Frequency of M&A disputes

While there are no official statistics on the frequency of M&A disputes in Italy, it is possible to identify certain trends by comparing international and domestic official reports and figures concerning M&A volumes and caseload data.

At international level:

  • with regard to M&A volumes, it is possible to say that after a steady and unprecedented rise over a number of years, in 2019 global M&A volumes will slowdown at a rate of 4 to 7 per cent;[2] and
  • with regard to caseload, although there is no official record of disputes, useful information may be found in the study of claims made under policies for warranty and indemnity (W&I) insurance published by AIG, the world’s biggest insurance provider, a source that has now become a very familiar tool for lawyers. This study concludes that roughly 20 per cent of the deals in which AIG provided a W&I policy trigger a claim.[3]

At national level:

  • with regard to M&A volumes, the same global slowdown affected the Italian market – in the first quarter of 2019 there were 165 transactions with an overall value of €4.2 billion (compared with €10 billion in the same period in 2018);[4] and
  • with regard to caseload, there are no statistics specifically concerning M&A disputes and we have to base our analysis on more general data concerning corporate matters (a category that includes M&A disputes):
  • according to the data released by the Milan Chamber of Arbitration, arbitration has witnessed steady growth since 2007, reaching a constant high of roughly 130 new cases per year, of which 28 per cent concerned corporate matters in 2018;[5] and
  • according to official data released by the Ministry of Justice, Italian commercial courts[6] have witnessed constant growth in terms of caseload since 2012.[7]

A comparison of these figures, combined with anecdotal evidence, suggests that M&A disputes have become – even with fluctuations determined by market trends and issues – a very common feature on the global stage and in Italy.

This trend is likely to continue because even the most sophisticated share purchase agreements and the best trained and most highly skilled counsel are not able to avoid possible disputes, considering the very particular nature of the transaction and the manifold factors and assets capable of triggering hidden and undisclosed liabilities. These very specific characteristics, combined with certain complex and special substantive issues typical of the Italian legal system that are dealt with below, require that when a dispute arises, it has to be carefully scrutinised by a specialist counsel.

Form of dispute resolution

Beyond any doubt, parties to international and large-scale M&A transactions opt for arbitration clauses and this is also true in Italy. Scholars hold that there are several reasons for this choice.

Privacy and confidentiality are two of the most attractive characteristics that make arbitration favourable over litigation, and are highly important, considering that entering a dispute involves the disclosure of due diligence reports, business plans, pending litigation, tax assessments and other sensitive issues disclosed and exchanged between the parties during negotiations (which the seller and buyer do not want to disclose). The level of privacy and confidentiality ensured by arbitration cannot be compared with the level granted in proceedings pending before ordinary Italian courts.

Perceived neutrality also plays an important role in the prevalence of arbitration over litigation, which is understandable if one considers that in international deals a party may not trust the court system in the counterparty’s country or may simply be unfamiliar with the procedural rules of a certain country.

Moreover, flexibility allows the parties, together with the arbitral tribunal, to schedule a case timetable. This is not possible before a court and the Italian Civil Procedure Code sets tight and mandatory deadlines.[8]

However, the main reason that arbitral proceedings are favoured over court cases is the robust M&A expertise of the arbitrators and experts.

The opportunity for parties and the arbitral institution to appoint members of the arbitral tribunal, ensures that the dispute will be decided by professionals who are familiar with the topics under discussion, although Italian judges also have a high level of expertise, particularly in the commercial courts.

In that regard, the distinctive feature of arbitration lies in the quality of the expert appointed to assess the technical matters at stake; only in an arbitration is it possible to ensure that the expert appointed has the appropriate training and skills, and suitable M&A expertise. In contrast, in a court case, an Italian judge appoints an expert by choosing one of the professionals in a specific list available at each court; this could result in the appointment of professionals who do not have the necessary level of M&A expertise and knowledge of the underlying technical issues.[9]

The other reason for arbitration prevailing over litigation is that, with the exception of some important decisions of the Italian Supreme Court, the ordinary courts rarely have the chance to issue decisions on these topics, which prevents the development of case law (although the confidentiality of arbitration awards also inhibits the development of precedent).

Grounds for M&A arbitrations

There are no official statistics on the grounds for M&A arbitrations in Italy, which means there can be no reliable analysis or assessment. The confidential nature of arbitration – one of its most appealing traits – does not make the task easier. It is possible to state, however, that the most frequent claims are based on breaches of representations and warranties.[10]

M&A arbitration often arises from price-adjustment and earn-out issues. It is very rare for arbitration to arise from failure to complete the transaction.

