.

The Golden Power applicable even after the Sunset Rule as modified by the Cash Decree

The Cash Decree also modified the existing provisions concerning the Golden Power that were, most recently, amended with the Law Decree No 105/2019 (subsequently duly converted into law) and for whose application Prime Minister’s Office decrees -- not yet issued -- were required.

Considering the need to give immediate enforceability to the already existing Golden Power rules, even without and before the issuance of the Prime Minister’s Office decrees and regardless the Sunset Rule, the Cash Decree stated that, until the relevant decrees of the Prime Minister’s Office are issued, the transfer, at any title (eg, also via contribution in kind), of participation in any company operating in any of the Sectors must be notified to the Government[1]..

Considering the wording of the law provision and the report drafted by the Parliament, during the process to examine and convert the Cash Decree into law (and even if the law provision is not totally clear), this obligation to notify only applies to acquisitions involving a change of control made by non-EU subjects.

These provisions shall apply regardless (and in addition) to the Sunset Rule and, therefore, shall be applicable immediately and also after 31 December 2020.

With regard to the Sectors for which notification is requested even after the expiration of the Sunset Rule, the law that converted the Cash Decree also specified that, when reference is made to:

1. the financial sector, it includes the credit and the insurance sectors; and

2. the healthcare sector, it includes the production, importation and wholesale distribution of medical devices, medical surgery devices and devices for personal protection. 

Considering the above, we may say that, at least until 31 December 2020, the Sunset Rule may create an overlap with respect to the Golden Power rules to be applied independently from the Covid-19 emergency.

The other main innovation of the Cash Decree applicable also independently form the Sunset Rule

The other main innovations of the Cash Decree, applicable not only with regard to the period of the Covid-19 emergency, make reference to:

• the requirements triggering the obligation to notify transactions to the government;

• the government’s power to start a procedure even without having received a prior notification; and

• the extension of the powers granted to the National Commission for Companies and Stock Exchange ('Consob').  

If the relevant requirements occur, the notification must be performed by the interested party within ten days of the acquisition or the adoption of the relevant resolution. In the case of a transaction such as a merger, the notification must be sent after the approval of the merger by shareholders[2] (if the merger is not to be approved by shareholders, the starting date is from the approval of the merger by the BoD). 

A practical suggestion could be to send an informal communication to the Prime Minister’s Office providing the information regarding the transaction/resolution to be made before sending the official notification; such an approach might speed up the process for the release of the relevant decision by the Prime Minister’s Office when the official notification is made.

The procedure and the timing

With regard to the procedure and, in particular, to the timing (usually of essence in the M&A transactions), the government has 45 days from the notification to either:

• approve the transaction/resolution;

• veto the resolutions and/or the transaction (whichever is the case);

• impose specific conditions; or

• request additional information.

In this last situation, the elapsing of the term is suspended until the requested information are provided to the Government; the requested information must be provided:

• within ten days if the information is required from one of the parties involved in the transaction or in the resolution; or

• within 20 days if the information is requested from a third party.

Additional information requests do not imply a further suspension of the term. In the event the government does not reply by the end of the term, the transaction/resolution is considered approved.

With regard to transactions completed in specific sectors (such as the acquisition of banks that are ruled by the Consolidated Banking Law with specific powers granted to the Bank of Italy in case of acquisition of shareholding in banks), without prejudice of the obligation to notify the government of a transaction if the relevant requirement occur, the government is entitled to exercise the Golden Power only in case the special regulation does not sufficiently safeguard the national interests.

Particular attention must be paid to the Golden Power rules when evaluating an M&A transaction, including the Sunset Rule. If the applicable provisions are breached, the relevant deeds are void. Furthermore, if the government is not notified a transaction/resolution when due:

• the government is entitled to autonomously start a procedure for evaluating the impact of the relevant transaction/resolution; and

• if the violation is not a crime, an administrative sanction equal to twice the value of the transaction and not lower than 1 per cent of the turnover resulting from the last approved financial statements of the companies involved in the transaction/resolution will be applied.

Last but not least, rumours were circling that the government is working on a draft of a Prime Minister’s decree that will definitively implement the Golden Power rules and will clearly identify which transactions are actually subject to the notification obligation. We will provide a further update on the relevant provisions when the final draft of such a decree is available and definitively approved.  

Back to Corporate and M&A Law Committee publications