Fraud and failure to disclose

In broad terms, parties that are in the process of negotiating a contract are requested to act in good faith; in an M&A deal, the seller has to give the buyer a fair representation of the most relevant characteristics of the target company. This process may be altered by certain circumstances – some of which may be brought about by the deceptive conduct of the seller, including fraud and failure to disclose – that may, in principle, entitle the buyer to set aside the agreement.

Nevertheless, whatever the factors – including the conduct of the parties to an M&A deal – that may potentially influence the validity of the agreement, the liability arising out of any of these elements requires unambiguity on an essential and cardinal point: the object of the M&A deal.

Italian case law and scholars unquestionably affirm that the object of an M&A deal is represented by the shares[11] and not by the assets and the goods belonging to the company sold.[12] This means that if after closing it emerges that the company or its assets do not have the qualities and characteristics that induced the buyer to negotiate and conclude the deal, the ordinary, legal guarantees provided by Italian law in connection with sale and purchase agreements are not available to the buyer.[13]

This is the first principle to be considered when approaching these topics under Italian law: legal guarantees available to the buyer in the case of defective goods sold – namely, the guarantees provided for by the Italian Civil Code – provide coverage only in the case of defects concerning the object of the sale (the shares) and not if they are related to the assets of the company sold (and represented by the shares).

This is the reason why it is essential to include in the M&A deal an accurate and comprehensive core of business representations and warranties; only in this way, can the buyer obtain protection against a mismatch between representation and reality.

After a very passionate and long debate that involved – and is still involving – scholars, arbitral tribunals and ordinary courts, it seems clear, after a decision issued by the Supreme Court in 2014,[14] that the business warranties do not have anything to do with the legal warranties set forth by Italian law and are covenants through which the seller undertakes to indemnify the buyer upon occurrence of a breach of one or all of the W&Is indicated in the agreement, and they are not related to the breach of the obligation to sell the shares.

This is the second principle to be considered when approaching these topics under Italian law: the W&Is set forth in an M&A agreement are not related to the object of the agreement and do not widen its scope, which remains limited to the shares.

Furthermore, M&A deals regularly provide for sole remedy clauses limiting the buyer’s right to an indemnity to be awarded according to a detailed procedure.

In this scenario, the spectrum of circumstances theoretically able in an M&A agreement to alter the negotiation process (such as the deceptive conduct of the seller or other causes) and to trigger consequences for the validity of the agreement appears more limited than in any other agreement.

Accordingly, if the buyer discovers that the company and its assets do not have the characteristics guaranteed, it cannot invoke nullity on the grounds of an error, since under Italian law the error must not only be significant (i.e., of such importance as to have induced the buyer to execute the agreement[15] and distinguishable by the other party),[16] but also related to the object of the agreement (namely, it must be related to the shares – and not to the assets and their value).

On the contrary – and for the same reasons seen from the opposite angle – the buyer should be in principle entitled to invoke the wilful misconduct of the seller,[17] the ‘underlying condition’[18] and the aliud pro alio,[19] as based on grounds that are not strictly related to the object of the agreement. However, although these remedies are theoretically available, they are hardly applicable in the case of a M&A agreement.

Burden of proof

Under Italian law, as a general rule, the burden of proof lies with both the parties: the claimant has to establish its case by adducing sufficient supporting evidence, while the defendant who wants to establish that the right invoked no longer exists, has to prove this circumstance and to adduce supporting evidence.[20]

This general rule has different regimes depending on the nature of the liability that the claimant is invoking.

In the case of contractual liability, the claimant is required only to adduce the contractual source and the breach invoked, while the defendant has to deny the claim by saying that he or she was not in breach or that the breach was not ascribable to him or her.[21]

In the case of liability in tort, the claimant has a more onerous burden of proof, it being required to prove all the elements, namely the fact giving rise to the tort, the damages suffered, and the causal link between the conduct of the defendant and the other elements.

Knowledge sharing

Italian law does not set forth specific statutory rules concerning the pooling of knowledge of sellers with the management; nonetheless, it is possible to outline how this issue is usually dealt with.

In M&A deals, it is usual for the parties to qualify the W&Is provided by the seller; the ‘knowledge qualifiers’ are sought by sellers to minimise their exposure, which buyers, on the contrary, try to widen.

The parties need to define knowledge so that the rules of the game are clear. It is necessary to define first of all what knowledge means and if this definition includes both actual and constructive knowledge.

Second, it is essential to clarify whose knowledge matters for the purposes of determining whether a knowledge-qualified representation has been breached. This is important because, without such a limitation, courts may be willing to impute knowledge to a pool of people that is larger than intended.

For instance, if a representation were simply qualified by the ‘knowledge of the company’, there is a significant risk that a court could impute the knowledge of employees who were not even involved in preparing or reviewing the representations and warranties in the purchase agreement – something that sellers want to avoid. But this generic clause could be detrimental also for buyers: the imputation of knowledge could be denied because, for example, that specific employee was acting within the scope of his or her employment when he or she acquired the knowledge.

For this reason, it is essential to link the definition of knowledge to a list of parties (i.e., a list of persons or specifically identified job titles).


Italian law would in principle entitle the non-breaching party to exercise several actions and remedies: termination, rescission, nullity, fulfilment, price reduction, the inadimplenti non est adimplendum exception and damages.

However, for M&A deals the spectrum of available remedies is more limited, for at least two different reasons.

The first, as already discussed, is linked to the specific characteristics and nature of these deals (the object being the shares and not the assets of the company).

The second concerns the effects of a clause that is a constant feature of M&A agreements, namely, the sole remedy clause, which limits the scope of the remedies available to the buyer if there is a breach by the seller and identifies – as the sole remedy available – the indemnification right to be exercised through the procedure set forth in the agreement.

According to Italian law, contractual clauses that exclude the right of a party to seek the nullity or rescission of the contract are ineffective and unenforceable;[22] scholars hold that the parties to an agreement cannot validly exclude this right.[23]

Moreover, according to Italian law, any clause excluding or limiting the liability of a party in the case of wilful misconduct or gross negligence is null.[24]

It has long been debated whether it is possible to exclude the right of termination; that debate may be summarised by saying that the analysis has to be conducted on a case-by-case basis and that the driver must be to consider if – considering the remedies excluded – the non-breaching party has the option to exercise enough rights to be able to overcome the disadvantage of the waiver of the termination right.

Another interesting problem is linked to the consequences of setting aside an M&A transaction. In principle, the consequence attached to this circumstance would be that the contract is considered as never having existed, with the consequential need for all the parties to give back any good, benefit or price received, since they would no longer be justified by any legal ground.[25]

If, however, as in the case of an M&A transaction, this is not practically (or legally) feasible, Italian case law – even if not specifically dealing with M&A deals – allows the replacement of these effects with an indemnification right.[26]

Measure of damages

Under Italian law, as well as under any other law, there are two distinct legal bases for the measure of damages: the first is the legal framework set forth by Italian law and the second is the contractual framework of the M&A deal.

Italian law traditionally contemplates only compensatory damages, excluding the possibility of punitive damages.[27]

Within the category of compensatory damages, it is possible to distinguish between positive damages and lost profits.[28] Positive damages are the losses really incurred by a party, while lost profits are the gains the non-breaching party would have obtained without the breach of the other party. Lost profits must be an immediate and direct consequence of the breach, and this requires a high standard of proof (it being necessary to prove that the profits would have been obtained by a high degree of probability).

It is common, however, for the parties to an M&A deal to intervene to modify this framework, by inserting the sole remedy clause that limits any remedy available to the buyer to an indemnification right to be claimed through an agreed procedure and with strict indemnity clauses.[29]

Furthermore, it is customary for the parties to further limit the range of the damages actually indemnifiable by the seller by excluding any indirect or consequential damage and calculating the indemnity by a multiple implicit in the negotiation of the sale price.[30]

Special substantive issues

There are numerous substantive issues that deserve to be considered as they represent a constant feature in arbitration proceedings in Italy. Needless to say that the limited scope of this chapter does not allow a thorough discussion of all of these issues, and therefore we will just mention some of the most relevant topics.

The object of an M&A deal and W&Is under Italian law

We have already seen that in Italy the object of an M&A deal and the nature of the W&Is has widely engaged scholars, arbitral tribunals and – to a certain, limited extent – Italian courts. We also know that the outcome of this debate is that the object of an M&A deal is represented by the shares and not by the company and its assets, though this is the real core of the agreed sale in the parties’ intentions.

As discussed above, this causes issues relating to the remedies available to the buyer if the assets sold (through the sale of the shares) do not have the promised and agreed qualities and characteristics. It is commonly held that the rules set forth by the Italian Civil Code concerning in general sale and purchase agreements and the guarantees available to buyers for the defects of the goods sold,[31] are not applicable for defects of the assets of the goods sold.

In addition to the consequences already dealt with under the sections ‘Fraud and failure to disclose’ and ‘Remedies’, owing to their distinctive nature as specifically provided guarantees,[32] W&Is are not subject to the strict limitation periods set forth by the Italian Civil Code for sale agreements (one year) but could benefit from the longer, ordinary limitation period (10 years).[33]

W&I policies

These policies are becoming increasingly common in Italy and they are interesting as they cover breaches in W&Is given in the sale of a business and allow buyers to be sure that warranties have real value even if the seller is unable to pay a warranty claim that arises in the future. These policies basically shift the burden of a breach from sellers to insurers and owing to this ‘derived’ nature, they have to make full reference to the due diligence and the W&Is in the share purchase agreement.[34]

Special procedural issues

There are numerous special procedural issues.

In the first place, under Italian law, the arbitral tribunals are not empowered to issue precautionary and interim measures,[35] although there are some nuances that are worthy of consideration.

A recent reform seems to have opened a narrow way through this ban, by excluding from the ban cases in which this is allowed by statutory rules.[36]

Furthermore, it is now commonly held that this ban would not exclude the possibility of the arbitration clauses providing a limited power for the arbitral tribunals to issue such measures – even by making reference to the arbitration rules of the arbitral chambers – bearing in mind, however, that they do not have any enforceable nature and are only provided with a sort of contractual nature; in other words, these measures cannot be enforced through state bodies.[37]

Another relevant issue regards the intervention and joinder of third parties. A recent reform of the statutory rules concerning arbitrations introduced some provisions in an attempt to answer the many unresolved questions.

Article 816 quinquies of the Italian Code of Civil Procedure states that the intervention and joinder of third parties is permitted only with the agreement of the third party and the parties to the arbitration, and the approval of the arbitral tribunal. The evident rationale of this provision lies in the need to safeguard the third party in case it was not party to the agreement including the arbitration clause.[38]


[1] Alessandro Scagliarini is a junior partner at Fieldfisher.

[2] Deloitte, M&A trends report, published on 22 March 2019: Iain Macmillan, Deloitte’s Global Leader for M&A and M&A Transaction Services, said: ‘The last five years have witnessed an unprecedented bull run in the global M&A markets. However, we might now be entering a late-cycle phase – in 2018 we saw the first year-on-year decline in volumes since 2014.’

[3] AIG, ‘Taxing time for M&A Insurance – AIG Claims Intelligence Series 2019’: Mary Duffy, Global Head M&A AIG, said: ‘The overall frequency for all deals on a global basis stands at 20 percent, with one in five deals resulting in a notification. This has remained fairly steady over the past few years.’

[4] KPMG Report on the Italian M&A market published on 3 April 2019.

[6] Article 2 of Law Decree No. 1 dated 24 January 2012 set up the ‘Tribunale delle imprese’ and extended the competence of the previously existing specialised sections to almost all litigation related to corporate law.

[7] The most recently updated available data show that in 2015 there were 6,074 new cases filed before Italian commercial courts and in the first six months of 2016 there were 3,277 new cases.

[8] Article 183, Paragraph 6 of the Italian Civil Procedure Code.

[9] The issues an arbitral tribunal has to address and cope with are not only related to legal aspects, but also concern substantive, sophisticated and technical issues. This is very clear in cases involving price adjustment issues (when an accounting firm is usually appointed) or, in particular, in cases involving breaches of representations and warranties when it is necessary to investigate the underlying substantial issue. The AIG 2019 Report on W&I Claims (see footnote 3) clarifies that major breaches concern financial statements, taxes, compliance with laws, material contracts, employees, intellectual property, litigation, operations, environment and fundamentals.

[10] This is based on the author’s own professional experience and the AIG report cited at footnote 3.

[11] Quotas if we are speaking about limited liability companies.

[12] In other words, there is a mismatch between (1) the form (the legal point of view), for which the object of the sale is represented by the shares and (2) the substance, considering that the buyer’s real intention – through the purchase of the shares – is to purchase the assets and the company.

[13] We make reference to Article 1490 and following of the Italian Civil Code.

[14] This leading case was welcomed with approval by the Italian community of arbitrators and practitioners in the M&A world, because it marked a robust endorsement by ordinary courts of the interpretation usually given by arbitral tribunals and scholars on the topics under discussion. During the past decades, the decisions released by the Supreme Court on this subject have had huge importance, firstly because of their always enlightening contribution and secondly owing to the fact that the Supreme Court has not had so many chances to be involved on these topics (because of the overwhelming prevalence of arbitration clauses). See also an old Supreme Court decision (338/1967), which was the very antithesis of the 2014 decision and a very recent one (13 March 2019, n. 7183) which is on the same track as the 2014 decision.

[15] Article 1429 Italian Civil Code.

[16] Article 1431 Italian Civil Code.

[17] Moreover, it is possible that the error has been induced by the wilful misconduct of the counterparty and the erring party is required to prove that the error has been essential to conclude the contract. The difference with a self-induced error is that the error causing the misrepresentation is owing to the deceptive conduct of the seller; the major commentators hold that not only an active deception but even a deception through silence or reticence on relevant circumstances may be considered as wilful misconduct; so not only a deliberate and intentional fraudulent action, but also a voluntary failure to disclose relevant circumstances.

[18] Furthermore, although not strictly connected to a fraudulent or deceitful action by the seller, it seems useful to widen the scope of this discussion by briefly making reference to the ‘implied condition or underlying purpose’, an interesting theory often linked with M&A deals, even if so far – leaving aside a not so recent decision issued by the Supreme Court and some other decisions – without great success. (Cass. 3 December 1991/1292 – App. Cagliari, 26 January 1996). Some prominent commentators hold that this theory could help in balancing the contractual mechanics in a deal that, though not characterised by deception (active or omissive) could nonetheless be unfair on the grounds of common and implied assumptions that represented the real core and the pivotal element of the deal (both for the buyer and the seller) and that later resulted in being incorrect.

[19] A Tina, Il contratto di acquisizione di partecipazioni societarie, Milano 2007, pages 266–267. Even with the uncertainties typical of a legal principle that does not find its origin in a formal source, it is possible to say that it occurs when there is a substantial difference between the negotiated deal and the one that has then been executed, so that what the buyer receives does not meet needs and expectations expressed before.

[20] Article 2697 Italian Civil Code.

[21] Article 1218 Italian Civil Code.

[22] Article 1462 Italian Civil Code.

[23] G. De Nova, Il sale and purchase agreement.

[24] Article 1229 Italian Civil Code. G. De Nova, Il Sale and Purchase Agreement.

[25] According to article 2033 of the Italian Civil Code this would represent a condictio indebiti.

[26] Cass. 8 November 2005, n. 21467. Cass. 1 August 2001, n. 10498, 4 February 2000, n. 1252, 18 November 1995, n. 11973, 13 April 1995, n. 1268.

[27] Recently, the Supreme Court seems to be opening the way to acknowledge punitive damages in the Italian legal system (Supreme Court Full Bench, 5 July 2017, n. 16601), even if this seems a long way and punitive damages are not customarily awarded by Italian courts or arbitral tribunals.

[28] Article 1223 Italian Civil Code.

[29] We mainly make reference to clauses concerning the amounts (de minimis, maximum amounts, etc.).

[30] It is usual for the parties to an M&A deal to calculate the price of the target by making reference to a specific multiple that changes depending on the specific industry; this multiple may be explicit in the agreement or, more often, may remain implicit.

[31] Article 1490 Italian Civil Code.

[32] This is a necessarily concise recap of decades of debate that involved and – is still involving – scholars, arbitral tribunals and – to a certain extent – Italian courts. Arbitral tribunals have always qualified W&I as specific guarantees, different from the guarantee provided by the Italian Civil Code for the defects of the goods sold (Article 1490). As emphasised, however, M&A agreements almost always provide for an arbitration clause, which substantially prevents the Italian Supreme Court from deciding this issue. However, on the few occasions that the Supreme Court has had to examine these issues, it did not lose the chance to give its view on this topic; in one of the most recent decisions (Supreme Court, 24 July 2014, n. 16963), it seems to have definitively approved the theory always endorsed by arbitral tribunals.

[33] A Tina, Il contratto di acquisizioni di partecipazioni societaria, page 225.

[34] The author is currently acting as counsel in an M&A international arbitration against an insurer that issued a W&I policy, which is possibly one of the first arbitrations on this issue.

[35] Article 818 Italian Civil Procedure Code. This principle is traditionally justified by the fact that arbitrators lack ius imperii, which is only in the hands of the judges.

[36] This power is partially granted in case of corporate arbitrations by Article 35, Paragraph 5 of Legislative Decree 5/2003 and concerns the power to stay the effectiveness of the company resolutions (provided the arbitration clause expressly provided this power).

[37] This is what can be found in some provisions of the Arbitral Chambers active in Italy (e.g., Article 26 of the newly issued Arbitration Rules of the Milan Arbitral Chamber).

[38] This provision, though useful, does not provide an answer to all the issues emerged and leaves open some matters that could trigger some criticalities.

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